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:
The components of net periodic benefit cost other than the service cost component are included in net interest and other financial costs on the consolidated statements of income.
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 a liability, we are unable to estimate a range of possible loss because the issues involved have not been fully developed through pleadings, discovery or court proceedings. However, the ultimate resolution of some of these contingencies could, individually or in the aggregate, be material.
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.
We are involved in a number of environmental enforcement matters arising in the ordinary course of business. While the outcome and impact toon 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.
MPLX continues to work towards a settlement of this matter with holders of the property rights at issue. Management does not believe the ultimate resolution of this matter will have a material adverse effect on our consolidated financial position, results of operations, or cash flows.
We are also a party to a number of other lawsuits and other proceedings arising in the ordinary course of business. While the ultimate outcome and impact to us cannot be predicted with certainty, we believe that the resolution of these other lawsuits and proceedings will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.
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.
MPC and MPLX hold interests in an offshore oil port, LOOP, and MPLX holds an interest in a crude oil pipeline system, LOCAP. Both LOOP and LOCAP have secured various project financings with throughput and deficiency agreements. Under the agreements, MPC, as a shipper, is required to advance funds if the investees are unable to service their debt. Any such advances are considered prepayments of future transportation charges. The duration of the agreements varies but tends to
follow the terms of the underlying debt, which extend through 2037. Our maximum potential undiscounted payments under these agreements for the debt principal totaled $171 million as of SeptemberJune 30, 2020.
In connection with MPLX’s 9.19 percent indirect interest in a joint venture (“Dakota Access”) that owns and operates the Dakota Access Pipeline and Energy Transfer Crude Oil Pipeline projects, collectively referred to as the Bakken Pipeline system, MPLX has entered into a Contingent Equity Contribution Agreement. MPLX, along with the other joint venture owners in the Bakken Pipeline system, has agreed to make equity contributions to the joint venture upon certain events occurring to allow the entities that own and operate the Bakken Pipeline system to satisfy their senior note payment obligations. The senior notes were issued to repay amounts owed by the pipeline companies to fund the cost of construction of the Bakken Pipeline system.
In March 2020, the U.S. District Court for the District of Columbia (the “D.D.C.”) ordered the U.S. Army Corps of Engineers (“Army Corps”), which granted permits and an easement for the Bakken Pipeline system, to conduct a full environmental impact statement (“EIS”), and further requested briefing on whether an easement necessary for the operation of the Bakken Pipeline system should be vacated while the EIS is being prepared.
On July 6, 2020, the D.D.C. ordered vacatur of the easement to cross Lake Oahe during the pendency of an EIS and further ordered a shut down of the pipeline by August 5, 2020. The D.D.C. denied a motion to stay that order. Dakota Access and the Army Corps appealed the D.D.C.’s orderorders to the U.S. Court of Appeals for the District of Columbia Circuit (the “Court of Appeals”). On July 14, 2020, the Court of Appeals issued an administrative stay while the court considered Dakota Access and the Army Corps’ emergency motion for stay pending appeal. On August 5, 2020, the Court of Appeals stayed the D.D.C.’s injunction that required the pipeline be shutdown and emptied of oil by August 5, 2020. The Court of Appeals denied a stay of the D.D.C.’s March order, which required the EIS, and further denied a stay of the D.D.C.’s July order, which vacated the easement. InOn January 26, 2021, the Court of Appeals upheld the D.D.C., briefing is ongoing for’s order vacating the easement while the Army Corps prepares the EIS. The Court of Appeals reversed the D.D.C.’s order to the extent it directed that the pipeline be shutdown and emptied of oil. On May 21, 2021, the D.D.C. denied a renewed request for an injunction, which is expectedinjunction. On June 22, 2021, the D.D.C. issued an order dismissing without prejudice the tribes’ claims against Dakota Access. The judge noted that the plaintiffs may move to be completed byreopen the endcase in the event of 2020. Oral argument on the meritsa violation of the case at the Court of Appeals occurred on November 4, 2020.court’s prior orders. The pipeline remains operational.
If the pipeline is temporarily shut down pending completion of the EIS, MPLX would have to contribute its 9.19 percent pro rata share of funds required to pay interest accruing on the notes and any portion of the principal that matures while the pipeline is shutdown. It is expected that MPLX would contribute its 9.19 percent pro rata share of any costs to remediate any deficiencies to reinstate the permit and/or return the pipeline into operation. If the vacatur of the easement permit results in a permanent shutdown of the pipeline, MPLX would have to contribute its 9.19 percent pro rata share of the cost to redeem the bonds (including the one percent redemption premium required pursuant to the indenture governing the notes) and any accrued and unpaid interest. As of SeptemberJune 30, 2020,2021, our maximum potential undiscounted payments under the Contingent Equity Contribution Agreement were approximately $230 million.
In connection with our 50 percent indirect interest in Crowley Ocean Partners LLC, we have agreed to conditionally guarantee our portion of the obligations of the joint venture and its subsidiaries under a senior secured term loan agreement. The term loan agreement provides for loans of up to $325 million to finance the acquisition of four product tankers. MPC’s liability under the guarantee for each vessel is conditioned upon the occurrence of certain events, including if we cease to maintain an investment grade credit rating or the charter for the relevant product tanker ceases to be in effect and is not replaced by a charter with an investment grade company on certain defined commercial terms. As of SeptemberJune 30, 2020,2021, our maximum potential undiscounted payments under this agreement for debt principal totaled $119$114 million.
In connection with our 50 percent indirect interest in Crowley Blue Water Partners LLC, we have agreed to provide a conditional guarantee of up to 50 percent of its outstanding debt balance in the event there is no charter agreement in place with an investment grade customer for the entity’s three vessels as well as other financial support in certain circumstances. As of SeptemberJune 30, 2020,2021, our maximum potential undiscounted payments under this arrangement was $115$111 million.
We have entered into other guarantees with maximum potential undiscounted payments totaling $94$99 million as of SeptemberJune 30, 2020,2021, which primarily consist of a commitment to contribute cash to an equity method investee for certain catastrophic events, in lieu of procuring insurance coverage, a commitment to fund a share of the bonds issued by a government entity for construction of public utilities in the event that other industrial users of the facility default on their utility payments and leases of assets containing general lease indemnities and guaranteed residual values.
Certain natural gas processing and gathering arrangements require us to construct natural gas processing plants, natural gas gathering pipelines and NGL pipelines and contain certain fees and charges if specified construction milestones are not achieved for reasons other than force majeure. In certain cases, certain producer customers may have the right to cancel the processing arrangements with us if there are significant delays that are not due to force majeure.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section should also be read in conjunction with the unaudited consolidated 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, 2019.2020.
Disclosures Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q, particularly Management’s Discussion and Analysis of Financial Condition and Results of Operations and Quantitative and Qualitative Disclosures about Market Risk, includes forward-looking statements that are subject to risks, contingencies or uncertainties. You can identify forward-looking statements by words such as “anticipate,” “believe,” “commitment,” “could,” “design,” “estimate,” “expect,” “forecast,” “goal,” “guidance,” “imply,” “intend,” “may,” “objective,” “opportunity,” “outlook,” “plan,” “policy,” “position,” “potential,” “predict,” “priority,” “project,” “proposition,” “prospective,” “pursue,” “seek,” “should,” “strategy,” “target,” “will,” “would” or other similar expressions that convey the uncertainty of future events or outcomes.
Forward-looking statements include, among other things, statements regarding:
•future levels of revenues, refiningfinancial and marketing margins, operating costs, retail gasolineresults;
•environmental, social and distillate margins, merchandise margins, income from operations, net income or earnings per share;governance (“ESG”) goals and targets, including those related to greenhouse gas emissions, diversity and inclusion and ESG reporting;
•our plans to achieve our ESG goals and targets and to monitor and report progress thereon;
•future levels of capital, environmental or maintenance expenditures, general and administrative and other expenses;
•expected savings from the restructuring or reorganization of business components;
•the success or timing of completion of ongoing or anticipated capitalprojects or maintenance projects;transactions;
•business strategies, growth opportunities and expected investment;investments;
•consumer demand for refined products, natural gas and NGLs;
•the timing and amount of any future common stock repurchases;repurchases or dividends; and
•the anticipated effects of actions of third parties such as competitors, activist investors, or federal, foreign, state or local regulatory authorities, or plaintiffs in litigation.
Our forward-looking statements are not guarantees of future performance, and you should not rely unduly on them, as they involve risks, uncertainties and assumptions that we cannot predict. Material differences between actual results and any future performance suggested in our forward-looking statements could result from a variety of factors, including the following:
•general economic, political or regulatory developments, including changes in governmental policies relating to refined petroleum products, crude oil, natural gas or NGLs, or taxation;
•the effects of the COVID-19 pandemic, including any related government policiesmagnitude, duration and actions, on our business, financial condition, results of operations and cash flows, including our growth, operating costs, labor availability, logistical capabilities, customer demand for our products and industry demand generally, margins, inventory value, cash position, taxes, the price of our securities and trading markets with respect thereto, our ability to access capital markets, and the global economy and financial markets generally;
the effectspotential resurgence of the COVID-19 pandemic and its effects, including travel restrictions, business and school closures, increased remote work, stay-at-home orders and other actions taken by individuals, government and the current economic environment generally, on our working capital, cash flows and liquidity, which can be significantly affected by decreases in commodity prices;private sector to stem the spread of the virus;
•our ability to successfully complete the planned Speedway sale and realize the expected benefits of the Speedway sale within the expected timeframe or at all;
the risk that we may not proceed with converting the Martinez refinery to a renewable diesel facility or that our expectations of future cash flows for a Martinez renewable diesel facility will not be fully realized;•impairments;
the risk that the cost savings and any other synergies from the Andeavor transaction may not be fully realized or may take longer to realize than expected;
further impairments;
•the regional, national and worldwide availability and pricing of refined products, crude oil, natural gas, NGLs and other feedstocks;
our ability to manage •disruptions in credit markets or changes to credit ratings;
•the reliability of processing units and other equipment;
•the adequacy of capital resources and liquidity, including availability, timing and amounts of free cash flow necessary to execute business plans and to effect any share repurchases or to maintain or increase the dividend;
•the potential effects of judicial or other proceedings on the business, financial condition, results of operations and cash flows;
continued or further volatility in and degradation of general economic, market, industry or business conditions as a result of the COVID-19 pandemic, (including any related government policies and actions), other infectious disease outbreaks, natural hazards, extreme weather events or otherwise;
•compliance with federal and state environmental, economic, health and safety, energy and other policies and regulations including the cost of compliance with the Renewable Fuel Standard, and enforcement actions initiated thereunder;
•adverse market conditions or other similar risks affecting MPLX;
•refining industry overcapacity or under capacity;
•changes in producer customers’ drilling plans or in volumes of throughput of crude oil, natural gas, NGLs, refined products or other hydrocarbon-based products;
•non-payment or non-performance by our producer and other customers;
•changes in the cost or availability of third-party vessels, pipelines, railcars and other means of transportation for crude oil, natural gas, NGLs, feedstocks and refined products;
•the price, availability and acceptance of alternative fuels and alternative-fuel vehicles and laws mandating such fuels or vehicles;
•political and economic conditions in nations that consume refined products, natural gas and NGLs, including the United States and Mexico, and in crude oil producing regions, including the Middle East, Africa, Canada and South America;
•actions taken by our competitors, including pricing adjustments, expansion of retail activities, the expansion and retirement of refining capacity and the expansion and retirement of pipeline capacity, processing, fractionation and treating facilities in response to market conditions;
•completion of pipeline projects within the United States;
•changes in fuel and utility costs for our facilities;
•accidents or other unscheduled shutdowns affecting our refineries, machinery, pipelines, processing, fractionation and treating facilities or equipment, or those of our suppliers or customers;
•acts of war, terrorism or civil unrest that could impair our ability to produce refined products, receive feedstocks or to gather, process, fractionate or transport crude oil, natural gas, NGLs or refined products;
•adverse changes in laws including with respect to tax and regulatory matters;
•political pressure and influence of environmental groups and other stakeholders upon policies and decisions related to the production, gathering, refining, processing, fractionation, transportation and marketing of crude oil or other feedstocks, refined products, natural gas, NGLs or other hydrocarbon-based products;
•labor and material shortages; and
•the costs, disruption and diversion of management’s attention associated with campaigns commenced by activist investors.investors; and
•personnel changes.
For additional risk factors affecting our business, see the risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2019, as updated in our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020. We undertake no obligation to update any forward-looking statements except to the extent required by applicable law.
CORPORATE OVERVIEW
We are a leading, integrated, downstream energy company headquartered in Findlay, Ohio. We own and operate the nation’s largest refining system. Our refineries supply refined products to resellers and consumers across the United States. We distribute refined products to our customers through transportation, storage, distribution and marketing services provided largely by our Midstream segment. We believe we are one of the largest wholesale suppliers of gasoline and distillates to resellers in the United States.
We have three strong brands: Marathon®, Speedway® and ARCO®. The branded outlets, which primarily operate under the Marathon brand, are established motor fuel brands across the United States available through approximately 7,000 branded outlets operated by independent entrepreneurs in 35 states, the District of Columbia and Mexico. The direct dealer network primarily operates under the ARCO brand, and consists of approximately 1,070 direct dealer locations primarily located in the West Coast region of the United States. As discussed in Recent Developments, we have entered into a sale agreement for our Speedway business.
We primarily conduct our midstream operations through our ownership interest in MPLX, which owns and operates crude oil and refined product transportation and logistics infrastructure and natural gas and NGL gathering, processing, and fractionation
assets. As of September 30, 2020, we owned, leased or had ownership interests in approximately 17,200 miles of crude oil and refined product pipelines that deliver crude oil to our refineries and other locations and refined products to wholesale, brand marketing and direct dealer locations. We distribute our refined products through one of the largest terminal operations in the United States and one of the largest private domestic fleets of inland petroleum product barges. Our integrated midstream energy asset network links producers of natural gas and NGLs from some of the largest supply basins in the United States to domestic and international markets. Our midstream gathering and processing operations include: natural gas gathering, processing and transportation; and NGL gathering, transportation, fractionation, storage and marketing.
Our operations consist of two reportable operating segments: Refining & Marketing and Midstream. Each of these segments is organized and managed based upon the nature of the products and services they offer.
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• | Refining & Marketing – refines crude oil and other feedstocks at our refineries in the Gulf Coast, Mid-Continent and West Coast regions of the United States, purchases refined products and ethanol for resale and distributes refined products through transportation, storage, distribution and marketing services provided largely by our Midstream segment. We sell refined products to wholesale marketing customers domestically and internationally, to buyers on the spot market, to independent entrepreneurs who operate primarily Marathon® branded outlets, through long-term fuel supply contracts with direct dealers who operate locations mainly under the ARCO® brand and to approximately 3,900 Speedway locations.
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• | Midstream – transports, stores, distributes and markets crude oil and refined products principally for the Refining & Marketing segment via refining logistics assets, pipelines, terminals, towboats and barges; gathers, processes and transports natural gas; and gathers, transports, fractionates, stores and markets NGLs. The Midstream segment primarily reflects the results of MPLX.
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Recent Developments
Strategic Actions to Enhance Shareholder Value
On August 2, 2020, we entered into a definitive agreement to sell Speedway, our company-owned and operated retail transportation fuel and convenience store business, to 7-Eleven, Inc. for $21 billion in cash, subject to certain adjustments based on the levels of cash, debt (as defined in the agreement) and working capital at closing and certain other items. The taxable transaction is expected to close in the first quarter of 2021, subject to customary closing conditions and regulatory approvals. This transaction is expected to result in after-tax cash proceeds of approximately $16.5 billion. The company expects to use the proceeds from the sale to strengthen the balance sheet and return capital to shareholders. We will retain our direct dealer business.
In connection with the agreement to sell Speedway, the Company has agreed to enter into certain ancillary agreements, including a 15-year fuel supply agreement for approximately 7.7 billion gallons per year associated with 7-Eleven, Inc. or its subsidiaries. Further, the Company expects incremental opportunities over time to supply 7-Eleven's remaining business as existing arrangements mature and as new locations are added in connection with its announced U.S. and Canada growth strategy.
As a result of the agreement to sell the Speedway business, its results are reported separately as discontinued operations in our consolidated statements of income for all periods presented and its assets and liabilities have been reclassified in our consolidated balance sheets to assets and liabilities held for sale. Prior to presentation of Speedway as discontinued operations, Speedway and our retained direct dealer business were the two reporting units within our Retail segment. Beginning with the third quarter of 2020, the direct dealer business is managed as part of the Refining & Marketing segment. The results of the Refining & Marketing segment have been retrospectively adjusted to include the results of the direct dealer business in all periods presented.
As a result of our agreement to sell Speedway, the following changes in our basis of presentation have occurred:
In accordance with ASC 205, Discontinued Operations, intersegment sales from our Refining & Marketing segment to the Speedway business are no longer eliminated as intercompany transactions and are now presented within sales and other operating revenue, since we will continue to supply fuel to the Speedway business subsequent to the sale to 7-Eleven. All periods presented have been retrospectively adjusted to reflect this change.
Beginning August 2, 2020, in accordance with ASC 360, Property, Plant, and Equipment, we ceased recording depreciation and amortization for the Speedway business’ property, plant and equipment, finite-lived intangible assets and right of use lease assets.
EXECUTIVE SUMMARY
Business Update
The outbreak of COVID-19 and its development into a pandemic in March 2020 have resulted in significant economic disruption globally. Actions taken by various governmental authorities, individuals and companies around the world to prevent the spread of COVID-19 through social distancing have restricted travel, many business operations, public gatherings and the overall level of individual movement and in-person interaction across the globe.
This has in turn significantly reduced global economic activity andglobe resulted in a decreasedramatic reductions in airline flights and motor vehicle use at a time when seasonal driving patterns typically result in an increase2020 as compared to prior to the pandemic.
Through the first six months of consumer2021, while demand for gasoline and a dramatic reduction in airline flights. As a result, there has also been a declineremains below historical levels, we continue to see recovery in the demandenvironment in which our business operates, albeit in some markets and regions more or less than others. The increased availability of vaccinations and the corresponding reductions in travel and business restrictions appear to be driving increased economic activity, including the opening of many business and schools as well as more in-person interaction broadly. While we have seen improving results through the first six months of 2021, we are unable to predict the potential effects a resurgence of COVID-19 may have on our financial position and results.
In response to this business environment, we continue to focus on three near-term priorities for the refined petroleum productsour businesses:
Strengthen Competitive Position of Assets
We are committed to positioning our assets so that we manufactureare a leader in operational, financial, and sell.sustainability performance and are evaluating the strength and fit of assets in our portfolio. Our goal is that each individual asset generates free-cash-flow back
to the business and contributes to shareholder returns. With our investments we are focused on high returning projects that we believe will enhance the competitiveness of our portfolio, including our investments in sustainable fuels and technologies that lower our carbon intensity as the global energy mix evolves.
Improve Commercial Performance
We are focused on leveraging advantaged raw material selection, new approaches in the demandcommercial space to be more dynamic amidst changing market conditions and achieving technology improvements to advance our commercial performance.
Lower Cost Structure
We are committed to achieving operational excellence by reducing costs, improving efficiency and driving operational improvements. In response to the pandemic, in March of 2020, we committed to immediately reducing our capital spending and operating expenses. In 2021, we are continuing this focus with planned reductions of over $200 million for refined petroleum products coupled with a decline in the price of crude oil has resulted in a significant decrease in the priceour capital expenditures and volume of the refined petroleum products we produceinvestments as compared to 2020 (excluding capitalized interest, potential acquisitions and sell and had a negative impact on workingMPLX’s capital during the first nine months of 2020.investment plan).
In addition, a decline inconnection with our commitment to lower cost and strengthen the market prices for products held in our inventories below the carrying valuecompetitive position of our inventory resultedassets, in an adjustment to the value of our inventories. At September 30, 2020, market values for these inventories were lower than their LIFO cost basis and, as a result, we recorded an LCM inventory valuation reserve of $1.19 billion. Based on movements of refined product prices, future inventory valuation adjustments could have a negative or positive effect to earnings. Such losses are subject to reversal in subsequent periods if prices recover.
We have been and continue to actively respond to the impacts that these matters are having on our business. During the third quarter of 2020 we announced strategic actions to lay a foundation for long-term success, including plans to optimize our assets and structurally lower costs in 2021 and beyond, whichbeyond. These actions included indefinitely idling the Gallup andrefinery, initiating actions to strategically reposition the Martinez refineriesrefinery to a renewable diesel facility and the approval of an involuntary workforce reduction plan. In connection with these strategic actions, we recorded restructuring expenses of $348 million for the three months ended September 30, 2020. We also progressed activities associated with the conversion of the Martinez refinery to a renewable diesel facility, including applying for permits, advancing discussions with feedstock suppliers, and beginning detailed engineering activities. As envisioned, the Martinez facility would be expected to start producing renewable diesel in 2022, with a potential to build to full capacity of 48,000 barrels per day in 2023.
We previously announced a goal to reduce capital spending by $1.35 billion, resulting in planned 2020 capital spending of $3.0 billion, or a reduction of approximately 30 percent from our initial plan for the year. We are currently on track to exceed this targeted reduction. The reductions are planned across all segments of the business. Our remaining capital spend primarily relates to growth projects that are already in progress or spending that supports the safe and reliable operation of our facilities.
We are also on track to exceed our targeted $950 million reduction of 2020 forecasted operating expenses, primarily through reductions of fixed costs and deferral of certain expense projects, which includes $200 million of operating expense reductions at MPLX.
In addition to these measures to address our operations, earlierresults in the year we took action to address our liquidity as outlined below:
Share repurchases have temporarily been suspended. The timing and amountfirst six months of future repurchases, if any, will depend upon several factors, including market and business conditions.
On April 27, 2020, we entered into an additional $1.0 billion 364-day revolving credit facility, which expires in 2021 to provide incremental liquidity and financial flexibility duringreflect the commodity price and demand downturn.
On April 27, 2020, we closed on the issuance of $2.5 billion of senior notes. Proceedsfavorable effects from the senior notes were used to pay down certain amounts outstanding on the five-year revolving credit facility.
During June 2020, we repaid the remaining amounts outstanding on the five-year revolving credit facility.
On September 23, 2020, we entered into a 364-day revolving credit agreement, which provides for a $1.0 billion unsecured revolving credit facility that matures in September 2021, and which replaces a similar 364-day revolving credit agreement that expired on September 28, 2020. At September 30, 2020, we had $7.7 billion available on our variable credit facilities.these cost reduction actions.
Many uncertainties remain with respect to COVID-19, including its resulting economic effects, and we are unable to predict the ultimate economic impacts from COVID-19 and how quickly nationalour U.S. and economies around the world can recover once the pandemic ultimately subsides. However, the adverse impact of the economic effects on MPC has been and will likelymay continue to be significant. We believe we have proactively addressed many of the known impacts of COVID-19 to the extent possible and will strive to continue to do so, but there can be no guarantee the measures will be fully effective.
Other Strategic Updates
On July 31, 2020, Western Refining Southwest, Inc. (“WRSW”), a wholly owned subsidiaryMay 14, 2021, we completed the sale of MPC, entered into a Redemption Agreement (the “Redemption Agreement”) with MPLX, pursuantSpeedway, our company-owned and operated retail transportation fuel and convenience store business, to which MPLX transferred to WRSW all7-Eleven for cash proceeds of the outstanding membership interests in Western Refining Wholesale, LLC (“WRW”), in exchange for the redemption of MPLX common units valued at $340 million held by WRSW. The$21.38 billion. This transaction resulted in a minor decrease in MPC’s ownership interest in MPLX. Beginning inpretax gain of $11.68 billion ($8.02 billion after income taxes) after deducting the third quarterbook value of 2020, the resultsnet assets and certain other adjustments. MPC remains committed to executing its plan to use the proceeds from the sale to strengthen the balance sheet and return capital to shareholders.
In connection with the Speedway sale, our board of these operations are presented indirectors approved an additional $7.1 billion share repurchase authorization bringing total share repurchase authorizations to $10.0 billion prior to the Refining & Marketing segment.June tender of shares discussed below.
On November 2, 2020, MPLX announcedJune 15, 2021, MPC completed a modified Dutch auction tender offer, purchasing 15,573,365 shares of its common stock at a purchase price of $63.00 per share, for an aggregate purchase price of approximately $981 million, excluding fees and expenses related to the board authorizationtender offer. As of June 30, 2021, MPC has $9.02 billion remaining under its share repurchase authorizations.
During the first six months of 2021, we utilized a unit repurchase program forportion of the repurchaseSpeedway sale proceeds to structurally reduce debt through the following actions:
•In June of up to $1 billion2021,we redeemed all of MPLX’sthe $300 million outstanding common units held by the public. MPLX may utilize various methods to effect the repurchases, which could include open market repurchases, negotiated block transactions, tender offers, accelerated unit repurchases or open market solicitations for units, some of which may be effected through Rule 10b5-1 plans. The timing andaggregate principal amount of repurchases, if any, will depend upon several factors, including market and business conditions, and repurchases may be initiated, suspended or discontinued at any time. The repurchase authorization has no expiration date.5.125% senior notes due April 2024.
•In May of 2021, we repaid all outstanding commercial paper borrowings, which along with cash had been used to finance the fourth quarter 2020 repayments of two senior notes with total principal of $1.13 billion.
•On March 1, 2021, we repaid the $1.0 billion outstanding aggregate principal amount of 5.125% senior notes due March 2021.
On March 18, 2020, we announced thatFebruary 24, 2021, MPC’s board of directors unanimously decidedapproved our plan to maintain MPC’s current midstream structure,strategically reposition the Martinez refinery to a renewable diesel facility. Converting the Martinez facility from refining petroleum to manufacturing renewable fuels signals our strong commitment to producing a substantial level of lower carbon-intensity fuels in California. As envisioned, the Martinez facility would start producing approximately 260 million gallons per year of renewable diesel by the second half of 2022, with MPC remaining, through a wholly owned subsidiary,potential to build to full capacity of approximately 730 million gallons per year by the general partnerend of MPLX. This decision concluded a comprehensive evaluation, led2023.
The Dickinson, North Dakota, renewable fuels facility began ramping operations at the end of 2020 and reached full design operating capacity by a special committeethe end of the board, that included extensive inputsecond quarter of 2021. The facility has the capacity to produce 184 million gallons per year of renewable diesel from multiple external advisorscorn and significant feedback from investors.
EXECUTIVE SUMMARYsoybean oil. MPC is selling the renewable diesel into the California market to comply with the California Low Carbon Fuel Standard.
Results
Select results for continuing operations are reflected in the following table. | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
(In millions) | | 2021 | | 2020 | | 2021 | | 2020 |
Income (loss) from continuing operations by segment | | | | | | | |
Refining & Marketing | $ | 224 | | | $ | (1,544) | | | $ | (374) | | | $ | (2,041) | |
Midstream | 977 | | | 869 | | | 1,949 | | | 1,774 | |
Corporate | (180) | | | (195) | | | (337) | | | (428) | |
Items not allocated to segments: | | | | | | | |
Transaction-related costs(a) | — | | | — | | | — | | | (8) | |
| | | | | | | |
Impairments(b) | (56) | | | (25) | | | (56) | | | (9,162) | |
| | | | | | | |
LCM inventory valuation adjustment | — | | | 1,470 | | | — | | | (1,715) | |
Income (loss) from continuing operations | 965 | | | 575 | | | 1,182 | | | (11,580) | |
Net interest and other financial costs | 372 | | | 341 | | | 725 | | | 673 | |
Income (loss) from continuing operations before income taxes | 593 | | | 234 | | | 457 | | | (12,253) | |
Provision (benefit) for income taxes on continuing operations | 5 | | | 150 | | | 39 | | | (1,801) | |
Income (loss) from continuing operations, net of tax | 588 | | | 84 | | | 418 | | | (10,452) | |
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| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(In millions) | | 2020 | | 2019 | | 2020 | | 2019 |
Income (loss) from continuing operations by segment | | | | | | | |
Refining & Marketing(a) | $ | (1,569 | ) | | $ | 989 |
| | $ | (3,610 | ) | | $ | 1,750 |
|
Midstream | 960 |
| | 919 |
| | 2,734 |
| | 2,705 |
|
Corporate(b) | (197 | ) | | (206 | ) | | (625 | ) | | (589 | ) |
Items not allocated to segments: | | | | | | | |
Equity method investment restructuring gain(c) | — |
| | — |
| | — |
| | 207 |
|
Transaction-related costs(d) | — |
| | (22 | ) | | (8 | ) | | (147 | ) |
Litigation | — |
| | — |
| | — |
| | (22 | ) |
Impairments(e) | (433 | ) | | — |
| | (9,595 | ) | | — |
|
Restructuring expense(f) | (348 | ) | | — |
| | (348 | ) | | — |
|
LCM inventory valuation adjustment | 530 |
| | — |
| | (1,185 | ) | | — |
|
Income (loss) from continuing operations | (1,057 | ) | | 1,680 |
| | (12,637 | ) | | 3,904 |
|
Net interest and other financial costs | 359 |
| | 312 |
| | 1,032 |
| | 932 |
|
Income (loss) from continuing operations before income taxes | (1,416 | ) | | 1,368 |
| | (13,669 | ) | | 2,972 |
|
Provision (benefit) for income taxes on continuing operations | (436 | ) | | 255 |
| | (2,237 | ) | | 600 |
|
Income (loss) from continuing operations, net of tax | (980 | ) | | 1,113 |
| | (11,432 | ) | | 2,372 |
|
| |
(a)(a) 2020 includes costs incurred in connection with the Midstream strategic review.
| Recast to reflect direct dealer income from operations of $103 million, $106 million, $303 million and $295 million for the third quarter 2020 and 2019 and the first nine months of 2020 and 2019, respectively. Includes a LIFO liquidation charge of $256 million in the third quarter of 2020. |
| |
(b)
| Recast to reflect corporate costs of $7 million, $8 million, $20 million and $21 million for the third quarter 2020 and 2019 and the first nine months of 2020 and 2019, respectively, that are no longer allocated to Speedway under discontinued operations accounting. |
| |
(c)
| Represents gain related to the formation of Capline LLC for the nine months ended September 30, 2019. |
| |
(d)
| 2020 includes costs incurred in connection with the Midstream strategic review. 2019 includes employee severance, retention and other costs related to the acquisition of Andeavor. |
| |
(e)
| Includes $7.4 billion goodwill impairment, $1.3 billion impairment of equity method investments and $886 million impairment of long lived assets for the nine months ended September 30, 2020. |
| |
(f)
| Restructuring expenses include $189 million of exit and disposal costs related to indefinite idling of the Martinez and Gallup refineries and $159 million of employee separation costs. |
Select results for discontinued operations are reflected in the following table.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
(In millions) | | 2021 | | 2020 | | 2021 | | 2020 |
Income from discontinued operations | | | | | | | |
Speedway | $ | 283 | | | $ | 426 | | | $ | 613 | | | $ | 826 | |
Transaction-related costs(a) | (23) | | | (30) | | | (46) | | | (57) | |
Gain on sale of assets | 11,682 | | | — | | | 11,682 | | | — | |
LCM inventory valuation adjustment | — | | | 10 | | | — | | | (25) | |
Income from discontinued operations | 11,942 | | | 406 | | | 12,249 | | | 744 | |
Net interest and other financial costs | 2 | | | 4 | | | 6 | | | 10 | |
Income from discontinued operations before income taxes | 11,940 | | | 402 | | | 12,243 | | | 734 | |
Provision for income taxes on discontinued operations | 3,726 | | | 210 | | | 3,795 | | | 224 | |
Income from discontinued operations, net of tax | $ | 8,214 | | | $ | 192 | | | $ | 8,448 | | | $ | 510 | |
(a) Costs related to the Speedway separation.
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(In millions) | | 2020 | | 2019 | | 2020 | | 2019 |
Income from discontinued operations | | | | | | | |
Speedway | $ | 456 |
| | $ | 344 |
| | $ | 1,282 |
| | $ | 831 |
|
Transaction-related costs(a) | (18 | ) | | — |
| | (75 | ) | | — |
|
LCM inventory valuation adjustment | — |
| | — |
| | (25 | ) | | — |
|
Income from discontinued operations | 438 |
| | 344 |
| | 1,182 |
| | 831 |
|
Net interest and other financial costs | 5 |
| | 5 |
| | 15 |
| | 13 |
|
Income from discontinued operations before income taxes | 433 |
| | 339 |
| | 1,167 |
| | 818 |
|
Provision for income taxes on discontinued operations | 62 |
| | 85 |
| | 286 |
| | 197 |
|
Income from discontinued operations, net of tax | $ | 371 |
| | $ | 254 |
| | $ | 881 |
| | $ | 621 |
|
| |
| Costs related to the Speedway separation. |
The following table includes net income (loss) per diluted share data.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
Net income (loss) per diluted share | | | | | | | | |
Continuing operations | $ | 0.45 | | | $ | (0.28) | | | $ | (0.27) | | | $ | (15.00) | |
Discontinued operations | 12.55 | | | 0.29 | | | 12.98 | | | 0.79 | |
Net income (loss) attributable to MPC | $ | 13.00 | | | $ | 0.01 | | | $ | 12.71 | | | $ | (14.21) | |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
Net income (loss) per diluted share | | | | | | | | |
Continuing operations | $ | (1.93 | ) | | $ | 1.27 |
| | $ | (16.93 | ) | | $ | 2.35 |
|
Discontinued operations | 0.57 |
| | 0.39 |
| | 1.35 |
| | 0.93 |
|
Net income (loss) attributable to MPC | $ | (1.36 | ) | | $ | 1.66 |
| | $ | (15.58 | ) | | $ | 3.28 |
|
Actions taken by various governmental authorities, individuals and companies to prevent the spread of COVID-19 through social distancing have restricted travel, many business operations, public gatherings and the overall level of individual movement and in-person interaction in the areas where we operate which has impacted demand for our products. Net income (loss) attributable to MPC was $(886) million,$8.51 billion, or $(1.36)$13.00 per diluted share, in the thirdsecond quarter of 20202021 compared to $1.10 billion,$9 million, or $1.66$0.01 per diluted share, for the thirdsecond quarter of 20192020 and $(10.11)$8.27 billion, or $(15.58)$12.71 per diluted share, in the first ninesix months of 20202021 compared to $2.19$(9.23) billion, or $3.28$(14.21) per diluted share, in the first ninesix months of 2019.2020.
For the thirdsecond quarter of 2020,2021, the change in net income (loss) attributable to MPC was largely due to a lossthe gain on the sale of Speedway and increases in our Refining & Marketing segment, long-lived asset impairment charges of $433 million, in addition to restructuring expenses of $348 million related to the idling of the Martinezaverage refined product sales prices and Gallup refineries and costs related to our announced workforce reduction. These changes werevolumes, partially offset by a $530 millionthe absence of an LCM benefit recognized in the quarter. The losssecond quarter of 2020 and a partial period of income from discontinued operations in our Refining & Marketing segmentdue to the sale of the Speedway business on May 14, 2021.
For the first six months of 2021, the change is primarily due to decreasesthe gain on the sale of Speedway, the absence of impairment expenses and an LCM inventory charge in the first six months of 2020 and increases in average refined product sales volumes, prices and margins during the current period and includes a charge of $256 million for the three months ended September 30, 2020 to reflect an expected LIFO liquidation for our crude oil inventories. These results werevolumes, partially offset by increaseda partial period of income from discontinued operations which relatesdue to the sale of the Speedway business in the third quarter of 2020 compared to the third quarter of 2019 mainly due to higher fuel margin and merchandise sales and lower operating and depreciation and amortization expenses, partially offset by lower fuel volumes.
For the first nine months of 2020, the change in net income (loss) attributable to MPC was primarily due to a loss in our Refining & Marketing segment, goodwill and long-lived asset impairment charges of $8.28 billion and impairments of equity method investments of $1.32 billion during the period primarily driven by the effects of COVID-19 and the decline in commodity prices, an LCM charge of $1.19 billion and restructuring expenses of $348 million related to the idling of the Martinez and Gallup refineries and costs related to our announced workforce reduction. The loss from operations in our Refining & Marketing segment is primarily due to decreases in refined product sales volumes, prices and margins during the current period and includes a charge of $256 million for the nine months ended September 30, 2020 to reflect an expected LIFO liquidation for our crude oil inventories. The costs of inventories in the historical LIFO layer which is expected to be liquidated are higher than current costs, which resulted in increased cost of revenues and decreased income from operations. These results were partially offset by increased income from discontinued operations, which relates to the Speedway business,
in the first nine months of 2020 compared to the first nine months of of 2019 largely due to higher fuel margin and lower depreciation and amortization expense, partially offset by lower fuel volumes.on May 14, 2021.
See Note 4 to the unaudited consolidated financial statements for additional information on discontinued operations.
Refer to the Results of Operations section for a discussion of consolidated financial results and segment results for the thirdsecond quarter of 20202021 as compared to the thirdsecond quarter of 20192020 and the first ninesix months of 20202021 compared to the first ninesix months of 2019.2020.
MPLX
We owned approximately 647 million MPLX common units at SeptemberJune 30, 20202021 with a market value of $10.19$19.17 billion based on the SeptemberJune 30, 20202021 closing price of $15.74$29.61 per common unit. On OctoberJuly 27, 2020,2021, MPLX declared a quarterly cash distribution of $0.6875 per common unit payable on NovemberAugust 13, 2020.2021. As a result, MPLX will make distributions totaling $715$705 million to its common unitholders. MPC’s portion of these distributions is approximately $445 million.
We received limited partner distributions of $1.35 billion$890 million from MPLX in the ninesix months ended SeptemberJune 30, 20202021 and $1.39 billion from MPLX and ANDX combined$904 million in the ninesix months ended SeptemberJune 30, 2019. The decrease in distributions from2020.
During the prior year is due to the fact that ANDX had a higher per unit distribution prior to the Merger when compared to the MPLX distribution per unit post-merger.
On July 31, 2020, WRSW, a wholly owned subsidiary of MPC, entered into a Redemption Agreement with MPLX, pursuant to which MPLX agreed to transfer to WRSW, all of the outstanding membership interests in WRW in exchange for the redemption ofsix months ended June 30, 2021, 11,929,998 MPLX common units held by WRSW. The transaction effectswere repurchased at an average cost per unit of $26.02. Total cash paid for units repurchased during the transfersix months ended June 30, 2021 was $310 million. As of June 30, 2021, MPLX had agreements to MPC of the Western wholesale distribution business that MPLX acquired as a result of its acquisition of ANDX. Beginning in the third quarter of 2020, the results of these operations are presented in MPC’s Refining & Marketing segment prospectively.
At the closing, per the terms of Redemption Agreement, MPLX redeemed 18,582,088 MPLXacquire 126,293 additional common units (the “Redeemed Units”) held by WRSW. The numberfor $4 million, which settled in early July 2021. As of Redeemed Units was calculated by dividing WRW’s aggregate valuation of $340June 30, 2021, $657 million byremained available under the simple average of the volume weighted average New York Stock Exchange prices of an MPLX commonauthorization for future unit for the ten trading days ending at market close on July 27, 2020. The transaction resulted in a minor decrease in MPC’s ownership interest in MPLX.repurchases.
See Note 5 to the unaudited consolidated financial statements for additional information on MPLX.
Liquidity
Our liquidity, excluding MPLX, totaled $8.44$22.35 billion at SeptemberJune 30, 20202021 consisting of:
| | | | | | | | | | | | | | | | | | | | |
| | June 30, 2021 |
(In millions) | | Total Capacity | | Outstanding Borrowings | | Available Capacity |
Bank revolving credit facility(a) | $ | 5,000 | | | $ | 1 | | | $ | 4,999 | |
Trade receivables facility | 100 | | | — | | | 100 | |
Total | $ | 5,100 | | | $ | 1 | | | $ | 5,099 | |
Cash and cash equivalents and short-term investments(b) | | | | | 17,249 | |
Total liquidity | | | | | $ | 22,348 | |
|
| | | | | | | | | | | | |
| | September 30, 2020 |
(In millions) | | Total Capacity | | Outstanding Borrowings | | Available Capacity |
Bank revolving credit facility(a)(b) | $ | 5,000 |
| | $ | 1 |
| | $ | 4,999 |
|
364-day bank revolving credit facility | 1,000 |
| | — |
| | 1,000 |
|
364-day bank revolving credit facility | 1,000 |
| | — |
| | 1,000 |
|
Trade receivables facility(c) | 750 |
| | — |
| | 750 |
|
Total | $ | 7,750 |
| | $ | 1 |
| | $ | 7,749 |
|
Cash and cash equivalents(d) | | | | | 688 |
|
Total liquidity | | | | | $ | 8,437 |
|
(a)Outstanding borrowings include $1 million in letters of credit outstanding under this facility. | |
(a)
| Excludes MPLX’s $3.50 billion bank revolving credit facility, which had approximately $3.41 billion available as of September 30, 2020. |
| |
(b)
| Outstanding borrowings include $1 million in letters of credit outstanding under this facility. |
| |
(c)
| Availability under our $750 million trade receivables facility is a function of eligible trade receivables, which will be lower in a sustained lower price environment for refined products. |
| |
(d)
| Includes cash and cash equivalents classified as assets held for sale of $98 million and excludes cash and cash equivalents of MPLX of $28 million. |
On September 23, 2020, MPC entered into a(b)Excludes cash and cash equivalents of MPLX of $8 million.
Effective June 18, 2021, we terminated our $1.0 billion unsecured 364-day revolving credit agreement, which provides for a $1.0 billion unsecured revolving credit facility that maturesdue in September 2021 and which replaceson June 23, 2021, we reduced the capacity under our trade receivables securitization facility from $750 million to $100 million. The trade receivables securitization facility expired in July of 2021, however, we plan to secure a similar 364-day revolving credit agreement that expired on September 28, 2020.new $100 million trade receivable facility in the third quarter of 2021.
On October 1, 2020,Additionally, nearly all of our tax refund of approximately $2.1 billion is expected to be received during the $475 million outstanding aggregate principal amountsecond half of 5.375 percent senior notes due October 2022 were redeemed at a price equal2021. We are working with the IRS to par using available cash on hand and liquidity provided through MPC’s credit facilities.
On September 25, 2020,facilitate the refund, but we announced that alldo not control the timing of the $650 million outstanding aggregate principal amount of 3.400 percent senior notes due December 2020 will be redeemed on November 15, 2020, using available cash on hand and liquidity provided through MPC’s credit facilities, at a price equal to par, plus accrued and unpaid interest to, but not including, such date.this payment.
MPLX’s liquidity totaled $4.93$4.52 billion at SeptemberJune 30, 2020.2021. As of SeptemberJune 30, 2020,2021, MPLX had cash and cash equivalents of $28$8 million, $3.41$3.5 billion available under its $3.5 billion revolving credit agreement and $1.5$1.0 billion available through its intercompany loan agreement with MPC.
OVERVIEW OF SEGMENTS
Refining & Marketing
Refining & Marketing segment income from operations depends largely on our Refining & Marketing margin, refining operating costs, refining planned turnarounds, distribution costs, refining planned turnarounddepreciation expenses and refinery throughputs.
Our Refining & Marketing margin is the difference between the prices of refined products sold and the costs of crude oil and other charge and blendstocks refined, including the costs to transport these inputs to our refineries and the costs of products purchased for resale. The crack spread is a measure of the difference between market prices for refined products and crude oil, commonly used by the industry as a proxy for the refining margin. Crack spreads can fluctuate significantly, particularly when prices of refined products do not move in the same direction as the cost of crude oil. As a performance benchmark and a comparison with other industry participants, we calculate Gulf Coast, Mid-Continent and West Coast crack spreads that we believe most closely track our operations and slate of products. The following are used for these crack-spreadcrack spread calculations:
•The Gulf Coast crack spread uses three barrels of LLSMEH crude producing two barrels of USGC CBOB gasoline and one barrel of USGC ULSD;ULSD. In the first quarter of 2021, we transitioned to MEH crude from LLS crude;
•The Mid-Continent crack spread uses three barrels of WTI crude producing two barrels of Chicago CBOB gasoline and one barrel of Chicago ULSD; and
•The West Coast crack spread uses three barrels of ANS crude producing two barrels of LA CARBOB and one barrel of LA CARB Diesel.
Our refineries can process significant amounts of sweet and sour crude oil, which typically can be purchased at a discount to crude oil referenced in our Gulf Coast, Mid-Continent and West Coast crack spreads. The amount of these discounts, which we refer to as the sweet differential and sour differential, can vary significantly, causing our Refining & Marketing margin to differ from blended crack spreads. In general, larger sweet and sour differentials will enhance our Refining & Marketing margin.
Future crude oil differentials will be dependent on a variety of market and economic factors, as well as U.S. energy policy.
The following table provides sensitivities showing an estimated change in annual net income due to potential changes in market conditions. |
| | | | |
(In millions, after-tax) | | |
Blended crack spread sensitivity(a) (per $1.00/barrel change) | $ | 910 |
|
Sour differential sensitivity(b) (per $1.00/barrel change) | 420 |
|
Sweet differential sensitivity(c) (per $1.00/barrel change) | 420 |
|
Natural gas price sensitivity(d) (per $1.00/MMBtu) | 325 |
|
| | | | | | | | |
(In millions, after-tax) | | |
Blended crack spread sensitivity(a) (per $1.00/barrel change) | $ | 838 | |
(a)Sour differential sensitivity(b)(per $1.00/barrel change)
| Crack spread based on 38 percent LLS, 38 percent WTI and 24 percent ANS with Gulf Coast, Mid-Continent and West Coast product pricing, respectively, and assumes all other differentials and pricing relationships remain unchanged. |
396 | |
(b)Sweet differential sensitivity(c)(per $1.00/barrel change)
| Sour crude oil basket consists of the following crudes: ANS, Argus Sour Crude Index, Maya and Western Canadian Select. We expect approximately 50 percent of the crude processed at our refineries in 2020 will be sour crude. |
381 | |
(c)Natural gas price sensitivity(d)(per $1.00/MMBtu)
| Sweet crude oil basket consists of the following crudes: Bakken, Brent, LLS, WTI-Cushing and WTI-Midland. We expect approximately 50 percent of the crude processed at our refineries in 2020 will be sweet crude. |
275 | |
(d)
| This is consumption-based exposure for our Refining & Marketing segment and does not include the sales exposure for our Midstream segment. |
(a)Crack spread based on 40 percent MEH, 40 percent WTI and 20 percent ANS with Gulf Coast, Mid-Continent and West Coast product pricing, respectively, and assumes all other differentials and pricing relationships remain unchanged.
42
(c)Sweet crude oil basket consists of the following crudes: Bakken, Brent, MEH, WTI-Cushing and WTI-Midland. We expect approximately 49 percent of the crude processed at our refineries in 2021 will be sweet crude.
(d)This is consumption-based exposure for our Refining & Marketing segment and does not include the sales exposure for our Midstream segment.
In addition to the market changes indicated by the crack spreads, the sour differential and the sweet differential, our Refining & Marketing margin is impacted by factors such as:
•the selling prices realized for refined products;
•the types of crude oil and other charge and blendstocks processed;
•our refinery yields;
•the cost of products purchased for resale; and
•the impact of commodity derivative instruments used to hedge price risk.risk;
•the potential impact of LCM adjustments to inventories in periods of declining prices; and
•the potential impact of LIFO liquidation charges due to draw-downs from historic inventory levels.
Refining & Marketing segment income from operations is also affected by changes in refinery operating costs and refining planned turnaround costs in addition to committed distribution costs. Changes in operating costs are primarily driven by the cost of energy used by our refineries, including purchased natural gas, and the level of maintenance costs. Refining planned turnarounds, requiring temporary shutdown of certain refinery operating units, are periodically performed at each refinery. Distribution costs primarily include long-term agreements with MPLX, which as discussed below which are based on committed volumesinclude minimum commitments to MPLX, and will negatively impact income from operations in periods when throughput or sales are lower or refineries are idled.
We have various long-term, fee-based commercial agreements with MPLX. Under these agreements, MPLX, which is reported in our Midstream segment, provides transportation, storage, distribution and marketing services to our Refining & Marketing segment. Certain of these agreements include commitments for minimum quarterly throughput and distribution volumes of crude oil and refined products and minimum storage volumes of crude oil, refined products and other products. Certain other agreements include commitments to pay for 100 percent of available capacity for certain marine transportation and refining logistics assets.
Midstream
Our Midstream segment transports, stores, distributes and markets crude oil and refined products, principally for our Refining & Marketing segment. The profitability of our pipeline transportation operations primarily depends on tariff rates and the volumes shipped through the pipelines. The profitability of our marine operations primarily depends on the quantity and availability of our vessels and barges. The profitability of our light product terminal operations primarily depends on the throughput volumes at these terminals. The profitability of our fuels distribution services primarily depends on the sales volumes of certain refined products. The profitability of our refining logistics operations depends on the quantity and availability of our refining logistics assets. A majority of the crude oil and refined product shipments on our pipelines and marine vessels and the refined product throughput at our terminals serve our Refining & Marketing segment and our refining logistics assets and fuels distribution services are used solely by our Refining & Marketing segment. As discussed above in the Refining & Marketing section, MPLX, which is reported in our Midstream segment, has various long-term, fee-based commercial agreements related to services provided to our Refining & Marketing segment. Under these agreements, MPLX has received various commitments of minimum throughput, storage and distribution volumes as well as commitments to pay for all available capacity of certain assets. The volume of crude oil that we transport is directly affected by the supply of, and refiner demand for, crude oil in the markets served directly by our crude oil pipelines, terminals and marine operations. Key factors in this supply and demand balance are the production levels of crude oil by producers in various regions or fields, the availability
and cost of alternative modes of transportation, the volumes of crude oil processed at refineries and refinery and transportation system maintenance levels. The volume of refined products that we transport, store, distribute and market is directly affected by the production levels of, and user demand for, refined products in the markets served by our refined product pipelines and marine operations. In most of our markets, demand for gasoline and distillate peaks during the summer driving season, which extends from May through September of each year, and declines during the fall and winter months. As with crude oil, other transportation alternatives and system maintenance levels influence refined product movements.
Our Midstream segment also gathers and processes natural gas and NGLs. NGL and natural gas prices are volatile and are impacted by changes in fundamental supply and demand, as well as market uncertainty, availability of NGL transportation and fractionation capacity and a variety of additional factors that are beyond our control. Our Midstream segment profitability is affected by prevailing commodity prices primarily as a result of processing or conditioning at our own or third‑party processing plants, purchasing and selling or gathering and transporting volumes of natural gas at index‑related prices and the cost of third‑party transportation and fractionation services. To the extent that commodity prices influence the level of natural gas drilling by our producer customers, such prices also affect profitability.
RESULTS OF OPERATIONS
The following discussion includes comments and analysis relating to our results of operations. This discussion should be read in conjunction with Item 1. Financial Statements and is intended to provide investors with a reasonable basis for assessing our historical operations, but should not serve as the only criteria for predicting our future performance.
Consolidated Results of Operations
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
(In millions) | | 2021 | | 2020 | | Variance | | 2021 | | 2020 | | Variance |
Revenues and other income: | | | | | | | | | | | |
Sales and other operating revenues(a) | $ | 29,615 | | | $ | 12,195 | | | $ | 17,420 | | | $ | 52,326 | | | $ | 34,399 | | | $ | 17,927 | |
Income (loss) from equity method investments | 93 | | | 79 | | | 14 | | | 184 | | | (1,154) | | | 1,338 | |
Net gain on disposal of assets | — | | | 2 | | | (2) | | | 3 | | | 5 | | | (2) | |
Other income | 119 | | | 24 | | | 95 | | | 196 | | | 47 | | | 149 | |
Total revenues and other income | 29,827 | | | 12,300 | | | 17,527 | | | 52,709 | | | 33,297 | | | 19,412 | |
Costs and expenses: | | | | | | | | | | | |
Cost of revenues (excludes items below) | 27,177 | | | 11,502 | | | 15,675 | | | 48,261 | | | 31,844 | | | 16,417 | |
LCM inventory valuation adjustment | — | | | (1,470) | | | 1,470 | | | — | | | 1,715 | | | (1,715) | |
Impairment expense | — | | | 25 | | | (25) | | | — | | | 7,847 | | | (7,847) | |
Depreciation and amortization | 871 | | | 833 | | | 38 | | | 1,715 | | | 1,696 | | | 19 | |
Selling, general and administrative expenses | 625 | | | 665 | | | (40) | | | 1,200 | | | 1,407 | | | (207) | |
| | | | | | | | | | | |
Other taxes | 189 | | | 170 | | | 19 | | | 351 | | | 368 | | | (17) | |
Total costs and expenses | 28,862 | | | 11,725 | | | 17,137 | | | 51,527 | | | 44,877 | | | 6,650 | |
Income (loss) from continuing operations | 965 | | | 575 | | | 390 | | | 1,182 | | | (11,580) | | | 12,762 | |
Net interest and other financial costs | 372 | | | 341 | | | 31 | | | 725 | | | 673 | | | 52 | |
Income (loss) from continuing operations before income taxes | 593 | | | 234 | | | 359 | | | 457 | | | (12,253) | | | 12,710 | |
Provision (benefit) for income taxes on continuing operations | 5 | | | 150 | | | (145) | | | 39 | | | (1,801) | | | 1,840 | |
Income (loss) from continuing operations, net of tax | 588 | | | 84 | | | 504 | | | 418 | | | (10,452) | | | 10,870 | |
Income from discontinued operations, net of tax | 8,214 | | | 192 | | | 8,022 | | | 8,448 | | | 510 | | | 7,938 | |
Net income (loss) | 8,802 | | | 276 | | | 8,526 | | | 8,866 | | | (9,942) | | | 18,808 | |
Less net income (loss) attributable to: | | | | | | | | | | | |
Redeemable noncontrolling interest | 21 | | | 21 | | | — | | | 41 | | | 41 | | | — | |
Noncontrolling interests | 269 | | | 246 | | | 23 | | | 555 | | | (758) | | | 1,313 | |
Net income (loss) attributable to MPC | $ | 8,512 | | | $ | 9 | | | $ | 8,503 | | | $ | 8,270 | | | $ | (9,225) | | | $ | 17,495 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(In millions) | | 2020 | | 2019 | | Variance | | 2020 | | 2019 | | Variance |
Revenues and other income: | | | | | | | | | | | |
Sales and other operating revenues(a) | $ | 17,408 |
| | $ | 27,552 |
| | $ | (10,144 | ) | | $ | 51,807 |
| | $ | 83,140 |
| | $ | (31,333 | ) |
Income (loss) from equity method investments(b) | 117 |
| | 104 |
| | 13 |
| | (1,037 | ) | | 272 |
| | (1,309 | ) |
Net gain on disposal of assets | 1 |
| | 2 |
| | (1 | ) | | 6 |
| | 220 |
| | (214 | ) |
Other income | 22 |
| | 30 |
| | (8 | ) | | 69 |
| | 93 |
| | (24 | ) |
Total revenues and other income | 17,548 |
| | 27,688 |
| | (10,140 | ) | | 50,845 |
| | 83,725 |
| | (32,880 | ) |
Costs and expenses: | | | | | | | | | | | |
Cost of revenues (excludes items below) | 16,673 |
| | 24,345 |
| | (7,672 | ) | | 48,517 |
| | 74,626 |
| | (26,109 | ) |
LCM inventory valuation adjustment | (530 | ) | | — |
| | (530 | ) | | 1,185 |
| | — |
| | 1,185 |
|
Impairment expense | 433 |
| | — |
| | 433 |
| | 8,280 |
| | — |
| | 8,280 |
|
Depreciation and amortization | 830 |
| | 761 |
| | 69 |
| | 2,526 |
| | 2,375 |
| | 151 |
|
Selling, general and administrative expenses | 673 |
| | 761 |
| | (88 | ) | | 2,080 |
| | 2,413 |
| | (333 | ) |
Restructuring expenses | 348 |
| | — |
| | 348 |
| | 348 |
| | — |
| | 348 |
|
Other taxes | 178 |
| | 141 |
| | 37 |
| | 546 |
| | 407 |
| | 139 |
|
Total costs and expenses | 18,605 |
| | 26,008 |
| | (7,403 | ) | | 63,482 |
| | 79,821 |
| | (16,339 | ) |
Income (loss) from continuing operations | (1,057 | ) | | 1,680 |
| | (2,737 | ) | | (12,637 | ) | | 3,904 |
| | (16,541 | ) |
Net interest and other financial costs | 359 |
| | 312 |
| | 47 |
| | 1,032 |
| | 932 |
| | 100 |
|
Income (loss) from continuing operations before income taxes | (1,416 | ) | | 1,368 |
| | (2,784 | ) | | (13,669 | ) | | 2,972 |
| | (16,641 | ) |
Provision (benefit) for income taxes on continuing operations | (436 | ) | | 255 |
| | (691 | ) | | (2,237 | ) | | 600 |
| | (2,837 | ) |
Income (loss) from continuing operations, net of tax | (980 | ) | | 1,113 |
| | (2,093 | ) | | (11,432 | ) | | 2,372 |
| | (13,804 | ) |
Income from discontinued operations, net of tax | 371 |
| | 254 |
| | 117 |
| | 881 |
| | 621 |
| | 260 |
|
Net income (loss) | (609 | ) | | 1,367 |
| | (1,976 | ) | | (10,551 | ) | | 2,993 |
| | (13,544 | ) |
Less net income (loss) attributable to: | | | | | | | | | | | |
Redeemable noncontrolling interest | 20 |
| | 20 |
| | — |
| | 61 |
| | 61 |
| | — |
|
Noncontrolling interests | 257 |
| | 252 |
| | 5 |
| | (501 | ) | | 738 |
| | (1,239 | ) |
Net income (loss) attributable to MPC | $ | (886 | ) | | $ | 1,095 |
| | $ | (1,981 | ) | | $ | (10,111 | ) | | $ | 2,194 |
| | $ | (12,305 | ) |
(a)In accordance with discontinued operations accounting, Speedway sales to retail customers and net results are reflected in Income from discontinued operations, net of tax and Refining & Marketing intercompany sales to Speedway are now presented as third party sales through the close of the sale on May 14, 2021. | |
(a)
| In accordance with discontinued operations accounting, Speedway sales to retail customers and net results are reflected in Income from discontinued operations, net of tax and Refining & Marketing intercompany sales to Speedway are now presented as third party sales. |
| |
(b)
| The first nine months of 2020 includes $1.32 billion of impairment expense. See Note 6 to the unaudited consolidated financial statements for further information. |
ThirdSecond Quarter 2021 Compared to Second Quarter 2020 Compared to Third Quarter 2019
Net income (loss) attributable to MPC decreased $1.98increased $8.50 billion in the thirdsecond quarter of 2021 compared to the second quarter of 2020 compared to the third quarter of 2019 largely due to a decreasethe gain on the sale of Speedway, increases in refined product sales volumes and prices, partially offset by the absence of an LCM inventory benefit in the second quarter of 2020 and a partial period of income from discontinued operations due to the sale of the Speedway business on May 14, 2021.
Revenues and other income increased $17.53 billion primarily due to:
•increased sales and other operating revenues of $17.42 billion primarily due to increased Refining & Marketing segment average refined product sales prices of $1.06 per gallon and increased refined product sales volumes of 611 mbpd; and
•increased other income of $95 million primarily due to higher income on RIN sales.
Costs and expenses increased $17.14 billion primarily due to:
•increased cost of revenues of $15.68 billion mainly due to higher refined product raw material and crude oil costs;
•the absence of an LCM benefit of $1.47 billion resulting from a lower LCM reserve as of June 30, 2020 as compared to March 31, 2020; and
•decreased selling, general and administrative expenses of $40 million largely due to cost reductions realized from our 2020 workforce reduction and other cost control efforts.
Net interest and other financial costs increased $31 million largely due to pension settlement losses of $49 million, partially offset by decreased interest expense due to lower MPC and MPLX borrowings.
We recorded a combined federal, state and foreign income tax provision of $5 million for the three months ended June 30, 2021, which was lower than the tax computed at the U.S. statutory rate primarily due to permanent tax differences related to income attributable to noncontrolling interests. We recorded a combined federal, state and foreign income tax provision of $150 million for the three months ended June 30, 2020, which was higher than the tax computed at the U.S. statutory rate primarily due to impacts attributable to noncontrolling interests, state taxes and the tax rate differential resulting from the expected NOL carryback provided under the CARES Act.
Noncontrolling interests increased $23 million primarily due to an increase in MPLX’s net income.
Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020
Net income attributable to MPC increased $17.50 billion in the first six months of 2021 compared to the first six months of 2020 primarily due to the gain on the sale of Speedway, the absence of impairment expenses and an LCM inventory charge in the first six months of 2020 and increases in average refined product sales prices and margin,volumes, partially offset by a partial period of income from discontinued operations due to the sale of the Speedway business on May 14, 2021.
Revenues and other income increased $19.41 billion primarily due to:
•increased sales and other operating revenues of $17.93 billion primarily due to increased average refined product sales prices of $0.63 per gallon and increased Refining & Marketing segment refined product sales volumes, which increased 46 mbpd;
•increased income from equity method investments of $1.34 billion largely due to impairments of equity method investments of $1.32 billion recorded in the first six months of 2020 primarily driven by the effects of COVID-19 and the decline in commodity prices; and
•increased other income of $149 million primarily due to higher income on RIN sales.
Costs and expenses increased $6.65 billion primarily due to:
•increased cost of revenues of $16.42 billion primarily due to higher crude oil and refined product raw material costs;
•the absence of an LCM charge of $1.72 billion primarily driven by the effects of COVID-19 and the decline in commodity prices $433 millionin the prior year;
•decreased impairment expense of long-lived assets impairment primarily related to the repositioning of our Martinez refinery, $348 million of restructuring expenses and a $256 million charge to reflect an expected LIFO liquidation for our crude oil inventories. These charges were partially offset by an LCM benefit of $530 million and increased income from discontinued operations, which represents our Speedway business.
Revenues and other income decreased $10.14$7.85 billion primarily due to decreased Refining & Marketing segment refined product sales volumes, which decreased 505 mbpd, and decreased average refined product sales prices of $0.55 per gallon largely due to reduced travel and business operations associated with the COVID-19 pandemic.
Costs and expenses decreased $7.40 billion primarily due to:
decreased cost of revenues of $7.67 billion mainly due to lower refined product sales volumes, which decreased 505 mbpd primarily due to reduced travel and business operations associated with the COVID-19 pandemic and an LCM benefit of $530 million. This was partially offset by a charge of $256 million to reflect an expected LIFO liquidation for our crude oil inventories. The costs of inventories in the historical LIFO layer which is expected to be liquidated are higher than current costs, which resulted in the LIFO liquidation charge;
long-lived asset impairment expenses of $433 million primarily related to the repositioning of the Martinez refinery;
decreased selling, general and administrative expenses of $88 million mainly due to decreases in salaries and employee-related expenses, contract services expenses, credit card processing fees for brand customers, and transaction-related costs, partially offset by increases in employee benefit costs and other expenses;
restructuring expenses of $348 million related to the idling of the Martinez and Gallup refineries and costs related to our announced workforce reduction. See Note 3 to the unaudited consolidated financial statements for additional information; and
increased other taxes of $37 million primarily due to increased property and environmental taxes of approximately $21 million and $17 million, respectively. Property taxes increased in the current period mainly due to the absence of tax exemptions and property tax refunds received in the third quarter of 2019 and environmental taxes increased largely due to the reinstatement of the Oil Spill Tax in 2020, which was not in effect for all of 2019.
Net interest and other financial costs increased $47 million largely due to increased MPC borrowings and decreased capitalized interest and interest income.
Benefit for income taxes on continuing operations was $436 million for the three months ended September 30, 2020 compared to provision for income taxes on continuing operations of $255 million for the three months ended September 30, 2019. The combined federal, state and foreign income tax rate was 31 percent (tax benefit rate) and 19 percent for the three months ended September 30, 2020 and 2019, respectively. The effective tax benefit rate for the three months ended September 30, 2020 was higher than the U.S. statutory rate of 21 percent due to certain permanent tax benefits related to net income attributable to noncontrolling interests, state taxes, and a change in estimate related to the expected NOL carryback provided by the CARES Act offset by non-tax deductible goodwill impairment. The combined federal, state and foreign continuing operations income tax rate for the three months ended September 30, 2019 and was less than the U.S. statutory rate of 21 percent primarily due to certain permanent tax differences related to net income attributable to noncontrolling interests offset by equity compensation and state and local tax expense.
Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019
Net income (loss) attributable to MPC decreased $12.31 billion in the first nine months of 2020 compared to the first nine months of 2019 primarily due to impairment expensesimpairments recorded for goodwill and long-lived assets in the in the first six months of $8.28 billion, impairments of equity method investments of $1.32 billion, an LCM charge of $1.19 billion, decreased refined product sales volumes, prices and margin, restructuring expenses of $348 million, and a charge of $256 million to reflect an expected LIFO liquidation in our crude oil inventories. These changes were partially offset by increased income from discontinued operations, which represents our Speedway business.
Revenues and other income decreased $32.88 billion primarily due to:
decreased sales and other operating revenues of $31.33 billion primarily due to decreased Refining & Marketing segment refined product sales volumes, which decreased 508 mbpd, and decreased average refined product sales prices of $0.56 per gallon primarily due to reduced travel and business operations associated with the COVID-19 pandemic;
decreased income from equity method investments of $1.31 billion largely due to impairments of equity method investments of $1.32 billion2020 primarily driven by the effects of COVID-19 and the decline in commodity prices; and
decreased net gain on disposal of assets of $214 million mainly due to the absence of a $207 million gain recognized in 2019 in connection with MPC’s exchange of its undivided interestprices in the Capline pipeline system for an equity ownership in Capline LLC.prior year; and
Costs and expenses decreased $16.34 billion primarily due to:
decreased cost of revenues of $26.11 billion primarily due to reduced travel and business operations associated with the COVID-19 pandemic, partially offset by increased cost of revenues of $256 million to reflect an expected LIFO liquidation for our crude oil inventories. The costs of inventories in the historical LIFO layer which is expected to be liquidated are higher than current costs, which resulted in the LIFO liquidation charge;
an LCM charge of $1.19 billion primarily driven by the effects of COVID-19 and the decline in commodity prices;
impairment expense of $8.28 billion recorded for goodwill and long-lived assets of $7.39 billion and $886 million, respectively, primarily driven by the effects of COVID-19 and the decline in commodity prices. It also includes impairment of long-lived assets primarily related to the repositioning of the Martinez refinery;
decreased selling, general and administrative expenses of $333$207 million mainly due to decreases in salaries and employee-related expenses, transaction-related expenses, credit card processing fees for brand customers and litigation expense, partially offset by increases in employee benefit costs and other expenses;
restructuring expense of $348 million related to the idling of the Martinez and Gallup refineries and costs related to our announced workforce reduction. See Note 3 to the unaudited consolidated financial statements for additional information; and
increased other taxes of $139 million primarily due to increased property and environmental taxes of approximately $77 million and $56 million, respectively. Property taxes increased in the current period mainly due to the absence of property tax refunds and tax exemptions received in the first nine months of 2019 and environmental taxes increased largely due to the reinstatement of the Oil Spill Tax incost reductions realized from our 2020 which was not in effect for all of 2019.workforce reduction and other cost control efforts.
Net interest and other financial costs increased $100$52 million largely due to increased MPC borrowings and foreign currency exchangepension settlement losses and decreased interest income.of $49 million.
Benefit for income taxes on continuing operations was $2.24 billion for the nine months ended September 30, 2020 compared to provision for income taxes on continuing operations of $600 million for the nine months ended September 30, 2019, mainly due to decreased income before income taxes of $16.64 billion. TheWe recorded a combined federal, state and foreign income tax rate was 16 percent (tax rate benefit) and 20 percentprovision of $39 million for the ninesix months ended SeptemberJune 30, 2020 and 2019, respectively. The effective tax rate for the nine months ended September 30, 20202021, which was lower than the tax computed at the U.S. statutory rate primarily due to permanent tax differences related to income attributable to noncontrolling interests. We recorded a combined federal, state and foreign income tax benefit of 21 percent$1.80 billion for the six months ended June 30, 2020, which was lower than the tax computed at the U.S. statutory rate primarily due to a significant amount of our pre-tax loss consisting of non-tax deductible goodwill impairment charges, partially offset by the tax rate differential resulting from the expected NOL carryback provided under the CARES Act. Additionally, our non-controlling interest in MPLX generally provides an effective tax rate benefit since the tax associated with those ownership interests is generally benefitedpaid by our noncontrolling interest in MPLX,those interests, but this benefit was lower for the ninesix months ended SeptemberJune 30, 2020 compared to the nine months ended September 30, 2019 due to goodwill and other impairment charges recorded by MPLX. The effective tax rate for the nine months ended September 30, 2019 was less than the U.S. statutory rate of 21 percent primarily due to $36 million of state deferred tax expense recorded as an out of period adjustment, offset by permanent tax differences related to net income attributable to noncontrolling interests.
Net income attributable to noncontrolling interests decreased $1.24increased $1.31 billion primarily due to an increase in MPLX’s net loss primarily resulting fromincome largely due to impairment expense recognized during the first ninesix months of 2020.
Results of Discontinued OperationsThe prospective and historical results of the Speedway business are presented as discontinued operations in our consolidated financial statements.
The following includes key financial and operating data for Speedway for the third quarter of 2020 compared to the third quarter of 2019 and the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019.
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
Key Financial and Operating Data | | 2020 | | 2019 | | 2020 | | 2019 |
Speedway fuel sales (millions of gallons) | 1,583 |
| | 1,992 |
| | 4,416 |
| | 5,820 |
|
Speedway fuel margin (dollars per gallon)(a)(b) | $ | 0.3025 |
| | $ | 0.2604 |
| | $ | 0.3640 |
| | $ | 0.2379 |
|
Merchandise sales (in millions) | | $ | 1,733 |
| | $ | 1,703 |
| | $ | 4,797 |
| | $ | 4,736 |
|
Merchandise margin (in millions)(b)(c) | $ | 510 |
| | $ | 498 |
| | $ | 1,376 |
| | $ | 1,376 |
|
Merchandise margin percent | 29.4 | % | | 29.2 | % | | 28.7 | % | | 29.1 | % |
Same store gasoline sales volume (period over period)(d) | (16.6 | )% | | (2.8 | )% | | (20.6 | )% | | (2.8 | )% |
Same store merchandise sales (period over period)(d)(e) | 0.8 | % | | 5.2 | % | | (0.9 | )% | | 5.6 | % |
Convenience stores at period-end | | 3,854 |
| | 3,931 |
| | | | |
| |
(a)
| The price paid by consumers less the cost of refined products, excluding transportation, consumer excise taxes and bankcard processing fees (where applicable), divided by gasoline and distillate sales volume. Excludes inventory valuation adjustments. |
| |
(b)
| See “Non-GAAP Measures” section for reconciliation and further information regarding this non-GAAP measure. |
| |
(c)
| The price paid by the consumers less the cost of merchandise. |
| |
(d)
| Same store comparison includes only locations owned at least 13 months.
|
Third Quarter 2020 Compared to Third Quarter 2019
Income from discontinued operations, net of tax, increased $117 million. Quarterly results reflected higher fuel and merchandise margins, partially offset by lower fuel volumes. Changes in fuel sales volumes were primarily due to the effects of the COVID-19 pandemic which resulted in restricted travel, social distancing and reduced business operations. In addition, fuel sales volumes decreased as a result of an agreement between Speedway and Pilot Travel Centers LLC (“PTC”), effective October 1, 2019, in which PTC supplies, prices and sells diesel fuel at certain Speedway and PTC locations with both companies sharing in the diesel fuel margins.
Beginning August 2, 2020, in accordance with ASC 360, Property, Plant, and Equipment, we ceased recording depreciation and amortization for the Speedway business’ property, plant and equipment, finite-lived intangible assets and right of use lease assets. As a result, Speedway depreciation and amortization was $36 million and $94 million, for third quarter of 2020 and 2019, respectively.
The Speedway fuel margin increased to 30.25 cents per gallon in the third quarter of 2020, from 26.04 cents per gallon in the third quarter of 2019.
Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019
Income from discontinued operations, net of tax, increased $260 million primarily due to higher fuel margin partially offset by lower fuel volumes. Changes in fuel sales volumes were primarily due to the effects of the COVID-19 pandemic which resulted in restricted travel, social distancing and reduced business operations. In addition, fuel sales volumes decreased as a result of an agreement between Speedway and PTC, effective October 1, 2019, in which PTC supplies, prices and sells diesel fuel at certain Speedway and PTC locations with both companies sharing in the diesel fuel margins.
Beginning August 2, 2020, in accordance with ASC 360, Property, Plant, and Equipment, we ceased recording depreciation and amortization for the Speedway business’ property, plant and equipment, finite-lived intangible assets and right of use lease assets. As a result, Speedway depreciation and amortization was $237 million and $285 million for the nine months ended September 30, 2020 and 2019, respectively.
The Speedway fuel margin increased to 36.40 cents per gallon in the first nine months of 2020 compared with 23.79 cents per gallon in the first nine months of 2019.
See Note 4 to the unaudited consolidated financial statements for additional information on discontinued operations.
Segment Results
Refining & Marketing
Beginning with the third quarter of 2020, the direct dealer business is managed as part of the Refining & Marketing segment. The results of the Refining & Marketing segment have been retrospectively adjusted to include the results of the direct dealer business in all periods presented.
The following includes key financial and operating data for the thirdsecond quarter of 2021 compared to the second quarter of 2020 and the six months ended June 30, 2021 compared to the third quarter of 2019 and the ninesix months ended SeptemberJune 30, 2020 compared to the nine months ended September 30, 2019.2020.
| | |
(a)
| Includes intersegment sales and sales destined for export. |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
Refining & Marketing Operating Statistics | | | | | | | | |
Net refinery throughput (mbpd) | | 2,536 |
| | 3,156 |
| | 2,601 |
| | 3,125 |
|
Refining & Marketing margin, excluding LIFO liquidation charge(a)(b)(c) | | $ | 8.28 |
| | $ | 15.11 |
| | $ | 9.46 |
| | $ | 14.17 |
|
LIFO liquidation charge | | (1.10 | ) | | — |
| | (0.36 | ) | | — |
|
Refining & Marketing margin per barrel(a)(b)(c) | | 7.18 |
| | 15.11 |
| | 9.10 |
| | 14.17 |
|
Less: | | | | | | | | |
Refining operating costs per barrel(d) | | 5.41 |
| | 5.44 |
| | 5.85 |
| | 5.45 |
|
Distribution costs per barrel(a)(e) | | 5.61 |
| | 4.32 |
| | 5.35 |
| | 4.49 |
|
Refining planned turnaround costs per barrel | | 1.01 |
| | 0.56 |
| | 1.02 |
| | 0.69 |
|
Depreciation and amortization per barrel(a) | | 1.96 |
| | 1.55 |
| | 1.95 |
| | 1.56 |
|
Plus: | | | | | | | | |
Purchase accounting-depreciation and amortization(f) | | — |
| | 0.12 |
| | — |
| | 0.01 |
|
Other per barrel(f) | | 0.08 |
| | 0.05 |
| | 0.01 |
| | 0.06 |
|
Refining & Marketing segment income (loss) per barrel | | $ | (6.73 | ) | | $ | 3.41 |
| | $ | (5.06 | ) | | $ | 2.05 |
|
| | |
(a)
| Recast to reflect direct dealer results in the Refining & Marketing segment. |
(a)Includes intersegment sales to Midstream and sales destined for export.
| | |
(b)
| Sales revenue less cost of refinery inputs and purchased products, divided by net refinery throughput. |
| |
(c)
| See “Non-GAAP Measures” section for reconciliation and further information regarding this non-GAAP measure. |
| |
(d)
| Includes refining operating costs and major maintenance costs. Excludes planned turnaround and depreciation and amortization expense. |
| |
(e)
| Includes fees paid to MPLX. On a per barrel throughput basis, these fees were $3.81 and $2.74 for the three months ended September 30, 2020 and 2019, respectively, and $3.63 and $2.79 for the nine months ended September 30, 2020 and 2019, respectively. Excludes depreciation and amortization expense. |
| |
(f)
| Reflects the cumulative effect through June 30, 2019 related to a measurement period adjustment arising from the finalization of purchase accounting. |
| |
(g)
| Includes income (loss) from equity method investments, net gain (loss) on disposal of assets and other income. |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
Refining & Marketing Operating Statistics | | | | | | | | |
Net refinery throughput (mbpd) | | 2,854 | | | 2,276 | | | 2,710 | | | 2,635 | |
| | | | | | | | |
| | | | | | | | |
Refining & Marketing margin per barrel(a)(b) | | 12.45 | | | 7.64 | | | 11.37 | | | 10.04 | |
Less: | | | | | | | | |
Refining operating costs per barrel, excluding winter storm effect(c) | 4.59 | | | 6.13 | | | 4.86 | | | 6.06 | |
Winter storm effect on refining operating cost(d) | — | | | — | | | 0.06 | | | — | |
Distribution costs per barrel | | 5.04 | | | 5.87 | | | 5.11 | | | 5.23 | |
Refining planned turnaround costs per barrel | | 0.24 | | | 0.78 | | | 0.35 | | | 1.02 | |
Depreciation and amortization per barrel | | 1.80 | | | 2.24 | | | 1.93 | | | 1.95 | |
Plus: | | | | | | | | |
Other per barrel(e) | | 0.08 | | | (0.07) | | | 0.18 | | | (0.04) | |
Refining & Marketing segment income (loss) per barrel | | $ | 0.86 | | | $ | (7.45) | | | $ | (0.76) | | | $ | (4.26) | |
Fees paid to MPLX included in distribution costs above | $ | 3.33 | | | $ | 4.06 | | | $ | 3.49 | | | $ | 3.54 | |
(a)Sales revenue less cost of refinery inputs and purchased products, divided by net refinery throughput.
(b)See “Non-GAAP Measures” section for reconciliation and further information regarding this non-GAAP measure.
(c)Includes refining operating costs and major maintenance costs. Excludes planned turnaround and depreciation and amortization expense.
(d)Winter storms in the first quarter of 2021 resulted in higher costs, including maintenance and repairs.
(e)Includes income (loss) from equity method investments, net gain (loss) on disposal of assets and other income.
The following table presents certain benchmark prices in our marketing areas and market indicators that we believe are helpful in understanding the results of our Refining & Marketing segment. The benchmark crack spreads below do not reflect the market cost of RINs necessary to meet EPA renewable volume obligations for attributable products under the Renewable Fuel Standard. | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
Benchmark Spot Prices (dollars per gallon) | | 2021 | | 2020 | | 2021 | | 2020 |
Chicago CBOB unleaded regular gasoline | $ | 2.07 | | | $ | 0.78 | | | $ | 1.86 | | | $ | 0.99 | |
Chicago ULSD | 2.04 | | | 0.88 | | | 1.89 | | | 1.15 | |
USGC CBOB unleaded regular gasoline | 1.99 | | | 0.81 | | | 1.84 | | | 1.03 | |
USGC ULSD | 1.95 | | | 0.91 | | | 1.82 | | | 1.19 | |
LA CARBOB | | 2.22 | | | 0.95 | | | 2.03 | | | 1.24 | |
LA CARB diesel | | 1.99 | | | 0.97 | | | 1.89 | | | 1.30 | |
| | | | | | | | |
Market Indicators (dollars per barrel) | | | | | | | | |
WTI | | $ | 66.17 | | | $ | 28.00 | | | $ | 62.22 | | | $ | 36.82 | |
MEH | | 66.90 | | | — | | | 63.26 | | | — | |
| | | | | | | | |
LLS | | — | | | 30.39 | | | — | | | 38.95 | |
ANS | | 68.51 | | | 30.57 | | | 64.85 | | | 40.72 | |
Crack Spreads: | | | | | | | | |
Mid-Continent WTI 3-2-1 | $ | 12.30 | | | $ | 4.72 | | | $ | 10.10 | | | 6.05 | |
USGC MEH 3-2-1 | 7.96 | | | — | | | 7.32 | | | — | |
USGC LLS 3-2-1 | — | | | 2.75 | | | — | | | 4.60 | |
West Coast ANS 3-2-1 | 13.42 | | | 7.44 | | | 12.05 | | | 10.04 | |
Blended 3-2-1(a) | 10.79 | | | 4.62 | | | 9.38 | | | 6.45 | |
Crude Oil Differentials: | | | | | | | |
Sweet | $ | (0.27) | | | $ | (1.70) | | | $ | (0.64) | | | $ | (1.20) | |
Sour | (3.09) | | | (3.78) | | | (3.10) | | | (4.34) | |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
Benchmark Spot Prices (dollars per gallon) | | 2020 | | 2019 | | 2020 | | 2019 |
Chicago CBOB unleaded regular gasoline | $ | 1.15 |
| | $ | 1.73 |
| | $ | 1.05 |
| | $ | 1.73 |
|
Chicago ULSD | 1.17 |
| | 1.79 |
| | 1.16 |
| | 1.86 |
|
USGC CBOB unleaded regular gasoline | 1.15 |
| | 1.65 |
| | 1.07 |
| | 1.65 |
|
USGC ULSD | 1.16 |
| | 1.83 |
| | 1.18 |
| | 1.88 |
|
LA CARBOB | | 1.33 |
| | 1.97 |
| | 1.27 |
| | 1.99 |
|
LA CARB diesel | | 1.24 |
| | 1.94 |
| | 1.28 |
| | 2.00 |
|
| | | | | | | | |
Market Indicators (dollars per barrel) | | | | | | | | |
LLS | | $ | 42.49 |
| | $ | 60.59 |
| | $ | 40.15 |
| | $ | 63.37 |
|
WTI | | 40.92 |
| | 56.44 |
| | 38.21 |
| | 57.10 |
|
ANS | | 42.75 |
| | 63.02 |
| | 41.41 |
| | 65.27 |
|
Crack Spreads: | | | | | | | | |
Mid-Continent WTI 3-2-1 | $ | 5.55 |
| | $ | 15.26 |
| | $ | 5.88 |
| | 15.85 |
|
USGC LLS 3-2-1 | 3.28 |
| | 10.05 |
| | 4.15 |
| | 8.12 |
|
West Coast ANS 3-2-1 | 9.21 |
| | 17.77 |
| | 9.76 |
| | 17.21 |
|
Blended 3-2-1(a) | 5.57 |
| | 13.88 |
| | 6.15 |
| | 13.24 |
|
Crude Oil Differentials: | | | | | | | |
Sweet | $ | (0.59 | ) | | $ | (1.31 | ) | | $ | (1.00 | ) | | $ | (2.40 | ) |
Sour | (2.26 | ) | | (2.35 | ) | | (3.64 | ) | | (2.50 | ) |
(a) Blended 3-2-1 Mid-Continent/USGC/West Coast crack spread is 40/40/20 percent in 2021. Blended 3-2-1 Mid-Continent/USGC/West Coast crack spread is 38/38/24 percent in 2020. These blends are based on our refining capacity by region in each period. Beginning in the first quarter of 2021, the prompt price for USGC was transitioned from LLS to MEH. | |
(a)
| Blended 3-2-1 Mid-Continent/USGC/West Coast crack spread is 38/38/24 percent in 2020 and 2019. These blends are based on our refining capacity by region in each period. |
ThirdSecond Quarter 2021 Compared to Second Quarter 2020 Compared to Third Quarter 2019
Refining & Marketing segment revenues decreased $10.13increased $17.19 billion primarily due to lower refined product sales volumes, which decreased 505 mbpd, and decreasedincreased average refined product sales prices of $0.55$1.06 per gallon. These decreases were primarily the resultgallon and increased refined product sales volume of reduced travel and business operations associated with the COVID-19 pandemic.611 mbpd.
Net refinery throughputs decreased 620increased 578 mbpd during the thirdsecond quarter of 2020,2021, primarily due to reducing throughputs and indefinitely idling certain facilities duringcontinuing industry recovery from the impact of COVID-19 pandemic.in 2020.
Refining & Marketing segment income from operations decreased $2.56increased $1.77 billion primarily due to lowerhigher blended crack spreads.spreads and reduced refining planned turnaround and refining operating costs.
Refining & Marketing margin excluding LIFO liquidation charge, was $8.28$12.45 per barrel for the thirdsecond quarter of 20202021 compared to $15.11$7.64 per barrel for the thirdsecond quarter of 2019.2020. Refining & Marketing margin is affected by our performance against the market indicators shown earlier, which use spot market values and an estimated mix of crude purchases and product sales. Based on the market indicators and our crude oil throughput, we estimate a net negativepositive impact of approximately $3$1.3 billion on Refining & Marketing margin for the thirdsecond quarter of 2021 compared to the second quarter of 2020, compared to the third quarter of 2019, primarily due to lowerhigher crack spreads. Our reported Refining & Marketing margin differs from market indicators due to the mix of crudes purchased and their costs, the effect of market structure on our crude oil acquisition prices, the effect of RIN prices on the crack spread, and other items like refinery yields, other feedstock variances direct dealerand fuel margin and, for the third quarter of 2020, a LIFO liquidation charge of $256 million.from sales to direct dealers. These factors had an estimated net positive effect of approximately $200$300 million on Refining & Marketing segment income in the thirdsecond quarter of 20202021 compared to the thirdsecond quarter of 2019.2020.
For the three months ended SeptemberJune 30, 2020,2021, refining operating costs, excluding depreciation and amortization, decreased $314$77 million, or $1.54 per barrel, compared to the three months ended SeptemberJune 30, 20192020 as we took actions to reduce costs in response to the
economic effects of COVID-19, including operating at lower throughput at our refineries and idling portions of our refining capacity. This decrease was partially offset by increased turnaround and distribution costs, excluding depreciation and amortization, of $70 million and $53 million, respectively. Net refinery throughput was 620 mbpd lower as compared to the three months ended September 30, 2019. On aThe per barrel basis, refining operating costs, excluding depreciation and amortization,cost also decreased $0.03 primarily due to lower throughput partially offset by decreased costs. as a result of higher throughputs during the quarter.
Distribution costs, excluding depreciation and amortization, increased $1.29 per barrel, primarily due to lower throughput. Distribution costs, excluding depreciation$94 million and amortization, include fees paid to MPLX of $889$866 million and $794$841 million for the thirdsecond quarter of 2021 and 2020, respectively. On a per barrel basis, distribution costs, excluding depreciation and 2019, respectively. amortization, decreased $0.83 per barrel as increased costs were offset by higher throughput.
Refining planned turnaround costs increased $0.45decreased $101 million, or $0.54 per barrel, due to the timing of turnaround activity and lower throughput. activity.
Depreciation and amortization per barrel increased by $0.41decreased $0.44 per barrel primarily due to lower throughput and increased costs.higher throughput.
NineSix Months Ended SeptemberJune 30, 20202021 Compared to NineSix Months Ended SeptemberJune 30, 20192020
Refining & Marketing segment revenues decreased $31.17increased $17.57 billion primarily due to lower refined product sales volumes, which decreased 508 mbpd, and decreasedincreased average refined product sales prices of $0.56$0.63 per gallon. These decreases were primarily the result of reduced travelgallon and business operations associated with the COVID-19 pandemic.higher refined product sales volumes, which increased 46 mbpd.
Net refinery throughputs decreased 524increased 75 mbpd in the first ninesix months of 2020,2021, primarily due to reducing throughputs and indefinitely idling certain facilities duringcontinuing industry recovery from the impact of COVID-19 pandemic.in 2020.
Refining & Marketing segment incomeloss from operations decreased $5.36$1.67 billion primarily driven by lowerhigher blended crack spreads.spreads and reduced refining operating and refining planned turnaround costs, partially offset by narrower sweet and sour differentials.
Refining & Marketing margin excluding LIFO liquidation charge, was $9.46$11.37 per barrel for the first ninesix months of 20202021 compared to $14.17$10.04 per barrel for the first ninesix months of 2019.2020. Refining & Marketing margin is affected by the market indicators shown earlier, which use spot market values and an estimated mix of crude purchases and product sales. Based on the market indicators and our crude oil throughput, we estimate a net negativepositive impact of approximately $7 billion$700 million on Refining & Marketing margin for the first ninesix months of 20202021 compared to the first ninesix months of 2019,2020, primarily due to lowerhigher crack spreads.spreads partially offset by narrower sweet and sour differentials. Our reported Refining & Marketing margin differs from market indicators due to the mix of crudes purchased and their costs, market structure on our crude oil acquisition prices, RIN prices on the crack spread, and other items like refinery yields, other feedstock variances and direct dealer fuel margin and, for the third quarter of 2020, a LIFO liquidation charge of $256 million.margin. These factors had an estimated net positive effect of approximately $1.4 billion$100 million on Refining & Marketing segment income in the first ninesix months of 20202021 compared to the first ninesix months of 2019.2020.
For the ninesix months ended SeptemberJune 30, 2020,2021, refining operating and distribution costs, excluding depreciation and amortization were $7.99 billion. This was a decrease of $499and the winter storm effect, decreased $525 million, or $1.20 per barrel, compared to the ninesix months ended SeptemberJune 30, 20192020 as we took actions to reduce costs in response to the economic effects of COVID-19, including operating at lower throughput at our refineries and idling portions of our refining capacity. This decrease was partially offset by increased refining planned turnaround
Distribution costs, excluding depreciation and amortization, were $2.51 billion in both periods and include fees paid to MPLX of $138 million. Net refinery throughput was 524 mbpd lower as compared to$1.71 billion and $1.70 billion for the ninefirst six months ended September 30, 2019.of 2021 and 2020, respectively. On a per barrel basis, refining operating costs and distribution costs, excluding depreciation and amortization, increased $0.40 and $0.86, respectively, mainlydecreased $0.12 per barrel due to lower throughput partially offset by a decrease in costs. Distribution costs, excluding depreciation and amortization, include fees paid to MPLX of $2.59 billion and $2.38 billion for the for the first nine months of 2020 and 2019, respectively. higher throughput.
Refining planned turnaround costs increased $0.33decreased $318 million, or $0.67 per barrel, due to the timing of turnaround activity and a decrease in throughput. activity.
Depreciation and amortization decreased $0.02 per barrel as increased costs were offset by $0.39 primarily due to a decrease in throughput and increased costs.
higher throughput.
Supplemental Refining & Marketing Statistics
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Refining & Marketing Operating Statistics | | | | | | | |
Crude oil capacity utilization percent(a) | 94 | | | 71 | | | 89 | | | 81 | |
Refinery throughputs (mbpd): | | | | | | | |
Crude oil refined | 2,713 | | | 2,165 | | | 2,548 | | | 2,475 | |
Other charge and blendstocks | 141 | | | 111 | | | 162 | | | 160 | |
Net refinery throughput | 2,854 | | | 2,276 | | | 2,710 | | | 2,635 | |
Sour crude oil throughput percent | 48 | | | 53 | | | 48 | | | 50 | |
Sweet crude oil throughput percent | 52 | | | 47 | | | 52 | | | 50 | |
Refined product yields (mbpd): | | | | | | | |
Gasoline | 1,436 | | | 1,114 | | | 1,380 | | | 1,301 | |
Distillates | 984 | | | 834 | | | 933 | | | 927 | |
Propane | 54 | | | 45 | | | 50 | | | 52 | |
Feedstocks and petrochemicals | 301 | | | 217 | | | 262 | | | 284 | |
Heavy fuel oil | 27 | | | 27 | | | 31 | | | 32 | |
Asphalt | 91 | | | 76 | | | 94 | | | 78 | |
Total | 2,893 | | | 2,313 | | | 2,750 | | | 2,674 | |
Refined product export sales volumes (mbpd)(b) | 231 | | | 219 | | | 237 | | | 301 | |
|
| | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Refining & Marketing Operating Statistics | | | | | | | |
Refined product export sales volumes (mbpd)(a) | 389 |
| | 379 |
| | 331 |
| | 407 |
|
Crude oil capacity utilization percent(b) | 84 |
| | 98 |
| | 82 |
| | 97 |
|
Refinery throughputs (mbpd):(c) | | | | | | | |
Crude oil refined | 2,390 |
| | 2,969 |
| | 2,446 |
| | 2,925 |
|
Other charge and blendstocks | 146 |
| | 187 |
| | 155 |
| | 200 |
|
Net refinery throughput | 2,536 |
| | 3,156 |
| | 2,601 |
| | 3,125 |
|
Sour crude oil throughput percent | 49 |
| | 47 |
| | 50 |
| | 49 |
|
Sweet crude oil throughput percent | 51 |
| | 53 |
| | 50 |
| | 51 |
|
Refined product yields (mbpd):(c) | | | | | | | |
Gasoline | 1,311 |
| | 1,553 |
| | 1,305 |
| | 1,538 |
|
Distillates | 872 |
| | 1,103 |
| | 908 |
| | 1,091 |
|
Propane | 50 |
| | 56 |
| | 51 |
| | 55 |
|
Feedstocks and petrochemicals | 230 |
| | 334 |
| | 266 |
| | 345 |
|
Heavy fuel oil | 21 |
| | 44 |
| | 28 |
| | 47 |
|
Asphalt | 92 |
| | 106 |
| | 83 |
| | 90 |
|
Total | 2,576 |
| | 3,196 |
| | 2,641 |
| | 3,166 |
|
(a)Based on calendar-day capacity, which is an annual average that includes down time for planned maintenance and other normal operating activities. | |
(b)Represents fully loaded export cargoes for each time period. These sales volumes are included in the total sales volume amounts.
(a)
| Represents fully loaded export cargoes for each time period. These sales volumes are included in the total sales volume amounts. |
| |
(b)
| Based on calendar-day capacity, which is an annual average that includes down time for planned maintenance and other normal operating activities. |
| |
(c)
| Excludes inter-refinery volumes which totaled 55 mbpd and 116 mbpd for the three months ended September 30, 2020 and 2019, respectively, and 68 mbpd and 98 mbpd for the nine months ended September 30, 2020 and 2019, respectively. |
Midstream
The following includes key financial and operating data for the thirdsecond quarter of 2021 compared to the second quarter of 2020 and the six months ended June 30, 2021 compared to the third quarter of 2019 and the ninesix months ended SeptemberJune 30, 2020 compared to the nine months ended September 30, 2019.2020.
| | |
(a)
| On owned common-carrier pipelines, excluding equity method investments. |
| | |
(b)
| Includes amounts related to unconsolidated equity method investments on a 100 percent basis. |
(a)On owned common-carrier pipelines, excluding equity method investments.
(b)Includes amounts related to unconsolidated equity method investments on a 100 percent basis.
| | |
(a)
| C2 + NGL pricing based on Mont Belvieu prices assuming an NGL barrel of approximately 35 percent ethane, 35 percent propane, 6 percent iso-butane, 12 percent normal butane and 12 percent natural gasoline. |
Third
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
Benchmark Prices | | 2021 | | 2020 | | 2021 | | 2020 |
Natural Gas NYMEX HH ($ per MMBtu) | $ | 2.97 | | | $ | 1.76 | | | $ | 2.85 | | | $ | 1.81 | |
C2 + NGL Pricing ($ per gallon)(a) | $ | 0.75 | | | $ | 0.34 | | | $ | 0.74 | | | $ | 0.37 | |
(a)C2 + NGL pricing based on Mont Belvieu prices assuming an NGL barrel of approximately 35 percent ethane, 35 percent propane, 6 percent iso-butane, 12 percent normal butane and 12 percent natural gasoline.
Second Quarter 20202021 Compared to ThirdSecond Quarter 20192020
Midstream segment revenue decreased $17 million primarily due to decreased demand for the products that we produce and transport due to the current macro-economic conditions in addition to lower natural gas prices.
Midstream segment income from operations increased $41$336 million mainlyand $108 million, respectively. Results for the quarter benefited from higher revenue, primarily due to contributions from organic growth projectshigher pipeline and reducedterminal throughputs and higher natural gas prices, in addition to lower operating expenses. Midstream segment income from operations also benefited from stable, fee based earnings in the current business environment.
NineSix Months Ended SeptemberJune 30, 20202021 Compared to NineSix Months Ended SeptemberJune 30, 20192020
Midstream segment revenue decreased $221 million primarily due to decreased demand for the products that we produce and transport due to the current macro-economic conditions in addition to lower natural gas and NGL prices in the first nine months of 2020.
Midstream segment income from operations increased $29$424 million mainlyand $175 million, respectively. Results benefited from higher revenue, primarily due to contributions from organic growth projectshigher pipeline and reducedterminal throughputs and higher natural gas prices, in addition to lower operating expenses. Midstream segment income from operations also benefited from stable, fee based earningsexpenses in the current business environment.first six months of 2021.
Corporate
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Key Financial Information (in millions) | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
Corporate(a) | $ | (180) | | | $ | (195) | | | $ | (337) | | | $ | (428) | |
(a)Corporate costs consist primarily of MPC’s corporate administrative expenses and costs related to certain non-operating assets, except for corporate overhead expenses attributable to MPLX, which are included in the Midstream segment.
Second Quarter 2021 Compared to Second Quarter 2020
Corporate costs decreased $15 million largely due to cost reductions realized from our 2020 workforce reduction and other cost control efforts.
Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020
Corporate costs decreased $91 million largely due to cost reductions realized from our 2020 workforce reduction and other cost control efforts.
Items not Allocated to Segments
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Key Financial Information (in millions) | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
Items not allocated to segments: | | | | | | | |
Transaction-related costs(a) | $ | — | | | $ | — | | | $ | — | | | $ | (8) | |
| | | | | | | |
Impairments | (56) | | | (25) | | | (56) | | | (9,162) | |
| | | | | | | |
LCM inventory valuation adjustment | — | | | 1,470 | | | — | | | (1,715) | |
Total items not allocated to segments: | (56) | | | 1,445 | | | (56) | | | (10,885) | |
|
| | | | | | | | | | | | | | | | |
Key Financial Information (in millions) | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
Corporate(a) | $ | (197 | ) | | $ | (206 | ) | | $ | (625 | ) | | $ | (589 | ) |
Items not allocated to segments: | | | | | | | |
Capline restructuring gain | — |
| | — |
| | — |
| | 207 |
|
Transaction-related costs(b) | — |
| | (22 | ) | | (8 | ) | | (147 | ) |
Litigation | — |
| | — |
| | — |
| | (22 | ) |
Impairments | (433 | ) | | — |
| | (9,595 | ) | | — |
|
Restructuring expense | (348 | ) | | — |
| | (348 | ) | | — |
|
LCM inventory valuation adjustment | 530 |
| | — |
| | (1,185 | ) | | — |
|
| |
(a)(a) | Corporate costs consist primarily of MPC’s corporate administrative expenses and costs related to certain non-operating assets, except for corporate overhead expenses attributable to MPLX, which are included in the Midstream segment. |
| |
(b)
| 2020 includes costs incurred in connection with the Midstream strategic review. Costs incurred in 2020 in connection with the Speedway separation are included in discontinued operations. See Note 4 to the unaudited consolidated financial statements for additional information on discontinued operations. 2019 costs include employee severance, retention and other costs related to the acquisition of Andeavor. |
Third Quarter 2020 Compared to Third Quarter 2019
Corporate costs decreased $9 million. Third quarter 2020 and 2019 corporate expenses include expenses of $7 million and $8 million, respectively, which are no longer allocable to Speedway due to discontinued operations accounting.
On August 3, 2020, we announced our plans to evaluate possibilities to strategically reposition our Martinez refinery, including the potential conversion of the refinery into a renewable diesel facility. Subsequent to August 3, 2020, we progressed activities associated with the conversion of the Martinez refinery to a renewable diesel facility, including applying for permits, advancing discussions with feedstock suppliers, and beginning detailed engineering activities. As a result of the progression of these activities, we recorded an impairment charge of $342 million related to abandoned assets. Additionally, MPLX cancelled in-process Martinez refinery logistics capital projects with $27 million of carrying value due to our progression toward converting Martinez to a renewable diesel facility. Impairment expense also includes $64 million related to goodwill transferred from our Midstream segment to our Refining & Marketing segment in connection with the transferMidstream strategic review. Costs incurred in 2020 in connection with the Speedway separation are included in discontinued operations. See Note 4 to MPCthe unaudited consolidated financial statements for additional information on discontinued operations.
Second Quarter 2021 Compared to Second Quarter 2020
Total items not allocated to segments included impairment expense of $56 million in the MPLX wholesale distribution business
second quarter of 2021. During the thirdsecond quarter of 2020, we announced strategic actionsrecognized an LCM benefit of $1.47 billion and impairment expense of $25 million.
Six Months Ended June 30, 2021 Compared to lay a foundation for long-term success, including plans to optimize our assets and structurally lower costs in 2021 and beyond, which included indefinitely idling the Gallup and Martinez refineries and the approval of an involuntary workforce reduction plan. In connection with these strategic actions, we recorded restructuring expenses of $348 million for the three months ended SeptemberSix Months Ended June 30, 2020
The indefinite idlingTotal items not allocated to segments included impairment expense of $56 million in the Gallup and Martinez refineries and progression of activities associated with the conversion of the Martinez refinery to a renewable diesel facility resulted in $189 million of restructuring expenses. Of the $189 million of restructuring expenses, we expect $130 million to settle in cash for costs related to decommissioning refinery processing units and storage tanks and fulfilling environmental remediation obligations. Additionally, we recorded a non-cash reserve against our materials and supplies inventory at these facilities of $51 million.
The involuntary workforce reduction plan, including employee reductions resulting from MPC's indefinite idling of its Martinez and Gallup refineries, affected approximately 2,050 employees. We recorded $159 million of restructuring expenses for separation benefits payable under our employee separation plan and certain collective bargaining agreements that we expect to settle in cash. Certain of the affected MPC employees provide services to MPLX. MPLX has various employee services agreements and secondment agreements with MPC pursuant to which MPLX reimburses MPC for employee costs, along with
the provision of operational and management services in support of MPLX’s operations. Pursuant to such agreements, MPC was reimbursed by MPLX for $36 million of the $159 million of restructuring expenses recorded for these actions.
As of September 30, 2020, $291 million of restructuring expenses were accrued as restructuring reserves in our consolidated balance sheet and we expect cash payments for the majority of these reserves to occur within the next twelve months.
The change from the LCM inventory valuation reserve at June 30, 2020 resulted in a benefit of $530 million for the three months ended September 30, 2020.
Transaction-related costs of $22 million for the third quarter of 2019 largely related to employee retention, severance and other costs associated with the Andeavor acquisition.
Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019
Corporate costs increased $36 million primarily due to an information systems integration project. The first ninesix months of 2020 and 2019 corporate expenses include expenses of $20 million and $21 million, respectively, which are no longer allocable to Speedway due to discontinued operations accounting.
2021. During the first ninesix months of 2020, we recorded impairment charges of approximately $9.60$9.16 billion, which includes $8.28$7.85 billion related to goodwill and long-lived assets and $1.32 billion related to equity method investments, and an LCM charge of $1.19$1.72 billion primarily driven by the effects of COVID-19 and the decline in commodity prices.
Items not allocated to segments also include transaction-related costs of $8 million for the first ninesix months of 2020 associated with the Midstream strategic review and other related activities and $147 million for the first nine months of 2019 largely related to the recognition of an obligation for vacation benefits provided to former Andeavor employees as part of the Andeavor acquisition as well as employee retention, severance and other costs. Transaction costs for the first nine months of 2020 related to the Speedway separation are included in discontinued operations. In the first nine months of 2019, other unallocated items include a $207 million gain resulting from the agreements executed with Capline LLC to contribute our 33 percent undivided interest in the Capline pipeline system in exchange for a 33 percent ownership interest in Capline LLC and a litigation reserve of $22 million.
During the third quarter of 2020, we announced strategic actions to lay a foundation for long-term success, including plans to optimize our assets and structurally lower costs in 2021 and beyond, which included indefinitely idling the Gallup and Martinez refineries and the approval of an involuntary workforce reduction plan. In connection with these strategic actions, we recorded restructuring expenses of $348 million for the three months ended September 30, 2020. See Note 3 to the unaudited consolidated financial statements and earlier discussion in this section for additional information.
activities.
Non-GAAP Financial MeasuresMeasure
Management uses certaina financial measuresmeasure to evaluate our operating performance that areis calculated and presented on the basis of methodologiesa methodology other than in accordance with GAAP. We believe thesethis non-GAAP financial measures aremeasure is useful to investors and analysts to assess our ongoing financial performance because, when reconciled to theirits most comparable GAAP financial measures, they providemeasure, it provides improved comparability between periods through the exclusion of certain items that we believe are not indicative of our core operating performance and that may obscure our underlying business results and trends. These measuresThis measure should not be considered a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP, and our calculationscalculation thereof may not be comparable to similarly titled measures reported by other companies. The non-GAAP financial measuresmeasure we use areis as follows:
Refining & Marketing Margin
Refining & Marketing margin is defined as sales revenue less the cost of refinery inputs and purchased products.products and excludes other items as reflected in the table below.
Reconciliation of Refining & Marketing income from operations to Refining & Marketing gross margin and Refining & Marketing margin
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions) | | 2021 | | 2020 | | 2021 | | 2020 |
Refining & Marketing income (loss) from operations(a) | | $ | 224 | | | $ | (1,544) | | | $ | (374) | | | $ | (2,041) | |
Plus (Less): | | | | | | | | |
Selling, general and administrative expenses | | 499 | | | 502 | | | 955 | | | 1,058 | |
LCM inventory valuation adjustment | | — | | | 1,470 | | | — | | | (1,715) | |
(Income) loss from equity method investments | | (14) | | | 19 | | | (19) | | | 22 | |
Net gain on disposal of assets | | — | | | 1 | | | (3) | | | 1 | |
Other income | | (89) | | | (4) | | | (143) | | | (8) | |
Refining & Marketing gross margin | | 620 | | | 444 | | | 416 | | | (2,683) | |
Plus (Less): | | | | | | | | |
Operating expenses (excluding depreciation and amortization) | | 2,305 | | | 2,240 | | | 4,580 | | | 5,073 | |
LCM inventory valuation adjustment | | — | | | (1,470) | | | — | | | 1,715 | |
Depreciation and amortization | | 466 | | | 463 | | | 944 | | | 936 | |
Gross margin excluded from Refining & Marketing margin(b) | | (198) | | | (75) | | | (377) | | | (184) | |
Other income included in Refining & Marketing margin | | 82 | | | — | | | 82 | | | — | |
Other taxes included in Refining & Marketing margin | | (42) | | | (19) | | | (66) | | | (43) | |
Refining & Marketing margin(a) | | 3,233 | | | 1,583 | | | 5,579 | | | 4,814 | |
| | | | | | | | |
| | | | | | | |
(a)LCM inventory valuation adjustments are excluded from Refining & Marketing income from operations and Refining & Marketing margin.
(b)Reflects the gross margin, excluding depreciation and amortization, of other related operations included in the Refining & Marketing segment and processing of credit card transactions on behalf of certain of our marketing customers.
|
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
(in millions) | | 2020 | | 2019 | | 2020 | | 2019 |
Refining & Marketing income from operations(a) | | $ | (1,569 | ) | | $ | 989 |
| | $ | (3,610 | ) | | $ | 1,750 |
|
Plus (Less): | | | | | | | | |
Selling, general and administrative expenses | | 518 |
| | 536 |
| | 1,576 |
| | 1,662 |
|
LCM inventory valuation adjustment | | 530 |
| | — |
| | (1,185 | ) | | — |
|
(Income) loss from equity method investments | | (16 | ) | | (6 | ) | | 6 |
| | (10 | ) |
Net gain on disposal of assets | | (1 | ) | | — |
| | — |
| | (8 | ) |
Other income | | (1 | ) | | (8 | ) | | (9 | ) | | (30 | ) |
Refining & Marketing gross margin | | (539 | ) | | 1,511 |
| | (3,222 | ) | | 3,364 |
|
Plus (Less): | | | | | | | | |
Operating expenses (excluding depreciation and amortization) | | 2,408 |
| | 2,643 |
| | 7,481 |
| | 7,881 |
|
LCM inventory valuation adjustment | | (530 | ) | | — |
| | 1,185 |
| | — |
|
Depreciation and amortization | | 456 |
| | 416 |
| | 1,392 |
| | 1,319 |
|
Gross margin excluded from Refining & Marketing margin(b) | | (101 | ) | | (179 | ) | | (285 | ) | | (464 | ) |
Other taxes included in Refining & Marketing margin | | (19 | ) | | (3 | ) | | (62 | ) | | (8 | ) |
Refining & Marketing margin(a) | | 1,675 |
| | 4,388 |
| | 6,489 |
| | 12,092 |
|
LIFO liquidation charge | | 256 |
| | — |
| | 256 |
| | — |
|
Refining & Marketing margin, excluding LIFO liquidation charge | | $ | 1,931 |
| | $ | 4,388 |
| | $ | 6,745 |
| | $ | 12,092 |
|
| |
(a)
| LCM inventory valuation adjustments are excluded from Refining & Marketing income from operations and Refining & Marketing margin. |
| |
(b)
| The gross margin, excluding depreciation and amortization, of operations that support Refining & Marketing such as biodiesel and ethanol ventures, power facilities and processing of credit card transactions. |
Speedway Fuel Margin
Speedway fuel margin is defined as the price paid by consumers less the cost of refined products, including transportation, consumer excise taxes and bankcard processing fees (where applicable).
Speedway Merchandise Margin
Speedway merchandise margin is defined as the price paid by consumers less the cost of merchandise.
Reconciliation of income from discontinued operations to Speedway gross margin and Speedway margin
|
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
(in millions) | | 2020 | | 2019 | | 2020 | | 2019 |
Income from discontinued operations(a) | | $ | 438 |
| | $ | 344 |
| | $ | 1,182 |
| | $ | 831 |
|
Plus (Less): | | | | | | | | |
Operating, selling, general and administrative expenses | | 584 |
| | 618 |
| | 1,779 |
| | 1,754 |
|
Income from equity method investments | | (21 | ) | | (20 | ) | | (70 | ) | | (58 | ) |
Net gain on disposal of assets | | 1 |
| | (2 | ) | | — |
| | (2 | ) |
Other income | | (34 | ) | | (3 | ) | | (127 | ) | | (9 | ) |
Speedway gross margin | | 968 |
| | 937 |
| | 2,764 |
| | 2,516 |
|
Plus (Less): | | | | | | | | |
LCM inventory valuation adjustment | | — |
| | — |
| | 25 |
| | — |
|
Depreciation and amortization | | 36 |
| | 94 |
| | 237 |
| | 285 |
|
Speedway margin(a) | | $ | 1,004 |
| | $ | 1,031 |
| | $ | 3,026 |
| | $ | 2,801 |
|
| | | | | | | | |
Speedway margin: | | | | | | | | |
Fuel margin | | $ | 478 |
| | $ | 519 |
| | $ | 1,607 |
| | $ | 1,385 |
|
Merchandise margin | | 510 |
| | 498 |
| | 1,376 |
| | 1,376 |
|
Other margin | | 16 |
| | 14 |
| | 43 |
| | 40 |
|
Speedway margin | | $ | 1,004 |
| | $ | 1,031 |
| | $ | 3,026 |
| | $ | 2,801 |
|
| |
(a)
| LCM inventory valuation adjustments are excluded from income from discontinued operations and Speedway margin. |
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Our consolidated cash and cash equivalents balance for continuing operations was approximately $618 million$11.84 billion at SeptemberJune 30, 20202021 compared to $1.39 billion$415 million at December 31, 2019.2020. Cash and cash equivalents for discontinued operations was $98 million at September 30, 2020 compared to $134$140 million at December 31, 2019.2020. Net cash provided by (used in) operating activities, investing activities and financing activities are presented in the following table. | | | | | | | | | | | | | | |
| | Six Months Ended June 30, |
(In millions) | | 2021 | | 2020 |
Net cash provided by (used in): | | | |
Operating activities | $ | 1,834 | | | $ | (230) | |
Investing activities | 15,403 | | | (2,077) | |
Financing activities | (5,954) | | | 1,871 | |
Total increase (decrease) in cash | $ | 11,283 | | | $ | (436) | |
|
| | | | | | | | |
| | Nine Months Ended September 30, |
(In millions) | | 2020 | | 2019 |
Net cash provided by (used in): | | | |
Operating activities | $ | 1,091 |
| | $ | 7,032 |
|
Investing activities | (2,824 | ) | | (4,575 | ) |
Financing activities | 922 |
| | (2,654 | ) |
Total increase (decrease) in cash | $ | (811 | ) | | $ | (197 | ) |
Net cash provided by operating activities decreased $5.94increased $2.06 billion in the first ninesix months of 20202021 compared to the first ninesix months of 2019,2020, primarily due to a decrease in operating results and an unfavorablefavorable change in working capital of $1.18$1.31 billion
mainly due to a decrease when comparing the change in accounts payable. Theseworking capital in both periods and an increase in operating results. Changes in working capital exclude changes in short-term debt. The favorable continuing operations changes were partially offset by an increasea decrease in cash provided by discontinued operations of $156$757 million which reflect the results of the Speedway business. ChangesThe decrease in cash provided by discontinued operating cash flows is due to tax payments related to the gain on sale and working capital exclude changes in short-term debt.changes.
Changes in working capital, excluding changes in short-term debt, were a net $490$347 million use of cash in the first ninesix months of 20202021 compared to a net $687 million source$1.66 billion use of cash in the first ninesix months of 2019.2020.
For the first ninesix months of 2021, changes in working capital were a net $347 million use of cash primarily due to the effects of increasing energy commodity prices and volumes at the end of the period on working capital. Accounts payable increased primarily due to increases in crude prices and volumes. Current receivables increased primarily due to higher crude and refined product prices and volumes. Inventories increased primarily due to increases in refined product and crude inventories.
For the first six months of 2020, changes in working capital, excluding the LCM reserve and changes in short-term debt, were a net $490 million$1.66 billion use of cash primarily due to the effects of decreasing energy commodity prices and volumes at the end of the period on working capital. Accounts payable decreased primarily due to decreases in crude prices and volumes. Current receivables decreased primarily due to lower crude prices and lower refined product prices and volumes. Excluding the LCM reserve, inventories decreased primarily due to a decreasedecreases in crude and refined productsproduct inventories.
ForNet cash provided by investing activities was $15.40 billion in the first ninesix months of 2019, changes in working capital, excluding changes in short-term debt, were a2021 compared to net $687 million source of cash primarily due to the effects of increasing energy commodity prices at the end of the period on working capital. Current receivables increased primarily due to higher refined product and crude prices and higher crude sales volumes. Accounts payable increased primarily due to increases in crude prices and crude volumes. Inventories decreased due to decreases in refined product and crude inventories, partially offset by an increase in materials and supplies inventory.
Net cash used in investing activities decreased $1.75of $2.08 billion in the first ninesix months of 2020. The change from 2020 compared to the first nine months of 2019,is primarily due to proceeds from the following:
sale of Speedway of $21.38 billion and a decrease in additions to property, plant and equipment of $1.13$1.09 billion, primarily due to decreased capital expenditures in the first nine monthspartially offset by purchases of 2020 in our Midstream and Refining & Marketing segments;
a decrease in netshort-term investments of $403 million largely due to investments in the first nine months$5.42 billion.
| |
• | a decrease in cash used in investing activities related to discontinued operations of $76 million primarily due to decreased capital expenditures in the first nine months of 2020 for Speedway. |
The consolidated statements of cash flows exclude changes to the consolidated balance sheets that did not affect cash. A reconciliation of additions to property, plant and equipment per the consolidated statements of cash flows to reported total capital expenditures and investments follows. | | | | Nine Months Ended September 30, | | | Six Months Ended June 30, |
(In millions) | | 2020 | | 2019 | (In millions) | | 2021 | | 2020 |
Additions to property, plant and equipment per the consolidated statements of cash flows | Additions to property, plant and equipment per the consolidated statements of cash flows | $ | 2,330 |
| | $ | 3,461 |
| Additions to property, plant and equipment per the consolidated statements of cash flows | $ | 606 | | | $ | 1,696 | |
Asset retirement expenditures | — |
| | 1 |
| |
| Decrease in capital accruals | Decrease in capital accruals | (426 | ) | | (282 | ) | Decrease in capital accruals | (19) | | | (338) | |
Total capital expenditures | Total capital expenditures | 1,904 |
| | 3,180 |
| Total capital expenditures | 587 | | | 1,358 | |
Investments in equity method investees (excludes acquisitions) | Investments in equity method investees (excludes acquisitions) | 436 |
| | 792 |
| Investments in equity method investees (excludes acquisitions) | 113 | | | 383 | |
Total capital expenditures and investments | Total capital expenditures and investments | $ | 2,340 |
| | $ | 3,972 |
| Total capital expenditures and investments | $ | 700 | | | $ | 1,741 | |
Financing activities were a net $922 million source of cash in the first nine months of 2020 compared to a net $2.65$5.95 billion use of cash in the first ninesix months of 2019.2021 compared to a net $1.87 billion source of cash in the first six months of 2020.
•MPC borrowed $7.41 billion and repaid $8.44 billion under its commercial paper program in the first six months of 2021.
•Long-term debt borrowings and repayments were a net $3.02$2.28 billion use of cash in the first six months of 2021 compared to a net $3.26 billion source of cash in the first ninesix months of 2020 compared to a net $1.20 billion source of cash in the first nine months of 2019.2020. During the first ninesix months of 2021, MPC repaid $1.3 billion of senior notes, borrowed and repaid $3.65 billion under its revolving credit facility and borrowed and repaid $4.65 billion under its trade receivables facility. MPLX redeemed $750 million of senior notes and had net payments of $175 million under its revolving credit facility. During the first six months of 2020, MPC issued $2.5 billion of senior notes, borrowed and repaid $3.5 billion under its revolving credit facility, and borrowed and repaid $1.23$1.18 billion under its trade receivables facility.facility and MPLX issued $3.0 billion of senior notes, which were used to repay $1.0 billion of outstanding borrowings under its term loan, $1.0 billion of floating rate senior notes and to redeem $450 million of senior notes, and had net borrowings of $95$825 million under its revolving credit facility. During the first nine months of 2019, MPLX issued $2.0 billion of floating rate senior notes, the proceeds of which were used to repay various outstanding MPLX borrowings, and had net borrowings of $500 million under its term loan.
•Cash used in common stock repurchases, decreased $1.89 billionincluding fees and expenses, totaled $984 million in the first ninesix months of 2020 compared to2021. See the first nine months“Capital Requirements” section for further discussion of 2019. Thereour stock repurchases.
•Repurchases of noncontrolling interests were no share repurchases$310 million in the first ninesix months of 2020 compared2021 related to $1.89 billion in the first nine monthsrepurchase of 2019.MPLX common units. See Note 105 to the unaudited consolidated financial statements for further discussion of share repurchases.MPLX.
Cash used in dividend payments increased $79 million in the first nine months of 2020 compared to the first nine months of 2019, primarily due to a $0.15 per share increase in our base dividend, partially offset by a reduction of shares resulting from share repurchases in 2019. Our dividend payments were $1.74 per common share in the first nine months of 2020 compared to $1.59 per common share in the first nine months of 2019.
Contributions from noncontrolling interests decreased $95 million in the first nine months of 2020 compared to the first nine months of 2019 primarily due to cash received in 2019 for an increased noncontrolling interest in an MPLX subsidiary.
Derivative Instruments
See Item 3. Quantitative and Qualitative Disclosures about Market Risk for a discussion of derivative instruments and associated market risk.
Capital Resources
MPC, Excluding MPLX
We control MPLX through our ownership of the general partner, however, the creditors of MPLX do not have recourse to MPC’s general credit through guarantees or other financial arrangements. The assets of MPLX can only be used to settle its own obligations and its creditors have no recourse to our assets. Therefore, in the following table, we present the liquidity of MPC, excluding MPLX. MPLX liquidity is discussed in the following section.
Our liquidity, excluding MPLX, totaled $8.44$22.35 billion at SeptemberJune 30, 20202021 consisting of:
| | | | | | | | | | | | | | | | | | | | |
| | June 30, 2021 |
(In millions) | | Total Capacity | | Outstanding Borrowings | | Available Capacity |
Bank revolving credit facility(a) | $ | 5,000 | | | $ | 1 | | | $ | 4,999 | |
Trade receivables facility | 100 | | | — | | | 100 | |
Total | $ | 5,100 | | | $ | 1 | | | $ | 5,099 | |
Cash and cash equivalents and short-term investments(b) | | | | | 17,249 | |
Total liquidity | | | | | $ | 22,348 | |
(a)Outstanding borrowings include $1 million in letters of credit outstanding under this facility.
(b)Excludes cash and cash equivalents of MPLX of $8 million.
|
| | | | | | | | | | | | |
| | September 30, 2020 |
(In millions) | | Total Capacity | | Outstanding Borrowings | | Available Capacity |
Bank revolving credit facility(a)(b) | $ | 5,000 |
| | $ | 1 |
| | $ | 4,999 |
|
364-day bank revolving credit facility | 1,000 |
| | — |
| | 1,000 |
|
364-day bank revolving credit facility | 1,000 |
| | — |
| | 1,000 |
|
Trade receivables facility(c) | 750 |
| | — |
| | 750 |
|
Total | $ | 7,750 |
| | $ | 1 |
| | $ | 7,749 |
|
Cash and cash equivalents(d) | | | | | 688 |
|
Total liquidity | | | | | $ | 8,437 |
|
On May 14, 2021, we completed the sale of Speedway, our company-owned and operated retail transportation fuel and convenience store business, to 7-Eleven for cash proceeds of $21.38 billion. This transaction resulted in a pretax gain of $11.68 billion ($8.02 billion after income taxes) after deducting the book value of the net assets and certain other adjustments. We utilized a portion of the Speedway sale proceeds to structurally reduce debt and the remaining proceeds are included in our liquidity as cash and cash equivalents and short-term investments. | |
(a)
| Excludes MPLX’s $3.50 billion bank revolving credit facility, which had approximately $3.41 billion available as of September 30, 2020. |
| |
(b)
| Outstanding borrowings include $1 million in letters of credit outstanding under this facility. |
| |
(c)
| Availability under our $750 million trade receivables facility is a function of eligible trade receivables, which will be lower in a sustained lower price environment for refined products. |
| |
(d)
| Includes cash and cash equivalents classified as assets held for sale of $98 million (see Note 4 to the unaudited consolidated financial statements) and excludes cash and cash equivalents of MPLX of $28 million. |
Because of the alternatives available to us, including internally generated cash flow and access to capital markets and a commercial paper program, we believe that our short-term and long-term liquidity is adequate to fund not only our current operations, but also our near-term and long-term funding requirements, including capital spending programs, the repurchase of shares of our common stock, dividend payments, defined benefit plan contributions, repayment of debt maturities the repurchase of shares of our common stock and other amounts that may ultimately be paid in connection with contingencies.
Effective June 18, 2021, we terminated our $1.0 billion unsecured 364-day revolving credit facility due in September 2021 and on June 23, 2021, we reduced the capacity under our trade receivables securitization facility from $750 million to $100 million. The trade receivables securitization facility expired in July of 2021, however, we plan to secure a new $100 million trade receivable facility in the third quarter of 2021.
Additionally, nearly all of our tax refund of approximately $2.1 billion is expected to be received during the second half of 2021. We are working with the IRS to facilitate the refund, but we do not control the timing of the payment.
We have a commercial paper program that allows us to have a maximum of $2.0 billion in commercial paper outstanding. We do not intend to have outstanding commercial paper borrowings in excess of available capacity under our bank revolving credit facility. As of SeptemberAt June 30, 2020,2021, we had no borrowings outstanding under the commercial paper borrowings outstanding.
On October 1, 2020, all of the $475 million outstanding aggregate principal amount of 5.375 percent senior notes due October 2022 were redeemed at a price equal to par using available cash on hand and liquidity provided through MPC’s credit facilities.
On September 25, 2020, we announced that all of the $650 million outstanding aggregate principal amount of 3.400 percent senior notes due December 2020 will be redeemed on November 15, 2020, using available cash on hand and liquidity provided through MPC’s credit facilities, at a price equal to par, plus accrued and unpaid interest to, but not including, such date.
On September 23, 2020, MPC entered into a 364-day revolving credit agreement with a syndicate of lenders. This revolving credit agreement provides for a $1.0 billion unsecured revolving credit facility that matures in September 2021, and replaces a similar 364-day revolving credit agreement that expired on September 28, 2020.
On April 27, 2020, MPC entered into a 364-day revolving credit agreement with a syndicate of lenders providing for a $1.0 billion unsecured revolving credit facility that matures in April 2021.
These two credit agreements contain representations and warranties, affirmative and negative covenants and events of default that MPC considers customary for agreements of similar nature and type and that are substantially similar to each other and those contained in the credit agreement for MPC’s $5.0 billion bank revolving credit facility.
On April 27, 2020, MPC closed on the issuance of $2.5 billion in aggregate principal amount of senior notes in a public offering, consisting of $1.25 billion aggregate principal amount of 4.500 percent unsecured senior notes due 2023 and $1.25 billion aggregate principal amount of 4.700 percent unsecured senior notes due 2025. MPC used the net proceeds from this offering to repay certain amounts outstanding under its five-year revolving credit facility.program.
The MPC credit agreementsagreement contains and our trade receivables facility containcontained representations and warranties, affirmative and negative covenants and events of default that we consider usual and customary for agreements of these types. The financial covenant included in the MPC credit agreementsagreement requires us to maintain, as of the last day of each fiscal quarter, a ratio of Consolidated Net Debt to Total Capitalization (as defined in the MPC credit agreements) of no greater than 0.65 to 1.00. As of SeptemberJune 30, 2020,2021, we were in compliance with the covenants contained in the MPC bank revolving credit facility and our trade receivables facility, including the financial covenant with a ratio of Consolidated Net Debt to Total Capitalization of 0.36less than 0.00 to 1.00.
Our intention is to maintain an investment-grade credit profile. As of SeptemberJune 30, 2020,2021, the credit ratings on our senior unsecured debt are as follows.
|
| | | | | | | |
Company | Rating Agency | Rating |
MPC | Moody’s | Baa2 (negative(stable outlook) |
| Standard & Poor’s | BBB (negative outlook) |
| Fitch | BBB (negative(stable outlook) |
The ratings reflect the respective views of the rating agencies. Although it is our intention to maintain a credit profile that supports an investment-grade rating, there is no assurance that these ratings will continue for any given period of time. The ratings may be revised or withdrawn entirely by the rating agencies if, in their respective judgments, circumstances so warrant.
None of theThe MPC credit agreements or our trade receivables facility containsagreement does not contain credit rating triggers that would result in the acceleration of interest, principal or other payments in the event that our credit ratings are downgraded. However, any downgrades of our senior unsecured debt could increase the applicable interest rates, yields and other fees payable under such agreementsthereunder and may limit our flexibility to obtain financing in the future, including to refinance existing indebtedness. In addition, a downgrade of our senior unsecured debt rating to below investment-grade levels could, under certain circumstances, decrease the amount of trade receivables that are eligible to be sold under our trade receivables facility, impact our ability to purchase crude oil on an unsecured basis and could result in us having to post letters of credit under existing transportation services or other agreements.
See Note 19 to the unaudited consolidated financial statements for further discussion of our debt.
MPLX
MPLX’s liquidity totaled $4.93$4.52 billion at SeptemberJune 30, 20202021 consisting of:
|
| | | | | | | | | | | | |
| | September 30, 2020 |
(In millions) | | Total Capacity | | Outstanding Borrowings | | Available Capacity |
MPLX LP - bank revolving credit facility | $ | 3,500 |
| | $ | 95 |
| | $ | 3,405 |
|
MPC Intercompany Loan Agreement | 1,500 |
| | — |
| | 1,500 |
|
Total | $ | 5,000 |
| | $ | 95 |
| | $ | 4,905 |
|
Cash and cash equivalents | | | | | 28 |
|
Total liquidity | | | | | $ | 4,933 |
|
| | | | | | | | | | | | | | | | | | | | |
| | June 30, 2021 |
(In millions) | | Total Capacity | | Outstanding Borrowings | | Available Capacity |
MPLX LP - bank revolving credit facility | $ | 3,500 | | | $ | — | | | $ | 3,500 | |
MPC intercompany loan agreement | 1,500 | | | 493 | | | 1,007 | |
Total | $ | 5,000 | | | $ | 493 | | | $ | 4,507 | |
Cash and cash equivalents | | | | | 8 | |
Total liquidity | | | | | $ | 4,515 | |
On August 18, 2020,4, 2021, MPLX issued $3.0announced the intent to provide notice of the redemption of all of the $1 billion outstanding aggregate principal amount of senior notes in a public offering, consisting of $1.5 billion aggregate principal amount of 1.750 percent senior notes due March 2026 and $1.5 billion aggregate principal amount of 2.650 percent senior notes due August 2030. Interest is payable semi-annually in arrears.
During the third quarter of 2020, a portion of the net proceeds from the senior notes offering was used to repay the $1.0 billion of outstanding borrowings under the MPLX term loan agreement, to repay the $1.0 billionMPLX's LIBOR plus 1.100% per annum floating rate senior notes due September 9, 2022. The notes are expected to be redeemed on September 3, 2021, andat a price equal to redeem all100% of the $450 million aggregate principal amount thereof, plus accrued and unpaid interest to, but not including, the redemption date. MPLX expects to fund the redemption amount with a combination of 6.375 percent senior notes due May 2024. On October 15, 2020, a portion ofcash on hand and borrowings under the remaining net proceeds fromMPLX credit agreement or the senior notes offering was used to redeem all of the $300 million aggregate principal amount of 6.250 percent senior notes due October 2022.MPC intercompany loan agreement.
The MPLX credit agreement contains certain representations and warranties, affirmative and restrictive covenants and events of default that we consider to be usual and customary for an agreement of this type. The financial covenant requires MPLX to maintain a ratio of Consolidated Total Debt as of the end of each fiscal quarter to Consolidated EBITDA (both as defined in the MPLX credit agreement) for the prior four fiscal quarters of no greater than 5.0 to 1.0 (or 5.5 to 1.0 during the six-month period following certain acquisitions). Consolidated EBITDA is subject to adjustments for certain acquisitions completed and capital projects undertaken during the relevant period. Other covenants restrict MPLX and/or certain of its subsidiaries from incurring debt, creating liens on assets and entering into transactions with affiliates. As of SeptemberJune 30, 2020,2021, MPLX was in compliance with the covenants, including the financial covenant with a ratio of Consolidated Total Debt to Consolidated EBITDA of 3.93.7 to 1.0.
Our intention is to maintain an investment-grade credit profile for MPLX. As of SeptemberJune 30, 2020,2021, the credit ratings on MPLX’s senior unsecured debt are as follows.
|
| | | | | | | |
Company | Rating Agency | Rating |
MPLX | Moody’s | Baa2 (negative(stable outlook) |
| Standard & Poor’s | BBB (negative outlook) |
| Fitch | BBB (negative(stable outlook) |
The ratings reflect the respective views of the rating agencies. Although it is our intention to maintain a credit profile that supports an investment-grade rating for MPLX, there is no assurance that these ratings will continue for any given period of time. The ratings may be revised or withdrawn entirely by the rating agencies if, in their respective judgments, circumstances so warrant.
The agreements governing MPLX’s debt obligations do not contain credit rating triggers that would result in the acceleration of interest, principal or other payments in the event that MPLX credit ratings are downgraded. However, any downgrades of MPLX senior unsecured debt to below investment grade ratings could increase the applicable interest rates, yields and other fees payable under such agreements. In addition, a downgrade of MPLX senior unsecured debt ratings to below investment-grade levels may limit MPLX’s ability to obtain future financing, including to refinance existing indebtedness.
See Item 8. Financial Statements and Supplementary Data – Note 19 for further discussion of MPLX’s debt.
Capital Requirements
Capital Investment Plan
MPC's capital investment plan for continuing and discontinued operations for 2020 originally totaled2021 totals approximately $2.6$1.4 billion for capital projects and investments, excluding MPLX, capitalized interest, potential acquisitions and acquisitions.MPLX’s capital investment plan. MPC’s capital investment plan includes all of the planned capital spending for Refining & Marketing and Corporate, as well as a portion of the planned capital investments in Midstream and Speedway’s capital spending through the close of the sale on May 14, 2021, which is now reported separately as discontinued operations. MPLX’sThe remainder of the planned capital spending for Midstream reflects the capital investment plan for 2020 originally totaled approximately $1.75 billion.
In responseMPLX, which totals $1.0 billion, excluding project reimbursements paid by MPC to the COVID-19 environment, the company announced a consolidatedMPLX and return of capital spending reduction of $1.35 billion to $3.0 billion for 2020. Remaining capital spend primarily relates to growth projects that are already in progress or spending that supports the safe and reliable operation of our facilities.from MPLX’s joint venture partners. We continuously evaluate our capital investment plan and make changes as conditions warrant.
Capital expenditures and investments for MPC and MPLX are summarized below. | | | | | | | | | | | | | | |
| | Six Months Ended June 30, |
(In millions) | | 2021 | | 2020 |
Capital expenditures and investments:(a) | | | | |
MPC continuing operations, excluding MPLX | | | | |
Refining & Marketing | | $ | 310 | | | $ | 741 | |
Midstream - Other | | 36 | | | 158 | |
Corporate and Other(b) | | 44 | | | 45 | |
Total MPC continuing operations, excluding MPLX | | $ | 390 | | | $ | 944 | |
| | | | |
MPC discontinued operations - Speedway | | $ | 177 | | | $ | 131 | |
| | | | |
Midstream - MPLX | | $ | 280 | | | $ | 741 | |
|
| | | | | | | | |
| | Nine Months Ended September 30, |
(In millions) | | 2020 | | 2019 |
MPC continuing operations, excluding MPLX | | | | |
Refining & Marketing | | $ | 995 |
| | $ | 1,411 |
|
Midstream - Other | | 193 |
| | 306 |
|
Corporate and Other(a) | | 146 |
| | 141 |
|
Total MPC continuing operations, excluding MPLX | | $ | 1,334 |
| | $ | 1,858 |
|
| | | | |
MPC discontinued operations - Speedway | | $ | 200 |
| | $ | 344 |
|
| | | | |
Midstream - MPLX | | $ | 1,006 |
| | $ | 2,114 |
|
(a) Capital expenditures exclude changes in capital accruals. | |
(a)(b) Excludes capitalized interest of $30 million and $56 million for the six months ended June 30, 2021 and 2020, respectively. | Includes capitalized interest of $85 million and $97 million for the nine months ended September 30, 2020 and 2019, respectively. |
Capital expenditures and investments in affiliates during the ninesix months ended SeptemberJune 30, 20202021, were primarily for Midstream and Refining & Marketing and Midstream segment projects. Major Refining & Marketing projects include the conversion of the Martinez facility from refining petroleum to manufacturing renewable fuels and the South Texas Asset Repositioning (“STAR”) project intended to optimize operations and reduce costs at our Galveston Bay refinery, in addition to other projects that we expect will help us reduce future operating costs.
Major Midstream projects include increasing processing capacity at a gas processing plant in the Marcellus region, which was placed in service, the Whistler natural gas pipeline, which began full commercial service, the Wink to Webster crude oil pipeline and the reversal of the Capline crude pipeline.
Other Capital Requirements
During the ninesix months ended SeptemberJune 30, 2020,2021, we contributed $3$226 million to our funded pension plans. We may choose to make additional contributions to our pension plans.
On OctoberJuly 28, 2020,2021, our board of directors approved a dividend of $0.58 per share on common stock. The dividend is payable DecemberSeptember 10, 2020,2021, to shareholders of record as of the close of business on NovemberAugust 18, 2020.
We have $1.0 billion of 5.125 percent senior notes due in March 2021.
As of SeptemberJune 30, 2020, $2912021, $77 million of restructuring expenses were accrued as restructuring reserves in our consolidated balance sheet and wesheet. We expect cash payments for the majority of these reservesremaining exit and disposal costs reserve to occur within the next twelve months.through 2024.
We may, from time to time, repurchase our senior notes in the open market, in tender offers, in privately-negotiated transactions or otherwise in such volumes, at such prices and upon such other terms as we deem appropriate.
Share Repurchases
DuringIn connection with the nine months ended SeptemberSpeedway sale, our board of directors approved an additional $7.1 billion share repurchase authorization bringing total share repurchase authorizations to $10.0 billion prior to the June tender of shares discussed below.
On June 15, 2021, MPC completed a modified Dutch auction tender offer, purchasing 15,573,365 shares of its common stock at a purchase price of $63.00 per share, for an aggregate purchase price of approximately $981 million, excluding fees and expenses related to the tender offer. As of June 30, 2020,2021, MPC has $9.02 billion remaining under its share repurchases were temporarily suspended, which has helped preserve our liquidity during the COVID-19 pandemic. The timing and amount of future repurchases, if any, will depend upon several factors, including market and business conditions, and such repurchases may be initiated, suspended or discontinued at any time. repurchase authorization.
Since January 1, 2012, our board of directors has approved $18.0$25.05 billion in total share repurchase authorizations and we have repurchased a total of $15.05$16.03 billion of our common stock, leaving $2.96 billion available for repurchases at September 30, 2020. The table below summarizes our total share repurchases forstock.
During the
ninesix months ended
SeptemberJune 30,
2020 and 2019. See Note 102021, 11,929,998 MPLX common units were repurchased at an average cost per unit of $26.02. Total cash paid for units repurchased during the six months ended June 30, 2021 was $310 million. As of June 30, 2021, MPLX had agreements to
acquire 126,293 additional common units for $4 million, which settled in early July 2021. As of June 30, 2021, $657 million remained available under the
unaudited consolidated financial statementsauthorization for
further discussion of the share repurchase plans. |
| | | | | | | |
| Nine Months Ended September 30, |
(In millions, except per share data) | 2020 | | 2019 |
Number of shares repurchased | — |
| | 33 |
|
Cash paid for shares repurchased | $ | — |
| | $ | 1,885 |
|
Average cost per share | $ | — |
| | $ | 58.75 |
|
future unit repurchases.We may utilize various methods to effect the repurchases, which could include open market repurchases, negotiated block transactions, tender offers, accelerated share repurchases or open market solicitations for shares, some of which may be effected through Rule 10b5-1 plans.
future repurchases, if any, will depend upon several factors, including market and business conditions, and such repurchases may be discontinued at any time.
Contractual Cash Obligations
As of SeptemberJune 30, 2020,2021, our contractual cash obligations included long-term debt, capital and operating lease obligations, purchase obligations and other long-term liabilities. During the first ninesix months of 2020,2021, our long-term debt commitments increaseddecreased approximately $2.9$3.97 billion primarily due to $2.5the repayment of $1.3 billion of MPC senior notes, issued and $3.0net repayment of $1.0 billion under the MPC commercial paper program, the redemption of $750 million of MPLX senior notes issued, the proceedsand net repayment of which were used to repay $1.0 billion of$175 million under the MPLX term loan and $1.0 billionrevolving credit facility.
During the quarter, we terminated a transportation services agreement with a total commitment of MPLX floating rate notes and redeem $450approximately $560 million of MPLX senior notes.
through the year 2028. There were no other material changes to our contractual cash obligations outside the ordinary course of business since December 31, 2019.2020.
Off-Balance Sheet Arrangements
Off-balance sheet arrangements comprise those arrangements that may potentially impact our liquidity, capital resources and results of operations, even though such arrangements are not recorded as liabilities under U.S. GAAP. Our off-balance sheet arrangements are limited to indemnities and guarantees that are described below. Although these arrangements serve a variety of our business purposes, we are not dependent on them to maintain our liquidity and capital resources, and we are not aware of any circumstances that are reasonably likely to cause the off-balance sheet arrangements to have a material adverse effect on our liquidity and capital resources.
We have provided various guarantees related to equity method investees. In conjunction with our spinoff from Marathon Oil, we entered into various indemnities and guarantees to Marathon Oil. These arrangements are described in Note 24 to the unaudited consolidated financial statements.
ENVIRONMENTAL MATTERS AND COMPLIANCE COSTSCOSTS
We have incurred and may continue to incur substantial capital, operating and maintenance, and remediation expenditures as a result of environmental laws and regulations. If these expenditures, as with all costs, are not ultimately reflected in the prices of our products and services, our operating results will be adversely affected. We believe that substantially all of our competitors must comply with similar environmental laws and regulations. However, the specific impact on each competitor may vary depending on a number of factors, including the age and location of its operating facilities, marketing areas, production processes and whether it is also engaged in the petrochemical business or the marine transportation of crude oil and refined products.
There have been no significant changes to our environmental matters and compliance costs during the ninesix months ended SeptemberJune 30, 2020.2021.
CRITICAL ACCOUNTING ESTIMATES
As of SeptemberJune 30, 2020,2021, there have been no significant changes to our critical accounting estimates since our Annual Report on Form 10-K for the year ended December 31, 2019 except as noted below.2020.
Impairment Assessments of Long-Lived Assets, Intangible Assets, Goodwill and Equity Method Investments
Fair value calculated for the purpose of testing our long-lived assets, intangible assets, goodwill and equity method investments for impairment is estimated using the expected present value of future cash flows method and comparative market prices when appropriate. Significant judgment is involved in performing these fair value estimates since the results are based on forecasted financial information prepared using significant assumptions including:
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• | Future operating performance. Our estimates of future operating performance are based on our analysis of various supply and demand factors, which include, among other things, industry-wide capacity, our planned utilization rate, end-user demand, capital expenditures and economic conditions. Such estimates are consistent with those used in our planning and capital investment reviews.
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• | Future volumes. Our estimates of future refinery, pipeline throughput and natural gas and natural gas liquid processing volumes are based on internal forecasts prepared by our Refining & Marketing and Midstream segments operations personnel. Assumptions about the effects of COVID-19 on our future volumes are inherently subjective and contingent upon the duration of the pandemic, which is difficult to forecast.
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• | Discount rate commensurate with the risks involved. We apply a discount rate to our cash flows based on a variety of factors, including market and economic conditions, operational risk, regulatory risk and political risk. This discount rate is also compared to recent observable market transactions, if possible. A higher discount rate decreases the net present value of cash flows.
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• | Future capital requirements. These are based on authorized spending and internal forecasts.
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Assumptions about the effects of COVID-19 and the macroeconomic environment are inherently subjective and contingent upon the duration of the pandemic and its impact on the macroeconomic environment, which is difficult to forecast. We base our fair value estimates on projected financial information which we believe to be reasonable. However, actual results may differ from these projections.
The need to test for impairment can be based on several indicators, including a significant reduction in prices of or demand for products produced, a weakened outlook for profitability, a significant reduction in pipeline throughput volumes, a significant reduction in natural gas or natural gas liquids processed, a significant reduction in refining margins, other changes to contracts or changes in the regulatory environment.
Long-lived assets used in operations are assessed for impairment whenever changes in facts and circumstances indicate that the carrying value of the assets may not be recoverable based on the expected undiscounted future cash flow of an asset group. For purposes of impairment evaluation, long-lived assets must be grouped at the lowest level for which independent cash flows can be identified, which generally is the refinery and associated distribution system level for Refining & Marketing segment assets, and the plant level or pipeline system level for Midstream segment assets. If the sum of the undiscounted estimated pretax cash flows is less than the carrying value of an asset group, fair value is calculated, and the carrying value is written down to the calculated fair value.
During the first quarter of 2020, we identified long-lived asset impairment triggers relating to all of our refinery asset groups within the Refining & Marketing segment as a result of decreases to the Refining & Marketing segment expected future cash flows. The cash flows associated with these assets were significantly impacted by the effects of COVID-19 and commodity price declines. We assessed each refinery asset group for impairment by comparing the undiscounted estimated pretax cash flows to the carrying value of each asset group. Of the 16 refinery asset groups, only the Gallup refinery’s carrying value exceeded its undiscounted estimated pretax cash flows. It was determined that the fair value of the Gallup refinery’s property, plant and equipment was less than the carrying value. As a result, we recorded a charge of $142 million in the first quarter of 2020 to impairment expense on the consolidated statements of income. The fair value measurements for the Gallup refinery assets represent Level 3 measurements.
During the second quarter of 2020, we identified long-lived asset impairment triggers relating to all of our refinery asset groups within the Refining & Marketing segment, except the Gallup refinery which had been impaired in the first quarter, as a result of continued macroeconomic developments impacting the Refining & Marketing segment expected future cash flows. All of these refinery asset groups undiscounted estimated pretax cash flows exceeded the carrying value by at least 17 percent.
On August 3, 2020, we announced our plans to evaluate possibilities to strategically reposition our Martinez refinery, including the potential conversion of the refinery into a renewable diesel facility. Subsequent to August 3, 2020, we progressed activities associated with the conversion of the Martinez refinery to a renewable diesel facility, including applying for permits, advancing discussions with feedstock suppliers, and beginning detailed engineering activities. As envisioned, the Martinez facility would be expected to start producing renewable diesel in 2022, with a potential to build to full capacity of 48,000 barrels per day in 2023. As a result of the progression of these activities, we identified assets that would be repurposed and utilized in a renewable diesel facility configuration and assets that would be abandoned since they had no function in a renewable diesel facility configuration. This change in our intended use for the Martinez refinery is a long-lived asset impairment trigger for the assets that would be repurposed and remain as part of the Martinez asset group. We assessed the asset group for impairment by comparing the undiscounted estimated pretax cash flows to the carrying value of the asset group and the undiscounted estimated pretax cash flows exceeded the Martinez asset group carrying value. We recorded impairment expense of $342 million for the abandoned assets as we are no longer using these assets and have no expectation to use these assets in the future. Additionally, as a result of our efforts to progress the conversion of Martinez refinery into a renewable diesel facility, MPLX cancelled in-process capital projects related to its Martinez refinery logistics operations resulting in impairments of $27 million in the third quarter.
The determination of undiscounted estimated pretax cash flows for our long-lived asset impairment tests utilized significant assumptions including management’s best estimates of the expected future cash flows, allocation of certain Refining & Marketing segment cash flows to the individual refineries, the estimated useful lives of the asset groups, and the salvage values of the refineries. The determinations of expected future cash flows and the salvage values of refineries require considerable judgment and are sensitive to changes in underlying assumptions and factors. As a result, there can be no assurance that the estimates and assumptions made for purposes of our impairment analysis will prove to be an accurate prediction of the future. Should our assumptions significantly change in future periods, it is possible we may determine the carrying values of additional refinery asset groups exceed the undiscounted estimated pretax cash flows of their refinery asset groups, which would result in future impairment charges.
During the first quarter of 2020, MPLX identified an impairment trigger relating to asset groups within its Western Gathering & Processing (“G&P”) reporting unit as a result of significant changes to expected future cash flows for these asset groups resulting from the effects of COVID-19. The cash flows associated with these assets were significantly impacted by volume declines reflecting decreased forecasted producer customer production as a result of lower commodity prices. MPLX assessed each asset group within the Western G&P reporting unit for impairment. It was determined that the fair value of the East Texas G&P asset group’s underlying assets was less than the carrying value. As a result, MPLX recorded impairment charges totaling $350 million related to its property, plant and equipment and intangibles, which are included in impairment expense on our consolidated statements of income. Fair value of MPLX’s PP&E was determined using a combination of an income and cost approach. The income approach utilized significant assumptions including management’s best estimates of the expected future cash flows and the estimated useful life of the asset group. The cost approach utilized assumptions for the current replacement costs of similar assets adjusted for estimated depreciation and deterioration of the existing equipment. The fair value of the intangibles was determined based on applying the multi-period excess earnings method, which is an income approach. Key assumptions included management’s best estimates of the expected future cash flows from existing customers, customer attrition rates and the discount rate. Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions and factors. As a result, there can be no assurance that the estimates and assumptions made for purposes of the impairment analysis will prove to be an accurate prediction of the future. The fair value measurements for the asset group fair values represent Level 3 measurements.
Unlike long-lived assets, goodwill is subject to annual, or more frequent if necessary, impairment testing at the reporting unit level. A goodwill impairment loss is measured as the amount by which a reporting unit's carrying value exceeds its fair value, without exceeding the recorded amount of goodwill.
The “Business Update” under Recent Developments in the Corporate Overview section describes the effects that the outbreak of COVID-19, its development into a pandemic and the effect the decline in commodity prices during the first quarter of 2020 have had on our business. Due to these developments, we performed impairment assessments during the first quarter of 2020 as discussed further below.
Prior to performing our goodwill impairment assessment as of March 31, 2020, we had goodwill totaling approximately $20 billion associated with eight of our 10 reporting units. As part of this assessment, we recorded goodwill impairment expenses of $7.33 billion in the first quarter of 2020 related to our Refining & Marketing and MPLX’s Eastern G&P reporting units. The Refining & Marketing and Eastern G&P reporting units recorded goodwill impairment charges of $5.52 billion and $1.81 billion, respectively, which fully impaired both reporting units’ historical goodwill balances. These goodwill impairment expenses are primarily driven by the effects of COVID-19, the decline in commodity prices and the slowing of drilling activity which has reduced production growth forecasts from MPLX’s producer customers. For the remaining six reporting units with goodwill, we determined that no significant adjustments to the carrying value of goodwill were necessary. The impairment assessment performed as of March 31, 2020 resulted in the fair value of the reporting units exceeding their carrying value by percentages ranging from approximately 8.5 percent to 270.0 percent. MPLX’s Crude Gathering reporting unit had goodwill totaling $1.1 billion at March 31, 2020 and MPLX’s fair value estimate for this reporting unit exceeded the reporting unit carrying value by 8.5 percent. The operations that make up this reporting unit were acquired by MPLX when it acquired ANDX. We accounted for the October 1, 2018 acquisition of Andeavor (through which we acquired control of ANDX), using the acquisition method of accounting, which required Andeavor assets and liabilities to be recorded at the acquisition date fair value. As such, given the short amount of time from when fair value was established to the date of the impairment test, the amount by which the fair value exceeded the carrying value within this reporting unit is not unexpected. An increase of one percentage point to the discount rate used to estimate the fair value of this reporting unit would not have resulted in goodwill impairment as of March 31, 2020. No other reporting units had fair values exceeding carrying values of less than 20 percent.
Significant assumptions used to estimate the reporting units’ fair value included estimates of future cash flows and market information for comparable assets. If estimates for future cash flows, which are impacted by future margins on products produced or sold, future volumes, and capital requirements, were to decline, the overall reporting units’ fair values would decrease, resulting in potential goodwill impairment charges. Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions and factors. As a result, there can be no assurance that the estimates and assumptions made for purposes of the impairment tests will prove to be an accurate prediction of the future.
Equity method investments are assessed for impairment whenever factors indicate an other than temporary loss in value. Factors providing evidence of such a loss include the fair value of an investment that is less than its carrying value, absence of an ability to recover the carrying value or the investee’s inability to generate income sufficient to justify our carrying value. During the first quarter of 2020, we recorded $1.32 billion of equity method investment impairment charges to income from equity method investments in the consolidated statements of income. The impairment charges primarily related to MPLX recording an other than temporary impairment totaling $1.26 billion, of which $1.25 billion related to MarkWest Utica EMG, L.L.C and its investment in Ohio Gathering Company, L.L.C. The fair value of the investments was determined based upon
applying the discounted cash flow method, which is an income approach. The discounted cash flow fair value estimate is based on known or knowable information at the interim measurement date. The significant assumptions that were used to develop the estimate of the fair value under the discounted cash flow method include management’s best estimates of the expected future cash flows, including prices and volumes, the weighted average cost of capital and the long-term growth rate. Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions and factors. As such, the fair value of these equity method investments represents a Level 3 measurement. As a result, there can be no assurance that the estimates and assumptions made for purposes of the impairment test will prove to be an accurate prediction of the future. The impairment was recorded through “Income from equity method investments.” The impairments were largely due to a reduction in forecasted volumes gathered and processed by the systems operated by the joint ventures. At September 30, 2020 we had $5.46 billion of equity method investments recorded on the Consolidated Balance Sheets.
An estimate of the sensitivity to net income resulting from impairment calculations is not practicable, given the numerous assumptions (e.g., pricing, volumes and discount rates) that can materially affect our estimates. That is, unfavorable adjustments to some of the above listed assumptions may be offset by favorable adjustments in other assumptions.
ACCOUNTING STANDARDS NOT YET ADOPTED
As discussed in Note 2 to the unaudited consolidated financial statements, certain new financialWe have not identified any recent accounting pronouncements will be effective forthat are expected to have a material impact on our financial statements in the future.
condition, results of operations or cash flows upon adoption.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a detailed discussion of our risk management strategies and our derivative instruments, see Item 7A. Quantitative and Qualitative Disclosures about Market Risk in our Annual Report on Form 10-K for the year ended December 31, 2019.2020.
See Notes 17 and 18 to the unaudited consolidated financial statements for more information about the fair value measurement of our derivatives, as well as the amounts recorded in our consolidated balance sheets and statements of income. We do not designate any of our commodity derivative instruments as hedges for accounting purposes.
The following table includes the composition of net gains and losses on our commodity derivative positions as of SeptemberJune 30, 2021 and 2020, and 2019, respectively. | | | | Nine Months Ended September 30, | | | Six Months Ended June 30, |
(In millions) | | 2020 | | 2019 | (In millions) | | 2021 | | 2020 |
Realized gain on settled derivative positions | $ | 33 |
| | $ | 54 |
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Unrealized gain (loss) on open net derivative positions | 47 |
| | (87 | ) | |
Realized gain (loss) on settled derivative positions | | Realized gain (loss) on settled derivative positions | $ | (172) | | | $ | 147 | |
Unrealized loss on open net derivative positions | | Unrealized loss on open net derivative positions | (76) | | | (44) | |
Net gain (loss) | Net gain (loss) | $ | 80 |
| | $ | (33 | ) | Net gain (loss) | $ | (248) | | | $ | 103 | |
See Note 18 to the unaudited consolidated financial statements for additional information on our open derivative positions at SeptemberJune 30, 2020.2021.
Sensitivity analysis of the effects on income from operations (“IFO”) of hypothetical 10 percent and 25 percent increases and decreases in commodity prices for open commodity derivative instruments as of SeptemberJune 30, 20202021 is provided in the following table. | | | | Change in IFO from a Hypothetical Price Increase of | | Change in IFO from a Hypothetical Price Decrease of | | | Change in IFO from a Hypothetical Price Increase of | | Change in IFO from a Hypothetical Price Decrease of |
(In millions) | | 10% | | 25% | | 10% | | 25% | (In millions) | | 10% | | 25% | | 10% | | 25% |
As of September 30, 2020 | | | | | | | | |
As of June 30, 2021 | | As of June 30, 2021 | | | | | | | |
Crude | Crude | $ | 3 |
| | $ | 8 |
| | $ | (3 | ) | | $ | (8 | ) | Crude | $ | (29) | | | $ | (74) | | | $ | 30 | | | $ | 74 | |
Refined products | Refined products | 35 |
| | 87 |
| | (35 | ) | | (87 | ) | Refined products | (33) | | | (82) | | | 33 | | | 82 | |
Blending products | Blending products | (13 | ) | | (32 | ) | | 13 |
| | 32 |
| Blending products | (15) | | | (37) | | | 15 | | | 37 | |
Soybean oil | | Soybean oil | (19) | | | (47) | | | 19 | | | 47 | |
Embedded derivatives | Embedded derivatives | (6 | ) | | (15 | ) | | 6 |
| | 15 |
| Embedded derivatives | (10) | | | (25) | | | 10 | | | 25 | |
We remain at risk for possible changes in the market value of commodity derivative instruments; however, such risk should be mitigated by price changes in the underlying physical commodity. Effects of these offsets are not reflected in the above sensitivity analysis.
We evaluate our portfolio of commodity derivative instruments on an ongoing basis and add or revise strategies in anticipation of changes in market conditions and in risk profiles. Changes to the portfolio after SeptemberJune 30, 20202021 would cause future IFO effects to differ from those presented above.
Sensitivity analysis of the effect of a hypothetical 100-basis-point change in interest rates on long-term debt, including the portion classified as current and excluding finance leases, as of SeptemberJune 30, 20202021 is provided in the following table. Fair value of cash and cash equivalents, receivables, accounts payable and accrued interest approximate carrying value and are relatively insensitive to changes in interest rates due to the short-term maturity of the instruments. Accordingly, these instruments are excluded from the table.
See Note 17 to the unaudited consolidated financial statements for additional information on the fair value of our debt.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in RulesRule 13a-15(e) under the Securities Exchange Act of 1934, as amended) was carried out under the supervision and with the participation of our management, including our chief executive officer and chief financial officer. Based upon that evaluation, the chief executive officer and chief financial officer concluded that the design and operation of these disclosure controls and procedures were effective as of SeptemberJune 30, 2020,2021, the end of the period covered by this report.