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 endedDecember 31, 2019 . 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, refining and marketing margins, operating costs, retail gasoline and distillate margins, merchandise margins, income from operations, net income or earnings per share;
• 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 capital or
maintenance projects;
• business strategies, growth opportunities and expected investment;
• consumer demand for refined products, natural gas and NGLs;
• the timing and amount of any future common stock repurchases; 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: • the effects of the COVID-19 pandemic, including any related government
policies 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 effects of the COVID-19 pandemic, and the current economic environment
generally, on our working capital, cash flows and liquidity, which can be
significantly affected by decreases in commodity prices;
• our ability to successfully complete the planned Speedway sale and realize
the expected benefits within the expected timeframe or at all;
• the risk that we may not proceed with converting the
renewable diesel facility or that our expectations of future cash flows for
a
• 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; 35
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• 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
oil producing regions, including the
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
• 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.
For additional risk factors affecting our business, see the risk factors described in our Annual Report on Form 10-K for the year endedDecember 31, 2019 , as updated in our Quarterly Reports on Form 10-Q for the quarters endedMarch 31, 2020 andJune 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 inFindlay, Ohio . We own and operate the nation's largest refining system. Our refineries supply refined products to resellers and consumers acrossthe 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 inthe 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 acrossthe United States available through approximately 7,000 branded outlets operated by independent entrepreneurs in 35 states, theDistrict of Columbia andMexico . The direct dealer network primarily operates under the ARCO brand, and consists of approximately 1,070 direct dealer locations primarily located in theWest Coast region ofthe 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 36
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assets. As ofSeptember 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 inthe 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 inthe 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. • Refining & Marketing - refines crude oil and other feedstocks at our
refineries in the
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. • 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.
Recent Developments Strategic Actions to Enhance Shareholder Value OnAugust 2, 2020 , we entered into a definitive agreement to sell Speedway, our company-owned and operated retail transportation fuel and convenience store business, to7-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 with7-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 announcedU.S. andCanada 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
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. 37
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Business Update The outbreak of COVID-19 and its development into a pandemic inMarch 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 and resulted in a decrease in motor vehicle use at a time when seasonal driving patterns typically result in an increase of consumer demand for gasoline and a dramatic reduction in airline flights. As a result, there has also been a decline in the demand for the refined petroleum products that we manufacture and sell. The decrease in the demand for refined petroleum products coupled with a decline in the price of crude oil has resulted in a significant decrease in the price and volume of the refined petroleum products we produce and sell and had a negative impact on working capital during the first nine months of 2020. In addition, a decline in the market prices for products held in our inventories below the carrying value of our inventory resulted in an adjustment to the value of our inventories. AtSeptember 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, which included indefinitely idling the Gallup andMartinez 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 endedSeptember 30, 2020 . We also progressed activities associated with the conversion of theMartinez refinery to a renewable diesel facility, including applying for permits, advancing discussions with feedstock suppliers, and beginning detailed engineering activities. As envisioned, theMartinez 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, earlier in the year we took action to address our liquidity as outlined below: • Share repurchases have temporarily been suspended. The timing and amount
of future repurchases, if any, will depend upon several factors, including
market and business conditions.
• On
revolving credit facility, which expires in 2021, to provide incremental
liquidity and financial flexibility during the commodity price and demand
downturn.
• On
notes. Proceeds from the senior notes were used to pay down certain amounts outstanding on the five-year revolving credit facility. • DuringJune 2020 , we repaid the remaining amounts outstanding on the five-year revolving credit facility. • OnSeptember 23, 2020 , we entered into a 364-day revolving credit
agreement, which provides for a
facility that matures in
364-day revolving credit agreement that expired on
facilities.
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 national economies can recover once the pandemic ultimately subsides. However, the adverse impact of the economic effects on MPC has been and will likely 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. 38
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Other Strategic Updates OnJuly 31, 2020 ,Western Refining Southwest, Inc. ("WRSW"), a wholly owned subsidiary of MPC, entered into a Redemption Agreement (the "Redemption Agreement") with MPLX, pursuant to which MPLX transferred to WRSW all of the outstanding membership interests inWestern Refining Wholesale, LLC ("WRW"), in exchange for the redemption of MPLX common units valued at$340 million held by WRSW. The transaction resulted in a minor decrease in MPC's ownership interest in MPLX. Beginning in the third quarter of 2020, the results of these operations are presented in the Refining & Marketing segment. OnNovember 2, 2020 , MPLX announced the board authorization of a unit repurchase program for the repurchase of up to$1 billion of MPLX's outstanding common units held by the public. MPLX may utilize various methods to effect the repurchases, which could include open market repurchases, negotiated block transactions, tender offers, accelerated unit repurchases or open market solicitations for units, some of which may be effected through Rule 10b5-1 plans. The timing and amount of repurchases, if any, will depend upon several factors, including market and business conditions, and repurchases may be initiated, suspended or discontinued at any time. The repurchase authorization has no expiration date. OnMarch 18, 2020 , we announced that MPC's board of directors unanimously decided to maintain MPC's current midstream structure, with MPC remaining, through a wholly owned subsidiary, the general partner of MPLX. This decision concluded a comprehensive evaluation, led by a special committee of the board, that included extensive input from multiple external advisors and significant feedback from investors. EXECUTIVE SUMMARY Results Select results for continuing operations are reflected in the following table. Three Months Ended Nine Months Ended September 30, September 30, (In millions) 2020 2019 2020 2019 Income (loss) from continuing operations by segment Refining & Marketing(a)$ (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) Recast to reflect direct dealer income from operations of
million,
and the first nine months of 2020 and 2019, respectively. Includes a LIFO
liquidation charge of
(b) Recast to reflect corporate costs of
2020 and 2019, respectively, that are no longer allocated to Speedway under
discontinued operations accounting.
(c) Represents gain related to the formation of
ended
(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
method investments and
nine months ended
(f) Restructuring expenses include
related to indefinite idling of the
million of employee separation costs. 39
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Select results for discontinued operations are reflected in the following table. Three Months Ended Nine Months Ended September 30, 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
(a) Costs related to the Speedway separation.
The following table includes net income (loss) per diluted share data.
Three Months Ended Nine Months Ended September 30, 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
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$(886) million , or$(1.36) per diluted share, in the third quarter of 2020 compared to$1.10 billion , or$1.66 per diluted share, for the third quarter of 2019 and$(10.11) billion , or$(15.58) per diluted share, in the first nine months of 2020 compared to$2.19 billion , or$3.28 per diluted share, in the first nine months of 2019. For the third quarter of 2020, the change in net income (loss) attributable to MPC was largely due to a loss 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 theMartinez and Gallup refineries and costs related to our announced workforce reduction. These changes were partially offset by a$530 million LCM benefit recognized in the quarter. 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 three months endedSeptember 30, 2020 to reflect an expected LIFO liquidation for our crude oil inventories. These results were partially offset by increased income from discontinued operations, which relates to 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 theMartinez 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 endedSeptember 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, 40
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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. 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 third quarter of 2020 as compared to the third quarter of 2019 and the first nine months of 2020 compared to the first nine months of 2019. MPLX We owned approximately 647 million MPLX common units atSeptember 30, 2020 with a market value of$10.19 billion based on theSeptember 30, 2020 closing price of$15.74 per common unit. OnOctober 27, 2020 , MPLX declared a quarterly cash distribution of$0.6875 per common unit payable onNovember 13, 2020 . As a result, MPLX will make distributions totaling$715 million to its common unitholders. MPC's portion of these distributions is approximately$445 million . We received limited partner distributions of$1.35 billion from MPLX in the nine months endedSeptember 30, 2020 and$1.39 billion from MPLX and ANDX combined in the nine months endedSeptember 30, 2019 . The decrease in distributions from 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. OnJuly 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 of MPLX common units held by WRSW. The transaction effects the transfer 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 MPLX common units (the "Redeemed Units") held by WRSW. The number of Redeemed Units was calculated by dividing WRW's aggregate valuation of$340 million by the simple average of the volume weighted averageNew York Stock Exchange prices of an MPLX common unit for the ten trading days ending at market close onJuly 27, 2020 . The transaction resulted in a minor decrease in MPC's ownership interest in MPLX. See Note 5 to the unaudited consolidated financial statements for additional information on MPLX. Liquidity Our liquidity, excluding MPLX, totaled$8.44 billion atSeptember 30, 2020 consisting of: September 30, 2020 Available (In millions) Total Capacity Outstanding Borrowings 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) Excludes MPLX's$3.50 billion bank revolving credit facility, which had approximately$3.41 billion available as ofSeptember 30, 2020 .
(b) Outstanding borrowings include
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
million and excludes cash and cash equivalents of MPLX of
OnSeptember 23, 2020 , MPC entered into a 364-day revolving credit agreement, which provides for a$1.0 billion unsecured revolving credit facility that matures inSeptember 2021 , and which replaces a similar 364-day revolving credit agreement that expired onSeptember 28, 2020 . 41
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OnOctober 1, 2020 , all of the$475 million outstanding aggregate principal amount of 5.375 percent senior notes dueOctober 2022 were redeemed at a price equal to par using available cash on hand and liquidity provided through MPC's credit facilities. OnSeptember 25, 2020 , we announced that all of the$650 million outstanding aggregate principal amount of 3.400 percent senior notes dueDecember 2020 will be redeemed onNovember 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. MPLX's liquidity totaled$4.93 billion atSeptember 30, 2020 . As ofSeptember 30, 2020 , MPLX had cash and cash equivalents of$28 million ,$3.41 billion available under its$3.5 billion revolving credit agreement and$1.5 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, distribution costs, refining planned turnaround 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 calculateGulf Coast , Mid-Continent andWest Coast crack spreads that we believe most closely track our operations and slate of products. The following are used for these crack-spread calculations: • TheGulf Coast crack spread uses three barrels of LLS crude producing two
barrels of USGC CBOB gasoline and one barrel of USGC ULSD;
• 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
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 ourGulf Coast , Mid-Continent andWest 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 asU.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
(a) Crack spread based on 38 percent LLS, 38 percent WTI and 24 percent ANS with
assumes all other differentials and pricing relationships remain unchanged.
(b) 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.
(c) 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.
(d) This is consumption-based exposure for our Refining & Marketing segment and
does not include the sales exposure for our Midstream segment. 42
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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.
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, as discussed below, which are based on committed volumes 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 at our own or thirdparty processing plants, purchasing and selling or gathering and transporting volumes of natural gas at indexrelated prices and the cost of thirdparty 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. 43
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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 Nine Months Ended September 30, 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
(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
See Note 6 to the unaudited consolidated financial statements for further
information.
Third Quarter 2020 Compared to Third Quarter 2019 Net income (loss) attributable to MPC decreased$1.98 billion in the third quarter of 2020 compared to the third quarter of 2019 largely due to a decrease in refined product sales volumes, prices and margin, primarily driven by the effects of COVID-19 and the decline in commodity prices,$433 million of long-lived assets impairment primarily related to the repositioning of ourMartinez 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. 44
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Revenues and other income decreased$10.14 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
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
the repositioning of the
• decreased selling, general and administrative expenses of
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 theMartinez 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
and environmental taxes of approximately
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 endedSeptember 30, 2020 compared to provision for income taxes on continuing operations of$255 million for the three months endedSeptember 30, 2019 . The combined federal, state and foreign income tax rate was 31 percent (tax benefit rate) and 19 percent for the three months endedSeptember 30, 2020 and 2019, respectively. The effective tax benefit rate for the three months endedSeptember 30, 2020 was higher than theU.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 endedSeptember 30, 2019 and was less than theU.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 EndedSeptember 30, 2020 Compared to Nine Months EndedSeptember 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 expenses for goodwill and long-lived assets 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
due to impairments of equity method investments of
driven by the effects of COVID-19 and the decline in commodity prices; and
• decreased net gain on disposal of assets of
absence of a
exchange of its undivided interest in the Capline pipeline system for an
equity ownership inCapline LLC . 45
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Costs and expenses decreased
travel and business operations associated with the COVID-19 pandemic,
partially offset by increased cost of revenues of
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
and the decline in commodity prices;
• impairment expense of
assets of
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 theMartinez refinery ;
• decreased selling, general and administrative expenses of
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 theMartinez 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
and environmental taxes of approximately
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 in 2020, which was not in effect
for all of 2019.
Net interest and other financial costs increased$100 million largely due to increased MPC borrowings and foreign currency exchange losses and decreased interest income. Benefit for income taxes on continuing operations was$2.24 billion for the nine months endedSeptember 30, 2020 compared to provision for income taxes on continuing operations of$600 million for the nine months endedSeptember 30, 2019 , mainly due to decreased income before income taxes of$16.64 billion . The combined federal, state and foreign income tax rate was 16 percent (tax rate benefit) and 20 percent for the nine months endedSeptember 30, 2020 and 2019, respectively. The effective tax rate for the nine months endedSeptember 30, 2020 was lower than theU.S. statutory rate of 21 percent 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 effective tax rate is generally benefited by our noncontrolling interest in MPLX, but this benefit was lower for the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 due to goodwill and other impairment charges recorded by MPLX. The effective tax rate for the nine months endedSeptember 30, 2019 was less than theU.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$1.24 billion primarily due to MPLX's net loss primarily resulting from impairment expense recognized during the first nine months of 2020. Results of Discontinued Operations The prospective and historical results of the Speedway business are presented as discontinued operations in our consolidated financial statements. The following includes key financial and operating data for Speedway for the third quarter of 2020 compared to the third quarter of 2019 and the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 . 46
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Table of Contents Three Months Ended Nine Months Ended September 30, September 30, Key Financial and Operating Data 2020 2019 2020 2019 Speedway fuel sales (millions of gallons) 1,583 1,992 4,416 5,820 Speedway fuel margin (dollars per gallon)(a)(b)$ 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.
(e) Excludes cigarettes. 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 andPilot Travel Centers LLC ("PTC"), effectiveOctober 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. BeginningAugust 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 to30.25 cents per gallon in the third quarter of 2020, from26.04 cents per gallon in the third quarter of 2019. Nine Months EndedSeptember 30, 2020 Compared to Nine Months EndedSeptember 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, effectiveOctober 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. BeginningAugust 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$285 million for the nine months endedSeptember 30, 2020 and 2019, respectively. The Speedway fuel margin increased to36.40 cents per gallon in the first nine months of 2020 compared with23.79 cents per gallon in the first nine months of 2019. See Note 4 to the unaudited consolidated financial statements for additional information on discontinued operations. 47
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Table of Contents Segment Results Refining & Marketing Beginning with the third quarter of 2020, the direct dealer business is managed as part of the Refining & Marketing segment. The results of the Refining & Marketing segment have been retrospectively adjusted to include the results of the direct dealer business in all periods presented. The following includes key financial and operating data for the third quarter of 2020 compared to the third quarter of 2019 and the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 . -------------------------------------------------------------------------------- [[Image Removed: chart-rmrevenues.jpg]][[Image Removed: chart-rmifo.jpg]] -------------------------------------------------------------------------------- [[Image Removed: chart-rmvolumes.jpg]][[Image Removed: chart-rmavesalesprice.jpg]] (a) Includes intersegment sales and sales destined for export. -------------------------------------------------------------------------------- 48
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Table of Contents Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 2020 2019 Refining & Marketing Operating Statistics Net refinery throughput (mbpd) 2,536 3,156 2,601 3,125 Refining & Marketing margin, excluding LIFO liquidation charge(a)(b)(c)$ 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 )
(a) Recast to reflect direct dealer results in the Refining & Marketing segment.
(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
respectively, and
2020 and 2019, respectively. Excludes depreciation and amortization expense.
(f) Reflects the cumulative effect through
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. 49
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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 meetEPA renewable volume obligations for attributable products under the Renewable Fuel Standard. Three Months Ended Nine Months Ended September 30, 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
in 2020 and 2019. These blends are based on our refining capacity by region
in each period.
Third Quarter 2020 Compared to Third Quarter 2019 Refining & Marketing segment revenues decreased$10.13 billion primarily due to lower refined product sales volumes, which decreased 505 mbpd, and decreased average refined product sales prices of$0.55 per gallon. These decreases were primarily the result of reduced travel and business operations associated with the COVID-19 pandemic. Net refinery throughputs decreased 620 mbpd during the third quarter of 2020, primarily due to reducing throughputs and indefinitely idling certain facilities during the COVID-19 pandemic. Refining & Marketing segment income from operations decreased$2.56 billion primarily due to lower blended crack spreads. Refining & Marketing margin, excluding LIFO liquidation charge, was$8.28 per barrel for the third quarter of 2020 compared to$15.11 per barrel for the third quarter of 2019. 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 negative impact of approximately$3 billion on Refining & Marketing margin for the third quarter of 2020 compared to the third quarter of 2019, primarily due to lower 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 dealer fuel margin and, for the third quarter of 2020, a LIFO liquidation charge of$256 million . These factors had an estimated net positive effect of approximately$200 million on Refining & Marketing segment income in the third quarter of 2020 compared to the third quarter of 2019. For the three months endedSeptember 30, 2020 , refining operating costs, excluding depreciation and amortization, decreased$314 million compared to the three months endedSeptember 30, 2019 as we took actions to reduce costs in response to the 50
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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 endedSeptember 30, 2019 . On a per barrel basis, refining operating costs, excluding depreciation and amortization, decreased$0.03 primarily due to lower throughput partially offset by decreased costs. Distribution costs, excluding depreciation and amortization, increased$1.29 per barrel, primarily due to lower throughput. Distribution costs, excluding depreciation and amortization, include fees paid to MPLX of$889 million and$794 million for the third quarter of 2020 and 2019, respectively. Refining planned turnaround costs increased$0.45 per barrel due to the timing of turnaround activity and lower throughput. Depreciation and amortization per barrel increased by$0.41 per barrel primarily due to lower throughput and increased costs. Nine Months EndedSeptember 30, 2020 Compared to Nine Months EndedSeptember 30, 2019 Refining & Marketing segment revenues decreased$31.17 billion primarily due to lower refined product sales volumes, which decreased 508 mbpd, and decreased average refined product sales prices of$0.56 per gallon. These decreases were primarily the result of reduced travel and business operations associated with the COVID-19 pandemic. Net refinery throughputs decreased 524 mbpd in the first nine months of 2020, primarily due to reducing throughputs and indefinitely idling certain facilities during the COVID-19 pandemic. Refining & Marketing segment income from operations decreased$5.36 billion primarily driven by lower blended crack spreads. Refining & Marketing margin, excluding LIFO liquidation charge, was$9.46 per barrel for the first nine months of 2020 compared to$14.17 per barrel for the first nine months of 2019. 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 negative impact of approximately$7 billion on Refining & Marketing margin for the first nine months of 2020 compared to the first nine months of 2019, primarily due to lower crack spreads. 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, direct dealer fuel margin and, for the third quarter of 2020, a LIFO liquidation charge of$256 million . These factors had an estimated net positive effect of approximately$1.4 billion on Refining & Marketing segment income in the first nine months of 2020 compared to the first nine months of 2019. For the nine months endedSeptember 30, 2020 , refining operating and distribution costs, excluding depreciation and amortization, were$7.99 billion . This was a decrease of$499 million compared to the nine months endedSeptember 30, 2019 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 costs of$138 million . Net refinery throughput was 524 mbpd lower as compared to the nine months endedSeptember 30, 2019 . On a per barrel basis, refining operating costs and distribution costs, excluding depreciation and amortization, increased$0.40 and$0.86 , respectively, mainly 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. Refining planned turnaround costs increased$0.33 per barrel due to the timing of turnaround activity and a decrease in throughput. Depreciation and amortization per barrel increased by$0.39 primarily due to a decrease in throughput and increased costs. 51
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Supplemental Refining & Marketing Statistics
Three Months Ended Nine Months Ended September 30, 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) 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
and 98 mbpd for the nine months ended
respectively.
Midstream
The following includes key financial and operating data for the third quarter of 2020 compared to the third quarter of 2019 and the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 . -------------------------------------------------------------------------------- [[Image Removed: chart-midstreamrevenue.jpg]][[Image Removed: chart-midstreamifo.jpg]] -------------------------------------------------------------------------------- 52
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[[Image Removed: chart-midstreamplthruput.jpg]][[Image Removed: chart-midstreamtermthruput.jpg]] [[Image Removed: chart-midstreamgathering.jpg]][[Image Removed: chart-midstreamgasprocessed.jpg]][[Image Removed: chart-midstreamfractionation.jpg]] (a) On owned common-carrier pipelines, excluding equity method investments.
(b) Includes amounts related to unconsolidated equity method investments on a
100 percent basis.
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Three Months Ended Nine Months Ended September 30, September 30, Benchmark Prices 2020 2019 2020 2019
Natural Gas NYMEX HH ($ per MMBtu)
(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 Quarter 2020 Compared to Third Quarter 2019 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 million mainly due to contributions from organic growth projects and reduced operating expenses. Midstream segment income from operations also benefited from stable, fee based earnings in the current business environment. 53
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Nine Months EndedSeptember 30, 2020 Compared to Nine Months EndedSeptember 30, 2019 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$29 million mainly due to contributions from organic growth projects and reduced operating expenses. Midstream segment income from operations also benefited from stable, fee based earnings in the current business environment. Corporate and Items not Allocated to Segments Three Months Ended Nine Months Ended Key Financial Information (in millions) September 30, September 30, 2020 2019 2020 2019 Corporate(a)$ (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) 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. OnAugust 3, 2020 , we announced our plans to evaluate possibilities to strategically reposition ourMartinez refinery , including the potential conversion of the refinery into a renewable diesel facility. Subsequent toAugust 3, 2020 , we progressed activities associated with the conversion of theMartinez 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-processMartinez refinery logistics capital projects with$27 million of carrying value due to our progression toward convertingMartinez 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 transfer to MPC of the MPLX wholesale distribution 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, which included indefinitely idling the Gallup andMartinez 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 endedSeptember 30, 2020 The indefinite idling of the Gallup andMartinez refineries and progression of activities associated with the conversion of theMartinez 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 itsMartinez 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 54
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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 ofSeptember 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 atJune 30, 2020 resulted in a benefit of$530 million for the three months endedSeptember 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 EndedSeptember 30, 2020 Compared to Nine Months EndedSeptember 30, 2019 Corporate costs increased$36 million primarily due to an information systems integration project. The first nine 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. During the first nine months of 2020, we recorded impairment charges of approximately$9.60 billion , which includes$8.28 billion related to goodwill and long-lived assets and$1.32 billion related to equity method investments, and an LCM charge of$1.19 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 nine 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 withCapline LLC to contribute our 33 percent undivided interest in the Capline pipeline system in exchange for a 33 percent ownership interest inCapline 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 andMartinez refineries and the approval of an involuntary workforce reduction plan. In connection with these strategic actions, we recorded restructuring expenses of$348 million for the three months endedSeptember 30, 2020 . See Note 3 to the unaudited consolidated financial statements and earlier discussion in this section for additional information. 55
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Non-GAAP Financial Measures Management uses certain financial measures to evaluate our operating performance that are calculated and presented on the basis of methodologies other than in accordance with GAAP. We believe these non-GAAP financial measures are useful to investors and analysts to assess our ongoing financial performance because, when reconciled to their most comparable GAAP financial measures, they provide improved comparability between periods through the exclusion of certain items that we believe are not indicative of our core operating performance and that may obscure our underlying business results and trends. These measures should not be considered a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP, and our calculations thereof may not be comparable to similarly titled measures reported by other companies. The non-GAAP financial measures we use are as follows: Refining & Marketing Margin Refining margin is defined as sales revenue less the cost of refinery inputs and purchased products. Reconciliation of Refining & Marketing income from operations to Refining & Marketing gross margin and Refining & Marketing margin Three Months Ended Nine Months Ended September 30, September 30, (in millions) 2020 2019 2020 2019 Refining & Marketing income from operations(a)$ (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
(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. 56
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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 Nine Months Ended September 30, 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 atSeptember 30, 2020 compared to$1.39 billion atDecember 31, 2019 . Cash and cash equivalents for discontinued operations was$98 million atSeptember 30, 2020 compared to$134 million atDecember 31, 2019 . Net cash provided by (used in) operating activities, investing activities and financing activities are presented in the following table. Nine Months Ended September 30, (In millions) 2020 2019 Net cash provided by (used in): Operating activities$ 1,091 $ 7,032 Investing activities (2,824 ) (4,575 ) Financing activities 922 (2,654 )
Total increase (decrease) in cash
Net cash provided by operating activities decreased$5.94 billion in the first nine months of 2020 compared to the first nine months of 2019, primarily due to a decrease in operating results and an unfavorable change in working capital of$1.18 billion 57
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mainly due to a decrease in accounts payable. These changes were partially offset by an increase in cash provided by discontinued operations of$156 million which reflect the results of the Speedway business. Changes in working capital exclude changes in short-term debt. Changes in working capital, excluding changes in short-term debt, were a net$490 million use of cash in the first nine months of 2020 compared to a net$687 million source of cash in the first nine months of 2019. For the first nine months of 2020, changes in working capital, excluding the LCM reserve and changes in short-term debt, were a net$490 million 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 decrease in crude and refined products inventories. For the first nine months of 2019, changes in working capital, excluding changes in short-term debt, were a 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$1.75 billion in the first nine months of 2020 compared to the first nine months of 2019, primarily due to the following: • a decrease in additions to property, plant and equipment of$1.13 billion
primarily due to decreased capital expenditures in the first nine months
of 2020 in our Midstream and Refining & Marketing segments;
• a decrease in net investments of
in the first nine months of 2019 in connection with the construction of
the Gray Oak Pipeline, which began initial start-up in the fourth quarter
of 2019; and
• a decrease in cash used in investing activities related to discontinued
operations of
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.
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