Edgar Filing: Marathon Petroleum Corp

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MPC-2014.03.31-10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



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

For the Quarterly Period Ended March 31, 2014



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

For the transition period from to

Commission file number 001-35054

Marathon Petroleum Corporation

(Exact name of registrant as specified in its charter)



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

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

(419) 422-2121

(Registrant’s telephone number, including area code)

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

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ¨ No x

There were 288,632,472 shares of Marathon Petroleum Corporation common stock outstanding as of April 30, 2014.

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MARATHON PETROLEUM CORPORATION

Form 10-Q

Quarter Ended March 31, 2014

INDEX



	Page
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Statements of Income (Unaudited)	2
Consolidated Statements of Comprehensive Income (Unaudited)	3
Consolidated Balance Sheets (Unaudited)	4
Consolidated Statements of Cash Flows (Unaudited)	5
Consolidated Statements of Equity (Unaudited)	6
Notes to Consolidated Financial Statements (Unaudited)	7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3. Quantitative and Qualitative Disclosures about Market Risk	38
Item 4. Controls and Procedures	39
Supplementary Statistics (Unaudited)	40

PART II – OTHER INFORMATION
Item 1. Legal Proceedings	43
Item 1A. Risk Factors	43
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	44
Item 6. Exhibits	45
Signatures	46

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

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Part I – Financial Information

Item 1. Financial Statements

Marathon Petroleum Corporation

Consolidated Statements of Income (Unaudited)



	Three Months Ended March 31,
(In millions, except per share data)	2014			2013
Revenues and other income:
Sales and other operating revenues (including consumer excise taxes)	$	23,285		$	23,330
Income from equity method investments	35			—
Net gain on disposal of assets	1			1
Other income	24			14
Total revenues and other income	23,345			23,345
Costs and expenses:
Cost of revenues (excludes items below)	20,540			20,034
Purchases from related parties	159			72
Consumer excise taxes	1,515			1,458
Depreciation and amortization	320			287
Selling, general and administrative expenses	346			249
Other taxes	104			89
Total costs and expenses	22,984			22,189
Income from operations	361			1,156
Net interest and other financial income (costs)	(46		)	(48		)
Income before income taxes	315			1,108
Provision for income taxes	108			378
Net income	207			730
Less net income attributable to noncontrolling interests	8			5
Net income attributable to MPC	$	199		$	725
Per Share Data (See Note 6)
Basic:
Net income attributable to MPC per share	$	0.68		$	2.19
Weighted average shares outstanding	293			331
Diluted:
Net income attributable to MPC per share	$	0.67		$	2.17
Weighted average shares outstanding	295			333
Dividends paid	$	0.42		$	0.35

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

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Marathon Petroleum Corporation

Consolidated Statements of Comprehensive Income (Unaudited)



	Three Months Ended March 31,
(In millions)	2014			2013
Net income	$	207		$	730
Other comprehensive income (loss):
Defined benefit postretirement and post-employment plans:
Actuarial changes, net of tax of $4 and $54	7			90
Prior service costs, net of tax of ($5) and ($5)	(8		)	(8		)
Other comprehensive income (loss)	(1		)	82
Comprehensive income	206			812
Less comprehensive income attributable to noncontrolling interests	8			5
Comprehensive income attributable to MPC	$	198		$	807

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

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Marathon Petroleum Corporation

Consolidated Balance Sheets (Unaudited)



(In millions, except per share data)	March 31, 2014			December 31, 2013
Assets
Current assets:
Cash and cash equivalents	$	2,166		$	2,292
Receivables, less allowance for doubtful accounts of $9 and $9	5,420			5,559
Inventories	5,689			4,689
Other current assets	173			197
Total current assets	13,448			12,737
Equity method investments	602			463
Property, plant and equipment, net	13,854			13,921
Goodwill	938			938
Other noncurrent assets	317			326
Total assets	$	29,159		$	28,385
Liabilities
Current liabilities:
Accounts payable	$	9,313		$	8,234
Payroll and benefits payable	259			406
Consumer excise taxes payable	371			373
Accrued taxes	614			513
Long-term debt due within one year	24			23
Other current liabilities	265			275
Total current liabilities	10,846			9,824
Long-term debt	3,635			3,373
Deferred income taxes	2,290			2,304
Defined benefit postretirement plan obligations	855			771
Deferred credits and other liabilities	775			781
Total liabilities	18,401			17,053
Commitments and contingencies (see Note 20)
Equity
MPC stockholders’ equity:
Preferred stock, no shares issued and outstanding (par value $0.01 per share, 30 million shares authorized)	—			—
Common stock:
Issued - 363 million and 362 million shares (par value $0.01 per share, 1 billion shares authorized)	4			4
Held in treasury, at cost - 73 million and 65 million shares	(4,849		)	(4,155		)
Additional paid-in capital	9,803			9,768
Retained earnings	5,591			5,507
Accumulated other comprehensive loss	(205		)	(204		)
Total MPC stockholders’ equity	10,344			10,920
Noncontrolling interests	414			412
Total equity	10,758			11,332
Total liabilities and equity	$	29,159		$	28,385

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

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Marathon Petroleum Corporation

Consolidated Statements of Cash Flows (Unaudited)



	Three Months Ended March 31,
(In millions)	2014			2013
Increase (decrease) in cash and cash equivalents
Operating activities:
Net income	$	207		$	730
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	320			287
Pension and other postretirement benefits, net	82			28
Deferred income taxes	(14		)	6
Net gain on disposal of assets	(1		)	(1		)
Equity method investments, net	6			4
Changes in the fair value of derivative instruments	(25		)	(57		)
Changes in:
Current receivables	139			(884		)
Inventories	(1,000		)	(517		)
Current accounts payable and accrued liabilities	1,011			2,491
All other, net	41			(8		)
Net cash provided by operating activities	766			2,079
Investing activities:
Additions to property, plant and equipment	(267		)	(195		)
Acquisitions	—			(1,493		)
Disposal of assets	2			3
Investments—acquisitions, loans and contributions	(123		)	(21		)
—redemptions and repayments	—			11
All other, net	28			13
Net cash used in investing activities	(360		)	(1,682		)
Financing activities:
Long-term debt – borrowings	270			—
– repayments	(6		)	(5		)
Debt issuance costs	—			(2		)
Issuance of common stock	13			28
Common stock repurchased	(689		)	(431		)
Dividends paid	(123		)	(116		)
Distributions to noncontrolling interests	(6		)	(4		)
All other, net	9			10
Net cash used in financing activities	(532		)	(520		)
Net decrease in cash and cash equivalents	(126		)	(123		)
Cash and cash equivalents at beginning of period	2,292			4,860
Cash and cash equivalents at end of period	$	2,166		$	4,737

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

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Marathon Petroleum Corporation

Consolidated Statements of Equity (Unaudited)



	MPC Stockholders’ Equity
(In millions)	Common Stock		Treasury Stock			Additional Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Noncontrolling Interests			Total Equity
Balance as of December 31, 2012	$	4	$	(1,253	)	$	9,527	$	3,880		$	(464	)	$	411		$	12,105
Net income	—		—			—		725			—			5			730
Dividends declared	—		—			—		(116		)	—			—			(116		)
Distributions to noncontrolling interests	—		—			—		—			—			(4		)	(4		)
Other comprehensive income	—		—			—		—			82			—			82
Shares repurchased	—		(531		)	100		—			—			—			(431		)
Shares issued (returned) - stock based compensation	—		(3		)	27		—			—			—			24
Stock-based compensation	—		—			22		—			—			—			22
Balance as of March 31, 2013	$	4	$	(1,787	)	$	9,676	$	4,489		$	(382	)	$	412		$	12,412
Balance as of December 31, 2013	$	4	$	(4,155	)	$	9,768	$	5,507		$	(204	)	$	412		$	11,332
Net income	—		—			—		199			—			8			207
Dividends declared	—		—			—		(124		)	—			—			(124		)
Distributions to noncontrolling interests	—		—			—		—			—			(6		)	(6		)
Other comprehensive income	—		—			—		—			(1		)	—			(1		)
Shares repurchased	—		(689		)	—		—			—			—			(689		)
Shares issued (returned)—stock based compensation	—		(5		)	14		—			—			—			9
Stock-based compensation	—		—			21		—			—			—			21
Other	—		—			—		9			—			—			9
Balance as of March 31, 2014	$	4	$	(4,849	)	$	9,803	$	5,591		$	(205	)	$	414		$	10,758

(Shares in millions)	Common Stock		Treasury Stock
Balance as of December 31, 2012	361		(28		)
Shares repurchased	—		(6		)
Balance as of March 31, 2013	361		(34		)
Balance as of December 31, 2013	362		(65		)
Shares repurchased	—		(8		)
Shares issued—stock-based compensation	1		—
Balance as of March 31, 2014	363		(73		)

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

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Notes to Consolidated Financial Statements (Unaudited)

1. Description of the Business and Basis of Presentation

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

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

See Note 8 for additional information about our operations.

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

These interim consolidated financial statements are unaudited; however, in the opinion of our management, these statements reflect all adjustments necessary for a fair statement of the results for the periods reported. All such adjustments are of a normal, recurring nature unless otherwise disclosed. These interim consolidated financial statements, including the notes, have been prepared in accordance with the rules of the Securities and Exchange Commission applicable to interim period financial statements and do not include all of the information and disclosures required by United States generally accepted accounting principles (“US GAAP”) for complete financial statements.

These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2013. The results of operations for the three months ended March 31, 2014 are not necessarily indicative of the results to be expected for the full year.

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

2. Accounting Standards

Not Yet Adopted

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

3. MPLX LP

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

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

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

The sales of interests in Pipeline Holdings to MPLX resulted in a change of our ownership in Pipeline Holdings, but not a change in control. We accounted for the sales as equity transactions, with the excess cash paid over historical carrying value recorded as a change within equity. We did not record a gain or loss on the transactions.

4. Acquisitions and Investments

Acquisition of Refinery and Related Logistics and Marketing Assets

On February 1, 2013, we acquired from BP Products North America Inc. and BP Pipelines (North America) Inc. (collectively, “BP”) the 451,000 barrel per calendar day refinery in Texas City, Texas, three intrastate natural gas liquid pipelines originating at the refinery, four light product terminals, branded-jobber marketing contract assignments for the supply of approximately 1,200 branded sites, a 1,040 megawatt electric cogeneration facility and a 50,000 barrel per day allocation of space on Colonial Pipeline. We refer to these assets as the “Galveston Bay Refinery and Related Assets.” We paid $1.49 billion for these assets, which included $935 million for inventory. The transaction was funded with cash on hand. Pursuant to the purchase and sale agreement, we may also be required to pay to BP a contingent earnout of up to an additional $700 million over six years, subject to certain conditions. During the second quarter of 2014, we expect to pay BP approximately $178 million for the first year's contingent earnout. See Note 13 for additional information on the contingent consideration.

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



(In millions, except per share data)	Three Months Ended March 31, 2013
Sales and other operating revenues (including consumer excise taxes)	$	25,296
Net income attributable to MPC	780
Net income attributable to MPC per share - basic	$	2.36
Net income attributable to MPC per share - diluted	2.34

The pro forma information includes adjustments to align accounting policies, an adjustment to depreciation expense to reflect the fair value of property, plant and equipment, increased amortization expense related to identifiable intangible assets and the related income tax effects.

Acquisitions of Convenience Stores

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

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

Assuming these transactions had been made at the beginning of any period presented, the consolidated pro forma results would not be materially different from reported results.

Investments in Ethanol Companies

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

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Investments in Pipeline Companies

We made contributions of $37 million to North Dakota Pipeline Company LLC ("North Dakota Pipeline") during the three months ended March 31, 2014. We have contributed $61 million since project inception. These contributions funded 37.5 percent of the construction costs incurred to-date on the Sandpiper pipeline project. In conjunction with our commitment to be an anchor shipper for the Sandpiper pipeline and our investment in the project, we will earn an approximate 27 percent equity interest in Enbridge Energy Partner L.P.'s North Dakota System when the Sandpiper pipeline is placed into service, which is projected to occur in 2016. We also have the option to increase our ownership interest to approximately 30 percent through additional investments in future system improvements. We account for our interest in North Dakota Pipeline using the equity method of accounting. See Note 20 for information on future contributions to North Dakota Pipeline.

In March 2014, we acquired from Chevron Raven Ridge Pipe Line Company an additional 7 percent interest in Explorer Pipeline Company ("Explorer") for $77 million, bringing our ownership interest to 25 percent. As a result of this increase in our ownership, we now account for our investment in Explorer using the equity method of accounting rather than the cost method. The cumulative impact of the change was applied as an adjustment to 2014 retained earnings.

5. Related Party Transactions

Our related parties include:


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


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


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


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


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


•	Other equity method investees.

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



	Three Months Ended March 31,
(In millions)	2014		2013
Other equity method investees	$	2	$	2

Purchases from related parties were as follows:



	Three Months Ended March 31,
(In millions)	2014		2013
Centennial	$	9	$	—
Explorer	13		—
LOCAP	5		4
LOOP	53		10
TAAE	16		—
TACE	27		26
TAME	34		30
Other equity method investees	2		2
Total	$	159	$	72

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

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



(In millions)	March 31, 2014		December 31, 2013
Centennial	$	—	$	1
Explorer	5		—
TAME	—		1
Total	$	5	$	2

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

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



(In millions)	March 31, 2014		December 31, 2013
Explorer	$	4	$	—
LOCAP	2		2
LOOP	4		3
TAAE	2		2
TACE	4		4
TAME	7		5
Total	$	23	$	16

6. Income per Common Share

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

Excluded from the diluted share calculation for both the three months ended March 31, 2014 and 2013 are less than one million shares related to stock-based compensation awards as their effect would be anti-dilutive.

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

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	Three Months Ended March 31,
(In millions, except per share data)	2014		2013
Basic earnings per share:
Allocation of earnings:
Net income attributable to MPC	$	199	$	725
Income allocated to participating securities	—		1
Income available to common stockholders - basic	$	199	$	724
Weighted average common shares outstanding	293		331
Basic earnings per share	$	0.68	$	2.19
Diluted earnings per share:
Allocation of earnings:
Net income attributable to MPC	$	199	$	725
Income allocated to participating securities	—		1
Income available to common stockholders - diluted	$	199	$	724
Weighted average common shares outstanding	293		331
Effect of dilutive securities	2		2
Weighted average common shares, including dilutive effect	295		333
Diluted earnings per share	$	0.67	$	2.17

7. Equity

Our board of directors has approved $6.0 billion in total share repurchase authorizations since January 1, 2012. As of March 31, 2014, we have repurchased a total of $4.83 billion of our common stock under these authorizations, leaving $1.17 billion available for repurchases through September 2015. Under these authorizations, we have acquired 73 million shares at an average cost per share of $66.19.

We may utilize various methods to effect the repurchases, which could include open market repurchases, negotiated block transactions, accelerated share repurchases or open market solicitations for shares, some of which may be effected through Rule 10b5-1 plans. The timing and amount of future repurchases, if any, will depend upon several factors, including market and business conditions, and such repurchases may be discontinued at any time.

Total share repurchases were as follows for the three months ended March 31, 2014 and 2013:



	Three Months Ended March 31,
(In millions, except per share data)	2014		2013
Number of shares repurchased^(a)	8		6
Cash paid for shares repurchased	$	689	$	431
Effective average cost per delivered share	$	87.60	$	80.95


^(a)	The three months ended March 31, 2013 includes one million shares received under the November 2012 accelerated share repurchase program, which were paid for in the fourth quarter of 2012.

At March 31, 2014, we had agreements to acquire additional common shares for $12 million, which were settled in early April 2014.

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8. Segment Information

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

•

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


•	Speedway – sells transportation fuels and convenience products in retail markets in the Midwest, primarily through Speedway^® convenience stores; and


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

On February 1, 2013, we acquired the Galveston Bay Refinery and Related Assets, which are part of the Refining & Marketing and Pipeline Transportation segments. Segment information for the period prior to the acquisition does not include amounts for these operations. See Note 4.

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



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



(In millions)	Refining & Marketing			Speedway		Pipeline Transportation		Total
Three Months Ended March 31, 2013
Revenues:
Customer	$	19,874		$	3,441	$	21	$	23,336
Intersegment^(a)	2,199			1		104		2,304
Segment revenues	$	22,073		$	3,442	$	125	$	25,640
Segment income from operations^(b)	$	1,105		$	67	$	51	$	1,223
Income (loss) from equity method investments	(4		)	—		4		—
Depreciation and amortization^(c)	236			27		18		281
Capital expenditures and investments^(d)(e)	1,420			36		90		1,546


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


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


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


^(d)	Capital expenditures include changes in capital accruals.


^(e)	The Refining & Marketing and Pipeline Transportation segments include the acquisition of the Galveston Bay Refinery and Related Assets. See Note 4.

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



	Three Months Ended March 31,
(In millions)	2014			2013
Segment income from operations	$	492		$	1,223
Items not allocated to segments:
Corporate and other unallocated items^(a)(b)	(67		)	(67		)
Pension settlement expenses^(c)	(64		)	—
Net interest and other financial income (costs)	(46		)	(48		)
Income before income taxes	$	315		$	1,108


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


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


^(c)	See Note 18.

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



	Three Months Ended March 31,
(In millions)	2014		2013
Segment capital expenditures and investments	$	340	$	1,546
Less: Investments in equity method investees	123		5
Plus: Items not allocated to segments:
Capital expenditures not allocated to segments	25		24
Capitalized interest	6		4
Total capital expenditures^(a)(b)	$	248	$	1,569


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


^(b)	See Note 16 for a reconciliation of total capital expenditures to additions to property, plant and equipment as reported in the consolidated statements of cash flows.

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



	Three Months Ended March 31,
(In millions)	2014		2013
Customer revenues (as reported above)	$	23,285	$	23,336
Corporate and other unallocated items	—		(6		)
Sales and other operating revenues (including consumer excise taxes)	$	23,285	$	23,330

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9. Other Items

Net interest and other financial income (costs) was:



	Three Months Ended March 31,
(In millions)	2014			2013
Interest:
Interest income	$	2		$	2
Interest expense	(49		)	(48		)
Interest capitalized	6			4
Total net interest	(41		)	(42		)
Other:
Net foreign currency losses	—			(1		)
Bank service and other fees	(5		)	(5		)
Total other	(5		)	(6		)
Net interest and other financial income (costs)	$	(46	)	$	(48	)

10. Income Taxes

The combined federal, state and foreign income tax rate was 34 percent for both the three months ended March 31, 2014 and 2013. The effective tax rate for the three months ended March 31, 2014 and 2013 is slightly less than the U.S. statutory rate of 35 percent primarily due to certain permanent benefit differences, including the domestic manufacturing deduction, partially offset by state and local tax expense.

We are continuously undergoing examination of our income tax returns, which have been completed for our U.S. federal and state income tax returns through the 2009 and 2003 tax years, respectively. We had $16 million of unrecognized tax benefits as of March 31, 2014. Pursuant to our tax sharing agreement with Marathon Oil Corporation ("Marathon Oil"), the unrecognized tax benefits related to pre-spinoff operations for which Marathon Oil was the taxpayer remain the responsibility of Marathon Oil and we have indemnified Marathon Oil accordingly. See Note 20 for indemnification information.

11. Inventories



(In millions)	March 31, 2014		December 31, 2013
Crude oil and refinery feedstocks	$	2,734	$	1,797
Refined products	2,540		2,367
Materials and supplies	333		425
Merchandise	82		100
Total (at cost)	$	5,689	$	4,689

Inventories are carried at the lower of cost or market value. The cost of inventories of crude oil and refinery feedstocks, refined products and merchandise is determined primarily under the last-in, first-out (“LIFO”) method. There were no liquidations of LIFO inventories for the three months ended March 31, 2014 and 2013.

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12. Property, Plant and Equipment



(In millions)	March 31, 2014		December 31, 2013
Refining & Marketing	$	17,117	$	16,982
Speedway	2,374		2,344
Pipeline Transportation	1,926		1,921
Corporate and Other	570		546
Total	21,987		21,793
Less accumulated depreciation	8,133		7,872
Property, plant and equipment, net	$	13,854	$	13,921

13. Fair Value Measurements

Fair Values—Recurring

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



	March 31, 2014
	Fair Value Hierarchy
(In millions)	Level 1		Level 2		Level 3		Netting and Collateral^(a)			Net Carrying Value on Balance Sheet^(b)		Collateral Pledged Not Offset
Commodity derivative instruments, assets	$	41	$	—	$	—	$	(39	)	$	2	$	82
Other assets	2		—		—		N/A			2		—
Total assets at fair value	$	43	$	—	$	—	$	(39	)	$	4	$	82

Commodity derivative instruments, liabilities	$	81	$	—	$	—	$	(81	)	$	—	$	—
Contingent consideration, liability^(c)	—		—		639		N/A			639		—
Total liabilities at fair value	$	81	$	—	$	639	$	(81	)	$	639	$	—



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

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


^(a)	Represents the impact of netting assets, liabilities and cash collateral when a legal right of offset exists. As of March 31, 2014 and December 31, 2013, cash collateral of $42 million and $32 million, respectively, was netted with mark-to-market derivative liabilities.


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


^(c)	Includes $178 million and $159 million classified as current at March 31, 2014 and December 31, 2013, respectively.

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Commodity derivatives in Level 1 are exchange-traded contracts for crude oil and refined products measured at fair value with a market approach using the close-of-day settlement prices for the market. Commodity derivatives are covered under master netting agreements with an unconditional right to offset. Collateral deposits in futures commission merchant accounts covered by master netting agreements related to Level 1 commodity derivatives are classified as Level 1 in the fair value hierarchy.

The contingent consideration represents the fair value as of March 31, 2014 of the amount we expect to pay to BP related to the earnout provision for the Galveston Bay Refinery and Related Assets acquisition. See Note 4. The fair value of the contingent consideration was estimated using an income approach and is therefore a Level 3 liability. The amount of cash to be paid under the arrangement is based on both a market-based crack spread and refinery throughput volumes for the months during which the contract applies, as well as established thresholds that cap the annual and total payment. The earnout payment cannot exceed $200 million per year for the first three years of the arrangement or $250 million per year for the last three years of the arrangement, with the total cumulative payment capped at $700 million over the six-year period. Any excess or shortfall from the annual cap for a current year’s earnout calculation will not affect subsequent years’ calculations. The fair value calculation used significant unobservable inputs, including (1) an estimate of refinery throughput volumes; (2) a range of internal and external crack spread forecasts from $13 to $18 per barrel; and (3) a range of risk-adjusted discount rates from 5 percent to 10 percent. An increase or decrease in crack spread forecasts or refinery throughput volume expectations will result in a corresponding increase or decrease in the fair value. Increases to the fair value as a result of increasing forecasts for both of these unobservable inputs, however, are limited as the earnout payment is subject to annual thresholds. An increase or decrease in the discount rate will result in a decrease or increase to the fair value, respectively. The fair value of the contingent consideration is reassessed each quarter, with changes in fair value recorded in cost of revenues.

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



	Three Months Ended March 31,
(In millions)	2014		2013
Beginning balance	$	625	$	—
Contingent consideration agreement	—		600
Total realized and unrealized losses included in net income	14		—
Ending balance	$	639	$	600

We did not hold any Level 3 derivative instruments during the three months ended March 31, 2014 and 2013. See Note 14 for the income statement impacts of our derivative instruments. There was an unrealized loss of $14 million related to the contingent consideration agreement for the three months ended March 31, 2014.

Fair Values – Reported

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



	March 31, 2014				December 31, 2013
(In millions)	Fair Value		Carrying Value		Fair Value		Carrying Value
Financial assets:
Investments	$	39	$	13	$	336	$	14
Other	30		28		31		30
Total financial assets	$	69	$	41	$	367	$	44
Financial liabilities:
Long-term debt^(a)	$	3,670	$	3,270	$	3,306	$	3,001
Deferred credits and other liabilities	21		21		21		21
Total financial liabilities	$	3,691	$	3,291	$	3,327	$	3,022


^(a)	Excludes capital leases

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

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

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

14. Derivatives

For further information regarding the fair value measurement of derivative instruments, including any effect of master netting agreements or collateral, see Note 13. We do not designate any of our commodity derivative instruments as hedges for accounting purposes.

Derivatives that are not designated as accounting hedges may include commodity derivatives used to hedge price risk on (1) inventories, (2) fixed price sales of refined products, (3) the acquisition of foreign-sourced crude oil and (4) the acquisition of ethanol for blending with refined products.

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



	March 31, 2014
(In millions)	Asset		Liability		Balance Sheet Location
Commodity derivatives	$	41	$	81	Other current assets

	December 31, 2013
(In millions)	Asset		Liability		Balance Sheet Location
Commodity derivatives	$	21	$	53	Other current assets

The table below summarizes open commodity derivative contracts as of March 31, 2014.



	Position	Total Barrels (In thousands)
Crude oil^(a)
Exchange-traded	Long	9,640
Exchange-traded	Short	(35,375	)
Refined Products^(a)
Exchange-traded	Long	2,317
Exchange-traded	Short	(3,658	)


^(a)	100 percent of these contracts expire in the second quarter of 2014.

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



	Gain (Loss)
(In millions)	Three Months Ended March 31,
Income Statement Location	2014			2013
Sales and other operating revenues	$	10		$	1
Cost of revenues	(61		)	(60		)
Total	$	(51	)	$	(59	)

15. Debt

Our outstanding borrowings at March 31, 2014 and December 31, 2013 consisted of the following:



(In millions)	March 31, 2014			December 31, 2013
Marathon Petroleum Corporation:
Revolving credit agreement due 2017	$	—		$	—
3.500% senior notes due March 1, 2016	750			750
5.125% senior notes due March 1, 2021	1,000			1,000
6.500% senior notes due March 1, 2041	1,250			1,250
Consolidated subsidiaries:
Capital lease obligations due 2014-2028	389			395
MPLX Operations LLC revolving credit agreement due 2017	270			—
Trade receivables securitization facility due 2016	—			—
Total	3,659			3,395
Unamortized discount	(10		)	(10		)
Fair value adjustments^(a)	10			11
Amounts due within one year	(24		)	(23		)
Total long-term debt due after one year	$	3,635		$	3,373


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

There were no borrowings or letters of credit outstanding under the MPC revolving credit agreement or the trade receivables securitization facility at March 31, 2014. During the three months ended March 31, 2014, MPLX borrowed $270 million under the MPLX Operations LLC revolving credit agreement (the "MPLX Credit Agreement") at an average interest rate of 1.5 percent per annum. The borrowings were used to fund MPLX's acquisition of an additional interest in Pipe Line Holdings. At March 31, 2014, MPLX had $270 million of borrowings and no letters of credit outstanding under the MPLX Credit Agreement, resulting in total unused loan availability of $230 million, or 46 percent of the borrowing capacity. The MPLX Credit Agreement is scheduled to mature on October 31, 2017.

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16. Supplemental Cash Flow Information



	Three Months Ended March 31,
(In millions)	2014		2013
Net cash provided by operating activities included:
Interest paid (net of amounts capitalized)	$	80	$	83
Net income taxes paid to (refunded from) taxing authorities	5		(5		)
Non-cash investing and financing activities:
Capital lease obligations increase	$	—	$	61
Acquisition:
Contingent consideration^(a)	—		600
Payable to seller^(a)	—		6


^(a)	Acquisition-date fair value of non-cash consideration associated with the Galveston Bay Refinery and Related Assets acquisition.

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



	Three Months Ended March 31,
(In millions)	2014			2013
Additions to property, plant and equipment	$	267		$	195
Acquisitions^(a)	—			1,377
Decrease in capital accruals	(19		)	(3		)
Total capital expenditures	$	248		$	1,569


^(a)	The three months ended March 31, 2013 includes the acquisition of the Galveston Bay Refinery and Related Assets, comprised of total consideration, excluding inventory and other current assets, plus assumed liabilities. Total consideration includes the base purchase price and a fair-value estimate of $600 million for the contingent consideration. See Note 4.

17. Accumulated Other Comprehensive Loss

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



(In millions)	Pension Benefits			Other Benefits			Gain on Cash Flow Hedge		Workers Compensation		Total
Balance as of December 31, 2012	$	(432	)	$	(36	)	$	4	—		$	(464	)
Other comprehensive income before reclassifications	67			9			—		—		76
Amounts reclassified from accumulated other comprehensive loss:
Amortization – prior service credit^(a)	(11		)	(2		)	—		—		(13		)
– actuarial loss^(a)	21			1			—		—		22
Tax effect	(4		)	1			—		—		(3		)
Other comprehensive income	73			9			—		—		82
Balance as of March 31, 2013	$	(359	)	$	(27	)	$	4	$	—	$	(382	)

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


^(a)	These accumulated other comprehensive loss components are included in the computation of net periodic benefit cost. See Note 18.

18. Defined Benefit Pension and Other Postretirement Plans

The following summarizes the components of net periodic benefit costs:



	Three Months Ended March 31,
	Pension Benefits						Other Benefits
(In millions)	2014			2013			2014			2013
Components of net periodic benefit cost:
Service cost	$	23		$	23		$	7		$	6
Interest cost	20			18			8			7
Expected return on plan assets	(28		)	(27		)	—			—
Amortization – prior service credit	(12		)	(11		)	(1		)	(2		)
– actuarial loss	13			21			1			1
– net settlement loss	64			—			—			—
Net periodic benefit cost	$	80		$	24		$	15		$	12

During the three months ended March 31, 2014, we made no contributions to our funded pension plans. We have no required funding for 2014 but may do so at our discretion. Current benefit payments related to unfunded pension and other postretirement benefit plans were $8 million and $5 million, respectively, during the three months ended March 31, 2014.

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

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19. Stock-Based Compensation Plans

Stock Option Awards

The following table presents a summary of our stock option award activity for the three months ended March 31, 2014:



	Number of Shares^(a)		Weighted Average Exercise Price
Outstanding at December 31, 2013	5,147,837		$	40.08
Granted	327,100		83.37
Exercised	(455,999	)	30.65
Forfeited, canceled or expired	(19,293	)	50.05
Outstanding at March 31, 2014	4,999,645		43.73


^(a)	Includes an immaterial number of stock appreciation rights.

The grant date fair value of stock option awards granted during the three months ended March 31, 2014 was $24.87 per share. The fair value of stock options granted to our employees is estimated on the date of the grant using the Black Scholes option-pricing model, which employs various assumptions. The assumption for expected volatility of our stock price was refined for the three months ended March 31, 2014 to reflect a weighting of 50 percent of MPC’s common stock implied volatility and 50 percent of MPC's common stock historical volatility.

Restricted Stock Awards

The following table presents a summary of restricted stock award activity for the three months ended March 31, 2014:



	Shares of Restricted Stock ("RS")				Restricted Stock Units ("RSU")
	Number of Shares		Weighted Average Grant Date Fair Value		Number of Units	Weighted Average Grant Date Fair Value
Outstanding at December 31, 2013	624,122		$	61.11	385,079	$	33.96
Granted	51,594		83.45		5,939	89.96
RS's Vested/RSU's Issued	(117,980	)	54.43		—	—
Forfeited	(14,840	)	64.31		—	—
Outstanding at March 31, 2014	542,896		64.60		391,018	34.81

Performance Unit Awards

The following table presents a summary of the activity for performance unit awards to be settled in shares for the three months ended March 31, 2014:



	Number of Units
Outstanding at December 31, 2013	3,822,500
Granted	2,033,700
Settled	—
Canceled	—
Outstanding at March 31, 2014	5,856,200

The performance unit awards granted in 2014 have a grant date fair value of $1.02 per unit, as calculated using a Monte Carlo valuation model.

MPLX Awards

During the three months ended March 31, 2014, MPLX granted equity-based compensation awards under the MPLX LP 2012 Incentive Compensation Plan. The compensation expense for these awards is not material to our consolidated financial statements.

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20. Commitments and Contingencies

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

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

At both March 31, 2014 and December 31, 2013, accrued liabilities for remediation totaled $123 million. It is not presently possible to estimate the ultimate amount of all remediation costs that might be incurred or the penalties if any that may be imposed. Receivables for recoverable costs from certain states, under programs to assist companies in clean-up efforts related to underground storage tanks at presently or formerly owned or operated retail marketing sites, were $50 million and $51 million at March 31, 2014 and December 31, 2013, respectively.

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

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

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

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

Guarantees related to indebtedness of equity method investees—We hold interests in an offshore oil port, LOOP, and a crude oil pipeline system, LOCAP. Both LOOP and LOCAP have secured various project financings with throughput and deficiency agreements. Under the agreements, we are required to advance funds if the investees are unable to service their debt. Any such advances are considered prepayments of future transportation charges. The duration of the agreements vary but tend to follow the terms of the underlying debt, which extend through 2037. Our maximum potential undiscounted payments under these agreements for the debt principal totaled $172 million as of March 31, 2014.

We hold an interest in a refined products pipeline through our investment in Centennial, and have guaranteed the payment of Centennial’s principal, interest and prepayment costs, if applicable, under a Master Shelf Agreement, which is scheduled to expire in 2024. The guarantee arose in order for Centennial to obtain adequate financing. Our maximum potential undiscounted payments under this agreement for debt principal totaled $41 million as of March 31, 2014.

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We hold an interest in an ethanol production facility through our investment in TAME, and through our participation as a lender under TAME’s revolving credit agreement, have agreed to reimburse the bank for 50 percent of any amounts drawn on a letter of credit that has been issued to secure TAME’s repayment of the tax exempt bonds. The credit agreement expires in 2018. Our maximum potential undiscounted payments under this arrangement were $25 million at March 31, 2014.

Marathon Oil indemnifications—In conjunction with our spinoff from Marathon Oil, we have entered into arrangements with Marathon Oil providing indemnities and guarantees with recorded values of $2 million as of March 31, 2014, which consist of unrecognized tax benefits related to MPC, its consolidated subsidiaries and the refining, marketing and transportation business operations prior to our spinoff which are not already reflected in the unrecognized tax benefits described in Note 10, and other contingent liabilities Marathon Oil may incur related to taxes. Furthermore, the separation and distribution agreement and other agreements with Marathon Oil to effect our spinoff provide for cross-indemnities between Marathon Oil and us. In general, Marathon Oil is required to indemnify us for any liabilities relating to Marathon Oil’s historical oil and gas exploration and production operations, oil sands mining operations and integrated gas operations, and we are required to indemnify Marathon Oil for any liabilities relating to Marathon Oil’s historical refining, marketing and transportation operations. The terms of these indemnifications are indefinite and the amounts are not capped.

Other guarantees—We have entered into other guarantees with maximum potential undiscounted payments totaling $122 million as of March 31, 2014, which primarily consist of a commitment to contribute cash to an equity method investee for certain catastrophic events, up to $50 million per event, in lieu of procuring insurance coverage, an indemnity to the co-lenders associated with an equity method investee’s credit agreement, and leases of assets containing general lease indemnities and guaranteed residual values.

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

Contractual commitments—At March 31, 2014, our contractual commitments to acquire property, plant and equipment and advance funds to equity method investees totaled $1.8 billion, which includes $700 million of contingent consideration associated with the acquisition of the Galveston Bay Refinery and Related Assets and $854 million for contributions to North Dakota Pipeline. See Notes 4 and 13 for additional information on the contingent consideration. See Note 4 for additional information on our investment in North Dakota Pipeline.


21.	Subsequent Event

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

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

Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the unaudited financial statements and accompanying footnotes included under Item 1. Financial Statements and in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2013.

Management’s Discussion and Analysis of Financial Condition and Results of Operations includes various forward-looking statements concerning trends or events potentially affecting our business. You can identify our forward-looking statements by words such as “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “goal,” “intend,” “plan,” “predict,” “project,” “seek,” “target,” “could,” “may,” “should,” “would,” "will" or other similar expressions that convey the uncertainty of future events or outcomes. In accordance with “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, these statements are accompanied by cautionary language identifying important factors, though not necessarily all such factors, which could cause future outcomes to differ materially from those set forth in forward-looking statements. For additional risk factors affecting our business, see Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2013.

Corporate Overview

We are an independent petroleum refining, marketing and transportation company. We currently own and operate seven refineries, all located in the United States, with an aggregate crude oil refining capacity of approximately 1.7 million barrels per calendar day. Our refineries supply refined products to resellers and consumers within our market areas, including the Midwest, Gulf Coast and Southeast regions of the United States. We distribute refined products to our customers through one of the largest private domestic fleets of inland petroleum product barges, one of the largest terminal operations in the United States, and a combination of MPC-owned and third-party-owned trucking and rail assets. We currently own, lease or have ownership interests in approximately 8,300 miles of crude oil and refined product pipelines to deliver crude oil to our refineries and other locations and refined products to wholesale and retail market areas. We are one of the largest petroleum pipeline companies in the United States on the basis of total volumes delivered.

Our operations consist of three reportable operating segments: Refining & Marketing; Speedway; and Pipeline Transportation. Each of these segments is organized and managed based upon the nature of the products and services they offer.

•

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


•	Speedway—sells transportation fuels and convenience products in the retail market in the Midwest, primarily through Speedway^® convenience stores; and


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

Executive Summary

Net income attributable to MPC was $199 million, or $0.67 per diluted share, for the first quarter of 2014 compared to $725 million, or $2.17 per diluted share, for the first quarter of 2013. The decrease was primarily due to our Refining & Marketing segment, which generated income from operations of $362 million in the first quarter of 2014 compared to $1.11 billion in the first quarter of 2013. The decrease in Refining & Marketing segment income from operations was primarily due to narrower crude oil differentials and higher turnaround costs, partially offset by higher crack spreads and more favorable net product price realizations.

Speedway segment income from operations decreased $9 million in the first quarter of 2014 compared to the first quarter of 2013, primarily due to a lower gasoline and distillate gross margin and higher operating expenses, partially offset by a higher merchandise gross margin.

Pipeline Transportation segment income from operations increased $21 million in the first quarter of 2014 compared to the first quarter of 2013. The increase primarily reflects an increase in pipeline transportation revenue and equity affiliate income, partially offset by higher operating expenses.

On February 1, 2013, we acquired from BP the 451,000 barrel per calendar day refinery in Texas City, Texas, three intrastate natural gas liquid pipelines originating at the refinery, four light product terminals, branded-jobber marketing contract assignments for the supply of approximately 1,200 branded sites, a 1,040 megawatt electric cogeneration facility and a 50 thousand barrel per day ("mbpd") allocation of space on the Colonial Pipeline. We refer to these assets as the “Galveston Bay

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Refinery and Related Assets.” We paid $1.49 billion for these assets, which included $935 million for inventory. Pursuant to the purchase and sale agreement, we may also be required to pay BP a contingent earnout of up to an additional $700 million over six years, subject to certain conditions. During the second quarter of 2014, we expect to pay BP approximately $178 million for the first year's contingent earnout. These assets are part of our Refining & Marketing and Pipeline Transportation segments. Our financial results and operating statistics for the period prior to the acquisition does not include amounts for the Galveston Bay Refinery and Related Assets. See Note 4 to the unaudited consolidated financial statements for additional information on this acquisition.

In March 2014, we acquired from Chevron Raven Ridge Pipe Line Company an additional 7 percent interest in Explorer for $77 million, bringing our ownership interest to 25 percent. This increase in our ownership percentage requires us to now account for our investment in Explorer using the equity method of accounting and begin reporting Explorer as a related party. Explorer owns approximately 1,900 miles of refined products pipeline from Lake Charles, Louisiana to Hammond, Indiana.

In 2013, we agreed with Enbridge Energy Partners, L.P. ("Enbridge") to serve as an anchor shipper for the Sandpiper pipeline, which will run from Beaver Lodge, North Dakota to Superior, Wisconsin and is targeted to be operational in early 2016. We also agreed to fund 37.5 percent of the construction of the Sandpiper pipeline project, which is currently estimated to cost $2.6 billion, of which approximately $1.0 billion is our share. We made contributions of $37 million during the first quarter of 2014 and have contributed $61 million since project inception. In exchange for our commitment to be an anchor shipper and our investment in the project, we will earn an approximate 27 percent equity interest in Enbridge's North Dakota System when the Sandpiper pipeline is placed into service. Enbridge's North Dakota System currently includes approximately 240 miles of crude oil gathering pipelines connected to a transportation pipeline that is approximately 730 miles long. We will also have the option to increase our ownership interest to approximately 30 percent through additional investments in future system improvements. See Notes 4 and 20 to the unaudited consolidated financial statements.

During the first three months of 2014, we paid $689 million to acquire 8 million common shares through open market share repurchases. The effective average cost was $87.60 per delivered share. At March 31, 2014, we also had agreements to repurchase additional common shares for $12 million, which were settled in early April 2014. As of March 31, 2014, we had an outstanding repurchase authorization of $1.17 billion, which expires in September 2015. See Note 7 to the unaudited consolidated financial statements.

Overview of Segments

Refining & Marketing

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

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

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

Historically, West Texas Intermediate crude oil ("WTI") has traded at prices similar to LLS. During 2011 and continuing through the first half of 2013, WTI traded at prices significantly less than LLS, which favorably impacted our Refining & Marketing gross margin. Logistical constraints in the U.S. mid-continent markets and other market factors acted to keep the price of WTI from rising with the prices of crude oil produced in other regions. However, the differential between WTI and LLS significantly narrowed during the second half of 2013 before widening modestly late in the first quarter of 2014 due to a

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variety of domestic and international market conditions. Future crude oil differentials will be dependent on a variety of market and economic factors.

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



(In millions, after-tax)
LLS 6-3-2-1 crack spread sensitivity^(a)(per $1.00/barrel change)	$	450
Sweet/sour differential sensitivity^(b) (per $1.00/barrel change)	200
LLS-WTI differential sensitivity^(c) (per $1.00/barrel change)	85
Natural gas price sensitivity (per $1.00/million British thermal unit change)	125


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


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


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

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


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


•	our refinery yields;


•	the selling prices realized for refined products;


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


•	the cost of products purchased for resale.

Refining & Marketing segment income from operations is also affected by changes in refinery direct operating costs, which include turnaround and major maintenance, depreciation and amortization and other manufacturing expenses. Changes in manufacturing costs are primarily driven by the cost of energy used by our refineries, including purchased natural gas, and the level of maintenance costs. Planned major maintenance activities, or turnarounds, requiring temporary shutdown of certain refinery operating units, are periodically performed at each refinery. We had significant planned turnaround and major maintenance activities at our Galveston Bay; Garyville, Louisiana; Robinson, Illinois and Catlettsburg, Kentucky refineries during the first quarter of 2014 compared to activities at our Catlettsburg, Garyville and Galveston Bay refineries during the first quarter of 2013.

Speedway

Our retail marketing gross margin for gasoline and distillate, which is the price paid by consumers less the cost of refined products, including transportation, consumer excise taxes and bankcard processing fees, impacts the Speedway segment profitability. Numerous factors impact gasoline and distillate demand throughout the year, including local competition, seasonal demand fluctuations, the available wholesale supply, the level of economic activity in our marketing areas and weather conditions. Market demand increases for gasoline and distillate generally increase the product margin we can realize. The gross margin on merchandise sold at convenience stores historically has been less volatile and has contributed substantially to Speedway's gross margin. Approximately two-thirds of Speedway’s gross margin was derived from merchandise sales in the first quarter of 2014. Speedway's convenience stores offer a wide variety of merchandise, including prepared foods, beverages and non-food items.

Pipeline Transportation

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

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Results of Operations

Consolidated Results of Operations



	Three Months Ended March 31,
(In millions)	2014			2013			Variance
Revenues and other income:
Sales and other operating revenues (including consumer excise taxes)	$	23,285		$	23,330		$	(45	)
Income from equity method investments	35			—			35
Net gain on disposal of assets	1			1			—
Other income	24			14			10
Total revenues and other income	23,345			23,345			—
Costs and expenses:
Cost of revenues (excludes items below)	20,540			20,034			506
Purchases from related parties	159			72			87
Consumer excise taxes	1,515			1,458			57
Depreciation and amortization	320			287			33
Selling, general and administrative expenses	346			249			97
Other taxes	104			89			15
Total costs and expenses	22,984			22,189			795
Income from operations	361			1,156			(795		)
Net interest and other financial income (costs)	(46		)	(48		)	2
Income before income taxes	315			1,108			(793		)
Provision for income taxes	108			378			(270		)
Net income	207			730			(523		)
Less net income attributable to noncontrolling interests	8		</