Edgar Filing: Marathon Petroleum Corp

Document

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 June 30, 2018



¨	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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	x	Accelerated filer	¨

Non-accelerated filer	¨ (Do not check if a smaller reporting company)	Smaller reporting company	¨

		Emerging growth company	¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

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 451,004,632 shares of Marathon Petroleum Corporation common stock outstanding as of August 1, 2018.

Table of Contents

MARATHON PETROLEUM CORPORATION

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2018

TABLE OF CONTENTS



	Page
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
CONSOLIDATED STATEMENTS OF INCOME	3
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME	4
CONSOLIDATED BALANCE SHEETS	5
CONSOLIDATED STATEMENTS OF CASH FLOWS	6
CONSOLIDATED STATEMENTS OF EQUITY AND REDEEMABLE NONCONTROLLING INTEREST	7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	8
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	33
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	55
ITEM 4. CONTROLS AND PROCEDURES	56
SUPPLEMENTARY STATISTICS (UNAUDITED)	57

PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS	61
ITEM 1A. RISK FACTORS	61
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITES AND USE OF PROCEEDS	65
ITEM 5. OTHER INFORMATION	65
ITEM 6. EXHIBITS	66
SIGNATURES	67

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.

GLOSSARY OF TERMS

Throughout this report, the following company or industry specific terms and abbreviations are used:



ASC	Accounting Standards Codification
ASU	Accounting Standards Update
ATB	Articulated tug barges
barrel	One stock tank barrel, or 42 United States gallons liquid volume, used in reference to crude oil or other liquid hydrocarbons.
bcf/d	One billion cubic feet per day
EBITDA	Earnings Before Interest, Tax, Depreciation and Amortization, a non-GAAP financial measure
EPA	United States Environmental Protection Agency
FASB	Financial Accounting Standards Board
GAAP	Accounting principles generally accepted in the United States
IDR	Incentive Distribution Right
LCM	Lower of cost or market
LIFO	Last in, first out, an inventory costing method
LLS	Louisiana Light Sweet crude oil, an oil index benchmark price
mbpd	Thousand barrels per day
MMBtu	One million British thermal units, an energy measurement
MMcf/d	One million cubic feet of natural gas per day
NGL	Natural gas liquids, such as ethane, propane, butanes and natural gasoline
OTC	Over-the-Counter
ppm	Parts per million
RIN	Renewable Identification Number
SEC	United States Securities and Exchange Commission
TCJA	Tax Cuts and Jobs Act
ULSD	Ultra-low sulfur diesel
USGC	U.S. Gulf Coast
VIE	Variable interest entity
WTI	West Texas Intermediate crude oil, an oil index benchmark price

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

MARATHON PETROLEUM CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)



	Three Months Ended June 30,				Six Months Ended June 30,
(In millions, except per share data)	2018		2017		2018		2017
Revenues and other income:
Sales and other operating revenues^(a)	$	22,118	$	18,033	$	40,812	$	34,167
Sales to related parties	199		147		371		301
Income from equity method investments	80		83		166		140
Net gain on disposal of assets	3		7		5		12
Other income	45		84		75		127
Total revenues and other income	22,445		18,354		41,429		34,747
Costs and expenses:
Cost of revenues (excludes items below)^(a)	19,517		16,101		36,887		31,047
Purchases from related parties	138		150		279		272
Depreciation and amortization	533		521		1,061		1,057
Selling, general and administrative expenses	424		485		826		875
Other taxes	122		115		225		223
Total costs and expenses	20,734		17,372		39,278		33,474
Income from operations	1,711		982		2,151		1,273
Net interest and other financial costs	195		158		378		307
Income before income taxes	1,516		824		1,773		966
Provision for income taxes	281		250		303		291
Net income	1,235		574		1,470		675
Less net income attributable to:
Redeemable noncontrolling interest	20		17		36		33
Noncontrolling interests	160		74		342		129
Net income attributable to MPC	$	1,055	$	483	$	1,092	$	513
Per Share Data (See Note 8)
Basic:
Net income attributable to MPC per share	$	2.30	$	0.94	$	2.34	$	0.99
Weighted average shares outstanding	459		513		467		519
Diluted:
Net income attributable to MPC per share	$	2.27	$	0.93	$	2.31	$	0.98
Weighted average shares outstanding	464		517		472		523
Dividends paid	$	0.46	$	0.36	$	0.92	$	0.72


^(a)	The 2018 period reflects an election to present certain taxes on a net basis. See Notes 2 and 3 for further information.

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 June 30,						Six Months Ended June 30,
(In millions)	2018			2017			2018			2017
Net income	$	1,235		$	574		$	1,470		$	675
Other comprehensive income (loss):
Defined benefit postretirement and post-employment plans:
Actuarial changes, net of tax of $2, $4, $5 and $7, respectively	7			7			14			11
Prior service costs, net of tax of ($2), ($4), ($4) and ($8), respectively	(7		)	(6		)	(14		)	(13		)
Other, net of tax of $0, $0, ($1) and $0, respectively	—			—			(2		)	—
Other comprehensive income (loss)	—			1			(2		)	(2		)
Comprehensive income	1,235			575			1,468			673
Less comprehensive income attributable to:
Redeemable noncontrolling interest	20			17			36			33
Noncontrolling interests	160			74			342			129
Comprehensive income attributable to MPC	$	1,055		$	484		$	1,090		$	511

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

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MARATHON PETROLEUM CORPORATION

CONSOLIDATED BALANCE SHEETS

(Unaudited)



(In millions, except share data)	June 30, 2018			December 31, 2017

Assets
Current assets:
Cash and cash equivalents (MPLX: $3 and $5, respectively)	$	4,999		$	3,011
Receivables, less allowance for doubtful accounts of $10 and $11 (MPLX: $370 and $299, respectively)	4,919			4,695
Inventories (MPLX: $73 and $65, respectively)	5,485			5,550
Other current assets (MPLX: $36 and $29, respectively)	145			145
Total current assets	15,548			13,401
Equity method investments (MPLX: $4,042 and $4,010, respectively)	4,838			4,787
Property, plant and equipment, net (MPLX: $13,642 and $12,187, respectively)	26,931			26,443
Goodwill (MPLX: $2,460 and $2,245, respectively)	3,586			3,586
Other noncurrent assets (MPLX: $472 and $479, respectively)	833			830
Total assets	$	51,736		$	49,047
Liabilities
Current liabilities:
Accounts payable (MPLX: $728 and $621, respectively)	$	8,113		$	8,297
Payroll and benefits payable (MPLX: $2 and $1, respectively)	432			591
Accrued taxes (MPLX: $46 and $38, respectively)	713			670
Debt due within one year (MPLX: $1 and $1, respectively)	26			624
Other current liabilities (MPLX: $222 and $130, respectively)	431			296
Total current liabilities	9,715			10,478
Long-term debt (MPLX: $11,874 and $6,945, respectively)	17,241			12,322
Deferred income taxes (MPLX: $11 and $5, respectively)	3,144			2,654
Defined benefit postretirement plan obligations	1,156			1,099
Deferred credits and other liabilities (MPLX: $246 and $230, respectively)	659			666
Total liabilities	31,915			27,219
Commitments and contingencies (see Note 22)
Redeemable noncontrolling interest	1,003			1,000
Equity
MPC stockholders’ equity:
Preferred stock, no shares issued and outstanding (par value $0.01 per share, 30 million shares authorized)	—			—
Common stock:
Issued – 735 million and 734 million shares (par value $0.01 per share, 1 billion shares authorized)	7			7
Held in treasury, at cost – 279 million and 248 million shares	(12,093		)	(9,869		)
Additional paid-in capital	13,688			11,262
Retained earnings	13,589			12,864
Accumulated other comprehensive loss	(233		)	(231		)
Total MPC stockholders’ equity	14,958			14,033
Noncontrolling interests	3,860			6,795
Total equity	18,818			20,828
Total liabilities, redeemable noncontrolling interest and equity	$	51,736		$	49,047

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)



	Six Months Ended June 30,
(In millions)	2018			2017
Operating activities:
Net income	$	1,470		$	675
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of deferred financing costs and debt discount	35			30
Depreciation and amortization	1,061			1,057
Pension and other postretirement benefits, net	65			(59		)
Deferred income taxes	2			23
Net gain on disposal of assets	(5		)	(12		)
Income from equity method investments	(166		)	(140		)
Distributions from equity method investments	217			136
Changes in the fair value of derivative instruments	1			59
Changes in:
Current receivables	(225		)	344
Inventories	66			107
Current accounts payable and accrued liabilities	(231		)	(208		)
All other, net	(41		)	(51		)
Net cash provided by operating activities	2,249			1,961
Investing activities:
Additions to property, plant and equipment	(1,466		)	(1,265		)
Acquisitions, net of cash acquired	—			(220		)
Disposal of assets	14			37
Investments – acquisitions, loans and contributions	(118		)	(677		)
– redemptions, repayments and return of capital	15			24
All other, net	37			89
Net cash used in investing activities	(1,518		)	(2,012		)
Financing activities:
Commercial paper – issued	—			300
– repayments	—			(300		)
Long-term debt – borrowings	9,610			2,241
– repayments	(5,270		)	(213		)
Debt issuance costs	(53		)	(21		)
Issuance of common stock	21			20
Common stock repurchased	(2,212		)	(1,170		)
Dividends paid	(430		)	(376		)
Issuance of MPLX LP common units	—			434
Distributions to noncontrolling interests	(394		)	(324		)
Contributions from noncontrolling interests	5			128
Contingent consideration payment	—			(89		)
All other, net	(19		)	(17		)
Net cash provided by financing activities	1,258			613
Net increase in cash, cash equivalents and restricted cash	1,989			562
Cash, cash equivalents and restricted cash at beginning of period	3,015			892
Cash, cash equivalents and restricted cash at end of period	$	5,004		$	1,454

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

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MARATHON PETROLEUM CORPORATION

CONSOLIDATED STATEMENTS OF EQUITY AND REDEEMBALE NONCONTROLLING INTEREST

(Unaudited)



	MPC Stockholders’ Equity
(In millions)	Common Stock		Treasury Stock			Additional Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Loss			Non-controlling Interests			Total Equity			Redeemable Non-controlling Interest
Balance as of December 31, 2016	$	7	$	(7,482	)	$	11,060	$	10,206		$	(234	)	$	6,646		$	20,203		$	1,000
Net income	—		—			—		513			—			129			642			33
Dividends declared	—		—			—		(375		)	—			—			(375		)	—
Distributions to noncontrolling interests	—		—			—		—			—			(291		)	(291		)	(33		)
Contributions from noncontrolling interests	—		—			—		—			—			128			128			—
Other comprehensive loss	—		—			—		—			(2		)	—			(2		)	—
Shares repurchased	—		(1,170		)	—		—			—			—			(1,170		)	—
Stock-based compensation	—		(12		)	47		—			—			1			36			—
Impact from equity transactions of MPLX LP	—		—			78		—			—			315			393			—
Balance as of June 30, 2017	$	7	$	(8,664	)	$	11,185	$	10,344		$	(236	)	$	6,928		$	19,564		$	1,000
Balance as of December 31, 2017	$	7	$	(9,869	)	$	11,262	$	12,864		$	(231	)	$	6,795		$	20,828		$	1,000
Cumulative effect of adopting new accounting standards	—		—			—		63			—			1			64			—
Net income	—		—			—		1,092			—			342			1,434			36
Dividends declared	—		—			—		(430		)	—			—			(430		)	—
Distributions to noncontrolling interests	—		—			—		—			—			(361		)	(361		)	(33		)
Contributions from noncontrolling interests	—		—			—		—			—			5			5			—
Other comprehensive loss	—		—			—		—			(2		)	—			(2		)	—
Shares repurchased	—		(2,212		)	—		—			—			—			(2,212		)	—
Stock-based compensation	—		(12		)	45		—			—			5			38			—
Impact from equity transactions of MPLX LP	—		—			2,381		—			—			(2,927		)	(546		)	—
Balance as of June 30, 2018	$	7	$	(12,093	)	$	13,688	$	13,589		$	(233	)	$	3,860		$	18,818		$	1,003

(Shares in millions)	Common Stock		Treasury Stock
Balance as of December 31, 2016	731		(203		)
Shares repurchased	—		(23		)
Shares issued – stock-based compensation	1		—
Balance as of June 30, 2017	732		(226		)
Balance as of December 31, 2017	734		(248		)
Shares repurchased	—		(31		)
Shares issued – stock-based compensation	1		—
Balance as of June 30, 2018	735		(279		)

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION

Description of the Business

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

See Note 10 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 SEC applicable to interim period financial statements and do not include all of the information and disclosures required by 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, 2017. The results of operations for the three and six months ended June 30, 2018 are not necessarily indicative of the results to be expected for the full year.

Certain prior period financial statement amounts have been reclassified to conform to current period presentation.

2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES

Revenue Recognition

As described in Note 3, we adopted ASU 2014-09, Revenue from Contracts with Customers (“ASC 606”) effective January 1, 2018. We recognize revenue based on consideration specified in contracts or agreements with customers when we satisfy our performance obligations by transferring control over products or services to a customer. Concurrent with our adoption of ASC 606, we made an accounting policy election that all taxes assessed by a governmental authority that are both imposed on and concurrent with a revenue-producing transaction and collected from our customers will be recognized on a net basis within “Sales and other operating revenues.”

The adoption of ASC 606 did not materially change our revenue recognition patterns, which are described below by reportable segment:

•

Refining & Marketing - The vast majority of our Refining & Marketing contracts contain pricing that is based on the market price for the product at the time of delivery. Our obligations to deliver product volumes are typically satisfied and revenue is recognized when control of the product transfers to our customers. Concurrent with the transfer of control, we typically receive the right to payment for the delivered product, the customer accepts the product and the customer has significant risks and rewards of ownership of the product. Payment terms require customers to pay shortly after delivery and do not contain significant financing components.

•

Speedway - Revenue is recognized when our customers receive control of the transportation fuels or merchandise. Payments from customers are received at the time sales occur in cash or by credit or debit card. Speedway offers a loyalty rewards program to its customers. We defer a minor portion of revenue on sales to the loyalty program participants until the participants redeem their rewards. The related contract liability, as defined in the standard, is not material to our financial statements.

•

Midstream - Midstream revenue transactions typically are defined by contracts under which we sell a product or provide a service. Revenues from sales of product are recognized when control of the product transfers to the customer. Revenues from sales of services are recognized over time when the performance obligation is satisfied as services are provided in a series. We have elected to use the output measure of progress to recognize revenue based on the units delivered, processed or transported. The transaction price in our Midstream contracts often has both fixed components, related to minimum volume commitments, and variable components which are primarily dependent on volumes. Variable consideration will generally not be estimated at contract inception as the transaction price is specifically allocable to the services provided at each period end.

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Refer to Note 10 for disclosure of our revenue disaggregated by segment and product line, as well as a description of our reportable segment operations.

3. ACCOUNTING STANDARDS

Recently Adopted

ASU 2014-09, Revenue - Revenue from Contracts with Customers (ASC 606)

On January 1, 2018, we adopted the new revenue standard, applying the modified retrospective method, whereby a cumulative effect is recorded to opening retained earnings and ASC 606 is applied prospectively. We recorded a net increase of $1 million to our retained earnings balance as of January 1, 2018 due to the cumulative effect of applying the new revenue standard.

Impact of Adoption

The adoption of ASC 606 did not materially change our revenue recognition patterns. The most significant impacts of adopting ASC 606 for the period ended June 30, 2018 are as follows:

•

a reduction of “Sales and other operating revenues” of $1.36 billion for the three months ended June 30, 2018 and $2.61 billion for the six months ended June 30, 2018 due to our accounting policy election to present taxes incurred concurrently with revenue producing transactions and collected on behalf of our customers on a net basis. For the three and six months ended June 30, 2017, taxes are reflected on a gross basis in “Sales and other operating revenues” and “Cost of revenues”, and include $1.27 billion and $2.47 billion, respectively, of taxes that are now subject to our net basis accounting policy election.

•

an increase to both “Sales and other operating revenues” and “Cost of revenues” of $124 million for the three months ended June 30, 2018 and $240 million for the six months ended June 30, 2018 related to certain Midstream contract provisions for third-party reimbursements, non-cash consideration and imbalances that require gross presentation under ASC 606. Comparative information continues to be reported under the accounting standards in effect for those periods.

Practical Expedients

We elected the completed contract practical expedient and only applied ASC 606 to contracts that were not completed as of January 1, 2018.

We do not disclose information on the future performance obligations for any contract with expected duration of one year or less at inception. As of June 30, 2018, we do not have future performance obligations that are material to future periods.

Receivables

On the accompanying consolidated balance sheets, “Receivables, less allowance for doubtful accounts” primarily consists of customer receivables. Significant, non-customer balances included in our receivables at June 30, 2018 include matching buy/sell receivables of $1.50 billion and income tax receivables of $117 million.

ASU 2016-16, Income Taxes - Intra-Entity Transfers of Assets Other Than Inventory

We adopted this accounting standards update in the first quarter of 2018 and recorded a $61 million cumulative-effect adjustment as an increase to retained earnings as of January 1, 2018 with the offset recorded as a reduction to “Deferred Income Taxes.”

We also adopted the following standards during the first six months of 2018, none of which had a material impact to our financial statements or financial statement disclosures:



ASU		Effective Date
2017-09	Stock Compensation - Scope of Modification Accounting	January 1, 2018
2017-07	Retirement Benefits - Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Cost	January 1, 2018
2017-05	Gains and Losses from the Derecognition of Nonfinancial Assets - Clarifying the Scope of Asset Derecognition Guidance	January 1, 2018
2017-01	Business Combinations - Clarifying the Definition of a Business	January 1, 2018
2016-18	Statement of Cash Flows - Restricted Cash	January 1, 2018
2016-15	Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments	January 1, 2018
2016-01	Financial Instruments - Recognition and Measurement of Financial Assets and Liabilities	January 1, 2018

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Not Yet Adopted

ASU 2018-02, Reporting Comprehensive Income - Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

In February 2018, the FASB issued an accounting standards update allowing an entity the choice to reclassify to retained earnings the tax effects related to the TCJA that are stranded in accumulated other comprehensive income. We do not expect adoption of this standard to have a material impact on our financial statements. The amendment is effective beginning in 2019 with early adoption permitted.

ASU 2017-12, Derivatives and Hedging - Targeted Improvements to Accounting for Hedging Activities

In August 2017, the FASB issued an accounting standards update to amend the hedge accounting rules to simplify the application of hedge accounting guidance and better portray the economic results of risk management activities in the financial statements. The guidance expands the ability to hedge nonfinancial and financial risk components, reduces complexity in fair value hedges of interest rate risk, eliminates the requirement to separately measure and report hedge ineffectiveness and eases certain hedge effectiveness assessment requirements. The guidance is effective beginning in 2019 with early adoption permitted. We are currently evaluating the impact of this guidance, including transition elections and required disclosures, on our financial statements and the timing of adoption. However, since we have not historically designated our commodity derivatives as hedges, we do not expect the adoption of this accounting standards update to have a material impact on our consolidated financial statements.

ASU 2017-04, Intangibles - Goodwill and Other - Simplifying the Test for Goodwill Impairment

In January 2017, the FASB issued an accounting standards update which simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under the new guidance, the recognition of an impairment charge is calculated based on the amount by which the carrying amount exceeds the reporting unit’s fair value, which could be different from the amount calculated under the current method using the implied fair value of the goodwill; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The guidance should be applied on a prospective basis, and is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019.

ASU 2016-13, Credit Losses - Measurement of Credit Losses on Financial Instruments

In June 2016, the FASB issued an accounting standards update related to the accounting for credit losses on certain financial instruments. The guidance requires that for most financial assets, losses be based on an expected loss approach which includes estimates of losses over the life of exposure that considers historical, current and forecasted information. Expanded disclosures related to the methods used to estimate the losses as well as a specific disaggregation of balances for financial assets are also required. The change is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. We do not expect application of this accounting standards update to have a material impact on our consolidated financial statements.

ASU 2016-02, Leases

In February 2016, the FASB issued an accounting standards update requiring lessees to record virtually all leases on their balance sheets. The accounting standards update also requires expanded disclosures to help financial statement users better understand the amount, timing and uncertainty of cash flows arising from leases. For lessors, this amended guidance modifies the classification criteria and the accounting for sales-type and direct financing leases. The change will be effective on a modified retrospective basis for fiscal years beginning after December 15, 2018, and interim periods within those years, with early adoption permitted. We continue to evaluate the impact of this standard on our financial statements and disclosures, internal controls and accounting policies. This evaluation process includes reviewing all forms of leases, performing a completeness assessment over the lease population and analyzing the practical expedients in order to determine the best path of implementing changes to existing processes and controls. We are implementing a third-party supported lease accounting information system to account for our lease population in accordance with this new standard and establishing internal controls over the new system. We believe the adoption of the standard will have a material impact on our consolidated financial statements as virtually all leases will be recognized as a right of use asset and lease obligation.

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4. MPLX LP

MPLX is a diversified, growth-oriented publicly traded master limited partnership formed by us to own, operate, develop and acquire midstream energy infrastructure assets. MPLX is engaged in the gathering, processing and transportation of natural gas; the gathering, transportation, fractionation, storage and marketing of NGLs; and the transportation, storage, distribution and marketing of crude oil and refined petroleum products.

As of June 30, 2018, we owned 63.6 percent of the outstanding MPLX common units and control MPLX through our ownership of the general partner interest in MPLX. MPLX is a VIE because the limited partners of MPLX do not have substantive kick-out or substantive participating rights over the general partner. We are the primary beneficiary of MPLX because in addition to our significant economic interest, we also have the power, through our 100 percent ownership of the general partner, to control the decisions that most significantly impact MPLX. We therefore consolidate MPLX and record a noncontrolling interest for the 36.4 percent interest owned by the public. We also record a redeemable noncontrolling interest related to MPLX’s preferred units.

The creditors of MPLX do not have recourse to MPC’s general credit through guarantees or other financial arrangements. The assets of MPLX are the property of MPLX and cannot be used to satisfy the obligations of MPC. MPC has effectively guaranteed certain indebtedness of LOOP LLC (“LOOP”) and LOCAP LLC (“LOCAP”), in which MPLX holds an interest. See Note 22 for more information.

Dropdowns to MPLX and GP/IDR Exchange

On February 1, 2018, we contributed our refining logistics assets and fuels distribution services to MPLX in exchange for $4.1 billion in cash and approximately 112 million common units and 2 million general partner units from MPLX. MPLX financed the cash portion of the transaction with its $4.1 billion 364-day term loan facility, which was entered into on January 2, 2018. We agreed to waive approximately one-third of the first quarter 2018 distributions on the common units issued in connection with this transaction. The contributions of these assets were accounted for as transactions between entities under common control and we did not record a gain or loss.

Immediately following the February 1, 2018 dropdown to MPLX, our IDRs were cancelled and our economic general partner interest was converted into a non-economic general partner interest, all in exchange for 275 million newly issued MPLX common units (“GP/IDR Exchange”). As a result of this transaction, the general partner units and IDRs were eliminated, are no longer outstanding and no longer participate in distributions of cash from MPLX.

On September 1, 2017, we contributed our joint-interest ownership in certain pipelines and storage facilities to MPLX in exchange for $420 million in cash and approximately 19 million common units and 378 thousand general partner units from MPLX. We also agreed to waive approximately two-thirds of the third quarter 2017 common unit distributions, IDRs and general partner distributions with respect to the common units issued in this transaction. The contributions of these assets were accounted for as transactions between entities under common control and we did not record a gain or loss.

On March 1, 2017, we contributed certain terminal, pipeline and storage assets to MPLX in exchange for $1.5 billion in cash and approximately 13 million common units and 264 thousand general partner units from MPLX. We also agreed to waive two-thirds of the first quarter 2017 common unit distributions, IDRs and general partner distributions with respect to the common units issued in this transaction. The contributions of these assets were accounted for as transactions between entities under common control and we did not record a gain or loss.

Noncontrolling Interest in MPLX

As a result of equity transactions of MPLX, we are required to adjust non-controlling interest and additional paid-in capital. Changes in MPC’s additional paid-in capital resulting from changes in its ownership interests in MPLX were as follows:



	Six Months Ended June 30,
(In millions)	2018			2017
Increase due to the issuance of MPLX LP common units to the public	$	5		$	25
Increase due to the issuance of MPLX LP common units and general partner units to MPC	1,114			94
Increase due to GP/IDR Exchange	1,808			—
Increase in MPC's additional paid-in capital	2,927			119
Tax impact	(546		)	(41		)
Increase in MPC's additional paid-in capital, net of tax	$	2,381		$	78

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Agreements

We have various long-term, fee-based commercial agreements with MPLX. Under these agreements, MPLX provides transportation, storage, distribution and marketing services to us. Under certain agreements, we commit to provide MPLX with minimum quarterly throughput and distribution volumes of crude oil and refined products and minimum storage volumes of crude oil, refined products and butane. Under certain other agreements, we commit to pay for 100 percent of available capacity for certain marine transportation and refining logistics assets. We also have agreements with MPLX that establish fees for operational and management services provided between us and MPLX and for executive management services and certain general and administrative services provided by us to MPLX. These transactions are eliminated in consolidation, but are reflected as intersegment transactions between our Refining & Marketing and Midstream segments.

5. ACQUISITIONS AND INVESTMENTS

Pending Merger with Andeavor

On April 29, 2018, MPC and Andeavor (“ANDV”) entered into a definitive merger agreement under which MPC has agreed to acquire all of ANDV’s outstanding shares. Under the terms of the agreement, ANDV shareholders will have the option to choose 1.87 shares of MPC stock or $152.27 in cash per share of ANDV common stock. The merger agreement includes election proration provisions that will result in approximately 22.9 million Andeavor shares being converted into cash consideration and the remaining Andeavor shares of approximately 128.2 million being converted into stock consideration. The aggregate cash consideration will be approximately $3.5 billion. The transaction was unanimously approved by the boards of directors of both companies, and MPC’s joint proxy statement/prospectus with ANDV has been declared effective by the Securities and Exchange Commission. The closing of the transaction remains subject to, among other things, customary closing conditions, including receipt of the approval of shareholders at the special meetings of both MPC and ANDV, which are scheduled for September 24, 2018.

We recognized transaction costs related to the pending merger of $10 million, which are reflected in selling, general and administrative expenses for the three and six months ended June 30, 2018.

Acquisition of Ozark Pipeline

On March 1, 2017, MPLX acquired the Ozark pipeline from Enbridge Pipelines (Ozark) LLC for approximately $219 million, including purchase price adjustments made in the second quarter of 2017. Based on the fair value of assets acquired and liabilities assumed at the acquisition date, the final purchase price was primarily allocated to property, plant and equipment. The Ozark pipeline is a 433-mile, 22-inch crude oil pipeline originating in Cushing, Oklahoma, and terminating in Wood River, Illinois, capable of transporting approximately 230 mbpd. We account for the Ozark pipeline within the Midstream segment.

Assuming the acquisition of the Ozark pipeline had occurred on January 1, 2016, the consolidated pro forma results would not have been materially different from reported results.

Investment in Pipeline Company

On February 15, 2017, MPLX acquired a partial, indirect equity interest in the Dakota Access Pipeline (“DAPL”) and Energy Transfer Crude Oil Company Pipeline (“ETCOP”) projects, collectively referred to as the Bakken Pipeline system, through a joint venture with Enbridge Energy Partners L.P. (“Enbridge Energy Partners”). The Bakken Pipeline system is capable of transporting more than 520 mbpd of crude oil from the Bakken/Three Forks production area in North Dakota to the Midwest through Patoka, Illinois and ultimately to the Gulf Coast. MPLX contributed $500 million of the $2 billion purchase price paid by the joint venture, MarEn Bakken Company LLC (“MarEn Bakken”), to acquire a 36.75 percent indirect equity interest in the Bakken Pipeline system from Energy Transfer Partners, L.P. (“ETP”) and Sunoco Logistics Partners, L.P. (“SXL”). MPLX holds, through a subsidiary, a 25 percent interest in MarEn Bakken, which equates to an approximate 9.2 percent indirect equity interest in the Bakken Pipeline system. We account for the investment in MarEn Bakken as part of our Midstream segment using the equity method of accounting.

Formation of Gathering and Processing Joint Venture

Effective January 1, 2017, MPLX and Antero Midstream formed a joint venture, Sherwood Midstream LLC (“Sherwood Midstream”), to support the development of Antero Resources Corporation’s Marcellus Shale acreage in West Virginia. MPLX has a 50 percent ownership interest in Sherwood Midstream. In connection with this transaction, MPLX contributed assets then under construction at the Sherwood Complex with a fair value of approximately $134 million and cash of approximately $20 million. Antero Midstream made an initial capital contribution of approximately $154 million.

Also effective January 1, 2017, MPLX converted all of its ownership interests in MarkWest Ohio Fractionation Company, L.L.C. (“Ohio Fractionation”), a previously wholly-owned subsidiary, to Class A Interests and amended its LLC Agreement to create Class B-3 Interests, which were sold to Sherwood Midstream for $126 million in cash. The Class B-3 Interests provide

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Sherwood Midstream with the right to fractionation revenue and the obligation to pay expenses related to 20 mbpd of capacity in the Hopedale 3 fractionator.

Effective January 1, 2017, MPLX and Sherwood Midstream formed a joint venture, Sherwood Midstream Holdings LLC (“Sherwood Midstream Holdings”), for the purpose of owning, operating and maintaining all of the shared assets for the benefit of and use in the operation of the gas plants and other assets owned by Sherwood Midstream and the gas plants and deethanization facilities owned by MPLX. MPLX contributed certain real property, equipment and facilities with a fair value of approximately $209 million to Sherwood Midstream Holdings in exchange for a 79 percent initial ownership interest. Sherwood Midstream contributed cash of approximately $44 million to Sherwood Midstream Holdings in exchange for a 21 percent ownership interest. The net book value of the contributed assets was approximately $203 million. The contribution was determined to be an in-substance sale of real estate. During the six months ended June 30, 2018, MPLX sold to Sherwood Midstream six percent of its equity ownership in Sherwood Midstream Holdings for $15 million.

We account for our direct interests in Sherwood Midstream and Sherwood Midstream Holdings as part of our Midstream segment using the equity method of accounting. We continue to consolidate Ohio Fractionation and have recognized a noncontrolling interest for Sherwood Midstream’s interest in that entity.

See Note 6 for additional information related to the investments in Sherwood Midstream, Ohio Fractionation and Sherwood Midstream Holdings.

6. VARIABLE INTEREST ENTITIES

In addition to MPLX, as described in Note 4, the following entities are also VIEs.

Crowley Coastal Partners

In May 2016, Crowley Coastal Partners was formed to own an interest in both Crowley Ocean Partners and Crowley Blue Water Partners. We have determined that Crowley Coastal Partners is a VIE based on the terms of the existing financing arrangements for Crowley Blue Water Partners and Crowley Ocean Partners and the associated debt guarantees by MPC and Crowley. Our maximum exposure to loss at June 30, 2018 was $483 million, which includes our equity method investment in Crowley Coastal Partners and the debt guarantees provided to each of the lenders to Crowley Blue Water Partners and Crowley Ocean Partners. We are not the primary beneficiary of this VIE because we do not have the power to control the activities that significantly influence the economic outcomes of the entity and, therefore, do not consolidate the entity.

MarkWest Utica EMG

On January 1, 2012, MarkWest Utica Operating Company, LLC (“Utica Operating”), a wholly-owned and consolidated subsidiary of MarkWest, and EMG Utica, LLC ("EMG Utica") (together the "Members"), executed agreements to form a joint venture, MarkWest Utica EMG LLC (“MarkWest Utica EMG”), to develop significant natural gas gathering, processing and NGL fractionation, transportation and marketing infrastructure in eastern Ohio.

As of June 30, 2018, MarkWest had a 56 percent ownership interest in MarkWest Utica EMG. MarkWest Utica EMG's inability to fund its planned activities without subordinated financial support qualify it as a VIE. Utica Operating is not deemed to be the primary beneficiary due to EMG Utica’s voting rights on significant matters. We account for our ownership interest in MarkWest Utica EMG as an equity method investment. Our maximum exposure to loss as a result of our involvement with MarkWest Utica EMG includes our equity investment, any additional capital contribution commitments and any operating expenses incurred by the subsidiary operator in excess of compensation received for the performance of the operating services. Our equity investment in MarkWest Utica EMG at June 30, 2018 was $2.1 billion.

Ohio Gathering

Ohio Gathering Company, L.L.C. (“Ohio Gathering”) is a subsidiary of MarkWest Utica EMG and is engaged in providing natural gas gathering services in the Utica Shale in eastern Ohio. Ohio Gathering is a joint venture between MarkWest Utica EMG and Summit Midstream Partners, LLC. As of June 30, 2018, we had a 34 percent indirect ownership interest in Ohio Gathering. As this entity is a subsidiary of MarkWest Utica EMG, which is accounted for as an equity method investment, MPLX reports its portion of Ohio Gathering’s net assets as a component of its investment in MarkWest Utica EMG.

Sherwood Midstream

As described in Note 5, MPLX and Antero Midstream formed a joint venture, Sherwood Midstream, to support the development of Antero Resources Corporation’s Marcellus Shale acreage in West Virginia. As of June 30, 2018, MPLX had a 50 percent ownership interest in Sherwood Midstream. Sherwood Midstream’s inability to fund its planned activities without additional subordinated financial support qualify it as a VIE. MPLX is not deemed to be the primary beneficiary, due to Antero Midstream’s voting rights on significant matters. We account for our ownership interest in Sherwood Midstream using the

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equity method of accounting. Our maximum exposure to loss as a result of our involvement with Sherwood Midstream includes our equity investment, any additional capital contribution commitments and any operating expenses incurred by the subsidiary operator in excess of compensation received for the performance of the operating services. Our equity investment in Sherwood Midstream at June 30, 2018 was $291 million.

Ohio Fractionation

As described in Note 5, MPLX converted all of its ownership interests in Ohio Fractionation to Class A Interests and amended its LLC Agreement to create Class B-3 Interests, which were sold to Sherwood Midstream, providing it with the right to fractionation revenue and the obligation to pay expenses related to 20 mbpd of capacity in the Hopedale 3 fractionator. Ohio Fractionation’s inability to fund its operations without additional subordinated financial support qualify it as a VIE. MPLX has been deemed to be the primary beneficiary of Ohio Fractionation because it has control over decisions that could significantly impact its financial performance, and as a result, consolidates Ohio Fractionation.

Sherwood Midstream Holdings

As described in Note 5, MPLX and Sherwood Midstream entered into a joint venture, Sherwood Midstream Holdings, for the purpose of owning, operating and maintaining all of the shared assets for the benefit of and use in the operation of the gas plants and other assets owned by Sherwood Midstream and the gas plants and deethanization facilities owned by MPLX. MPLX had an initial 79 percent direct ownership in Sherwood Midstream Holdings, in addition to a 10.5 percent indirect interest through its ownership in Sherwood Midstream. Sherwood Midstream Holdings’ inability to fund its operations without additional subordinated financial support qualify it as a VIE. We account for our ownership interest in Sherwood Midstream Holdings using the equity method of accounting as Sherwood Midstream is considered to be the general partner and controls all decisions related to Sherwood Midstream Holdings. Our maximum exposure to loss as a result of our involvement with Sherwood Midstream Holdings includes our equity investment, any additional capital contribution commitments and any operating expenses incurred by the subsidiary operator in excess of compensation received for the performance of the operating services. Our equity investment in Sherwood Midstream Holdings at June 30, 2018 was $155 million.

7. RELATED PARTY TRANSACTIONS

Our related parties include:


•	Crowley Blue Water Partners, in which we have a 50 percent indirect noncontrolling interest. Crowley Blue Water Partners owns and operates three Jones Act ATB vessels.


•	Crowley Ocean Partners, in which we have a 50 percent indirect noncontrolling interest. Crowley Ocean Partners owns and operates Jones Act product tankers.


•	Illinois Extension Pipeline Company, L.L.C. (“Illinois Extension Pipeline”), in which we have a 35 percent noncontrolling interest. Illinois Extension Pipeline owns and operates the Southern Access Extension (“SAX”) crude oil pipeline.


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


•	LOOP, in which we have a 51 percent noncontrolling interest. LOOP owns and operates the only U.S. deepwater crude oil port.


•	MarkWest Utica EMG, in which we have a 56 percent noncontrolling interest. MarkWest Utica EMG is engaged in natural gas processing and NGL fractionation, transportation and marketing in Ohio.


•	Ohio Gathering, in which we have a 34 percent indirect noncontrolling interest. Ohio Gathering is a subsidiary of MarkWest Utica EMG providing natural gas gathering service in the Utica Shale region of eastern Ohio.


•	PFJ Southeast, in which we have a 29 percent noncontrolling interest. PFJ Southeast owns and operates travel plazas primarily in the Southeast region of the United States.


•	Sherwood Midstream, in which we have a 50 percent noncontrolling interest. Sherwood Midstream supports the development of Antero Resources Corporation’s Marcellus Shale acreage in West Virginia.


•	Sherwood Midstream Holdings, in which we have an 81 percent direct and indirect noncontrolling interest. Sherwood Midstream Holdings owns certain infrastructure at the Sherwood Complex that is shared by and supports the operation of both the Sherwood Midstream and MarkWest gas processing plants and deethanization facilities.


•	The Andersons Albion Ethanol LLC (“TAAE”), in which we have a 45 percent noncontrolling interest, The Andersons Clymers Ethanol LLC (“TACE”), in which we have a 61 percent noncontrolling interest and The Andersons Marathon Ethanol LLC (“TAME”), in which we have a 67 percent noncontrolling interest. These companies each own and operate an ethanol production facility.


•	Other equity method investees.

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We believe that transactions with related parties were conducted on terms comparable to those with unaffiliated parties.

Sales to related parties were as follows:



	Three Months Ended June 30,				Six Months Ended June 30,
(In millions)	2018		2017		2018		2017
PFJ Southeast	$	196	$	145	$	365	$	296
Other equity method investees	3		2		6		5
Total	$	199	$	147	$	371	$	301

Sales to related parties consists primarily of sales of refined products.

Other income from related parties, which is included in “Other income” on the accompanying consolidated statements of income, was as follows:



	Three Months Ended June 30,				Six Months Ended June 30,
(In millions)	2018		2017		2018		2017
MarkWest Utica EMG	$	4	$	4	$	8	$	8
Ohio Gathering	4		4		8		8
Sherwood Midstream	2		3		5		4
Other equity method investees	4		4		6		6
Total	$	14	$	15	$	27	$	26

Other income from related parties consists primarily of fees received for operating transportation assets for our related parties.

Purchases from related parties were as follows:



	Three Months Ended June 30,				Six Months Ended June 30,
(In millions)	2018		2017		2018		2017
Crowley Blue Water Partners	$	14	$	14	$	30	$	28
Crowley Ocean Partners	20		20		40		39
Illinois Extension Pipeline	23		24		47		49
LOCAP	3		6		7		11
LOOP	14		26		31		39
TAAE	22		23		41		31
TACE	10		9		18		25
TAME	25		21		45		38
Other equity method investees	7		7		20		12
Total	$	138	$	150	$	279	$	272

Related party purchases from Crowley Blue Water Partners and Crowley Ocean Partners consist of leasing marine equipment primarily used to transport refined products. Related party purchases from Illinois Extension Pipeline, LOCAP, LOOP and other equity method investees consist primarily of crude oil transportation costs. Related party purchases from TAAE, TACE and TAME consist of ethanol purchases.

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



(In millions)	June 30, 2018		December 31, 2017
PFJ Southeast	$	30	$	28
Other equity method investees	8		8
Total	$	38	$	36

Payables to related parties, which are included in “Accounts payable” on the accompanying consolidated balance sheets, were as follows:



(In millions)	June 30, 2018		December 31, 2017
Illinois Extension Pipeline	$	8	$	8
LOOP	4		3
MarkWest Utica EMG	26		29
Ohio Gathering	—		9
Sherwood Midstream	8		8
Other equity method investees	10		12
Total	$	56	$	69

8. INCOME PER COMMON SHARE

We compute basic earnings per share by dividing net income attributable to MPC less income allocated to participating securities by the weighted average number of shares of common stock outstanding. Since MPC grants certain incentive compensation awards to employees and non-employee directors that are considered to be participating securities, we have calculated our earnings per share using the two-class method. Diluted income per share assumes exercise of certain stock-based compensation awards, provided the effect is not anti-dilutive.



	Three Months Ended June 30,				Six Months Ended June 30,
(In millions, except per share data)	2018		2017		2018		2017
Basic earnings per share:
Allocation of earnings:
Net income attributable to MPC	$	1,055	$	483	$	1,092	$	513
Income allocated to participating securities	1		—		1		—
Income available to common stockholders – basic	$	1,054	$	483	$	1,091	$	513
Weighted average common shares outstanding	459		513		467		519
Basic earnings per share	$	2.30	$	0.94	$	2.34	$	0.99
Diluted earnings per share:
Allocation of earnings:
Net income attributable to MPC	$	1,055	$	483	$	1,092	$	513
Income allocated to participating securities	1		—		1		—
Income available to common stockholders – diluted	$	1,054	$	483	$	1,091	$	513
Weighted average common shares outstanding	459		513		467		519
Effect of dilutive securities	5		4		5		4
Weighted average common shares, including dilutive effect	464		517		472		523
Diluted earnings per share	$	2.27	$	0.93	$	2.31	$	0.98

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



	Three Months Ended June 30,		Six Months Ended June 30,
(In millions)	2018	2017	2018	2017
Shares issued under stock-based compensation plans	1	—	1	2

9. EQUITY

As of June 30, 2018, we had $5.98 billion of share repurchase authorization remaining under authorizations from our board of directors. 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:



	Three Months Ended June 30,				Six Months Ended June 30,
(In millions, except per share data)	2018		2017		2018		2017
Number of shares repurchased	12		14		31		23
Cash paid for shares repurchased	$	885	$	750	$	2,212	$	1,170
Average cost per share	$	76.30	$	52.35	$	71.58	$	51.53

As of June 30, 2018, we had agreements to acquire 495,702 common shares for $35 million, which were settled in early July 2018.

10. SEGMENT INFORMATION

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

•

Refining & Marketing – refines crude oil and other feedstocks at our six refineries in the Gulf Coast and Midwest regions of the United States, purchases refined products and ethanol for resale and distributes refined products through transportation, storage, distribution and marketing services provided by our Midstream segment. We sell refined products to wholesale marketing customers domestically and internationally, to buyers on the spot market, to our Speedway business segment and to independent entrepreneurs who operate Marathon^® retail outlets.


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

•

Midstream – gathers, processes and transports natural gas; gathers, transports, fractionates, stores and markets NGLs; and 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. The Midstream segment primarily reflects the results of MPLX, our sponsored master limited partnership.

As discussed in Note 4, on February 1, 2018, we contributed certain refining logistics assets and fuels distribution services to MPLX. The results of these new businesses are reported in the Midstream segment prospectively from February 1, 2018, resulting in a net reduction of $232 million and $413 million to Refining & Marketing segment results and a net increase to Midstream segment results of the same amount for the three and six months ended June 30, 2018, respectively. No effect was given to prior periods as these entities were not considered businesses prior to February 1, 2018.

Segment income represents income from operations attributable to the reportable segments. Corporate administrative expenses, except for those attributable to MPLX, 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.

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(In millions)	Refining & Marketing		Speedway		Midstream		Total
Three Months Ended June 30, 2018
Revenues:
Third party	$	16,105	$	5,263	$	750	$	22,118
Intersegment	2,871		2		762		3,635
Related party	197		2		—		199
Segment revenues	$	19,173	$	5,267	$	1,512	$	25,952
Segment income from operations	$	1,025	$	159	$	617	$	1,801
Income from equity method investments^(b)	4		19		56		79
Depreciation and amortization^(b)	252		73		191		516
Capital expenditures and investments^(c)	196		88		601		885



(In millions)	Refining & Marketing		Speedway		Midstream		Total
Three Months Ended June 30, 2017
Revenues:
Third party	$	12,691	$	4,794	$	548	$	18,033
Intersegment^(a)	2,808		1		363		3,172
Related party	145		2		—		147
Segment revenues	$	15,644	$	4,797	$	911	$	21,352
Segment income from operations	$	562	$	238	$	332	$	1,132
Income from equity method investments^(b)	2		21		40		63
Depreciation and amortization^(b)	272		65		168		505
Capital expenditures and investments^(c)	180		78		494		752



(In millions)	Refining & Marketing		Speedway		Midstream		Total
Six Months Ended June 30, 2018
Revenues:
Third party	$	29,517	$	9,832	$	1,463	$	40,812
Intersegment	5,250		3		1,393		6,646
Related party	367		4		—		371
Segment revenues	$	35,134	$	9,839	$	2,856	$	47,829
Segment income from operations	$	892	$	254	$	1,184	$	2,330
Income from equity method investments^(b)	7		33		125		165
Depreciation and amortization^(b)	504		152		372		1,028
Capital expenditures and investments^(c)	387		127		1,083		1,597

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(In millions)	Refining & Marketing		Speedway		Midstream		Total
Six Months Ended June 30, 2017
Revenues:
Third party	$	23,912	$	9,175	$	1,080	$	34,167
Intersegment^(a)	5,398		2		707		6,107
Related party	297		4		—		301
Segment revenues	$	29,607	$	9,181	$	1,787	$	40,575
Segment income from operations	$	492	$	373	$	641	$	1,506
Income from equity method investments^(b)	4		34		82		120
Depreciation and amortization^(b)	539		129		359		1,027
Capital expenditures and investments^(c)(d)	372		113		1,564		2,049


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


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


^(c)	Capital expenditures include changes in capital accruals, acquisitions and investments in affiliates. See reconciliation from segment totals to MPC total capital expenditures below.


^(d)	The Midstream segment includes $220 million for the acquisition of the Ozark pipeline and an investment of $500 million in MarEn Bakken related to the Bakken Pipeline system for the six months ended June 30, 2017.

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



	Three Months Ended June 30,						Six Months Ended June 30,
(In millions)	2018			2017			2018			2017
Segment income from operations	$	1,801		$	1,132		$	2,330		$	1,506
Items not allocated to segments:
Corporate and other unallocated items^(a)	(91		)	(83		)	(180		)	(166		)
Litigation	—			(86		)	—			(86		)
Impairments^(b)	1			19			1			19
Income from operations	1,711			982			2,151			1,273
Net interest and other financial costs	195			158			378			307
Income before income taxes	$	1,516		$	824		$	1,773		$	966


^(a)	Corporate and other unallocated items consists 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. Corporate overhead expenses are not allocated to the Refining & Marketing and Speedway segments.


^(b)	Includes MPC’s share of gains from the sale of assets remaining from the canceled Sandpiper pipeline project.

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



	Three Months Ended June 30,				Six Months Ended June 30,
(In millions)	2018		2017		2018		2017
Segment capital expenditures and investments	$	885	$	752	$	1,597	$	2,049
Less investments in equity method investees^(a)	77		111		118		677
Plus items not allocated to segments:
Corporate	17		18		35		34
Capitalized interest	16		14		34		26
Total capital expenditures^(b)	$	841	$	673	$	1,548	$	1,432


^(a)	The six months ended June 30, 2017 includes an investment of $500 million in MarEn Bakken related to the Bakken Pipeline system.


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

Revenues by product line were as follows:



	Three Months Ended June 30,				Six Months Ended June 30,
(In millions)	2018		2017		2018		2017
Refined products	$	19,292	$	15,439	$	35,450	$	29,315
Merchandise	1,286		1,343		2,416		2,535
Crude oil and refinery feedstocks	978		824		1,861		1,511
Midstream services, transportation and other	562		427		1,085		806
Sales and other operating revenues	$	22,118	$	18,033	$	40,812	$	34,167

11. OTHER ITEMS

Net interest and other financial costs were as follows:



	Three Months Ended June 30,						Six Months Ended June 30,
(In millions)	2018			2017			2018			2017
Interest income	$	(25	)	$	(4	)	$	(45	)	$	(9	)
Interest expense	229			173			442			336
Interest capitalized	(16		)	(18		)	(34		)	(33		)
Loss on extinguishment of debt	—			—			4			—
Other financial costs	7			7			11			13
Net interest and other financial costs	$	195		$	158		$	378		$	307

12. INCOME TAXES

The combined federal, state and foreign income tax rate was 19 percent and 30 percent for the three months ended June 30, 2018 and 2017, respectively, and 17 percent and 30 percent for the six months ended June 30, 2018 and 2017, respectively. The effective tax rate for the three and six months ended June 30, 2018 was less than the U.S. statutory rate of 21 percent primarily due to certain permanent tax differences related to net income attributable to noncontrolling interest and equity compensation offset by state and local tax expense. The effective tax rate for the three and six months ended June 30, 2017 was less than the then applicable U.S. statutory rate of 35 percent primarily due to certain permanent tax differences related to net income attributable to noncontrolling interest, the domestic manufacturing deduction and equity compensation offset by state and local tax expense.

We are continuously undergoing examination of our income tax returns, which have been completed through the 2007 tax year for state returns and the 2009 tax year for our U.S. federal return. As of June 30, 2018, we had $21 million of unrecognized tax benefits.

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Prior to its spin-off on June 30, 2011, Marathon Petroleum Corporation was included in the Marathon Oil Corporation (“Marathon Oil”) federal income tax returns for all applicable years. During the third quarter 2017, Marathon Oil received a notice of Final Partnership Administrative Adjustment (“FPAA”) from the IRS for taxable year 2010, relating to certain pre-spinoff transactions. Marathon Oil filed a U.S. Tax Court petition disputing these adjustments during the fourth quarter of 2017. We received an FPAA for taxable years 2011-2014 for items resulting from this matter and filed a U.S. Tax Court petition for tax years 2011-2014 to dispute these corollary adjustments in the fourth quarter of 2017. We continue to believe that the issue in dispute is more likely than not to be fully sustained and therefore, no liability has been accrued for this matter.

Pursuant to our tax sharing agreement with Marathon Oil, the unrecognized tax benefits related to pre-spinoff operations for which Marathon Oil was the taxpayer remain the responsibility of Marathon Oil and we have indemnified Marathon Oil accordingly. See Note 22 for indemnification information.

13. INVENTORIES



(In millions)	June 30, 2018		December 31, 2017
Crude oil and refinery feedstocks	$	2,059	$	2,056
Refined products	2,811		2,839
Materials and supplies	455		494
Merchandise	160		161
Total	$	5,485	$	5,550

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 LIFO method. There were no material liquidations of LIFO inventories for the six months ended June 30, 2018.

14. PROPERTY, PLANT AND EQUIPMENT



(In millions)	June 30, 2018		December 31, 2017
Refining & Marketing^(a)	$	18,314	$	19,490
Speedway	5,433		5,358
Midstream^(a)	17,411		14,898
Corporate and Other	827		792
Total	41,985		40,538
Less accumulated depreciation	15,054		14,095
Property, plant and equipment, net	$	26,931	$	26,443


^(a)	On February 1, 2018, we contributed certain refining logistics assets and fuels distribution services to MPLX. In connection with this transaction, approximately $830 million of net property, plant and equipment was recorded to the Midstream segment with an offsetting reduction to the Refining & Marketing segment.

We own a 33 percent undivided joint interest in the Capline Pipeline System (“Capline”), a crude oil pipeline that runs from St. James, LA to Patoka, IL. We account for this undivided joint interest by recognizing our proportionate share of Capline’s assets on our balance sheet, which are primarily classified as property, plant and equipment. Capline experienced a significant reduction in shipment volumes in the second quarter of 2018 primarily due to recently completed competing pipelines. The pipeline`s owners are proceeding with planning for the reversal of the pipeline to support southbound movements of crude oil as supported by shipper interest indicated during a non-binding open season conducted in 2017. Pending agreement among the owners, southbound service is estimated to commence by the second half of 2022. In the second quarter of 2018, we evaluated our share of Capline assets for impairment in accordance with ASC 360, and determined no impairment existed due to the probability of continuing future cash flows associated with a reversed Capline. As of June 30, 2018, our carrying value was $155 million.

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15. FAIR VALUE MEASUREMENTS

Fair Values—Recurring

The following tables present assets and liabilities accounted for at fair value on a recurring basis as of June 30, 2018 and December 31, 2017 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.



	June 30, 2018
	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	$	134	$	—	$	—	$	(134	)	$	—	$	16
Other assets	3		—		—		N/A			3		—
Total assets at fair value	$	137	$	—	$	—	$	(134	)	$	3	$	16

Commodity derivative instruments, liabilities	$	171	$	—	$	2	$	(171	)	$	2	$	—
Embedded derivatives in commodity contracts^(c)	—		—		66		—			66		—
Total liabilities at fair value	$	171	$	—	$	68	$	(171	)	$	68	$	—

December 31, 2017

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