Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
All statements in this section, other than statements of historical fact, are forward-looking statements that are inherently uncertain. See “Disclosures Regarding Forward-Looking Statements” and Item 1A. Risk Factors for a discussion of the factors that could cause actual results to differ materially from those projected in these statements. The following information concerning our business, results of operations and financial condition should also be read in conjunction with the information included under Item 1. Business, Item 1A. Risk Factors and Item 8. Financial Statements and Supplementary Data.
EXECUTIVE SUMMARY
Business Update
For the year ended December 31, 2022, our results were favorably impacted by the continuing recovery in the environment in which our business operates. The increase in global demand for refined products and global commodity supply constraints have contributed to increases in the market prices of petroleum-based transportation fuels and in Refining & Marketing margins and Midstream throughputs. Supply has remained constrained for a variety of reasons, including, but not limited to, effects from refinery closures and disruptions in the crude oil and petroleum-based products markets resulting from the Russia-Ukraine conflict. We are unable to predict the potential effects that resurgences of COVID-19 or the continuance or escalation of the military conflict between Russia and Ukraine, and related sanctions or market disruptions, may have on our financial position and results. It remains uncertain how long these conditions may last or how severe they may become.
In 2022, data indicated a sharp rise in inflation in the U.S. and globally. Current and future inflationary effects may be driven by, among other things, supply chain disruptions, governmental stimulus or fiscal policies and increasing demand for certain goods and services as recovery from the COVID-19 pandemic continues. We have observed higher costs for feedstocks, labor and materials used in our business. We cannot predict the effect of rising interest rates, the concerns of a recession and higher inflation and fuel prices on demand for our products and services.
In response to this business environment, we continue to focus on the following priorities for our business:
Strengthen Competitive Position of Assets
We are committed to positioning our assets so that we are a leader in operational, financial, and sustainability performance and are evaluating the strength and fit of assets in our portfolio. Our goal is that each individual asset generates free-cash-flow back to the business and contributes to shareholder returns. With our investments, we are focused on high returning projects that we believe will enhance the competitiveness of our portfolio, including our investments in sustainable fuels and technologies that lower our carbon intensity as the global energy mix evolves.
Improve Commercial Performance
We are focused on leveraging advantaged raw material selection, new approaches in the commercial space to be more dynamic amidst changing market conditions and achieving technology improvements to advance our commercial performance. A near-term focus has been securing advantaged renewable feedstocks as we continue to advance our renewable fuels production capabilities. This includes exploring joint venture opportunities and strategic alliances within the renewable fuels value chain.
Continued Capital Discipline and Focus on Low-Cost Culture
We are committed to achieving operational excellence by reducing costs, improving efficiency, driving operational improvements and being disciplined in capital allocation. This means lowering our costs in all aspects of our business and challenging ourselves to be disciplined in every dollar we spend across our organization. We look to optimize our portfolio of investment opportunities to ensure efficient deployment of capital focusing on projects with the highest returns.
Commitment to Sustainability
Our approach to sustainability spans the environmental, social and governance dimensions of our business. That means strengthening resiliency by lowering the carbon intensity and conserving natural resources; innovating for the future by investing in renewables and emerging technologies; and embedding sustainability in decision-making and in how we engage our people and many stakeholders. Specifically, in 2022, we were the first among U.S. independent refiners to establish a 2030 target to reduce absolute Scope 3 - Category 11 GHG emissions. This goal added to our existing targets for reducing Scope 1 & 2 GHG emissions intensity, for lowering methane emissions intensity and for lowering our freshwater withdrawal intensity. Additionally, MPLX is progressing towards meeting its 2025 and 2030 methane intensity reduction goals, as well as its biodiversity target, by applying sustainable landscapes to its compatible right of ways.
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Strategic Updates
Martinez Renewable Fuels Project Joint Venture
On September 21, 2022, MPC closed on the formation of the Martinez Renewable joint venture. The partnership is structured as a 50/50 joint venture with Neste expected to contribute a total of $1 billion. These contributions will continue into 2023. At the closing date, MPC contributed property, plant and equipment, inventory, and working capital valued at $1.47 billion and Neste contributed $728 million in cash. MPC recorded a gain of $549 million resulting from the difference between the carrying value and fair value of the contributed property, plant and equipment and inventory. Subsequent to the closing, the joint venture paid a special distribution to MPC of $500 million, which is reflected as a return of capital in MPC’s consolidated statements of cash flows. At December 31, 2022, MPC’s investment value in the entity is approximately $1.07 billion.
MPC will continue to manage project execution and operate the facility once construction is complete. The annual feedstock supply requirements are split between the joint venture partners, which include specific commitments to supply advantaged feedstocks. The annual production output will be shared evenly between the joint venture partners, and each partner will have the ability to market its share of the products. The joint venture, being optimally located to strengthen both partners' footprint in renewable fuels, will utilize existing processing infrastructure and diverse inbound and outbound logistics.
This strategic partnership is expected to advance the current project objectives of delivering low carbon intensity fuels to support California's climate goals. MPC and Neste will leverage their complementary core competencies in the joint venture. MPC brings experience in renewable diesel facility conversion, large capital project execution and operating expertise in the California market. Neste brings knowledge in sustainable feedstock sourcing and in renewable liquid fuels production. The joint venture reflects both partners' commitment to obtain low carbon intensity feedstocks to achieve the project objectives of providing fuels that meet the demand driven by the Low Carbon Fuel Standard.
The facility is expected to ramp up to producing 730 million gallons per year by the end of 2023, with pretreatment capabilities coming online in 2023.
Share Repurchase Authorization
As of December 31, 2022, MPC had $3.33 billion remaining under its share repurchase authorizations. On January 31, 2023, the company announced that its Board of Directors had approved an incremental $5.0 billion share repurchase authorization. Future repurchases under this incremental authorization will depend on the macro environment, cash available after opportunities for capital investment and growth of the business and market conditions. This authorization is in addition to a $5.0 billion share repurchase authorization announced on August 2, 2022 and a $5.0 billion share repurchase authorization announced on February 2, 2022. The authorizations have no expiration date.
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Results
During the first quarter of 2022, our chief operating decision maker (“CODM”) began to evaluate the performance of our segments using segment adjusted EBITDA. We have modified our presentation of segment performance to be consistent with this change, including prior periods presented for consistent and comparable presentation. Amounts included in net income and excluded from segment adjusted EBITDA include: (i) depreciation and amortization; (ii) provision for income taxes; (iii) net interest and other financial costs; (iv) noncontrolling interests; (v) turnaround expenses and (vi) other adjustments as deemed necessary. These items are either: (i) believed to be non-recurring in nature; (ii) not believed to be allocable or controlled by the segment; or (iii) are not tied to the operational performance of the segment.
Select results for continuing operations for 2022 and 2021 are reflected in the following table.
Segment adjusted EBITDA for reportable segments
Refining planned turnaround costs (1,122) (582)
Storm impacts — (70)
LIFO inventory credit 148 —
Gain on sale of assets(a) 1,058 —
Renewable volume obligation requirements(b) 238 —
Litigation 27 —
Impairments(c) — (13)
Idling facility expenses — (12)
Depreciation and amortization(d) (3,215) (3,364)
Net interest and other financial costs (1,000) (1,483)
Income from continuing operations before income taxes $ 20,469 2,817
(a)Includes the non-cash gain related to the contribution of assets by MPC on the formation of the Martinez Renewable joint venture and the non-cash gain on lease reclassification. See Item 8. Financial Statements and Supplementary Data - Notes 16 and 28.
(b)Represents retroactive changes in renewable volume obligation requirements published by the EPA in June 2022 for the 2020 and 2021 annual obligations.
(c)Impairment of equity method investments. See Item 8. Financial Statements and Supplementary Data - Note 7.
(d)2021 includes $56 million of impairments of long-lived assets.
The following table includes net income per diluted share data.
Continuing operations $ 27.98 $ 2.02
Net income attributable to MPC $ 28.12 $ 15.24
Net income attributable to MPC increased $4.78 billion, or $12.88 per diluted share, in 2022 compared to 2021 primarily due to increased average refined product sales prices and volumes and non-cash net gains on the disposal of assets, partially offset by increased operating costs and the absence of a gain on the sale of Speedway and a partial period of income from discontinued operations due to the sale of the Speedway business on May 14, 2021.
See Item 8. Financial Statements and Supplementary Data – Note 5 for additional information on discontinued operations.
Refer to the Results of Operations section for a discussion of financial results by segment for the three years ended December 31, 2022.
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MPLX
We received limited partner distributions of $1.87 billion and $2.16 billion from MPLX during 2022 and 2021, respectively. The decrease in 2022 is primarily due to a supplemental distribution amount of $0.5750 per common unit in the third quarter of 2021 that did not recur in 2022. We owned approximately 647 million MPLX common units at December 31, 2022 with a market value of $21.26 billion based on the December 30, 2022 closing unit price of $32.84. On January 25, 2023, MPLX declared a quarterly cash distribution of $0.7750 per common unit, which was paid February 14, 2023. As a result, MPLX made distributions totaling $776 million to its common unitholders. MPC’s portion of this distribution was approximately $502 million.
During the year ended December 31, 2022, MPLX repurchased 15 million common units at an average cost per unit of $31.96 and paid $491 million of cash. As of December 31, 2022, $846 million remained available under the authorization for future repurchases.
On February 9, 2023, MPLX issued $1.1 billion aggregate principal amount of 5.00% senior notes due 2033 and $500 million aggregate principal amount of 5.65% senior notes due 2053 in an underwritten public offering.
On February 15, 2023, MPLX redeemed all of the 600,000 outstanding Series B preferred units at the redemption price of $1,000 per unit. The semi-annual distribution due to Series B unitholders on February 15, 2023, was also paid on that date, in the usual manner. MPLX also provided notice to redeem all of MPLX’s and MarkWest’s $1.0 billion aggregate principal amount of 4.50% senior notes due July 2023.
See Item 8. Financial Statements and Supplementary Data – Note 6 for additional information on MPLX.
OVERVIEW OF SEGMENTS
Refining & Marketing
Refining & Marketing segment adjusted EBITDA depends largely on our refinery throughputs, Refining & Marketing margin, refining operating costs and distribution costs. Our total refining capacity was 2,898 mbpcd, 2,887 mbpcd and 2,874 mbpcd as of December 31, 2022, 2021 and 2020, respectively.
Our Refining & Marketing margin is the difference between the prices of refined products sold and the costs of crude oil and other charge and blendstocks refined, including the costs to transport these inputs to our refineries and the costs of products purchased for resale. The crack spread is a measure of the difference between market prices for refined products and crude oil, commonly used by the industry as a proxy for the refining margin. Crack spreads can fluctuate significantly, particularly when prices of refined products do not move in the same relationship as the cost of crude oil. As a performance benchmark and a comparison with other industry participants, we calculate Gulf Coast, Mid-Continent and West Coast crack spreads that we believe most closely track our operations and slate of products. The following will be used for these crack-spread calculations:
•The Gulf Coast crack spread uses three barrels of MEH crude producing two barrels of USGC CBOB gasoline and one barrel of USGC ULSD;
•The Mid-Continent crack spread uses three barrels of WTI crude producing two barrels of Chicago CBOB gasoline and one barrel of Chicago ULSD; and
•The West Coast crack spread uses three barrels of ANS crude producing two barrels of LA CARBOB and one barrel of LA CARB Diesel.
Our refineries process a variety of sweet and sour grades of crude oil, which typically can be purchased at a discount to the crude oils referenced in our Gulf Coast, Mid-Continent and West Coast crack spreads. The amount of these discounts, which we refer to as the sweet differential and the sour differential, can vary significantly, causing our Refining & Marketing margin to differ from blended crack spreads. In general, larger sweet and sour differentials will enhance our Refining & Marketing margin.
Future crude oil differentials will be dependent on a variety of market and economic factors, as well as U.S. energy policy.
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The following table provides sensitivities showing an estimated change in annual Refining & Marketing adjusted EBITDA due to potential changes in market conditions.
(In millions)
Blended crack spread sensitivity(a) (per $1.00/barrel change) $ 1,080
Sour differential sensitivity(b) (per $1.00/barrel change) 500
Sweet differential sensitivity(c) (per $1.00/barrel change) 500
Natural gas price sensitivity(d) (per $1.00/MMBtu) 310
(a)Crack spread based on 40 percent MEH, 40 percent WTI and 20 percent ANS with Gulf Coast, Mid-Continent and West Coast product pricing, respectively, and assumes all other differentials and pricing relationships remain unchanged.
(b)Sour crude oil basket consists of the following crudes: ANS, Argus Sour Crude Index, Maya and Western Canadian Select. We assume approximately 50 percent of the crude processed at our refineries in 2023 will be sour crude.
(c)Sweet crude oil basket consists of the following crudes: Bakken, Brent, MEH, WTI-Cushing and WTI-Midland. We assume approximately 50 percent of the crude processed at our refineries in 2023 will be sweet crude.
(d)This is consumption based exposure for our Refining & Marketing segment and does not include the sales exposure for our Midstream segment.
In addition to the market changes indicated by the crack spreads, the sour differential and the sweet differential, our Refining & Marketing margin is impacted by factors such as:
•the selling prices realized for refined products;
•the types of crude oil and other charge and blendstocks processed;
•our refinery yields;
•the cost of products purchased for resale;
•the impact of commodity derivative instruments used to hedge price risk;
•the potential impact of LCM adjustments to inventories in periods of declining prices;
•the potential impact of LIFO liquidation charges due to draw-downs from historic inventory levels; and
•the cost of purchasing RINs in the open market to comply with RFS2 requirements.
Inventories are stated at the lower of cost or market. Costs of crude oil, refinery feedstocks and refined products are stated under the LIFO inventory costing method and aggregated on a consolidated basis for purposes of assessing if the cost basis of these inventories may have to be written down to market values. At December 31, 2022, market values for refined products exceed their cost basis and, therefore, there is no LCM inventory valuation reserve at the end of the year. Based on movements of refined product prices, future inventory valuation adjustments could have a negative effect to earnings. Such losses are subject to reversal in subsequent periods if prices recover.
Refining & Marketing segment adjusted EBITDA is also affected by changes in refining operating costs in addition to committed distribution costs. Changes in operating costs are primarily driven by the cost of energy used by our refineries, including purchased natural gas, and the level of maintenance costs. Distribution costs primarily include long-term agreements with MPLX, which as discussed below include minimum commitments to MPLX, and will negatively impact segment adjusted EBITDA in periods when throughput or sales are lower or refineries are idled.
We have various long-term, fee-based commercial agreements with MPLX. Under these agreements, MPLX, which is reported in our Midstream segment, provides transportation, storage, distribution and marketing services to our Refining & Marketing segment. Certain of these agreements include commitments for minimum quarterly throughput and distribution volumes of crude oil and refined products and minimum storage volumes of crude oil, refined products and other products. Certain other agreements include commitments to pay for 100 percent of available capacity for certain marine transportation and refining logistics assets.
Midstream
Our Midstream segment transports, stores, distributes and markets crude oil and refined products, principally for our Refining & Marketing segment. The profitability of our pipeline transportation operations primarily depends on tariff rates and the volumes shipped through the pipelines. The profitability of our marine operations primarily depends on the quantity and availability of our vessels and barges. The profitability of our light product terminal operations primarily depends on the throughput volumes at these terminals. The profitability of our fuels distribution services primarily depends on the sales volumes of certain refined products. The profitability of our refining logistics operations depends on the quantity and availability of our refining logistics assets. A majority of the crude oil and refined product shipments on our pipelines and marine vessels and the refined product throughput at our terminals serve our Refining & Marketing segment. Our refining logistics assets and fuels distribution services are used solely by our Refining & Marketing segment.
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As discussed above in the Refining & Marketing section, MPLX, which is reported in our Midstream segment, has various long-term, fee-based commercial agreements related to services provided to our Refining & Marketing segment. Under these agreements, MPLX has received various commitments of minimum throughput, storage and distribution volumes as well as commitments to pay for all available capacity of certain assets. The volume of crude oil that we transport is directly affected by the supply of, and refiner demand for, crude oil in the markets served directly by our crude oil pipelines, terminals and marine operations. Key factors in this supply and demand balance are the production levels of crude oil by producers in various regions or fields, the availability and cost of alternative modes of transportation, the volumes of crude oil processed at refineries and refinery and transportation system maintenance levels. The volume of refined products that we transport, store, distribute and market is directly affected by the production levels of, and user demand for, refined products in the markets served by our refined product pipelines and marine operations. In most of our markets, demand for gasoline and distillate peaks during the summer driving season, which extends from May through September of each year, and declines during the fall and winter months. As with crude oil, other transportation alternatives and system maintenance levels influence refined product movements.
Our Midstream segment also gathers and processes natural gas and NGLs. NGL and natural gas prices are volatile and are impacted by changes in fundamental supply and demand, as well as market uncertainty, availability of NGL transportation and fractionation capacity and a variety of additional factors that are beyond our control. Our Midstream segment profitability is affected by prevailing commodity prices primarily as a result of processing or conditioning at our own or third‐party processing plants, purchasing and selling or gathering and transporting volumes of natural gas at index‐related prices and the cost of third‐party transportation and fractionation services. To the extent that commodity prices influence the level of natural gas drilling by our producer customers, such prices also affect profitability.
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RESULTS OF OPERATIONS
The following discussion includes comments and analysis relating to our results of operations for the years ended December 31, 2022, 2021 and 2020. This discussion should be read in conjunction with Item 8. Financial Statements and Supplementary Data and is intended to provide investors with a reasonable basis for assessing our historical operations, but should not serve as the only criteria for predicting our future performance.
Consolidated Results of Operations
Revenues and other income:
Costs and expenses:
Restructuring expenses — — — 367 (367)
Less net income (loss) attributable to:
(a)In accordance with discontinued operations accounting, Speedway sales to retail customers and net results are reflected in Income from discontinued operations, net of tax, and Refining & Marketing intercompany sales to Speedway are presented as third-party sales through the close of the sale on May 14, 2021.
2022 Compared to 2021
Net income attributable to MPC increased $4.78 billion in 2022 compared to 2021, primarily due to increased average refined product sales prices and volumes and net gains on the disposal of assets, partially offset by increased operating costs and the absence of a gain on the sale of Speedway and a partial period of income from discontinued operations due to the sale of the Speedway business on May 14, 2021.
Total revenues and other income increased $59.02 billion in 2022 compared to 2021 primarily due to:
•increased sales and other operating revenues of $57.47 billion primarily due to increased average refined product sales prices of $0.96 per gallon, or 47 percent, and refined product sales volumes of 83 mbpd, or 2 percent, largely due to continuing recovery in demand for our products across all our regions;
•increased income from equity method investments of $197 million largely due to increased income from midstream equity affiliates;
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•increased net gains on disposal of assets of $1.04 billion mainly due to a gain of $549 million on the formation of the Martinez Renewable joint venture and a gain of $509 million on a lease reclassification; and
•increased other income of $315 million primarily due to higher income on RIN sales.
Total costs and expenses increased $41.85 billion in 2022 compared to 2021 primarily due to:
•increased cost of revenues of $41.66 billion primarily due to higher crude oil costs and finished product purchases;
•decreased depreciation and amortization of $149 million mainly due to 2021 Midstream asset impairments and assets that were fully depreciated in 2021;
•increased selling, general and administrative expenses of $235 million mainly due to increased salaries, benefits and employee related expenses, credit card processing fees, contract services and insurance: and
•increased other taxes of $104 million largely due to retroactive operating tax assessments for prior periods.
Net interest and other financial costs decreased $483 million largely due to increased interest income, decreased debt retirement expenses related to the redemption of MPC senior notes in 2021, decreased interest expense due to lower MPC borrowings and decreased pension and other postretirement non-service costs, partially offset by increased interest expense due to higher MPLX borrowings. We capitalized interest of $104 million in 2022 and $73 million in 2021. See Item 8. Financial Statements and Supplementary Data – Note 13 for further details.
We recorded a combined federal, state and foreign income tax expense of $4.49 billion for the year ended December 31, 2022, which was higher than the tax computed at the U.S. statutory rate primarily due to state taxes, partially offset by permanent tax benefits related to net income attributable to noncontrolling interests. We recorded a combined federal, state and foreign income tax expense of $264 million for the year ended December 31, 2021, which was lower than the tax computed at the U.S. statutory rate primarily due to certain permanent tax benefits related to net income attributable to noncontrolling interests and a change in benefit related to the net operating loss (“NOL”) carryback provided under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), partially offset by state taxes. See Item 8. Financial Statements and Supplementary Data – Note 14 for further details.
Net income attributable to noncontrolling interests increased $283 million mainly due to an increase in MPLX’s net income.
2021 Compared to 2020
Net income attributable to MPC increased $19.56 billion in 2021 compared to 2020 primarily due to the gain on the sale of Speedway, the absence of impairment expenses and a LIFO liquidation charge and increases in average refined product sales prices and volumes, partially offset by a partial period of income from discontinued operations due to the sale of the Speedway business on May 14, 2021. See Segment Results for additional information.
Total revenues and other income increased $51.90 billion in 2021 compared to 2020 primarily due to:
•increased sales and other operating revenues of $50.20 billion primarily due to increased average refined product sales prices of $0.80 per gallon, or 65 percent, and refined product sales volumes of 203 mbpd, or 6 percent, largely due to continuing economic recovery from the impact of the COVID-19 pandemic in 2020;
•increased income from equity method investments of $1.39 billion largely due to impairments of equity method investments of $1.32 billion in 2020 primarily driven by the effects of the COVID-19 pandemic and the decline in commodity prices; and
•increased other income of $350 million primarily due to higher income on RIN sales.
Total costs and expenses decreased $35.35 billion in 2021 compared to 2020 primarily due to:
•increased cost of revenues of $44.28 billion primarily due to higher refined product sales volumes in addition to higher crude oil and refined product raw material costs, partially offset by the absence of a LIFO liquidation charge in 2020 of $561 million;
•decreased impairment expense of $8.43 billion due to impairments recorded for goodwill and long-lived assets in 2020 primarily driven by the effects of COVID-19 and the decline in commodity prices;
•decreased selling, general and administrative expenses of $173 million mainly due to cost reductions realized from our 2020 workforce reduction and other cost control efforts; and
•decreased restructuring expenses of $367 million related to the idling of the Martinez and Gallup refineries and costs related to our announced workforce reduction in 2020. See Item 8. Financial Statements and Supplementary Data – Note 19 for additional information.
Net interest and other financial costs increased $118 million largely due to debt retirement expenses related to the redemption of MPC senior notes and pension settlement losses of $75 million, partially offset by decreased interest expense due to lower MPLX and MPC borrowings. We capitalized interest of $73 million in 2021 and $129 million in 2020. See Item 8. Financial Statements and Supplementary Data – Note 13 for further details.
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We recorded a combined federal, state and foreign income tax expense of $264 million for the year ended December 31, 2021, which was lower than the tax computed at the U.S. statutory rate primarily due to certain permanent tax benefits related to net income attributable to noncontrolling interests and a change in benefit related to the NOL carryback provided under the CARES Act, partially offset by state taxes. We recorded a combined federal, state and foreign income tax benefit of $2.43 billion for the year ended December 31, 2020, which is lower than the tax computed at the U.S. statutory rate primarily due to a significant amount of our pre-tax loss consisting of non-tax deductible goodwill impairment charges, partially offset by the tax rate differential resulting from the NOL carryback provided under the CARES Act. Additionally, our effective tax rate is generally benefited by our noncontrolling interest in MPLX, but this benefit was lower for the year ended December 31, 2020 due to goodwill and other impairment charges recorded by MPLX. See Item 8. Financial Statements and Supplementary Data – Note 14 for further details.
Net income attributable to noncontrolling interests increased $1.40 billion mainly due to an increase in MPLX’s net income largely due to impairment expense recognized during 2020.
Segment Results
We classify our business in the following reportable segments: Refining & Marketing and Midstream. Segment adjusted EBITDA represents adjusted EBITDA attributable to the reportable segments. Amounts included in net income and excluded from segment adjusted EBITDA include: (i) depreciation and amortization; (ii) provision for income taxes; (iii) net interest and other financial costs; (iv) noncontrolling interests; (v) turnaround expenses and (vi) other adjustments as deemed necessary. These items are either: (i) believed to be non-recurring in nature; (ii) not believed to be allocable or controlled by the segment; or (iii) are not tied to the operational performance of the segment.
Our segment adjusted EBITDA for reportable segments was approximately $25.03 billion, $8.93 billion and $3.12 billion for the years ended December 31, 2022, 2021 and 2020, respectively.
Refining & Marketing
The following includes key financial and operating data for 2022, 2021 and 2020.
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(a)Includes intersegment sales to Midstream and sales destined for export.
LIFO inventory credit (charge) per barrel 0.14 — (0.59)
Refining & Marketing margin per barrel(a)(b) 28.24 13.36 8.37
Less:
Refining operating costs per barrel(c) 5.41 5.02 5.68
LIFO inventory credit (charge) per barrel 0.14 — (0.59)
Refining & Marketing adjusted EBITDA per barrel 17.88 3.44 (2.06)
Less:
Storm impacts on refining operating cost per barrel(e) — 0.05 —
Refining planned turnaround costs per barrel 1.04 0.57 0.88
LIFO inventory (credit) charge per barrel (0.14) — 0.59
Depreciation and amortization per barrel 1.72 1.83 1.96
Refining & Marketing segment income (loss) per barrel $ 15.26 $ 0.99 $ (5.49)
(a)Sales revenue less cost of refinery inputs and purchased products, divided by net refinery throughput.
(b)See “Non-GAAP Measures” section for reconciliation and further information regarding this non-GAAP measure.
(c)Includes refining operating and major maintenance costs. Excludes planned turnaround and depreciation and amortization expense.
(d)Includes income (loss) from equity method investments, net gain (loss) on disposal of assets and other income.
(e)Storms in the first and third quarters of 2021 resulted in higher costs, including maintenance and repairs.
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The following table presents certain benchmark prices in our marketing areas and market indicators that we believe are helpful in understanding the results of our Refining & Marketing segment. The benchmark crack spreads below do not reflect the market cost of RINs necessary to meet EPA renewable volume obligations for attributable products under the Renewable Fuel Standard.
Chicago CBOB unleaded regular gasoline $ 2.87 $ 2.02 $ 1.07
Chicago ultra-low sulfur diesel 3.43 2.06 1.19
USGC CBOB unleaded regular gasoline 2.76 2.01 1.10
Market Indicators (dollars per barrel)
Crack Spreads
Crude Oil Differentials
(a)The blended crack spreads for 2022, 2021 and the fourth quarter of 2020 are weighted 40 percent of the USGC crack spread, 40 percent of the Mid-Continent crack spread and 20 percent of the West Coast crack spread. The blended crack spreads for the first three quarters of 2020 are weighted 38 percent of the USGC crack spread, 38 percent of the Mid-Continent crack spread and 24 percent of the West Coast crack spread. These blends are based on MPC’s refining capacity by region in each period. Beginning in the first quarter of 2021, the prompt price for USGC was transitioned from LLS to MEH.
2022 Compared to 2021
Refining & Marketing segment revenues increased $56.71 billion primarily due to increased average refined product sales prices of $0.96 per gallon and higher refined product sales volumes, which increased 83 mbpd.
Refinery crude oil capacity utilization was 96 percent during 2022 and net refinery throughputs increased 152 mbpd primarily due to continuing recovery in demand for our products across all our regions.
Refining & Marketing segment adjusted EBITDA increased $15.74 billion primarily driven by higher per barrel margins, partially offset by increased refining operating costs and distribution costs, both excluding depreciation and amortization, and turnaround costs.
Refining & Marketing margin, excluding LIFO inventory credit of $148 million, was $28.10 per barrel for 2022 compared to $13.36 per barrel for 2021. Refining & Marketing margin is affected by the market indicators shown earlier, which use spot market values and an estimated mix of crude purchases and product sales. Based on the market indicators and our crude oil throughput, we estimate a net positive impact of approximately $18 billion on Refining & Marketing margin, primarily due to higher crack spreads. Our reported Refining & Marketing margin differs from market indicators due to the mix of crudes purchased and their costs, the effects of market structure on our crude oil acquisition prices, RIN prices on the crack spread and other items like refinery yields and other feedstock variances, direct dealer fuel margin, and for 2022, a LIFO inventory credit of $148 million. These factors had an estimated net negative impact on Refining & Marketing segment adjusted EBITDA of approximately $1.5 billion in 2022 compared to 2021.
For the year ended December 31, 2022, refining operating costs, excluding depreciation and amortization and storm impacts, were $5.83 billion. This was an increase of $708 million, or $0.39 per barrel, compared to the year ended December 31, 2021 primarily due to an increase in energy costs largely as a result of higher natural gas and electricity prices.
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Distribution costs, excluding depreciation and amortization, were $5.27 billion and $5.15 billion for 2022 and 2021, respectively, and include fees paid to MPLX of $3.65 billion and $3.47 billion for 2022 and 2021, respectively. On a per barrel basis, distribution costs, excluding depreciation and amortization, decreased $0.15 due to higher throughput.
Refining planned turnaround costs increased $540 million, or $0.47 per barrel, due to the scope and timing of turnaround activity.
Depreciation and amortization per barrel decreased by $0.11, primarily due to a decrease in costs and an increase in throughput.
We purchase RINs to satisfy a portion of our RFS2 compliance. Our expenses associated with purchased RINs were $2.40 billion in 2022 and $1.49 billion in 2021 and are included in Refining & Marketing margin. The increase in 2022 was primarily due to higher weighted average RIN costs and an increase in RIN obligations due to higher production.
2021 Compared to 2020
Refining & Marketing segment revenues increased $49.25 billion primarily due to increased average refined product sales prices of $0.80 per gallon and higher refined product sales volumes, which increased 203 mbpd.
Refinery crude oil capacity utilization was 91 percent during 2021 and net refinery throughputs increased 216 mbpd primarily due to continuing economic recovery from the impact of the COVID-19 pandemic in 2020.
Refining & Marketing segment adjusted EBITDA increased $5.46 billion primarily driven by higher blended crack spreads.
Refining & Marketing margin, excluding LIFO inventory charge, was $13.36 per barrel for 2021 compared to $8.96 per barrel for 2020. Refining & Marketing margin is affected by the market indicators shown earlier, which use spot market values and an estimated mix of crude purchases and product sales. Based on the market indicators and our crude oil throughput, we estimate a net positive impact of $5.0 billion on Refining & Marketing margin, primarily due to higher crack spreads. Our reported Refining & Marketing margin differs from market indicators due to the mix of crudes purchased and their costs, the effects of market structure on our crude oil acquisition prices, RIN prices on the crack spread and other items like refinery yields and other feedstock variances, direct dealer fuel margin, and for 2020, a LIFO liquidation charge of $561 million. These factors had an estimated net positive impact on Refining & Marketing segment adjusted EBITDA of approximately $700 million, including the LIFO inventory charge, in 2021 compared to 2020.
For the year ended December 31, 2021, refining operating costs, excluding depreciation and amortization and storm impacts, were $5.13 billion. This was a decrease of $241 million, or $0.66 per barrel, compared to the year ended December 31, 2020 as we took actions to reduce costs in response to the economic effects of the COVID-19 pandemic, including idling portions of our refining capacity, partially offset by an increase in energy costs largely as a result of higher natural gas prices.
Distribution costs, excluding depreciation and amortization, were $5.15 billion and $5.08 billion for 2021 and 2020, respectively, and include fees paid to MPLX of $3.47 billion and $3.46 billion for 2021 and 2020, respectively. On a per barrel basis, distribution costs, excluding depreciation and amortization, decreased $0.33 due to increased throughput.
Refining planned turnaround costs decreased $250 million, or $0.31 per barrel, due to the timing of turnaround activity and an increase in throughput.
Depreciation and amortization per barrel decreased by $0.13, primarily due to an increase in throughput partially offset by an increase in costs.
We purchase RINs to satisfy a portion of our RFS2 compliance. Our expenses associated with purchased RINs were $1.49 billion in 2021 and $606 million in 2020 and are included in Refining & Marketing margin. The increase in 2021 was primarily due to higher weighted average RIN costs.
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Supplemental Refining & Marketing Statistics
Refining & Marketing Operating Statistics
Crude oil capacity utilization percent(a) 96 91 82
Refinery throughputs (mbpd):
Sour crude oil throughput percent 47 47 49
Sweet crude oil throughput percent 53 53 51
Refined product yields (mbpd):
Refined product export sales volumes (mbpd)(c) 315 371 340
(a)Based on calendar-day capacity, which is an annual average that includes down time for planned maintenance and other normal operating activities.
(b)Product yields include renewable production.
(c)Represents fully loaded export cargoes for each time period. These sales volumes are included in the total sales volumes amounts.
Midstream
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(a)On owned common-carrier pipelines, excluding equity method investments.
(b)Includes amounts related to MPLX operated unconsolidated equity method investments on a 100 percent basis.
Natural Gas NYMEX HH ($ per MMBtu) $ 6.52 $ 3.72 $ 2.13
C2 + NGL Pricing ($ per gallon)(a) $ 1.03 $ 0.87 $ 0.43
(a)C2 + NGL pricing based on Mont Belvieu prices assuming an NGL barrel of approximately 35 percent ethane, 35 percent propane, six percent Iso-Butane, 12 percent normal butane and 12 percent natural gasoline.
2022 Compared to 2021
Midstream segment revenue and segment adjusted EBITDA increased $971 million and $362 million, respectively. Results largely benefited from higher product pricing, mainly due to increased average C2 + NGL prices of $0.16 per gallon. These price increases resulted in higher revenues of approximately $380 million, as well as higher cost of sales of $315 million. The Midstream segment also benefited from higher gathering system throughputs, resulting in increased revenue of $356 million, in addition to higher pipeline and terminal throughputs. Segment adjusted EBITDA increased primarily due to income from equity method investments of approximately $211 million.
2021 Compared to 2020
Midstream segment revenue and segment adjusted EBITDA increased $1.18 billion and $349 million, respectively. Results benefited from higher revenue, primarily due to higher natural gas prices, higher pipeline and terminal throughputs and lower operating expenses, partially offset by a decrease in marine transportation fees.
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Corporate
(a)Corporate costs consist primarily of MPC’s corporate administrative expenses and costs related to certain non-operating assets, except for corporate overhead expenses attributable to MPLX, which are included in the Midstream segment. Corporate costs include depreciation and amortization of $55 million, $165 million and $165 million for the years ended December 31, 2022, 2021 and 2020, respectively.
2022 Compared to 2021
Corporate expenses increased $57 million in 2022 compared to 2021 primarily driven by stock-based and special award compensation expense and retroactive operating tax assessments for prior periods. The company will continue to pursue recovery of these tax assessments. These increases were partially offset by decreased depreciation and amortization of $110 million mainly due to 2021 asset impairments of $56 million and assets that were fully depreciated in 2021.
2021 Compared to 2020
Corporate expenses decreased $104 million in 2021 compared to 2020 largely due to cost reductions realized from our 2020 workforce reduction and other cost control efforts.
Items not Allocated to Segments
Our CODM evaluates the performance of our segments using segment adjusted EBITDA. Items identified in the table below are either believed to be non-recurring in nature or not believed to be allocable, controlled by the segment or are not tied to the operational performance of the segment.
Items not allocated to segments:
Gain on sale of assets $ 1,058 $ — $ 66
Renewable volume obligation requirements 238 — —
Idling facility expenses — (12) —
Restructuring expense — — (367)
Transaction-related costs(a) — — (8)
Total items not allocated to segments $ 1,323 $ (25) $ (9,966)
(a)2020 includes costs incurred in connection with the Midstream strategic review and other related efforts. Costs incurred in connection with the Speedway separation are included in discontinued operations.
2022 Compared to 2021
Total items not allocated to segments primarily include the non-cash gain of $549 million on the formation of the Martinez Renewable joint venture, the non-cash gain of $509 million on a lease reclassification, and a $238 million benefit related to retroactive changes in renewable volume obligation requirements published by the EPA for 2020 and 2021.
2021 Compared to 2020
Unallocated items in 2020 include impairment charges of $9.74 billion which includes $8.43 billion related to goodwill and long-lived assets and $1.32 billion related to equity method investments. See Item 8. Financial Statements and Supplementary Data – Note 7 for additional information.
During 2020, we indefinitely idled our Gallup refinery, initiated actions to strategically reposition our Martinez refinery to a renewable diesel facility and approved an involuntary workforce reduction plan. In connection with these strategic actions, we recorded restructuring expenses of $367 million for the year ended December 31, 2020. See Item 8. Financial Statements and Supplementary Data – Note 19 for additional information.
Other unallocated items in 2020 include a favorable litigation settlement of $84 million and gain on sale of assets of $66 million related to the sale of three asphalt terminals and certain other Refining & Marketing assets.
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Non-GAAP Financial Measure
Management uses a financial measure to evaluate our operating performance that is calculated and presented on the basis of methodologies other than in accordance with GAAP. We believe this non-GAAP financial measure is useful to investors and analysts to assess our ongoing financial performance because, when reconciled to its most comparable GAAP financial measure, it provides improved comparability between periods through the exclusion of certain items that we believe are not indicative of our core operating performance and that may obscure our underlying business results and trends. This measure should not be considered a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP, and our calculation thereof may not be comparable to similarly titled measures reported by other companies. The non-GAAP financial measure we use is as follows:
Refining & Marketing Margin
Refining margin is defined as sales revenue less the cost of refinery inputs and purchased products and excludes other items reflected in the table below.
Reconciliation of Refining & Marketing income (loss) from operations to Refining & Marketing gross margin and Refining & Marketing margin
Refining & Marketing income (loss) from operations $ 16,437 $ 1,016 $ (5,189)
Plus (Less):
Selling, general and administrative expenses 2,294 2,021 2,030
Income from equity method investments (31) (59) (2)
Net gain on disposal of assets (37) (6) (1)
Plus (Less):
Operating expenses (excluding depreciation and amortization) 10,683 9,806 9,694
Other taxes included in Refining & Marketing margin (173) (142) (79)
LIFO inventory (credit) charge (148) — 561
(a)Reflects the gross margin, excluding depreciation and amortization, of other related operations included in the Refining & Marketing segment and processing of credit card transactions on behalf of certain of our marketing customers, net of other income.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Our cash and cash equivalents balance for continuing operations was $8.63 billion at December 31, 2022, compared to $5.29 billion at December 31, 2021. Net cash provided by (used in) operating activities, investing activities and financing activities for the past three years is presented in the following table.
Net cash provided by (used in):
Operating activities - continuing operations $ 16,319 $ 8,384 $ 807
Operating activities - discontinued operations 42 (4,024) 1,612
Investing activities - continuing operations 623 (6,517) (2,922)
Investing activities - discontinued operations — 21,314 (335)
Total increase (decrease) in cash $ 3,337 $ 4,738 $ (973)
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Operating Activities
Continuing Operations
Net cash provided by operating activities from continuing operations increased $7.94 billion in 2022 compared to 2021, primarily due to an increase in operating results partially offset by an unfavorable change in working capital of $2.29 billion. Net cash provided by operating activities from continuing operations increased $7.58 billion in 2021 compared to 2020, primarily due to an increase in operating results and a favorable change in working capital of $633 million. The above changes in working capital exclude changes in short-term debt.
For 2022, changes in working capital were a net $1.34 billion use of cash, primarily due to the effect of increases in energy commodity prices and volumes at the end of the year on working capital. Current receivables increased primarily due to higher crude and refined product volumes and prices. Inventories increased primarily due to increases in crude, refined product and materials and supplies inventories. Accounts payable increased primarily due to increases in crude prices.
For 2021, changes in working capital were a net $947 million source of cash, primarily due to the effect of increases in energy commodity prices and volumes at the end of the year on working capital. Accounts payable increased primarily due to increases in crude prices and volumes. Current receivables increased primarily due to higher crude and refined product prices and volumes.
For 2020, changes in working capital were a net $314 million source of cash, primarily due to the effect of decreases in energy commodity prices, inventory and refined product volumes on working capital. Accounts payable decreased primarily due to lower crude payable prices. Current receivables decreased primarily due to lower crude and refined product receivable prices and refined product volumes. Inventories decreased mainly due to decreases in refined product, crude and materials and supplies inventories.
Discontinued Operations
Net cash provided by operating activities from discontinued operations was $42 million in 2022 largely due to the settlement of working capital related to the Speedway sale, partially offset by the payment of state income tax liabilities. Net cash used in operating activities from discontinued operations was $4.02 billion in 2021 primarily due to tax payments related to the sale of Speedway, partially offset by a partial year of business income due to the sale of Speedway on May 14, 2021. Net cash provided by operating activities from discontinued operations in 2020 includes Speedway business income.
Investing Activities
Continuing Operations
Net cash provided by investing activities from continuing operations was $623 million in 2022, compared to net cash used of $6.52 billion and $2.92 billion in 2021 and 2020, respectively.
•In 2022, the change in net cash provided by continuing operations was primarily due to maturities and sales of short-term investments of $7.16 billion and $1.30 billion, respectively, partially offset by purchases of short-term investments of $6.02 billion. The cash provided by maturities and sales of short-term investments was primarily used to fund our return of capital initiatives announced as part of the Speedway sale.
•In 2021, proceeds from the sale of Speedway were used to purchase $12.50 billion of short-term investments and cash of $5.41 billion and $1.54 billion was provided by the maturities and sales, respectively, of short-term investments. The cash provided by maturities and sales of short-term investments was primarily used to fund our return of capital initiatives announced as part of the Speedway sale.
•Cash used for additions to property, plant and equipment was $2.42 billion in 2022, compared to $1.46 billion in 2021 and $2.79 billion in 2020, primarily due to spending in our Refining & Marketing and Midstream segments in 2022. See discussion of capital expenditures and investments under the “Capital Spending” section.
•Cash used for acquisitions was $413 million in 2022 primarily due to the purchase of Crowley Coastal Partner’s interest in Crowley Ocean Partners LLC and its four subsidiaries for approximately $485 million, which included $196 million to pay off the debt associated with the four tankers.
•Cash provided by net investments was $110 million in 2022 compared to a net use of cash of $171 million in 2021 and $348 million in 2020. Investments in 2022 include a $500 million cash distribution received from the Martinez Renewable joint venture at its formation, partially offset by increased contributions to equity method investments, which included the $60 million contribution to MPLX’s Bakken Pipeline joint venture to fund its share of a debt repayment by the joint venture. Investments in 2021 primarily include midstream projects and our joint venture with ADM. The decrease from 2020 is due to the completion of the South Texas Gateway Terminal, the Gray Oak Pipeline and the Whistler Pipeline projects which were included in 2020 net investments.
•Cash provided by disposal of assets totaled $90 million, $153 million and $150 million in 2022, 2021 and 2020, respectively. In 2022 and 2021, we primarily sold Midstream assets and in 2020, we sold three asphalt terminals and other Refining & Marketing assets.
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The consolidated statements of cash flows exclude changes to the consolidated balance sheets that did not affect cash. A reconciliation of additions to property, plant and equipment to total capital expenditures and investments follows for each of the last three years.
Increase (decrease) in capital accruals (37) 141 (518)
Investments in equity method investees 405 210 485
Total capital expenditures and investments $ 2,788 $ 1,815 $ 2,754
Discontinued Operations
Net cash provided by investing activities from discontinued operations in 2021 primarily includes the $21.38 billion proceeds from the sale of Speedway, partially offset primarily by cash used for Speedway capital expenditures of $177 million. Net cash used in investing activities for discontinued operations for 2020 primarily includes Speedway capital expenditures.
Financing Activities
Financing activities were a use of cash of $13.65 billion in 2022, $14.42 billion in 2021 and $135 million in 2020.
•During 2022, MPLX issued $2.5 billion of senior notes, redeemed $1.0 billion of senior notes and had net payments of $300 million under its revolving credit facility.
•During 2021, we reduced debt through the following actions:
•On December 2, 2021, all of the $1.25 billion outstanding aggregate principal amount of MPC's 4.5% senior notes due May 2023 and the $850 million outstanding aggregate principal amount of MPC’s 4.75% senior notes due December 2023, including the portion of such notes for which Andeavor LLC was the obligor, were redeemed at a price equal to par, plus a make-whole premium calculated in accordance with the terms of the senior notes and accrued and unpaid interest to, but not including, the redemption date. MPC funded the redemption amount with cash on hand.
•In June 2021, we redeemed all of the $300 million outstanding aggregate principal amount of MPC’s 5.125% senior notes due April 2024 at a price equal to 100.854% of the principal amount, plus accrued and unpaid interest to, but not including, the redemption date.
•In May 2021, we repaid all outstanding commercial paper borrowings, which, along with cash had been used to finance the fourth quarter 2020 repayments of two series of MPC’s senior notes in the aggregate total principal amount of $1.13 billion.
•On March 1, 2021, we repaid the $1 billion outstanding aggregate principal amount of MPC’s 5.125% senior notes due March 2021.
•In 2021, MPLX redeemed $1.75 billion of senior notes and had net borrowings of $300 million under its revolving credit facility.
•During 2020, MPC issued $2.5 billion of senior notes, redeemed $1.13 billion of senior notes, borrowed and repaid $4.23 billion under its revolving credit facility and borrowed and repaid $3.55 billion under its trade receivables facility. MPLX issued $3.0 billion of senior notes, which were used to repay $1.0 billion of outstanding borrowings under its term loan, $1.0 billion of floating rate senior notes and to redeem $750 million of fixed rate senior notes and had net borrowings of $175 million under its revolving credit facility.
•Cash used in common stock repurchases totaled $11.92 billion in 2022 and $4.65 billion in 2021. See the “Capital Requirements” section for further discussion of our stock repurchases.
•Cash used in dividend payments totaled $1.28 billion in 2022, $1.48 billion in 2021 and $1.51 billion in 2020. Dividends per share were $2.49 in 2022, $2.32 in 2021 and $2.32 in 2020. The decreases in 2022 and 2021 are primarily due to share repurchases, partially offset by an increase in per share dividends in 2022.
•Cash used in distributions to noncontrolling interests totaled $1.21 billion in 2022, $1.45 billion in 2021 and $1.24 billion in 2020. MPLX’s distributions in 2021 included a supplemental distribution amount of $0.5750 per common unit.
•Cash used in repurchases of noncontrolling interests totaled $491 million in 2022, $630 million in 2021 and $33 million in 2020 due to MPLX’s repurchases of its common units. See the “Capital Requirements” section for further discussion of MPLX’s unit repurchases.
Derivative Instruments
See Item 7A. Quantitative and Qualitative Disclosures about Market Risk for a discussion of derivative instruments and associated market risk.
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Capital Resources
MPC, Excluding MPLX
We control MPLX through our ownership of the general partner; however, the creditors of MPLX do not have recourse to MPC’s general credit through guarantees or other financial arrangements, except as noted. MPC has effectively guaranteed certain indebtedness of LOOP and LOCAP, in which MPLX holds an interest. Therefore, in the following table, we present the liquidity of MPC, excluding MPLX. MPLX liquidity is discussed in the following section.
Our liquidity, excluding MPLX, totaled $16.53 billion at December 31, 2022 consisting of:
Bank revolving credit facility $ 5,000 $ — $ 1 $ 4,999
Trade receivables facility(a) 100 — 100 —
Cash and cash equivalents and short-term investments(b) 11,532
(a)The committed borrowing and letter of credit issuance capacity of the trade receivables securitization facility is $100 million. In addition, the facility allows for the issuance of letters of credit in excess of the committed capacity at the discretion of the issuing banks. As of December 31, 2022, letters of credit in the total amount of $1.05 billion were issued and outstanding under the facility to secure contracts awarded by the Department of Energy to purchase crude oil from the Strategic Petroleum Reserve.
(b)Excludes $238 million of MPLX cash and cash equivalents.
Because of the alternatives available to us, including internally generated cash flow and access to capital markets and a commercial paper program, we believe that our short-term and long-term liquidity is adequate to fund not only our current operations, but also our near-term (less than twelve months) and long-term funding requirements, including capital spending programs, the repurchase of shares of our common stock, dividend payments, defined benefit plan contributions, repayment of debt maturities and other amounts that may ultimately be paid in connection with contingencies.
We have a commercial paper program that allows us to have a maximum of $2.0 billion in commercial paper outstanding, with maturities up to 397 days from the date of issuance. We do not intend to have outstanding commercial paper borrowings in excess of available capacity under our bank revolving credit facilities. At December 31, 2022, we had no borrowings outstanding under the commercial paper program.
On July 7, 2022, MPC entered into a new five-year revolving credit agreement (the “MPC Credit Agreement”) to replace its previous $5.0 billion credit facility that was scheduled to expire in October 2023. The MPC Credit Agreement, among other things, provides for a $5.0 billion unsecured revolving credit facility that matures in July 2027 and letter of credit issuing capacity under the facility of up to $2.2 billion. Letters of credit issuing capacity is included in, not in addition to, the $5.0 billion borrowing capacity. The financial covenants of the MPC Credit Agreement are substantially the same as those contained in the previous credit agreement.
The MPC Credit Agreement and trade receivables facility contain representations and warranties, affirmative and negative covenants and events of default that we consider usual and customary for agreements of these types. The financial covenant included in the MPC Credit Agreement requires us to maintain, as of the last day of each fiscal quarter, a ratio of Consolidated Net Debt to Total Capitalization (as defined in the MPC Credit Agreement) of no greater than 0.65 to 1.00. Other covenants restrict us and/or certain of our subsidiaries from incurring debt, creating liens on assets and entering into transactions with affiliates. As of December 31, 2022, we were in compliance with the covenants contained in the MPC Credit Agreement and our trade receivables facility, including the financial covenant with a ratio of Consolidated Net Debt to Total Capitalization of approximately 0 to 1.00.
Our intention is to maintain an investment-grade credit profile. As of February 1, 2023, the credit ratings on our senior unsecured debt are as follows.
Company Rating Agency Rating
MPC Moody’s Baa2 (stable outlook)
Standard & Poor’s BBB (stable outlook)
Fitch BBB (stable outlook)
The ratings reflect the respective views of the rating agencies. Although it is our intention to maintain a credit profile that supports an investment-grade rating, there is no assurance that these ratings will continue for any given period of time. The ratings may be revised or withdrawn entirely by the rating agencies if, in their respective judgments, circumstances so warrant.
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The MPC Credit Agreement does not contain credit rating triggers that would result in the acceleration of interest, principal or other payments in the event that our credit ratings are downgraded. However, any downgrades of our senior unsecured debt could increase the applicable interest rates, yields and other fees payable under such agreements and may limit our flexibility to obtain financing in the future, including to refinance existing indebtedness. In addition, a downgrade of our senior unsecured debt rating to below investment-grade levels could, under certain circumstances, impact our ability to purchase crude oil on an unsecured basis and could result in us having to post letters of credit under existing transportation services or other agreements.
See Item 8. Financial Statements and Supplementary Data – Note 22 for further discussion of our debt.
MPLX
MPLX’s liquidity totaled $3.74 billion at December 31, 2022 consisting of:
MPLX bank revolving credit facility $ 2,000 $ — $ — $ 2,000
MPC intercompany loan agreement 1,500 — — 1,500
Cash and cash equivalents 238
Total liquidity $ 3,738
On March 14, 2022, MPLX issued $1.5 billion aggregate principal amount of 4.950% senior notes due March 2052 in an underwritten public offering. The net proceeds were used to repay amounts outstanding under the MPC intercompany loan agreement and under the previous MPLX credit agreement.
On July 7, 2022, MPLX entered into a new five-year revolving credit agreement (the “MPLX Credit Agreement”) to replace its previous $3.5 billion credit facility that was scheduled to expire in July 2024. The MPLX Credit Agreement, among other things, provides for a $2.0 billion unsecured revolving credit facility that matures in July 2027 and letter of credit issuing capacity under the facility of up to $150 million. Letters of credit issuing capacity is included in, not in addition to, the $2.0 billion borrowing capacity. The financial covenants of the MPLX Credit Agreement are substantially the same as those contained in the previous credit agreement.
On August 11, 2022, MPLX issued $1.0 billion aggregate principal amount of 4.950% senior notes due September 2032 in an underwritten public offering. The net proceeds were used to redeem all of the $500 million aggregate principal amount of 3.500% senior notes due December 2022, $14 million of which was issued by Andeavor Logistics LP, and to redeem all of the $500 million aggregate principal amount of 3.375% senior notes due March 2023.
The MPLX Credit Agreement contains certain representations and warranties, affirmative and restrictive covenants and events of default that we consider to be usual and customary for an agreement of this type. The financial covenant requires MPLX to maintain a ratio of Consolidated Total Debt as of the end of each fiscal quarter to Consolidated EBITDA (both as defined in the MPLX Credit Agreement) for the prior four fiscal quarters of no greater than 5.0 to 1.0 (or 5.5 to 1.0 for up to two fiscal quarters following certain acquisitions). Consolidated EBITDA is subject to adjustments for certain acquisitions completed and capital projects undertaken during the relevant period. Other covenants restrict MPLX and/or certain of its subsidiaries from incurring debt, creating liens on assets and entering into transactions with affiliates. As of December 31, 2022, MPLX was in compliance with the covenants, including the financial covenant with a ratio of Consolidated Total Debt to Consolidated EBITDA of 3.5 to 1.0.
Our intention is to maintain an investment-grade credit profile for MPLX. As of February 1, 2023, the credit ratings on MPLX’s senior unsecured debt are as follows.
Company Rating Agency Rating
MPLX Moody’s Baa2 (stable outlook)
Standard & Poor’s BBB (stable outlook)
Fitch BBB (stable outlook)
The ratings reflect the respective views of the rating agencies. Although it is our intention to maintain a credit profile that supports an investment-grade rating for MPLX, there is no assurance that these ratings will continue for any given period of time. The ratings may be revised or withdrawn entirely by the rating agencies if, in their respective judgments, circumstances so warrant.
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The agreements governing MPLX’s debt obligations do not contain credit rating triggers that would result in the acceleration of interest, principal or other payments in the event that MPLX credit ratings are downgraded. However, any downgrades of MPLX senior unsecured debt to below investment grade ratings could increase the applicable interest rates, yields and other fees payable under such agreements. In addition, a downgrade of MPLX senior unsecured debt ratings to below investment-grade levels may limit MPLX’s ability to obtain future financing, including to refinance existing indebtedness.
See Item 8. Financial Statements and Supplementary Data – Note 22 for further discussion of MPLX’s debt.
Capital Requirements
Capital Spending
MPC’s capital investment plan for 2023 totals approximately $1.3 billion for capital projects and investments, excluding capitalized interest, potential acquisitions and MPLX’s capital investment plan. MPC’s 2023 capital investment plan includes all of the planned capital spending for Refining & Marketing and Corporate as well as a portion of the planned capital investments for Midstream. The remainder of the planned capital spending for Midstream reflects the capital investment plan for MPLX. We continuously evaluate our capital plan and make changes as conditions warrant. The 2023 capital investment plan for MPC and MPLX and capital expenditures and investments for each of the last three years are summarized by segment below.
Capital expenditures and investments:(a)
MPC, excluding MPLX
MPC discontinued operations - Speedway $ — $ — $ 177 $ 277
(a)Capital expenditures include changes in capital accruals.
(b)Excludes capitalized interest of $103 million, $68 million and $106 million for 2022, 2021 and 2020, respectively. The 2023 capital investment plan excludes capitalized interest.
(c)The 2023 capital investment plan excludes reimbursable capital.
Refining & Marketing
The Refining & Marketing segment’s forecasted 2023 capital spending and investments is approximately $1.25 billion. This amount includes approximately $350 million of growth capital for low carbon projects, primarily the Martinez facility conversion and an emissions reduction project at our Los Angeles refinery. There is also $550 million of growth capital focused on traditional projects such as the STAR project and projects that we expect will help us reduce future operating costs and improve the competitive position of our assets. Maintenance capital is expected to be approximately $350 million which is essential to maintain the safety, integrity and reliability of our assets.
Major capital projects completed over the last three years have focused on refinery optimization, production of higher value products, increased capacity to upgrade residual fuel oil and expanded export capacity. We also focused on projects such as the Martinez facility conversion, the STAR project at our Galveston Bay refinery, which is scheduled to complete in the first half of 2023, and projects expected to reduce future operating costs.
Midstream
MPLX’s capital investment plan of $950 million, net of reimbursements, includes approximately $800 million of organic growth capital and $150 million of maintenance capital. MPLX’s growth capital plans are anchored in the Marcellus, Permian, and Bakken basins. In addition to new gas processing plants in the Marcellus and Permian, the remainder of MPLX’s capital plan is mostly focused on other investments targeted at the expansion or debottlenecking of existing assets to meet customer demand.
Major capital projects over the last three years included investments for the development of natural gas and natural gas liquids infrastructure to support MPLX’s producer customers, primarily in the Marcellus, Utica and Permian regions and development of various crude oil and refined petroleum products infrastructure projects.
Corporate and Other
The 2023 capital forecast includes approximately $50 million to support corporate and other activities. Major projects over the last three years included upgrades to information technology systems.
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Share Repurchases
From January 1, 2012 through December 31, 2022, our board of directors has approved $35.05 billion in total share repurchase authorizations and we have repurchased a total of $31.72 billion of our common stock. As of December 31, 2022, MPC had $3.33 billion remaining under its share repurchase authorizations, which reflects the repurchase of 830,000 common shares for $96 million that settled in the first quarter of 2023. On January 31, 2023, we announced our board of directors approved an incremental $5.0 billion share repurchase authorization. The authorization has no expiration date. The table below summarizes our total share repurchases. See Item 8. Financial Statements and Supplementary Data – Note 11 for further discussion of the share repurchase plans.
Number of shares repurchased 131 76 —
Cash paid for shares repurchased $ 11,922 $ 4,654 $ —
Average cost per share $ 91.20 $ 62.65 $ —
We may utilize various methods to effect the repurchases, which could include open market repurchases, negotiated block transactions, tender offers, accelerated share repurchases or open market solicitations for shares, some of which may be effected through Rule 10b5-1 plans. The timing and amount of future repurchases, if any, will depend upon several factors, including market and business conditions, and such repurchases may be suspended or discontinued at any time.
MPLX Unit Repurchases
The table below summarizes MPLX’s total unit repurchases.
Number of common units repurchased 15 23 1
Cash paid for common units repurchased $ 491 $ 630 $ 33
As of December 31, 2022, MPLX had approximately $846 million remaining under its unit repurchase authorizations. The repurchase authorizations have no expiration date.
MPLX may utilize various methods to effect the repurchases, which could include open market repurchases, negotiated block transactions, accelerated unit repurchases, tender offers or open market solicitations for units, 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.
See Item 8. Financial Statements and Supplementary Data – Note 6 for further discussion of the MPLX unit repurchase program.
Material Cash Commitments
Contractual Obligations
We have purchase commitments primarily consisting of obligations to purchase and transport crude oil and feedstocks used in our refining operations. As of December 31, 2022, we had purchase obligations for crude oil, NGLs and renewable feedstocks of $23.11 billion, with $16.96 billion payable within 12 months, and crude oil transportation obligations of $6.19 billion, with $655 million payable within 12 months. These contracts include variable price arrangements. For purposes of this disclosure, we have estimated prices to be paid primarily based on futures curves for the commodities to the extent available. Our contractual obligations do not include our contractual obligations to MPLX under various fee-based commercial agreements as these transactions are eliminated in the consolidated financial statements.
At December 31, 2022, we have non-cancelable obligations to acquire property, plant and equipment of $289 million, with $261 million payable within 12 months.
At December 31, 2022, we have aggregate principal amount of outstanding debt of $26.55 billion, with $1.0 billion payable within 12 months, and interest on the debt of $16.70 billion, with $1.20 billion payable within 12 months. See Item 8. Financial Statements and Supplementary Data – Note 22 for additional information on our debt.
Our other contractual obligations primarily consist of finance and operating leases and pension and post-retirement obligations, for which additional information is included in Item 8. Financial Statements and Supplementary Data – Notes 28 and 26, respectively.
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Other Cash Commitments
On January 27, 2023, we announced our board of directors approved a $0.75 per share dividend, payable March 10, 2023 to shareholders of record at the close of business on February 16, 2023.
We may, from time to time, repurchase our senior notes and preferred units in the open market, in tender offers, in privately-negotiated transactions or otherwise in such volumes, at such prices and upon such other terms as we deem appropriate.
TRANSACTIONS WITH RELATED PARTIES
See Item 8. Financial Statements and Supplementary Data – Note 9 for discussion of activity with related parties.
ENVIRONMENTAL MATTERS AND COMPLIANCE COSTS
We have incurred and may continue to incur substantial capital, operating and maintenance, and remediation expenditures as a result of environmental laws and regulations. If these expenditures, as with all costs, are not ultimately reflected in the prices of our products and services, our operating results will be adversely affected. We believe that substantially all of our competitors must comply with similar environmental laws and regulations. However, the specific impact on each competitor may vary depending on a number of factors, including the age and location of its operating facilities, marketing areas, production processes and whether it is also engaged in the petrochemical business or the marine transportation of crude oil and refined products.
Legislation and regulations pertaining to fuel specifications, climate change and GHG emissions have the potential to materially adversely impact our business, financial condition, results of operations and cash flows, including costs of compliance and permitting delays. The extent and magnitude of these adverse impacts cannot be reliably or accurately estimated at this time because specific regulatory and legislative requirements have not been finalized and uncertainty exists with respect to the measures being considered, the costs and the time frames for compliance, and our ability to pass compliance costs on to our customers.
Our environmental expenditures, including non-regulatory expenditures, for each of the last three years were:
Compliance:(a)
(a)Based on the American Petroleum Institute’s definition of environmental expenditures.
(b)These amounts include spending charged against remediation reserves, where permissible, but exclude non-cash provisions recorded for environmental remediation. Environmental remediation costs increased in 2022 compared to 2021 primarily due to a release of crude oil on an MPLX pipeline near Edwardsville, Illinois in March of 2022.
We accrue for environmental remediation activities when the responsibility to remediate is probable and the amount of associated costs can be reasonably estimated. As environmental remediation matters proceed toward ultimate resolution or as additional remediation obligations arise, charges in excess of those previously accrued may be required.
New or expanded environmental requirements, which could increase our environmental costs, may arise in the future. It is not possible to predict all of the ultimate costs of compliance, including remediation costs that may be incurred and penalties that may be imposed.
Our environmental capital expenditures accounted for 7 percent, 8 percent and 6 percent of capital expenditures, for 2022, 2021 and 2020, respectively, excluding acquisitions. Our environmental capital expenditures are expected to be approximately $179 million, or 8 percent, of total planned capital expenditures in 2023. Actual expenditures may vary as the number and scope of environmental projects are revised as a result of improved technology or changes in regulatory requirements and could increase if additional projects are identified or additional requirements are imposed.
For more information on environmental regulations that impact us, or could impact us, see Item 1. Business – Regulatory Matters and Item 1A. Risk Factors.
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CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the respective reporting periods. Accounting estimates are considered to be critical if (1) the nature of the estimates and assumptions is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change; and (2) the impact of the estimates and assumptions on financial condition or operating performance is material. Actual results could differ from the estimates and assumptions used.
Fair Value Estimates
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. There are three approaches for measuring the fair value of assets and liabilities: the market approach, the income approach and the cost approach, each of which includes multiple valuation techniques. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The income approach uses valuation techniques to measure fair value by converting future amounts, such as cash flows or earnings, into a single present value amount using current market expectations about those future amounts. The cost approach is based on the amount that would currently be required to replace the service capacity of an asset. This is often referred to as current replacement cost. The cost approach assumes that the fair value would not exceed what it would cost a market participant to acquire or construct a substitute asset of comparable utility, adjusted for obsolescence.
The fair value accounting standards do not prescribe which valuation technique should be used when measuring fair value and does not prioritize among the techniques. These standards establish a fair value hierarchy that prioritizes the inputs used in applying the various valuation techniques. Inputs broadly refer to the assumptions that market participants use to make pricing decisions, including assumptions about risk. Level 1 inputs are given the highest priority in the fair value hierarchy while Level 3 inputs are given the lowest priority. The three levels of the fair value hierarchy are as follows:
•Level 1 – Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in active markets as of the measurement date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
•Level 2 – Observable market-based inputs or unobservable inputs that are corroborated by market data. These are inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the measurement date.
•Level 3 – Unobservable inputs that are not corroborated by market data and may be used with internally developed methodologies that result in management’s best estimate of fair value.
Valuation techniques that maximize the use of observable inputs are favored. Assets and liabilities are classified in their entirety based on the lowest priority level of input that is significant to the fair value measurement. The assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the placement of assets and liabilities within the levels of the fair value hierarchy. We use an income or market approach for recurring fair value measurements and endeavor to use the best information available. See Item 8. Financial Statements and Supplementary Data – Note 20 for disclosures regarding our fair value measurements.
Significant uses of fair value measurements include:
•assessment of impairment of long-lived assets;
•assessment of impairment of intangible assets:
•assessment of impairment of goodwill;
•assessment of impairment of equity method investments;
•recorded values for assets acquired and liabilities assumed in connection with acquisitions; and
•recorded values of derivative instruments.
Impairment Assessments of Long-Lived Assets, Intangible Assets, Goodwill and Equity Method Investments
Fair value calculated for the purpose of testing our long-lived assets, intangible assets, goodwill and equity method investments for impairment is estimated using the expected present value of future cash flows method and comparative market prices when appropriate. Significant judgment is involved in performing these fair value estimates since the results are based on forecasted financial information prepared using significant assumptions including:
•Future operating performance. Our estimates of future operating performance are based on our analysis of various supply and demand factors, which include, among other things, industry-wide capacity, our planned utilization rate, end-user demand, capital expenditures and economic conditions. Such estimates are consistent with those used in our planning and capital investment reviews.
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•Future volumes. Our estimates of future refinery, pipeline throughput and natural gas and natural gas liquid processing volumes are based on internal forecasts prepared by our Refining & Marketing and Midstream segments operations personnel. Assumptions about the effects of the COVID-19 pandemic on our future volumes are inherently subjective and contingent upon the duration of the pandemic, which is difficult to forecast.
•Discount rate commensurate with the risks involved. We apply a discount rate to our cash flows based on a variety of factors, including market and economic conditions, operational risk, regulatory risk and political risk. This discount rate is also compared to recent observable market transactions, if possible. A higher discount rate decreases the net present value of cash flows.
•Future capital requirements. These are based on authorized spending and internal forecasts.
Assumptions about the macroeconomic environment are inherently subjective and difficult to forecast. We base our fair value estimates on projected financial information which we believe to be reasonable. However, actual results may differ from these projections.
The need to test for impairment can be based on several indicators, including a significant reduction in prices of or demand for products produced, a weakened outlook for profitability, a significant reduction in pipeline throughput volumes, a significant reduction in natural gas or natural gas liquids processed, a significant reduction in refining margins, other changes to contracts or changes in the regulatory environment. The following sections detail our critical accounting estimates related to impairment assessments for long-lived assets, goodwill and equity method investments.
Long-lived Asset Impairment Assessments
Long-lived assets used in operations are assessed for impairment whenever changes in facts and circumstances indicate that the carrying value of the assets may not be recoverable based on the expected undiscounted future cash flow of an asset group. For purposes of impairment evaluation, long-lived assets must be grouped at the lowest level for which independent cash flows can be identified, which generally is the refinery and associated distribution system level for Refining & Marketing segment assets, and the plant level or pipeline system level for Midstream segment assets. If the sum of the undiscounted estimated pretax cash flows is less than the carrying value of an asset group, fair value is calculated, and the carrying value is written down to the calculated fair value.
Goodwill Impairment Assessments
Unlike long-lived assets, goodwill is subject to annual, or more frequent if necessary, impairment testing at the reporting unit level. A goodwill impairment loss is measured as the amount by which a reporting unit's carrying value exceeds its fair value, without exceeding the recorded amount of goodwill.
At December 31, 2022, MPC had four reporting units with goodwill totaling approximately $8.24 billion. The majority of this balance is comprised of the Midstream reporting units, including $1.1 billion for the MPLX Crude Gathering reporting unit and $6.6 billion for the MPLX Transportation & Storage reporting unit. For the annual impairment assessment as of November 30, 2022, management performed only a qualitative assessment for three reporting units as we determined it was more likely than not that the fair value of the reporting units exceeded the carrying value. Significant assumptions used to estimate the reporting units’ fair value under a qualitative approach included estimates of future cash flows and market information for comparable assets. A quantitative assessment was performed for the MPLX Crude Gathering reporting unit, which resulted in the fair value of the reporting unit exceeding its carrying value by greater than 10 percent. The fair value of the reporting unit was determined based on applying both a discounted cash flow method (i.e., income approach) as well as a market approach. An increase of one percentage point to the discount rate used to estimate the fair value of the reporting units would not have resulted in a goodwill impairment charge as of November 30, 2022. Significant assumptions that were used to estimate the Crude Gathering reporting unit’s fair values under the discounted cash flow method included management’s best estimates of the discount rate, as well as estimates of future cash flows, which are impacted primarily by producer customers’ development plans, which impact future volumes and capital requirements. If estimates for future cash flows were to decline, the overall reporting units’ fair values would decrease, resulting in potential goodwill impairment charges. Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions and factors. As a result, there can be no assurance that the estimates and assumptions made for purposes of the impairment tests will prove to be an accurate prediction of the future.
Equity Method Investment Impairment Assessment
Equity method investments are assessed for impairment whenever factors indicate an other than temporary loss in value. Factors providing evidence of such a loss include the fair value of an investment that is less than its carrying value, absence of an ability to recover the carrying value or the investee’s inability to generate income sufficient to justify our carrying value. At December 31, 2022, we had $6.47 billion of investments in equity method investments recorded on our consolidated balance sheet.
See Item 8. Financial Statements and Supplementary Data – Note 16 for additional information on our equity method investments. See Item 8. Financial Statements and Supplementary Data – Note 18 for additional information on our goodwill and intangibles, including a table summarizing our recorded goodwill by segment.
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Derivatives
We record all derivative instruments at fair value. Substantially all of our commodity derivatives are cleared through exchanges which provide active trading information for identical derivatives and do not require any assumptions in arriving at fair value. Fair value estimation for all our derivative instruments is discussed in Item 8. Financial Statements and Supplementary Data – Note 20. Additional information about derivatives and their valuation may be found in Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Variable Interest Entities
We evaluate all legal entities in which we hold an ownership or other pecuniary interest to determine if the entity is a VIE. Our interests in a VIE are referred to as variable interests. Variable interests can be contractual, ownership or other pecuniary interests in an entity that change with changes in the fair value of the VIE’s assets. When we conclude that we hold an interest in a VIE we must determine if we are the entity’s primary beneficiary. A primary beneficiary is deemed to have a controlling financial interest in a VIE. This controlling financial interest is evidenced by both (a) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (b) the obligation to absorb losses that could potentially be significant to the VIE or the right to receive benefits that could potentially be significant to the VIE. We consolidate any VIE when we determine that we are the primary beneficiary. We must disclose the nature of any interests in a VIE that is not consolidated.
Significant judgment is exercised in determining that a legal entity is a VIE and in evaluating our interest in a VIE. We use primarily a qualitative analysis to determine if an entity is a VIE. We evaluate the entity’s need for continuing financial support; the equity holder’s lack of a controlling financial interest; and/or if an equity holder’s voting interests are disproportionate to its obligation to absorb expected losses or receive residual returns. We evaluate our interests in a VIE to determine whether we are the primary beneficiary. We use a primarily qualitative analysis to determine if we are deemed to have a controlling financial interest in the VIE, either on a standalone basis or as part of a related party group. We continually monitor our interests in legal entities for changes in the design or activities of an entity and changes in our interests, including our status as the primary beneficiary to determine if the changes require us to revise our previous conclusions.
Changes in the design or nature of the activities of a VIE, or our involvement with a VIE, may require us to reconsider our conclusions on the entity’s status as a VIE and/or our status as the primary beneficiary. Such reconsideration requires significant judgment and understanding of the organization. This could result in the deconsolidation or consolidation of the affected subsidiary, which would have a significant impact on our financial statements.
Variable Interest Entities are discussed in Item 8. Financial Statements and Supplementary Data – Note 8.
Pension and Other Postretirement Benefit Obligations
Accounting for pension and other postretirement benefit obligations involves numerous assumptions, the most significant of which relate to the following:
•the discount rate for measuring the present value of future plan obligations;
•the expected long-term return on plan assets;
•the rate of future increases in compensation levels;
•health care cost projections; and
•the mortality table used in determining future plan obligations.
We utilize the work of third-party actuaries to assist in the measurement of these obligations. We have selected different discount rates for each of our pension plans and retiree health and welfare based on the projected benefit payment patterns of each individual plan. The selected rates are compared to various similar bond indexes for reasonableness. In determining the assumed discount rates, we use our third-party actuaries’ discount rate models. These models calculate an equivalent single discount rate for the projected benefit plan cash flows using yield curves derived from Aa or higher corporate bond yields. The yield curves represent a series of annualized individual spot discount rates from 0.5 to 99 years. The bonds used have an average rating of Aa or higher from a recognized rating agency and generally only non-callable bonds are included. Outlier bonds that have a yield to maturity that deviate significantly from the average yield within each maturity grouping are not included. Each issue is required to have at least $300 million par value outstanding.
Of the assumptions used to measure the year-end obligations and estimated annual net periodic benefit cost, the discount rate has the most significant effect on the periodic benefit cost reported for the plans. Decreasing the discount rates of 5.10 percent for our pension plans and 5.00 percent for our other postretirement benefit plans by 0.25 percent would increase pension obligations and other postretirement benefit plan obligations by $64 million and $16 million, respectively, and would increase defined benefit pension expense and other postretirement benefit plan expense by $4 million and less than $1 million, respectively.
The long-term asset rate of return assumption considers the asset mix of the plans (currently targeted at approximately 50 percent equity securities and 50 percent fixed income securities for the primary funded pension plan), past performance and other factors. Certain components of the asset mix are modeled with various assumptions regarding inflation and returns. In
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addition, our long-term asset rate of return assumption is compared to those of other companies and to historical returns for reasonableness. We used the 5.75 percent long-term rate of return to determine our 2022 defined benefit pension expense. After evaluating activity in the capital markets, along with the current and projected plan investments, we increased the asset rate of return for our primary plan to 7.00 percent effective for 2023. Decreasing the 6.00 percent asset rate of return assumption by 0.25 percentage points would increase our defined benefit pension expense by $6 million.
Compensation change assumptions are based on historical experience, anticipated future management actions and demographics of the benefit plans.
Health care cost trend assumptions are developed based on historical cost data, the near-term outlook and an assessment of likely long-term trends.
We utilized the 2021 mortality tables from the U.S. Society of Actuaries.
Item 8. Financial Statements and Supplementary Data – Note 26 includes detailed information about the assumptions used to calculate the components of our annual defined benefit pension and other postretirement plan expense, as well as the obligations and accumulated other comprehensive loss reported on the year-end balance sheets.
ACCOUNTING STANDARDS NOT YET ADOPTED
Refer to Item 8. Financial Statements and Supplementary Data – Note 3 to our audited consolidated financial statements for recently issued financial accounting pronouncements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
GENERAL
We are exposed to market risks related to the volatility of crude oil and refined product prices. We employ various strategies, including the use of commodity derivative instruments, to hedge the risks related to these price fluctuations. We are also exposed to market risks related to changes in interest rates and foreign currency exchange rates. As of December 31, 2022, we did not have any financial derivative instruments to hedge the risks related to interest rate fluctuations; however, we have used them in the past, and we continually monitor the market and our exposure and may enter into these agreements again in the future. We are at risk for changes in fair value of all of our derivative instruments; however, such risk should be mitigated by price or rate changes related to the underlying commodity or financial transaction.
We believe that our use of derivative instruments, along with our risk assessment procedures and internal controls, does not expose us to material adverse consequences. While the use of derivative instruments could materially affect our results of operations in particular quarterly or annual periods, we believe that the use of these instruments will not have a material adverse effect on our financial position or liquidity.
See Item 8. Financial Statements and Supplementary Data – Notes 20 and 21 for more information about the fair value measurement of our derivatives, as well as the amounts recorded in our consolidated balance sheets and statements of income. We do not designate any of our commodity derivative instruments as hedges for accounting purposes.
Commodity Price Risk
Refining & Marketing
Our strategy is to obtain competitive prices for our products and allow operating results to reflect market price movements dictated by supply and demand. We use a variety of commodity derivative instruments, including futures, swaps and options, as part of an overall program to hedge commodity price risk. We also do a limited amount of trading not directly related to our physical transactions.
We use derivative instruments related to the acquisition of foreign-sourced crude oil and ethanol blended with refined petroleum products to hedge price risk associated with market volatility between the time we purchase the product and when we use it in the refinery production process or it is blended. In addition, we may use commodity derivative instruments on fixed price contracts for the sale of refined products to hedge risk by converting the refined product sales to market-based prices. The majority of these derivatives are exchange-traded contracts, but we also enter into over-the-counter swaps, options and over-the-counter options. We closely monitor and hedge our exposure to market risk on a daily basis in accordance with policies approved by our board of directors. Our positions are monitored daily by a risk control group to ensure compliance with our stated risk management policy.
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Midstream
NGL and natural gas prices are volatile and are impacted by changes in fundamental supply and demand, as well as market uncertainty, availability of NGL transportation and fractionation capacity and a variety of additional factors that are beyond MPLX’s control. MPLX may at times use a variety of commodity derivative instruments, including futures and options, as part of an overall program to economically hedge commodity price risk. A portion of MPLX’s profitability is directly affected by prevailing commodity prices primarily as a result of purchasing and selling NGLs and natural gas at index-related prices. To the extent that commodity prices influence the level of drilling by MPLX producer customers, such prices also indirectly affect profitability. MPLX may enter into derivative contracts, which are primarily swaps traded on the OTC market as well as fixed price forward contracts. MPLX’s risk management policy does not allow it to enter into speculative positions with its derivative contracts. Execution of MPLX’s hedge strategy and the continuous monitoring of commodity markets and its open derivative positions are carried out by its hedge committee, comprised of members of senior management.
To mitigate MPLX’s cash flow exposure to fluctuations in the price of NGLs, it may use NGL derivative swap contracts. A small portion of its NGL price exposure may be managed by using crude oil contracts. To mitigate MPLX’s cash flow exposure to fluctuations in the price of natural gas, it may use natural gas derivative swap contracts, taking into account the partial offset of its long and short natural gas positions resulting from normal operating activities.
MPLX would be exposed to additional commodity risk in certain situations such as if producers under‐deliver or over‐deliver products or if processing facilities are operated in different recovery modes. In the event that MPLX has derivative positions in excess of the product delivered or expected to be delivered, the excess derivative positions may be terminated.
MPLX management conducts a standard credit review on counterparties to derivative contracts, and it has provided the counterparties with a guaranty as credit support for its obligations. MPLX uses standardized agreements that allow for offset of certain positive and negative exposures in the event of default or other terminating events, including bankruptcy.
Open Derivative Positions and Sensitivity Analysis
The following table includes the composition of net losses/gains on our commodity derivative positions for the years ended December 31, 2022 and 2021, respectively.
Realized loss on settled derivative positions $ (93) $ (359)
Unrealized gain (loss) on open net derivative positions 35 (21)
See Item 8. Financial Statements and Supplementary Data – Note 21 for additional information on our open derivative positions at December 31, 2022.
Sensitivity analysis of the incremental effects on income from operations (“IFO”) of hypothetical 10 percent and 25 percent increases and decreases in commodity prices for open commodity derivative instruments as of December 31, 2022 is provided in the following table.
We remain at risk for possible changes in the market value of commodity derivative instruments; however, such risk should be mitigated by price changes in the underlying physical commodity. Effects of these offsets are not reflected in the above sensitivity analysis.
We evaluate our portfolio of commodity derivative instruments on an ongoing basis and add or revise strategies in anticipation of changes in market conditions and in risk profiles. Changes to the portfolio after December 31, 2022 would cause future IFO effects to differ from those presented above.
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Interest Rate Risk
Our use of fixed or variable-rate debt directly exposes us to interest rate risk. Fixed rate debt, such as our senior notes, exposes us to changes in the fair value of our debt due to changes in market interest rates. Fixed rate debt also exposes us to the risk that we may need to refinance maturing debt with new debt at higher rates or that our current fixed rate debt may be higher than the current market. Variable-rate debt, such as borrowings under our revolving credit facilities, exposes us to short-term changes in market rates that impact our interest expense. See Item 8. Financial Statements and Supplementary Data – Note 22 for additional information on our debt.
Sensitivity analysis of the effect of a hypothetical 100-basis-point change in interest rates on long-term debt, including the portion classified as current and excluding finance leases, as of December 31, 2022 is provided in the following table. The fair value of cash and cash equivalents, receivables, accounts payable and accrued interest approximate carrying value and, in addition to short-term investments which are recorded at fair value, are relatively insensitive to changes in interest rates due to the short-term maturity of the instruments. Accordingly, these instruments are excluded from the table.
Long-term debt
Variable-rate $ — — $ —
(a)Fair value was based on market prices, where available, or current borrowing rates for financings with similar terms and maturities.
(b)Assumes a 100-basis point decrease in the weighted average yield-to-maturity at December 31, 2022.
(c)Assumes a 100-basis-point change in interest rates. The change in net income was based on the weighted average balance of debt outstanding for the year ended December 31, 2022.
See Item 8. Financial Statements and Supplementary Data – Note 20 for additional information on the fair value of our debt.
Foreign Currency Exchange Rate Risk
We are impacted by foreign exchange rate fluctuations related to some of our purchases of crude oil denominated in Canadian dollars and some of our sales of finished products denominated in Mexican pesos. We did not use derivatives to hedge our market risk exposure to these foreign exchange rate fluctuations in 2022.
Counterparty Risk
MPLX is subject to risk of loss resulting from nonpayment by its customers to whom it provides services, leases assets, or sells natural gas or NGLs. MPLX believes that certain contracts where it sells NGLs and acts as its producer customers’ agent would allow it to pass those losses through to its customers, thus reducing its risk, when it is selling NGLs and acting as its producer customers’ agent. Its credit exposure related to these customers is represented by the value of its trade receivables or lease receivables. Where exposed to credit risk, MPLX analyzes the customer’s financial condition prior to entering into a transaction or agreement, establishes credit terms and monitors the appropriateness of these terms on an ongoing basis. In the event of a customer default, MPLX may sustain a loss and its cash receipts could be negatively impacted.
We are subject to risk of loss resulting from nonpayment or nonperformance by counterparties to our derivative contracts. Our credit exposure related to commodity derivative instruments is represented by the fair value of contracts with a net positive fair value at the reporting date. Outstanding instruments expose us to credit loss in the event of nonperformance by the counterparties to the agreements. Should the creditworthiness of one or more of our counterparties decline, our ability to mitigate nonperformance risk is limited to a counterparty agreeing to either a voluntary termination and subsequent cash settlement or a novation of the derivative contract to a third party. In the event of a counterparty default, we may sustain a loss and our cash receipts could be negatively impacted.
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Item 8. Financial Statements and Supplementary Data
INDEX
Page
Management’s Responsibilities for Financial Statements 69
Management’s Report on Internal Control over Financial Reporting 69
Report of Independent Registered Public Accounting Firm (PCAOB ID 238) 70
Audited Consolidated Financial Statements:
Consolidated Statements of Income 72
Consolidated Statements of Comprehensive Income 73
Consolidated Balance Sheets 74
Consolidated Statements of Cash Flows 75
Consolidated Statements of Equity and Redeemable Noncontrolling Interest 77
Notes to Consolidated Financial Statements 78
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Management’s Responsibilities for Financial Statements
The accompanying consolidated financial statements of Marathon Petroleum Corporation and its subsidiaries (“MPC”) are the responsibility of management and have been prepared in conformity with accounting principles generally accepted in the United States of America. They necessarily include some amounts that are based on best judgments and estimates. The financial information displayed in other sections of this Annual Report on Form 10-K is consistent with these consolidated financial statements.
MPC seeks to assure the objectivity and integrity of its financial records by careful selection of its managers, by organizational arrangements that provide an appropriate division of responsibility and by communications programs aimed at assuring that its policies and methods are understood throughout the organization.
The board of directors pursues its oversight role in the area of financial reporting and internal control over financial reporting through its Audit Committee. This committee, composed solely of independent directors, regularly meets (jointly and separately) with the independent registered public accounting firm, management and internal auditors to monitor the proper discharge by each of their responsibilities relative to internal accounting controls and the consolidated financial statements.
/s/ Michael J. Hennigan /s/ Maryann T. Mannen /s/ C. Kristopher Hagedorn
Management’s Report on Internal Control over Financial Reporting
MPC’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended). An evaluation of the design and effectiveness of our internal control over financial reporting, based on the framework in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, was conducted under the supervision and with the participation of management, including our chief executive officer and chief financial officer. Based on the results of this evaluation, MPC’s management concluded that its internal control over financial reporting was effective as of December 31, 2022.
The effectiveness of MPC’s internal control over financial reporting as of December 31, 2022 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein.
/s/ Michael J. Hennigan /s/ Maryann T. Mannen
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Marathon Petroleum Corporation
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Marathon Petroleum Corporation and its subsidiaries (the “Company”) as of December 31, 2022 and 2021, and the related consolidated statements of income, of comprehensive income, of equity and redeemable noncontrolling interest and of cash flows for each of the three years in the period ended December 31, 2022, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
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Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Goodwill Impairment Test - Crude Gathering Reporting Unit
As described in Note 18 to the consolidated financial statements and as disclosed by management, the Company’s consolidated goodwill balance was $8.2 billion as of December 31, 2022, which includes, within the Midstream segment, the goodwill associated with MPLX’s Crude Gathering reporting unit of $1.1 billion. Management annually evaluates goodwill for impairment as of November 30, as well as whenever events or changes in circumstances indicate it is more likely than not that the fair value of a reporting unit with goodwill is less than its carrying amount. The fair value of the MPLX Crude Gathering reporting unit was determined based on applying both a discounted cash flow method (i.e. income approach) as well as a market approach. Significant assumptions that were used to estimate the reporting unit’s fair value under the discounted cash flow method included management’s best estimates of the discount rate, as well as estimates of future cash flows, which are impacted primarily by producer customers’ development plans, which impact future volumes and capital requirements.
The principal considerations for our determination that performing procedures relating to the goodwill impairment test of the Crude Gathering reporting unit of the Midstream segment is a critical audit matter are (i) the significant judgment by management when determining the fair value of the reporting unit; and (ii) the high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence relating to management’s significant assumption related to future volumes.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s goodwill impairment test, including controls over the determination of the fair value of the Crude Gathering reporting unit. These procedures also included, among others (i) testing management’s process for determining the fair value of the reporting unit; (ii) evaluating the appropriateness of the income and market approaches used; (iii) testing the completeness and accuracy of underlying data used by management in the approaches; and (iv) evaluating the reasonableness of the significant assumption related to future volumes. Evaluating the assumption related to future volumes involved (i) considering whether the assumption used was reasonable considering past performance of the reporting unit, producer customers’ historical and future production volumes, and industry outlook reports; and (ii) considering whether the assumption was consistent with evidence obtained in other areas of the audit.
/s/ PricewaterhouseCoopers LLP
Toledo, Ohio
February 23, 2023
We have served as the Company’s auditor since 2010.
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Marathon Petroleum Corporation
Consolidated Statements of Income
Revenues and other income:
Income (loss) from equity method investments(a) 655 458 (935)
Net gain on disposal of assets 1,061 21 70
Costs and expenses:
Impairment expense — — 8,426
Selling, general and administrative expenses 2,772 2,537 2,710
Restructuring expenses — — 367
Provision (benefit) for income taxes on continuing operations 4,491 264 (2,430)
Income (loss) from continuing operations, net of tax 15,978 2,553 (11,182)
Income from discontinued operations, net of tax 72 8,448 1,205
Less net income (loss) attributable to:
Redeemable noncontrolling interest 88 100 81
Per share data (See Note 10)
Basic:
Weighted average shares outstanding 512 634 649
Diluted:
Weighted average shares outstanding 516 638 649
(a)2020 includes impairment expense. See Note 7 for further information.
The accompanying notes are an integral part of these consolidated financial statements.
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Marathon Petroleum Corporation