Marathon Petroleum Corp quarterly report, Q3 FY2012

Marathon Petroleum Corporation — Q3 2012 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2012. MPC operates Refining & Marketing, Speedway retail, and Pipeline Transportation businesses. The 2011 nine-month comparison includes pre-spinoff periods reported as the former Marathon Oil refining, marketing and transportation business; those periods may not be fully comparable with MPC as a standalone company.

Financial performance and position

Metric	Q3 2012	Q3 2011	Nine months 2012	Nine months 2011
Sales and operating revenues	$21.047B	$20.614B	$61.551B	$59.165B
Income from operations	$1.895B	$1.759B	$4.158B	$3.903B
Net income	$1.224B	$1.133B	$2.634B	$2.464B
Diluted earnings per share	$3.59	$3.16	$7.65	$6.88
Operating cash flow	Not separately stated	Not separately stated	$2.449B	$2.671B

Q3 net income rose $91 million year over year; nine-month net income rose $170 million. The Minnesota Assets settlement gain contributed materially to both comparisons.
Nine-month total capital expenditures were $1.069B; additions to property, plant and equipment were $966M. Cash increased $308M in the period to $3.387B.
At September 30, cash was $3.387B; total debt was $3.349B, including current maturities. Debt-to-total-capital was 23%, versus 26% at year-end 2011. Total reported liquidity was $6.387B, including cash, $2.0B revolving capacity and a $1.0B receivables facility; neither facility had borrowings or letters of credit outstanding.
Refining & Marketing gross margin averaged $13.12 per barrel in Q3 and $10.92 for the first nine months, versus $13.18 and $10.30, respectively, in 2011. Q3 refinery throughput was 1.345 million barrels per day, down from 1.368 million; nine-month throughput was 1.335 million, versus 1.354 million.
Nine-month segment operating income: Refining & Marketing $3.959B (up from $3.773B); Speedway $233M (up from $198M); Pipeline Transportation $144M (down from $161M). Q3 figures were $1.691B, $76M and $52M, respectively.
Q3 and nine-month effective tax rates were 35% and 36%, respectively. Dividends paid were $0.35 per share in Q3 and $0.85 per share for the first nine months.

Material changes and unusual items

A settlement with the buyer of the previously sold Minnesota Assets generated $183M of pretax income in the first nine months, including $86M of deferred gain from the original sale. Under the settlement, MPC received $132M cash and a new preferred security valued at $45M; earnout and margin-support obligations between the parties were released.
Pension settlement expenses were $33M in Q3 and $116M for the first nine months, following lump-sum retirement payments. Pension plan amendments reduced pension liabilities by approximately $537M, with the offset primarily in other comprehensive income; the benefit is to be amortized into income through 2024.
Q3 Refining & Marketing income was slightly lower despite stronger benchmark crack spreads, reflecting crude acquisition costs, lower wholesale realizations and higher maintenance costs. Nine-month performance improved with higher average gross margin.
Speedway Q3 operating income declined on lower fuel margins and higher expenses; nine-month income increased with stronger merchandise margin. Speedway acquired 97 stores during the first nine months.
MPC recorded a $14M impairment of a prepaid Centennial pipeline tariff due to market conditions and lower throughput. At September 30, Centennial was not shipping product; MPC reported no impairment of its equity investment.
Commodity derivative instruments produced a net loss of $283M in Q3 versus a $258M gain in Q3 2011; the nine-month results were a $64M gain versus $435M. MPC does not designate commodity derivatives as accounting hedges.

Outlook, liquidity, risks and contingencies

The filing provides no formal earnings guidance. MPC set a 2012 capital and investment budget of $1.42B, excluding capitalized interest. The Detroit refinery expansion was described as nearly complete and on budget; a 70-day turnaround began in September, with the expanded refinery expected online in November 2012.
On October 7, MPC agreed to acquire BP’s 451,000-barrel-per-day Texas City refinery and related logistics and marketing assets. Consideration is $598M plus inventory, estimated at approximately $1.2B at current prices, and a contingent earnout of up to $700M over six years. Closing was anticipated in early 2013, subject to customary conditions and regulatory approval; MPC expected to use cash on hand.
MPLX completed its IPO on October 31, after the reporting date. MPC retained a 73.6% interest and received $203M in net proceeds; MPLX retained funds for expansion spending. These are subsequent events, not September 30 cash or ownership balances.
MPC’s $2.0B two-year repurchase authorization included a completed $850M accelerated repurchase at an average $41.75 per share. A further $500M repurchase was announced November 5; the company reported $650M remaining under authorization after both programs.
Environmental remediation liabilities were $118M at September 30, with $49M of recoverable-cost receivables. MPC disclosed guarantees for investee debt, including maximum potential payments of $172M for LOOP/LOCAP, $48M for Centennial and $25M for TAME, plus other guarantees. Contractual commitments for capital projects and investee funding totaled $182M.
A Kentucky attorney general lawsuit alleges $89M of customer overcharges during 2005 and includes later pricing claims. MPC is defending the matter; the filing says an unfavorable outcome could materially affect results, financial position or cash flows, while management states it does not expect an adverse material effect. The filing also reports routine environmental proceedings and other litigation.
Risks to results include volatile refining margins and crude differentials, refinery turnarounds and operating disruptions, demand and throughput changes, commodity-price exposure, environmental obligations, and conditions or approvals affecting the Texas City acquisition and planned projects. MPC reported investment-grade ratings with stable outlooks and compliance with its credit covenant.

Important facts for investors to verify

How much of reported earnings growth is attributable to the $183M Minnesota settlement gain and how results trend excluding that item and pension settlement expenses.
Whether refinery margins, crude acquisition economics and throughput remain favorable after the Detroit turnaround, and the project’s final cost and operating contribution.
The Texas City acquisition’s final inventory value, earnout conditions, regulatory outcome, funding and expected returns.
Cash generation and working-capital movement: operating cash flow declined year over year, with the filing citing working-capital use from lower payables and higher inventories.
Current exposure and developments in the Kentucky litigation, environmental remediation, and guarantees for equity-method investees.