Form 8-K Marathon Petroleum Corp For: Jan 25

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Speedway

(A business of Marathon Petroleum Corporation)

Interim Condensed Combined Financial Statements as of September 30, 2020 and December 31, 2019 and for the Nine Months Ended September 30, 2020 and 2019

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INDEX TO CONDENSED COMBINED FINANCIAL STATEMENTS

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Speedway Business of Marathon Petroleum Corporation

Condensed Combined Statements of Income (Unaudited)

(a) Cost of sales includes related party purchases. See Note 5 for further information. Cost of sales excludes depreciation and amortization, which are reflected in a separate line item.

(b) Operating, general and administrative expenses exclude depreciation and amortization, which are reflected in a separate line item.

See accompanying notes to condensed combined financial statements.

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Speedway Business of Marathon Petroleum Corporation

Condensed Combined Statements of Comprehensive Income (Unaudited)

See accompanying notes to condensed combined financial statements.

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Speedway Business of Marathon Petroleum Corporation

Condensed Combined Balance Sheets (Unaudited)

 

See accompanying notes to condensed combined financial statements.

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Speedway Business of Marathon Petroleum Corporation

Condensed Combined Statements of Changes in Equity (Unaudited)

 

See accompanying notes to condensed combined financial statements.

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Speedway Business of Marathon Petroleum Corporation

Condensed Combined Statements of Cash Flows (Unaudited)

 

(a) Includes restricted cash of $0 and $30 as of December 31, 2019 and December 31, 2018, respectively.

(b) Includes restricted cash of $0 and $0 as of September 30, 2020 and September 30, 2019, respectively.

See accompanying notes to condensed combined financial statements.

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NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS

NOTE 1. SEPARATION FROM MARATHON PETROLEUM CORPORATION AND BASIS OF PRESENTATION

Background

The accompanying unaudited combined financial statements and notes present the combined statements of income, financial position, and cash flows of the Speedway business (“Speedway”, “the Company”, “we”, “us”, “our”) of Marathon Petroleum Corporation (“MPC” or “Parent”).

On August 2, 2020, Marathon Petroleum Corporation (“MPC” or “Parent”) entered into an agreement to sell Speedway to 7-Eleven, Inc. (“Buyer”) for $21 billion in cash consideration, subject to certain adjustments based on the levels of cash, debt (as defined in the agreement) and working capital at closing and certain other items. This transaction is targeted to be completed by the first quarter of 2021, subject to market, regulatory and certain other customary conditions. Until the sale occurs, Speedway will be a wholly owned subsidiary of MPC.

MPC and Buyer will enter into several agreements to implement the legal and structural separation between MPC and Speedway; govern the relationship between MPC and Buyer after the completion of the separation; and allocate between MPC and Buyer various assets, liabilities, and obligations, including, among other things, employee benefits, environmental liabilities, intellectual property, and tax-related assets and liabilities.

Basis of Presentation

These condensed combined financial statements have been derived from the Consolidated Financial Statements and accounting records of MPC. These condensed combined financial statements reflect the combined historical results of operations, financial position and cash flows of the Company for the periods presented as historically managed within MPC. These condensed combined financial statements are unaudited; however, in the opinion of our management, these statements reflect all adjustments necessary for a fair statement of the results for the periods reported. All such adjustments are of a normal, recurring nature unless otherwise disclosed. The condensed combined financial statements may not be indicative of the Company’s future performance and do not necessarily reflect what the financial position, results of operations and cash flows would have been had it operated as an independent company during the periods presented. These interim condensed combined financial statements, including the notes, have been prepared in accordance with the rules of the Securities and Exchange Commission (“SEC”) applicable to interim period financial statements and do not include all of the information and disclosures required by GAAP for complete financial statements. These interim condensed combined financial statements should be read in conjunction with the audited combined financial statements for the year ended December 31, 2019. The results of operations for the nine months ended September 30, 2020 are not necessarily indicative of the results to be expected for the full year.

Speedway has one reportable operating segment, which includes its consolidated convenience store operations as well as diesel branding agreement income. Speedway’s equity method investment in PFJ Southeast is a separate operating segment with results reported as equity investment income. All intracompany transactions have been eliminated. All significant intercompany transactions between us and Parent have been included in these condensed combined financial statements. Intercompany transactions between us and Parent are deemed to have settled immediately through Parent company investment, other than those transactions which have been historically settled in cash and which are reflected in the condensed combined balance sheets as Accounts payable—related parties, Accrued interest—related party and Notes payable—related party. The net effect of deemed settled transactions is reflected in the condensed combined statements of cash flows as a financing activity and in the condensed combined balance sheets as Parent company investment. Refer to Note 5 for additional information.

Historically, MPC provided certain corporate functions to the Company and costs associated with these functions were allocated to the Company. These functions include, but are not limited to, executive management, legal, human resources, treasury, investor relations, finance, accounting, internal audit, information technology, and the related benefit costs associated with such functions, such as stock-based compensation. The costs of such services were allocated to the Company based on direct usage when identifiable, with the remainder allocated on a pro rata basis of income from operations, total assets and headcount of the Company and MPC. The charges for these functions are deemed settled in cash by Speedway to MPC in the period in which the costs were recorded within Operating, general and administrative expenses in the combined statements of income. The Company believes the bases on which the expenses have been allocated are a reasonable reflection of the utilization of services provided to, or the benefit received by, Speedway during the periods presented; however, they may not be indicative of the actual expense that would have been incurred had Speedway been operating as an independent company for the periods presented. Actual costs that may have been incurred if the Company had been a standalone company would depend on a number of factors, including the organizational structure, whether functions were outsourced or performed by employees, and strategic decisions made in areas such as information technology and infrastructure. Going forward, the Company may perform these functions using its own resources, outsourced services or services from Buyer. For an interim period,

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however, some of these functions may continue to be provided between MPC and the Company under a transition services agreement following the separation.

Current and deferred income taxes have been determined based on the stand-alone results of Speedway. However, because the Company filed as part of MPC’s tax group in certain jurisdictions, the Company’s actual tax balances may differ from those reported.

MPC utilizes a centralized treasury management function for financing its operations, with cash from MPC’s operating companies, including Speedway, swept to shared MPC cash pooling accounts. The cash and cash equivalents held by MPC at the corporate level are not specifically identifiable to the Company and therefore have not been reflected in the Company’s combined balance sheets. Cash transfers between MPC and the Company are accounted for through Parent company investment. Cash and cash equivalents in the combined balance sheets represent cash and cash equivalents directly identifiable to the Company and its operations.

The condensed combined financial statements include certain liabilities that have historically been held at the MPC corporate level but are specifically identifiable or otherwise attributable to the Company. MPC’s third-party long-term debt and the related interest expense have not been allocated to the Company for any of the periods presented as the Company was not the legal obligor of such debt and the MPC borrowings were not directly attributable to the Company.

NOTE 2. ACCOUNTING STANDARDS

Recently Adopted Accounting Standards

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

Effective January 1, 2020, we adopted ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” using the modified retrospective transition method. The guidance requires that for most financial assets, losses be based on an expected loss approach which includes estimates of losses over the life of exposure that considers historical, current and forecasted information. Expanded disclosures related to the methods used to estimate the losses as well as a specific disaggregation of balances for financial assets are also required.  The application of this ASU did not have a material impact on our condensed combined financial statements.

We also adopted the following ASUs during the first nine months of 2020, which also did not have a material impact to our condensed combined financial statements:

Accounting Standards Not Yet Adopted

ASU 2019-12, Income Taxes (Topic 740)—Simplifying the Accounting for Income Taxes

In December 2019, the FASB issued new guidance to simplify the accounting for income taxes. Amendments include removal of certain exceptions to the general principles of ASC 740 and simplification in several other areas such as accounting for a franchise tax or similar tax that is partially based on income. The change is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted in any interim or annual period, with any adjustments reflected as of the beginning of the fiscal year of adoption. We do not expect the application of this ASU to have a material impact on our combined financial statements.

NOTE 3. ACQUISITIONS

Acquisition of NOCO Express

During the third quarter of 2019, MPC acquired an asphalt terminal and 33 NOCO Express retail stores in Buffalo, Syracuse and Rochester, New York, from NOCO Incorporated for total consideration of $135 million. The 33 NOCO Express retail stores (“NOCO Retail”) were integrated into Speedway and are reflected in the Company’s financial results from July 2019, with close occurring over

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a two-week period from July 15 to July 25. Based on the final fair value estimates of assets acquired and liabilities assumed at the acquisition date, $27 million of the purchase price was allocated to property, plant and equipment, $3 million to inventory and $56 million to goodwill attributable to NOCO Retail. Goodwill is tax deductible and represents the value expected to be created by geographically expanding our retail platform and the assembled workforce.

The Company determined the NOCO Retail results of operations are not material. Therefore the pro forma information is not required. Additionally, transaction costs incurred were not considered significant.

NOTE 4. REVENUE

Disaggregated Revenue

Net revenues by major product line for the nine months ended September 30, 2020 and 2019 were as follows:

 

(a) Includes related party fuel transportation income of $12 million and $10 million for the nine months ended September 30, 2020 and 2019, respectively.

(b) Includes rental income of $24 million and $15 million for the nine months ended September 30, 2020 and 2019, respectively.

Contract Balances

Performance obligations are generally satisfied at the time goods are sold to customers with cash collected at the time of sale or shortly thereafter for payments by credit card. Contract liabilities are recognized for sales of prepaid cards and in connection with Speedway’s loyalty programs, with the related performance obligations satisfied at the time prepaid cards or loyalty points are redeemed and goods are transferred to the customer. The closing balances of contract liabilities arising from the prepaid card and loyalty programs as of September 30, 2020 and December 31, 2019 were $98 million and $105 million respectively.

Revenue recognized that was included in the opening contract liabilities balance for the nine months ended September 30, 2020 and September 30, 2019 was $77 million and $81 million, respectively. Contract assets are not material to the condensed combined financial statements.

We do not disclose information on the future performance obligations for any contract with expected duration of one year or less at inception. As of September 30, 2020, we do not have future performance obligations that are material to future periods.

NOTE 5. RELATED PARTY TRANSACTIONS AND PARENT COMPANY INVESTMENT

These condensed combined financial statements have been derived from the Consolidated Financial Statements and accounting records of MPC. The following discussion summarizes activity between the Company and MPC (and its affiliates that are not part of the planned separation).

Related Party Transactions with MPC:

Allocation of General Corporate Expenses

The combined statements of income include expenses for certain centralized functions and other programs provided and administered by MPC, as described in Note 1. The costs of these services allocated to the Company, which are included with operating, general and administrative expenses in the condensed combined statements of income for the nine months ended September 30, 2020 and 2019, were $62 million and $60 million, respectively.

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Related Party Accounts Payable

Certain intercompany transactions between Speedway and MPC related to cash pooling and general financing activities have been included within Parent company investment in the combined balance sheets in the historical periods presented when the intercompany transactions are not historically settled in cash.

Certain purchases of fuel inventory from MPC and its affiliate businesses have historically been settled in cash and, therefore, are reflected in the condensed combined balance sheets as Accounts payable – related parties and amounted to $2 million and $35 million as of September 30, 2020 and December 31, 2019, respectively. The majority of fuel purchases were not historically settled in cash and are included within Parent company investment in the condensed combined balance sheets.

Related Party Purchases and Sales

The Company purchased $7.60 billion and $13.11 billion of fuel inventory from MPC during the nine months ended September 30, 2020 and 2019, respectively. Of these purchases, $52 million and $479 million were cash settled during the nine months ended September 30, 2020 and 2019, respectively. Speedway’s purchases of fuel inventory that were not historically settled in cash are presented as net transfers (to) from Parent in the condensed combined statements of cash flows. Speedway also sells a small amount of fuel and fuel hauling services to other MPC businesses. Speedway sales to MPC amounted to $6 million and $12 million during the nine months ended September 30, 2020 and 2019, respectively.

Related Party Debt and Interest

In 2014, the Company entered into an intercompany loan agreement with a subsidiary of MPC for an aggregate amount of $2.25 billion consisting of (i) a $500 million Term Loan due September 30, 2019 with an interest rate of one-month USD LIBOR plus 2.25{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}, (ii) an $875 million 5.25{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} Senior Note due September 15, 2022 and (iii) an $875 million 5.5{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} Senior Note due September 15, 2024. The outstanding balance on the $875 million 5.25{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} Senior Note due September 15, 2022 was settled during the quarter ended September 30, 2020, with the settlement reflected as a component of Transfers (to) / from Parent, net in the condensed combined statements of cash flows. The $875 million 5.5{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} Senior Note due September 15, 2024 was partially settled during the quarter ended September 30, 2020 with a remaining balance of $739 million as of September 30, 2020.

Accrued interest expense associated with these related party loans as of September 30, 2020 and December 31, 2019 was $2 million and $28 million, respectively, and is reflected within Accrued interest—related party.

Interest expense associated with these related party loans for the nine months ended September 30, 2020 and 2019 was $70 million and $87 million, respectively, and is reflected within Interest expense, net—related party in the condensed combined statements of income.

Parent Company Investment

The net transfers (to) from Parent are included within Parent company investment on the condensed combined statements of changes in equity. The components of the net transfers (to) from Parent during the nine months ended September 30, 2020 and 2019 were as follows:

 

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Transactions with Other Related Parties:

Diesel Branding Agreement

Speedway and PTC entered into a diesel fuel branding agreement effective October 1, 2019 in which PTC agreed to supply, price and sell diesel fuel at certain Speedway and PTC locations. At September 30, 2020, this agreement included approximately 350 Speedway and PTC fueling locations across 15 states, including approximately 200 Speedway commercial fueling locations. Under the terms of the agreement, both companies agreed to share the diesel fuel margins captured as a result of the sourcing efficiencies and logistical economies of scale. Diesel branding agreement income was $110 million for the nine months ended September 30, 2020. We account for this agreement as a collaborative arrangement in scope of ASC 808, Collaborative Arrangements. Under ASC 808, we account for the income earned under this agreement as operating income reflected in the condensed combined statements of income as Diesel branding agreement income.

PFJ Southeast

Speedway sells fuel-hauling services to PFJ Southeast. Related party revenue for fuel-hauling services sold to PFJ Southeast for the nine months ended September 30, 2020 and 2019 was $7 million and $7 million, respectively.

NOTE 6. INVENTORIES

 

Inventories are carried at the lower of cost or market value. At September 30, 2020, market values for transportation fuel inventories were lower than their cost basis, resulting in a reserve of $25 million. No such reserve existed as of December 31, 2019. LCM inventory valuation reserve adjustments are reflected within Cost of Sales in the condensed combined statements of income. The cost of inventories of transportation fuels and merchandise is determined primarily under the LIFO method. There were no LIFO inventory liquidations recognized for the nine months ended September 30, 2020 and 2019.

NOTE 7. OTHER CURRENT LIABILITIES

At September 30 2020 and December 31 2019, other current liabilities were comprised of the following:

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NOTE 8. FAIR VALUE MEASUREMENTS

ASC 820, “Fair Value Measurement,” (ASC 820) defines fair value as 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. ASC 820 also establishes a three-level fair value hierarchy that prioritizes information used in developing assumptions when pricing an asset or liability as follows:

ASC 820 requires the use of observable market data, when available, in making fair value measurements. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.

We believe the carrying value of our other financial instruments, including cash and cash equivalents, receivables, accounts payable and certain accrued liabilities approximate fair value. Our fair value assessment incorporates a variety of considerations, including the short-term duration of the instruments and the expected insignificance of bad debt expense, which includes an evaluation of counterparty credit risk. We believe the carrying value of our long-term debt—related party approximates fair value.

 

NOTE 9. PENSIONS AND OTHER POSTRETIREMENT BENEFITS

Components of Net Periodic Benefit Cost and Other Comprehensive Loss

The following summarizes the net periodic benefit costs for our defined benefit pension and other postretirement plans.

(a) Net periodic benefit cost reflects a calculated market-related value of plan assets which recognizes changes in fair value over three years.

The components of net periodic benefit cost other than the service cost component are included in net interest and other financial costs on the Condensed Combined statements of income.

Contributions to defined contribution plans –Contributions to defined contribution plans totaled $25 million and $27 million in the nine months ended September 30, 2020 and 2019, respectively.

NOTE 10. INCOME TAXES

For the nine months ended September 30, 2020, we recorded an income tax provision of $259 million or 25.7{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} of income before income taxes compared to $162 million or 25.1{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} during the prior period. For the nine months ended September 30, 2020 and 2019, the effective tax rate is more than the federal statutory rate of 21{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} due principally to state income taxes.

NOTE 11. COMMITMENTS AND CONTINGENCIES

The Company is involved in various litigations, claims and administrative proceedings, including those related to environmental and asset retirement matters. In accordance with ASC 450, “Contingencies” (ASC 450), the Company records accruals for loss contingencies when it is both probable that a liability will be incurred and the amount of the loss can be reasonably estimated. Amounts recorded for identified contingent liabilities are estimates, which are reviewed periodically and adjusted to reflect additional

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information when it becomes available. Subject to the uncertainties inherent in estimating future costs for contingent liabilities, except as expressly set forth in this note, management believes that any liability which may result from these legal matters would not have a material adverse effect on the financial condition, results of operations, liquidity or cash flows of the Company.

Environmental Matters

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

At September 30, 2020 and December 31, 2019, accrued liabilities for remediation totaled $36 million and $37 million, respectively. It is not presently possible to estimate the ultimate amount of all remediation costs that might be incurred or the penalties if any that may be imposed. Receivables for recoverable costs from certain states, under programs to assist companies in clean-up efforts related to underground storage tanks at presently or formerly owned or operated retail marketing sites, were $20 million and $20 million at September 30, 2020 and December 31, 2019, respectively.

Governmental and other entities in various states have filed lawsuits against coal, gas, oil and petroleum companies, including the Company. The lawsuits allege damages as a result of climate change and the plaintiffs are seeking unspecified damages and abatement under various tort theories. Similar lawsuits may be filed in other jurisdictions. At this early stage, the ultimate outcome of these matters remains uncertain, and neither the likelihood of an unfavorable outcome nor the ultimate liability, if any, can be determined.

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

 Asset Retirement Obligations

Our short-term asset retirement obligations were $4 million and $4 million at September 30, 2020 and December 31, 2019, respectively, which are included in other current liabilities in our condensed combined balance sheets. Our long-term asset retirement obligations were $22 million and $22 million at September 30, 2020 and December 31, 2019, respectively, which are included in Other long-term liabilities in our condensed combined balance sheets.

Legal Matters

In May 2007, the Kentucky attorney general filed a lawsuit against MPC and Marathon Oil in state court in Franklin County, Kentucky for alleged violations of Kentucky’s emergency pricing and consumer protection laws following Hurricanes Katrina and Rita in 2005. The lawsuit alleged that MPC overcharged customers by $89 million during September and October 2005. The complaint sought disgorgement of these sums, as well as penalties, under Kentucky’s emergency pricing and consumer protection laws. In May 2011, the Kentucky attorney general amended his complaint to include a request for immediate injunctive relief as well as unspecified damages and penalties related to MPC’s wholesale gasoline pricing in April and May 2011 under statewide price controls that were activated by the Kentucky governor on April 26, 2011, and which have since expired. A settlement agreement was reached on July 25, 2019 in which MPC agreed to pay $22 million. Speedway was allocated $11 million which was included in Operating, general and administrative expenses in the combined financial statements.

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

Insurance

We are self-insured for workers’ compensation, general liability, and automobile claims. Actual claim settlements and expenses incident thereto may differ from the provisions for loss.

Other guarantees – We have entered into other guarantees with maximum potential undiscounted payments totaling $11 million as of September 30, 2020, which consist primarily of a commitment to contribute cash to an equity method investee for certain catastrophic events in lieu of procuring insurance coverage and leases of assets containing general lease indemnities and guaranteed residual values.

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

Contractual Commitments and Contingencies

At September 30, 2020 and December 31, 2019, our contractual commitments to acquire property, plant and equipment totaled $2 million and $13 million, respectively. At September 30, 2020, our contractual commitments to purchase services and materials totaled $29 million; there were no such commitments at December 31, 2019.

NOTE 12. SUPPLEMENTAL CASH FLOW INFORMATION

Net cash provided by operating activities included interest paid of $96 million and $111 million during the nine months ended September 30, 2020 and 2019, respectively.

The unaudited condensed combined statements of cash flows exclude changes to the unaudited condensed combined balance sheets that did not affect cash. A reconciliation of additions to property, plant and equipment to total capital expenditures follows for the nine months ended September 30, 2020 and 2019.

NOTE 13. SUBSEQUENT EVENTS

The Company has evaluated subsequent events after the balance sheet date of September 30, 2020 through January 25, 2021, the date the combined financial statements were available to be issued. During the fourth quarter of 2020, Pilot Travel Centers LLC exercised an option to purchase our 29 percent interest in PFJ Southeast LLC, subject to customary closing conditions and regulatory approvals. We expect the purchase to close in 2021 and to account for our equity method investment in PFJ Southeast LLC as an asset held for sale beginning in the fourth quarter of 2020.

 

 

INDEX TO COMBINED FINANCIAL STATEMENTS

 

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Report of Independent Auditors

To the Board of Directors and Stockholders of Marathon Petroleum Corporation

We have audited the accompanying combined financial statements of the Speedway Business of Marathon Petroleum Corporation, which comprise the combined balance sheets as of December 31, 2019 and 2018, and the related combined statements of income, comprehensive income, changes in equity and cash flows for each of the three years in the period ended December 31, 2019.

Management’s Responsibility for the Combined Financial Statements

Management is responsible for the preparation and fair presentation of the combined financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of combined financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on the combined financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the combined financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the combined financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Company’s preparation and fair presentation of the combined financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the combined financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of the Speedway Business of Marathon Petroleum Corporation as of December 31, 2019 and 2018 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019 in accordance with accounting principles generally accepted in the United States of America.

/s/ PricewaterhouseCoopers LLP

Toledo, Ohio

June 11, 2020, except for the effects of the revision discussed in Note 1 to the combined financial statements, as to which the date is January 25, 2021

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Speedway Business of Marathon Petroleum Corporation

Combined Statements of Income

 

(a) The 2019 and 2018 periods reflect an election to present certain taxes on a net basis concurrent with our adoption of Accounting Standard Update (“ASU”) 2014-09, Revenue—Revenue from Contracts with Customers. See Note 3 for further information. Sales in 2019, 2018 and 2017 include excise taxes of $3,383, $2,829 and $2,893, respectively.

(b) Cost of sales includes related party purchases. See Note 6 for further information. Cost of sales excludes depreciation and amortization, which are reflected in a separate line item.

(c) Operating, general and administrative expenses exclude depreciation and amortization, which are reflected in a separate line item.

See accompanying notes to combined financial statements.

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Speedway Business of Marathon Petroleum Corporation

Combined Statements of Comprehensive Income

See accompanying notes to combined financial statements.

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Speedway Business of Marathon Petroleum Corporation

Combined Balance Sheets

 

(a) We adopted Accounting Standard Update (“ASU”) No. 2016-02, Leases as of January 1, 2019. See Note 3 for further information.

See accompanying notes to combined financial statements.

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Speedway Business of Marathon Petroleum Corporation

Combined Statements of Changes in Equity

 

See accompanying notes to combined financial statements.

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Speedway Business of Marathon Petroleum Corporation

Combined Statements of Cash Flows  

See accompanying notes to combined financial statements.

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NOTES TO COMBINED FINANCIAL STATEMENTS

NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Description of Business

The accompanying combined financial statements and notes present the combined statements of income, financial position, and cash flows of the Speedway business (“Speedway”, “the Company”, “we”, “us”, “our”) of Marathon Petroleum Corporation (“MPC” or “Parent”).

Speedway owns and operates a chain of convenience stores across the United States, with approximately 3,900 locations. Our convenience stores sell transportation fuels and a wide variety of food and merchandise for our “on-the-go” customers, including beverages, snacks, prepared and pre-packaged foods, health and beauty products, tobacco products and general convenience items. Speedway also owns a 29 percent interest in PFJ Southeast LLC (“PFJ Southeast”), a joint venture between Speedway and Pilot Travel Centers LLC (“PTC”) with 125 travel center locations primarily in the Southeast United States. Additionally, Speedway and PTC entered into a diesel fuel branding agreement effective October 1, 2019 in which PTC agreed to supply, price and sell diesel fuel at certain Speedway and PTC locations with both companies agreeing to share in the diesel fuel margins. At December 31, 2019, this agreement included approximately 330 Speedway and PTC fueling locations across 13 states, including approximately 180 Speedway commercial fueling locations.

On October 31, 2019, MPC announced its intention to separate its retail store operations (primarily operated under the Speedway brand), excluding MPC’s direct-dealer retail locations, from the remainder of its businesses.

Basis of Presentation

These combined financial statements have been derived from the Consolidated Financial Statements and accounting records of MPC. These combined financial statements reflect the combined historical results of operations, financial position and cash flows of the Company for the periods presented as historically managed within MPC in conformity with generally accepted accounting principles in the United States (“GAAP”). The combined financial statements may not be indicative of the Company’s future performance and do not necessarily reflect what the financial position, results of operations and cash flows would have been had it operated as an independent company during the periods presented.

These combined financial statements were issued on June 11, 2020 and we have since revised our 2019 and 2018 related party fuel purchases and cash settled related party fuel purchases disclosure balances presented in Note 6. The revisions reflect additional related party purchases and cash settled related party purchases that were identified by management. The revisions increased the related party purchases balances by $1.82 billion and $405 million and increased the cash settled related party purchases balances by $122 million and $30 million for the periods ending December 31, 2019 and 2018, respectively. We believe these adjustments are not material to any individual year presented.

Speedway has one reportable operating segment, which includes its consolidated convenience store operations as well as diesel branding agreement income. Speedway’s equity method investment in PFJ Southeast is a separate

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operating segment with results reported as equity investment income, described in further detail in Note 8. All intracompany transactions have been eliminated. All significant intercompany transactions between us and Parent have been included in these combined financial statements. Intercompany transactions between us and Parent are deemed to have settled immediately through Parent company investment, other than those transactions which have been historically settled in cash and which are reflected in the combined balance sheets as Accounts payable—related parties, Accrued interest—related party and Notes payable—related party. The net effect of deemed settled transactions is reflected in the combined statements of cash flows as a financing activity and in the combined balance sheets as Parent company investment. Refer to Note 6 for additional information.

Historically, MPC provided certain corporate functions to the Company and costs associated with these functions were allocated to the Company. These functions include, but are not limited to, executive management, legal, human resources, treasury, investor relations, finance, accounting, internal audit, information technology, and the related benefit costs associated with such functions, such as stock-based compensation. The costs of such services were allocated to the Company based on direct usage when identifiable, with the remainder allocated on a pro rata basis of income from operations, total assets and headcount of the Company and MPC. The charges for these functions are deemed settled in cash by Speedway to MPC in the period in which the costs were recorded within Operating, general and administrative expenses in the combined statements of income. The Company believes the bases on which the expenses have been allocated are a reasonable reflection of the utilization of services provided to, or the benefit received by, Speedway during the periods presented; however, they may not be indicative of the actual expense that would have been incurred had Speedway been operating as an independent company for the periods presented. Actual costs that may have been incurred if the Company had been a standalone company would depend on a number of factors, including the organizational structure, whether functions were outsourced or performed by employees, and strategic decisions made in areas such as information technology and infrastructure. Going forward, the Company may perform these functions using its own resources or outsourced services. For an interim period, however, some of these functions will continue to be provided between MPC and the Company under a transition services agreement following the separation.

Current and deferred income taxes have been determined based on the stand-alone results of Speedway. However, because the Company filed as part of MPC’s tax group in certain jurisdictions, the Company’s actual tax balances may differ from those reported.

MPC utilizes a centralized treasury management function for financing its operations, with cash from MPC’s operating companies, including Speedway, swept to shared MPC cash pooling accounts. The cash and cash equivalents held by MPC at the corporate level are not specifically identifiable to the Company and therefore have not been reflected in the Company’s combined balance sheets. Cash transfers between MPC and the Company are accounted for through Parent company investment. Cash and cash equivalents in the combined balance sheets represent cash and cash equivalents directly identifiable to the Company and its operations.

The combined financial statements include certain liabilities that have historically been held at the MPC corporate level but are specifically identifiable or otherwise attributable to the Company. MPC’s third-party long-term debt and the related interest expense have not been allocated to the Company for any of the periods presented as the Company was not the legal obligor of such debt and the MPC borrowings were not directly attributable to the Company.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

The preparation of financial statements in accordance with GAAP requires management 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 combined financial statements and the reported amounts of revenues and expenses during the respective reporting periods.

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Parent Company Investment

Parent company investment reflected in the combined balance sheets represents MPC’s historical investment in the Company, the accumulated net earnings after taxes and the net effect of the allocations to/from and transactions with MPC. Refer to Note 6 for additional information.

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand and cash on deposit. Cash equivalents consist of liquid instruments and investments with maturities of three months or less when purchased. The recorded amounts approximate fair value. The majority of cash on hand is cash held at Speedway store locations to which the Company does not have immediate access. Cash on deposit is generally transferred to our Parent on a daily basis.

Restricted Cash

Restricted cash consists of proceeds from an asset disposition that was designated a like-kind exchange under Section 1031 of the Internal Revenue Code, which requires the cash to be reinvested in a like kind asset within a specified period of time to avoid adverse tax consequences. As of December 31, 2018, $30 million of restricted cash was included in Other current assets. Restricted cash was immaterial as of December 31, 2019.

Receivables and Allowance for Doubtful Accounts

Our receivables primarily consist of amounts due from credit card companies and certain vendors. Receivables are recorded at the invoiced amounts and generally do not bear interest. Allowances for doubtful accounts are generally recorded when it becomes probable the credit receivable will not be collected and are booked to bad debt expense. The allowance for doubtful accounts is the best estimate of the amount of probable credit losses. We review past-due balances over 180 days individually for collectability. The allowance for doubtful accounts was immaterial for December 31, 2019 and December 31, 2018.

Inventories

Inventories are carried at the lower of cost or market value. Costs for transportation fuel inventories are determined using the last-in, first-out “LIFO” method. Costs for transportation fuel inventories are aggregated on a consolidated basis for purposes of assessing if the LIFO cost basis of these inventories may have to be written down to market value.

Costs for food service products (including coffee, fountain beverages, and prepared foods) are determined using the item cost method. This method involves counting each item in inventory, assigning costs to each item based on the actual purchase costs and recording the cost of items sold. Costs for all other merchandise (including packaged foods, tobacco products, automotive products, beer and wine, and other pre-packaged merchandise) are determined using the LIFO method.

The company evaluates inventory shortages and records reductions to its inventory balance throughout the year based on actual physical counts in its facilities. Refer to Note 7 for additional information.

Equity Method Investments

Investments in entities over which we have significant influence, but not control, are accounted for using the equity method of accounting. Income from equity method investments represents our proportionate share of net income generated by the equity method investees.

Differences in the basis of the investments and the separate net asset values of the investees, if any, are amortized into net income over the remaining useful lives of the underlying assets and liabilities, except for any excess

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related to goodwill. Equity method investments are evaluated for impairment whenever changes in the facts and circumstances indicate a loss in value has occurred. When the loss is deemed to be other than temporary, the carrying value of the equity method investment is written down to fair value.

Property, Plant and Equipment

Property, plant and equipment are recorded at cost or, in the case of assets acquired in a business combination, at fair value. Expenditures related to the implementation of software are capitalized and presented as part of property, plant and equipment. Depreciation expense is computed on a straight-line basis over the estimated useful lives of the assets. The range of useful lives used to depreciate property, plant and equipment is as follows:

 

When items of property, plant and equipment are sold or otherwise disposed of, any gains or losses are reported in net income. Gains on the disposal of property, plant and equipment are recognized when earned, which is generally at the time of closing. If a loss on disposal is expected, such losses are recognized when the assets are classified as held for sale. Refer to Note 9 for additional information.

Asset impairment and store closings

Property, plant and equipment are reviewed for potential impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable (for example, when a store generates negative adjusted cash flows). If the sum of the expected undiscounted future cash flows from the use of the asset group and its eventual disposition is less than the carrying amount of the asset group, an impairment assessment is performed and the excess of the book value over the fair value of the asset group is recorded as an impairment loss.

In determining whether an asset is impaired, assets are grouped at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets, which for the Company is generally on a store-by-store basis. The Company writes down property, plant and equipment of stores to be sold to an estimated net realizable value at the time management commits to a plan to close and begins active marketing of the stores. The Company bases the estimated net realizable value of property and equipment on its experience in utilizing and/or disposing of similar assets, on estimates provided by its own and/or third-party real estate experts, or a valid offer from a third party.

Goodwill and Intangible Assets

Goodwill represents the excess of the purchase price over the estimated fair value of the net assets acquired in the acquisition of a business. Goodwill is not amortized, but rather is tested for impairment annually and when events or changes in circumstances indicate that the fair value of a reporting unit with goodwill has been reduced below carrying value. The Company has a single reporting unit for purposes of goodwill impairment testing. The fair value of the reporting unit is determined using an income and/or market approach which is compared to the carrying value of the reporting unit. The fair value under the income approach is calculated using the expected present value of future cash flows method. Significant assumptions used in the cash flow forecasts include future net operating margins, future volumes, discount rates and future capital requirements. If the carrying amount of the reporting unit exceeds its fair value, an impairment loss would be recognized in an amount equal to that excess, limited to the total amount of goodwill. Refer to Note 10 for additional information.

Amortization of intangibles with definite lives is calculated using the straight-line method, which is reflective of the benefit pattern in which the estimated economic benefit is expected to be received over the estimated useful

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life of the intangible asset. Intangible assets such as brand rights, liquor licenses, and other intangible assets with finite useful lives are amortized on a straight-line basis over their estimated economic lives. The weighted-average useful lives approximate the following:

 

Intangibles subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the intangible may not be recoverable. If the sum of the expected undiscounted future cash flows related to the asset is less than the carrying amount of the asset, an impairment loss is recognized based on the fair value of the asset. Intangibles not subject to amortization are tested for impairment annually and when circumstances indicate that the fair value is less than the carrying amount of the intangible. If the fair value is less than the carrying value, an impairment is recorded for the difference. Refer to Note 11 for additional information.

Pensions and Other Postretirement Benefit Plans

We recognize the funded status of Speedway-sponsored defined benefit plans on the combined balance sheets. Actuarial gains or losses and prior service costs or credits that have not yet been recognized as part of net periodic benefit cost are recorded as a component of Accumulated Other Comprehensive Income (“AOCI”).

The calculation of the obligation and expense for pension plans and other postretirement benefits sponsored by the Company is dependent on assumptions selected by actuaries and the Company. Those assumptions are described in Note 14 and include, among others, the discount rate, the expected long-term rate of return on plan assets, mortality and the rates of increase in compensation and health care costs. Actual results that differ from the assumptions are accumulated and amortized over future periods and, therefore, generally affect the recognized expense and recorded obligation in future periods. While the Company believes that the assumptions are appropriate, significant differences in actual experience or significant changes in assumptions may materially affect the pension and other postretirement obligations and future expense.

Certain employees of the Company participate in defined benefit plans sponsored by MPC (“Shared Plans”), which include participants from other MPC businesses. We account for our participation in the Shared Plans as multiemployer plans in these combined financial statements. Therefore, no plan assets or liabilities related to the Shared Plans have been included in the combined balance sheets. Speedway’s portion of pension and other postretirement expenses related to the Shared Plans is included in Operating, general and administrative expenses in the combined statements of income.

Employees of the Company participate in various qualified and unqualified defined contribution pension and other postretirement benefit plans. Our required contributions to such plans are expensed when contributed for funded plans, or over the service period for unfunded plans. Our contributions due but not yet paid for unfunded plans are recorded as a liability in the combined balance sheets. Refer to Note 14 for additional information regarding the Company’s pension and other postretirement benefit plans.

Asset Retirement Obligations

The fair value of asset retirement obligations is recognized in the period in which the obligations are incurred if a reasonable estimate of fair value can be made. The majority of our recognized asset retirement liability relates to removal of underground storage tanks at our leased convenience stores. The fair values recorded for such obligations are based on the most probable current cost projections.

Asset retirement obligations have not been recognized for some assets because the fair value cannot be reasonably estimated since the settlement dates of the obligations are indeterminate. Such obligations will be

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recognized in the period when sufficient information becomes available to estimate a range of potential settlement dates. The asset retirement obligations principally include the hazardous material disposal and removal or dismantlement requirements associated with the closure of certain retail assets.

Our practice is to keep our assets in good operating condition through routine repair and maintenance of component parts in the ordinary course of business and by continuing to make improvements based on technological advances. As a result, we believe that generally these assets have no expected settlement date for purposes of estimating asset retirement obligations since the dates or ranges of dates upon which we would retire these assets cannot be reasonably estimated at this time.

Environmental Costs

Environmental expenditures for additional equipment that mitigates or prevents future contamination or improves environmental safety or efficiency of the existing assets are capitalized. We recognize remediation costs and penalties when the responsibility to remediate is probable and the amount of associated costs can be reasonably estimated. The timing of remediation accruals coincides with completion of a feasibility study or the commitment to a formal plan of action. Remediation liabilities are accrued based on estimates of known environmental exposure. If recoveries of remediation costs from third parties are probable, a receivable is recorded. Remediation accruals and receivables are not discounted.

Revenue Recognition

Revenue is recognized for retail sales of transportation fuels and merchandise at the time of the sale to the customer. Payments from customers are received at the time sales occur in cash or by credit or debit card. Speedway offers a loyalty rewards program to its customers. We defer a minor portion of revenue on sales to loyalty program participants until the participants redeem their rewards. We defer revenue associated with the sale of our prepaid gift cards until they are redeemed for transportation fuels or merchandise. Commissions on lottery tickets and sales of third-party prepaid gift cards are recorded on a net basis at the time of sale. As of January 1, 2018, we made an accounting policy election that all taxes assessed by a governmental authority that are both imposed on and concurrent with a revenue-producing transaction and collected from our customers will be recognized on a net basis within sales and other operating revenues.

Refer to Note 3 for additional information.

Cost of sales

Cost of sales includes all costs incurred to acquire transportation fuel and merchandise inventories, including the purchase price, freight-in, transportation costs to stores, purchasing costs and shrink. Cost of sales does not include credit card processing fees or labor costs, as these amounts are included in Operating, general and administrative expense. Cost of sales does not include any depreciation of property, plant and equipment, as these amounts are included in depreciation and amortization.

Merchandise vendor allowances and rebates

We receive payments for vendor allowances and volume rebates from various suppliers of convenience store merchandise. Purchase-based vendor allowances and rebates are recognized in inventory and subsequently cost of sales. Sales-based vendor allowances and rebates are recognized directly in cost of sales.

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Self-insurance

We are self-insured for workers’ compensation, general liability, and automobile claims. We record a self-insurance claim liability for workers’ compensation, determined actuarially at each year end based on claims filed and an estimate of claims incurred but not yet reported. The liability is discounted. Our self-insurance reserve totaled $29 million and $27 million as of December 31, 2019 and 2018, respectively.

Income Taxes

Income taxes as presented in the combined financial statements attribute current and deferred income taxes of MPC to the Company’s stand-alone financial statements in a manner that is systematic, rational and consistent with the asset and liability method prescribed by FASB ASC Topic 740: Income Taxes (“ASC 740”). Accordingly, Speedway’s income tax provision was prepared following the separate return method. The separate return method applies ASC 740 to the stand-alone financial statements of each member of the consolidated group as if the group members were a separate taxpayer and a stand-alone enterprise. The calculation of our income taxes on a separate return basis requires a considerable amount of judgment and use of both estimates and allocations. As a result, actual transactions included in the Consolidated Financial Statements of MPC may not be included in the separate combined financial statements of the Company. Similarly, the tax treatment of certain items reflected in the combined financial statements of the Company may not be reflected in the Consolidated Financial Statements and tax returns of MPC. Therefore, such items as net operating losses, credit carry-forwards and valuation allowances may exist in the stand-alone financial statements that may or may not exist in MPC’s Consolidated Financial Statements. As such, the income taxes of the Company as presented in the combined financial statements may not be indicative of the income taxes that the Company will report in the future.

Certain operations of the Company have historically been included in a combined return with other MPC entities. Current obligations for taxes in certain jurisdictions, where the Company files a combined tax return with MPC, are deemed settled with MPC for purposes of the combined financial statements. Current obligations for tax in jurisdictions where the Company does not file a combined return with MPC, including certain U.S. states, are recorded within Accrued taxes on the combined balance sheets.

In the ordinary course of business, there is inherent uncertainty in quantifying our income tax positions. We assess our income tax positions and record tax benefits for all years subject to examination based upon management’s evaluation of the facts, circumstances and information available at the reporting date. For those tax positions where it is more-likely-than-not that a tax benefit will be sustained, we have recorded the largest amount of tax benefit with a greater than 50 percent likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more-likely-than-not that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements. Where applicable, associated interest expense has also been recognized. We recognize accrued interest related to unrecognized tax benefits in interest expense. Penalties, if incurred, would be recognized as a component of income tax expense. Refer to Note 16 for additional information.

Business Combinations

We recognize and measure the assets acquired and liabilities assumed in a business combination based on their estimated fair values at the acquisition date. Any excess or surplus of the purchase consideration when compared to the fair value of the net assets acquired, if any, is recorded as goodwill or gain from a bargain purchase. For material acquisitions, management engages an independent valuation specialist to assist with the determination of fair value of the assets acquired, liabilities assumed noncontrolling interest, if any, and goodwill, based on recognized business valuation methodologies. An income, market or cost valuation method may be utilized to estimate the fair value of the assets acquired, liabilities assumed and noncontrolling interest, if any, in a business combination. The income valuation method represents the present value of future cash flows over the life of the asset using: (i) discrete financial forecasts, which rely on management’s estimates of revenue and operating,

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general and administrative expenses; (ii) long-term growth rates; and (iii) appropriate discount rates. The market valuation method uses prices paid for a reasonably similar asset by other purchasers in the market, with adjustments relating to any differences between the assets. The cost valuation method is based on the replacement cost of a comparable asset at prices at the time of the acquisition reduced for depreciation of the asset. If the initial accounting for the business combination is incomplete by the end of the reporting period in which the acquisition occurs, an estimate will be recorded. Subsequent to the acquisition date, and not later than one year from the acquisition date, we will record any material adjustments to the initial estimate based on new information obtained that would have existed as of the date of the acquisition. Any adjustment that arises from information obtained that did not exist as of the date of the acquisition will be recorded in the period of the adjustment. Acquisition-related costs are expensed as incurred in connection with each business combination.

Concentration Risk

MPC supplied substantially all of the motor fuel purchased by us for resale during all years presented. No customers are individually material to our operations.

NOTE 3. ACCOUNTING STANDARDS

Recently Adopted Accounting Standards

ASU 2016-02, Leases

We adopted ASU No. 2016-02, Leases (“ASC 842”), as of January 1, 2019, electing the transition method which permits entities to adopt the provisions of the standard using the modified retrospective approach without adjusting comparative periods. We also elected the package of practical expedients permitted under the transition guidance within ASC 842, which among other things, allowed us to grandfather the historical accounting conclusions until a reassessment event occurs. We have also elected the practical expedient to not recognize short-term leases on the balance sheet and the practical expedient to combine lease and non-lease components for the majority of our underlying classes of assets. In instances where the practical expedient was not elected, lease and non-lease consideration is allocated based on relative standalone selling price.

Right of use (“ROU”) assets represent our right to use an underlying asset for which we obtain substantially all of the economic benefits and the right to direct the use of the asset during the lease term. Lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. We recognize ROU assets and lease liabilities on the balance sheet for leases with a lease term of greater than one year. Payments that are not fixed at the commencement of the lease are considered variable and are excluded from the ROU asset and lease liability calculations. In the measurement of our ROU assets and lease liabilities, the fixed lease payments in the agreement are discounted using a secured incremental borrowing rate for a term similar to the duration of the lease, as our leases do not have readily determinable implicit rates. Operating lease expense is recognized on a straight-line basis over the lease term.

Adoption of the new standard resulted in the recording of ROU assets and lease liabilities of approximately $743 million and $746 million, respectively, as of January 1, 2019. The standard did not materially impact our combined statements of income, cash flows or equity as a result of adoption.

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

In connection with our annual goodwill impairment test, we adopted ASU 2017-04 prospectively during the fourth quarter of 2019. Under ASU 2017-04, the recognition of an impairment charge is calculated based on the amount by which the carrying amount exceeds the reporting unit’s fair value, which could be different from the amount calculated under the former method using the implied fair value of the goodwill; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The adoption did not have an impact on the combined financial statements.

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

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASC 606”), which created a comprehensive, five-step model for revenue recognition that requires a company to recognize revenue to depict the transfer of promised goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. Under ASC 606, companies are required to use more judgment and make more estimates when considering contract terms as well as relevant facts and circumstances when identifying performance obligations, estimating the amount of variable consideration in the transaction price and allocating the transaction price to each separate performance obligation. The Company adopted ASC 606 on January 1, 2018 using the modified retrospective approach. Concurrent with our adoption of ASC 606, we made an accounting policy election that all taxes assessed by a governmental authority that are both imposed on and concurrent with a revenue-producing transaction and collected from our customers will be recognized on a net basis within Sales.

Impact of Adoption

The adoption of ASC 606 did not materially change our revenue recognition patterns. The most significant impact of adopting ASC 606 for the year ended December 31, 2018 was a reduction of sales and other operating revenues of $890 million due to our accounting policy election to present taxes incurred concurrently with revenue producing transactions and collected on behalf of our customers on a net basis.

Practical Expedients

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

ASU 2016-18, Statement of Cash Flows—Restricted Cash

In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash,” an update that requires restricted cash and restricted cash equivalents in the statement of cash flows to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period amounts shown on the statements of cash flow. The Company adopted this standard on January 1, 2018 which resulted in an impact to the combined financial statements of $30 million.

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We also adopted the following ASUs during 2019 and 2018, none of which had a material impact to our financial statements or financial statement disclosures:

 

Accounting Standards Not Yet Adopted

ASU 2019-12, Income Taxes (Topic 740)—Simplifying the Accounting for Income Taxes

In December 2019, the FASB issued new guidance to simplify the accounting for income taxes. Amendments include removal of certain exceptions to the general principles of ASC 740 and simplification in several other areas such as accounting for a franchise tax or similar tax that is partially based on income. The change is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted in any interim or annual period, with any adjustments reflected as of the beginning of the fiscal year of adoption. We do not expect the application of this ASU to have a material impact on our combined financial statements.

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

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

NOTE 4. ACQUISITIONS

Acquisition of Andeavor

On October 1, 2018, MPC acquired Andeavor. Andeavor was an integrated oil and gas refining, logistics and marketing company. The subset of Andeavor’s operations consisting primarily of company-owned and operated convenience stores (“Andeavor Retail”) was integrated into Speedway, with the remainder integrated into other operations of MPC. The Company’s financial results reflect the results of Andeavor Retail from October 1, 2018,

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the date of the acquisition. Of the purchase consideration transferred by MPC, $4.19 billion was attributable to Andeavor Retail.

We accounted for the Andeavor Retail acquisition using the acquisition method of accounting, which requires Andeavor Retail assets and liabilities to be recorded on our balance sheet at fair value as of the acquisition date. The size and the breadth of the Andeavor Retail acquisition necessitated the use of the one-year measurement period provided under ASC 805 to fully analyze all the factors used in establishing the asset and liability fair values as of the acquisition date. We completed a final determination of the fair value of certain assets and liabilities during the three months ended September 30, 2019 and recorded final adjustments to our preliminary purchase price allocation. These adjustments reflect the completion of valuation studies of the acquired property, plant and equipment in order to finalize assumptions used in their cost approach valuation methodology and finalization of specific valuation assumptions and data inputs for other individual asset valuation models. The fair value estimates of assets acquired and liabilities assumed as of the acquisition date which are attributable to Andeavor Retail are noted in the table below.

(a) Includes intangible assets.

Details of our valuation methodology and significant inputs for fair value measurements are included by asset class below. The fair value measurements for property, plant and equipment, intangible assets and long-term debt are based on significant inputs that are not observable in the market and, therefore, represent Level 3 measurements.

Goodwill

Speedway recognized $3.44 billion of goodwill related to Andeavor Retail, of which $48 million is tax deductible due to carryover tax basis from Andeavor. The recognized goodwill represents the value expected to be created by a nationwide retail platform and optimization of information systems and business processes.

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Inventory

The fair value of inventory was determined by recognizing transportation fuels and merchandise inventory at market prices less selling costs and profit margin associated with the remaining sales process.

Property, Plant and Equipment

The fair value of property, plant and equipment was based primarily on the cost approach. Key assumptions in the cost approach included determining the replacement cost by evaluating recent purchases of similar assets or published data, and adjusting replacement cost for economic and functional obsolescence, location, normal useful lives, and capacity (if applicable).

Acquired Intangible Assets

The fair value of the acquired identifiable intangible assets is $157 million, which represents the value of brand rights, tradenames, liquor licenses and other intangible assets. Brand rights and tradenames were valued by applying the relief of royalty method, which is an income approach. The intangible assets are all definite lived and will be amortized over 2 to 10 years.

Acquisition Costs

Speedway’s allocated portion of acquisition costs was $7 million. Additionally, we recognized various other transaction-related costs, including employee-related costs associated with the Andeavor acquisition. All of these costs are reflected in Operating, general and administrative expenses in the combined statements of income. The employee-related costs are primarily due to pre-existing Andeavor change-in-control and equity award agreements that create obligations and accelerated equity vesting upon the Company notifying employees of significant changes to or elimination of their responsibilities.

Andeavor Revenues and Income from Operations

Andeavor Retail’s results have been included in Speedway’s combined financial statements for the period subsequent to the date of the acquisition on October 1, 2018. Andeavor Retail contributed revenues of approximately $1.74 billion for the period from October 1 through December 31, 2018. We do not believe it is practical to disclose Andeavor Retail’s contribution to earnings for the period from October 1, 2018 through December 31, 2018 as our integration efforts have resulted in the elimination of Andeavor Retail stand-alone discrete financial information due mainly to our inclusion of Andeavor Retail inventory in our LIFO inventory pools, which does not allow us to objectively distinguish the cost of sales between the two historical reporting entities.

Pro Forma Financial Information

Supplemental pro forma financial information has not been included to give effect to the Andeavor Retail acquisition as of January 1, 2017, as it is impracticable to obtain such information without undue cost and effort due to the lack of availability of historical U.S. GAAP financial data for Andeavor Retail on a standalone basis.

Acquisition of Express Mart

During the fourth quarter of 2018, Speedway acquired 78 transportation fuel and convenience store locations from Petr-All Petroleum Consulting Corporation for total consideration of $266 million. These stores are located primarily in the Syracuse, Rochester and Buffalo markets in New York and operated under the Express Mart brand.

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Based on the final fair value estimates of assets acquired and liabilities assumed at the acquisition date, $97 million of the purchase price was allocated to property, plant and equipment, $9 million to inventory, $2 million to intangibles, $158 million to goodwill, $1 million to other current assets, and $1 million to other current liabilities. Goodwill is tax deductible and represents the value expected to be created by geographically expanding our retail platform and the assembled workforce.

The Company determined the Express Mart results of operations are not material. Therefore the pro forma information is not required. Additionally, transaction costs incurred were not considered significant.

Acquisition of NOCO Express

During the third quarter of 2019, MPC acquired an asphalt terminal and 33 NOCO Express retail stores in Buffalo, Syracuse and Rochester, New York, from NOCO Incorporated for total consideration of $135 million. The 33 NOCO Express retail stores (“NOCO Retail”) were integrated into Speedway and are reflected in the Company’s financial results from July 2019, with close occurring over a two-week period from July 15 to July 25. Based on the final fair value estimates of assets acquired and liabilities assumed at the acquisition date, $27 million of the purchase price was allocated to property, plant and equipment, $3 million to inventory and $56 million to goodwill attributable to NOCO Retail. Goodwill is tax deductible and represents the value expected to be created by geographically expanding our retail platform and the assembled workforce.

The Company determined the NOCO Retail results of operations are not material. Therefore the pro forma information is not required. Additionally, transaction costs incurred were not considered significant.

NOTE 5. REVENUE

Disaggregated Revenue

Net revenues by major product line for the years ended December 31, 2019, 2018 and 2017 were as follows:

 

(a) Includes related party fuel transportation income of $14 million, $10 million and $9 million for the years ended December 31, 2019, 2018 and 2017, respectively.

(b) Includes rental income of $19 million, $24 million and $23 million for the years ended December 31, 2019, 2018 and 2017, respectively.

Contract Balances

Performance obligations are generally satisfied at the time goods are sold to customers with cash collected at the time of sale or shortly thereafter for payments by credit card. Contract liabilities are recognized for sales of prepaid cards and in connection with Speedway’s loyalty programs, with the related performance obligations satisfied at the time prepaid cards or loyalty points are redeemed and goods are transferred to the customer. The closing balances of contract liabilities arising from the prepaid card and loyalty programs as of December 31, 2019 and 2018 were as follows:

 

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The beginning balance of contract liabilities after adoption of ASC 606 as of January 1, 2018 was $85 million. There were no significant changes in the contract liability balance during the years ended December 31, 2019 and 2018. Revenue recognized that was included in the opening contract liabilities balance for the years ended December 31, 2019 and 2018 was $86 and $74, respectively. Contract assets are not material to the combined financial statements.

We do not disclose information on the future performance obligations for any contract with expected duration of one year or less at inception. As of December 31, 2019, we do not have future performance obligations that are material to future periods.

NOTE 6. RELATED PARTY TRANSACTIONS AND PARENT COMPANY INVESTMENT

These combined financial statements have been derived from the Consolidated Financial Statements and accounting records of MPC. The following discussion summarizes activity between the Company and MPC (and its affiliates that are not part of the planned separation).

Related Party Transactions with MPC:

Allocation of General Corporate Expenses

The combined statements of income include expenses for certain centralized functions and other programs provided and administered by MPC, as described in Note 1. The costs of these services allocated to the Company, which are included with operating, general and administrative expenses in the combined statements of income for the years ended December 31, 2019, 2018 and 2017, were $86 million, $61 million and $54 million, respectively.

Related Party Accounts Payable

Certain intercompany transactions between Speedway and MPC related to cash pooling and general financing activities have been included within Parent company investment in the combined balance sheets in the historical periods presented when the intercompany transactions are not historically settled in cash.

Certain purchases of fuel inventory from MPC and its affiliate businesses have historically been settled in cash and, therefore, are reflected in the combined balance sheets as Accounts payable – related parties and amounted to $35 million and $19 million as of December 31, 2019 and 2018, respectively. Other fuel purchases not historically settled in cash are included within Parent company investment in the combined balance sheets.

Related Party Purchases and Sales

Speedway purchases fuel inventory from other MPC businesses. The Company purchased $17.22 billion, $14.24 billion and $11.44 billion of fuel inventory from MPC during the years ended December 31, 2019, 2018 and 2017, respectively. Of these purchases, $681 million, $166 million, and $0 million were cash settled during the years ended December 31, 2019, 2018 and 2017, respectively. Speedway’s purchases of fuel inventory that were not historically settled in cash are presented as net transfers (to) from Parent in the combined statements of cash flows. Speedway also sells a small amount of fuel and fuel hauling services to other MPC businesses. Speedway sales to MPC amounted to $17 million, $9 million and $7 million during the years ended December 31, 2019, 2018 and 2017, respectively.

Related Party Debt and Interest

In 2014, the Company entered into an intercompany loan agreement with a subsidiary of MPC for an aggregate amount of $2.25 billion consisting of (i) a $500 million Term Loan due September 30, 2019 with an interest rate of one-month USD LIBOR plus 2.25{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}, (ii) an $875 million 5.25{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} Senior Note due September 15, 2022 and (iii) an $875 million 5.5{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} Senior Note due September 15, 2024.

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Accrued interest expense associated with these related party loans for the years ended December 31, 2019 and 2018 was $28 million and $28 million, respectively, and is reflected within Accrued interest—related party.

Interest expense associated with these related party loans for the years ended December 31, 2019, 2018 and 2017 was $111 million, $116 million and $112 million, respectively, and is reflected within Interest expense, net—related party in the combined statements of income.

Parent Company Investment

The net transfers (to) from Parent are included within Parent company investment on the combined statements of changes in equity. The components of the net transfers (to) from Parent during the years ended December 31, 2019, 2018 and 2017 were as follows:

 

Transactions with Other Related Parties:

Diesel Branding Agreement

Speedway and PTC entered into a diesel fuel branding agreement effective October 1, 2019 in which PTC agreed to supply, price and sell diesel fuel at certain Speedway and PTC locations. At December 31, 2019, this agreement included approximately 330 Speedway and PTC fueling locations across 13 states, including approximately 180 Speedway commercial fueling locations. Under the terms of the agreement, both companies agreed to share the diesel fuel margins captured as a result of the sourcing efficiencies and logistical economies of scale. Diesel branding agreement income was $28 million for the year ended December 31, 2019. We account for this agreement as a collaborative arrangement in scope of ASC 808, Collaborative Arrangements. Under ASC 808, we account for the income earned under this agreement as operating income reflected in the combined statements of income as Diesel branding agreement income.

PFJ Southeast

Speedway sells fuel-hauling services to PFJ Southeast. Related party revenue for fuel-hauling services sold to PFJ Southeast for the years ended December 31, 2019, 2018 and 2017 was $9 million, $8 million and $8 million, respectively.

NOTE 7. INVENTORIES

 

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The LIFO method accounted for 95 percent and 94 percent of total inventory value at December 31, 2019 and 2018, respectively. Current acquisition costs of inventories were estimated to exceed the LIFO inventory value at December 31, 2019 and December 31, 2018 by $84 million and $67 million, respectively. There were no material liquidations of LIFO inventories in 2019, 2018 and 2017.

NOTE 8. EQUITY METHOD INVESTMENTS

Investments in Equity Method Affiliates

 

Summarized financial information for equity method investments was as follows:

 

(1) Speedway’s proportionate share of PFJ Southeast’s net income differs from the amount recognized as equity investment income from the joint venture due to basis difference amortization, as noted in Note 2.

Dividends and partnership distributions received from equity method investees (excluding distributions that represented a return of capital previously contributed) were $94 million, $61 million and $40 million in 2019, 2018 and 2017, respectively.

NOTE 9. PROPERTY, PLANT AND EQUIPMENT

At December 31, the major classes of property, plant and equipment were as follows:

 

Property, plant and equipment includes gross assets acquired under finance leases of $66 million and $35 million at December 31, 2019 and 2018, respectively, with related amounts in accumulated depreciation of $12 million and $5 million at December 31, 2019 and 2018.

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

 

Total impairment charges of $22 million, $1 million and $1 million for the years ended December 31, 2019, 2018 and 2017, respectively, are included in Depreciation and amortization in the combined statements of income. Impairment charges in 2019 related primarily to stores held for sale, which were written down to estimated net realizable value at the time management committed to a plan to close the stores and began active marketing of the stores.

NOTE 10. GOODWILL

The changes in the carrying amount of Goodwill are as follows:

 

The Company performs its annual goodwill impairment test during the fourth quarter of each year, or on an interim basis upon the occurrence of a triggering event or a change in circumstances that would more likely than not reduce the fair value of a reporting unit below its carrying value. The annual evaluation of goodwill was performed and did not result in impairment.

NOTE 11. INTANGIBLE ASSETS

Our definite-lived intangible assets as of December 31, 2019 and 2018 were as follows:

 

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Amortization expense for 2019, 2018 and 2017 was $15 million, $6 million and $1 million, respectively. Estimated future amortization expense related to the intangible assets at December 31, 2019 is as follows:

 

At December 31, 2019 and 2018, we had indefinite-lived intangible assets of $47 million and $47 million, respectively, which are primarily tradenames and indefinite-lived liquor licenses. The annual evaluation of intangibles was performed and did not result in impairment.

NOTE 12. OTHER CURRENT LIABILITIES

At December 31, other current liabilities were comprised of the following:

 

NOTE 13. FAIR VALUE MEASUREMENTS

ASC 820, “Fair Value Measurement,” (ASC 820) defines fair value as 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. ASC 820 also establishes a three-level fair value hierarchy that prioritizes information used in developing assumptions when pricing an asset or liability as follows:

ASC 820 requires the use of observable market data, when available, in making fair value measurements. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.

We believe the carrying value of our other financial instruments, including cash and cash equivalents, receivables, accounts payable and certain accrued liabilities approximate fair value. Our fair value assessment incorporates a variety of considerations, including the short-term duration of the instruments and the expected insignificance of bad debt expense, which includes an evaluation of counterparty credit risk. We believe the carrying value of our long-term debt—related party approximates fair value, as the notes were determined to have interest rates that are close to “at-market.”

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NOTE 14. PENSIONS AND OTHER POSTRETIREMENT BENEFITS

We have a noncontributory defined benefit pension plan covering substantially all employees. Benefits under this plan have been based primarily on age, years of service and final average pensionable earnings. The years of service component of this formula was frozen as of December 31, 2009. Benefits for service beginning January 1, 2010 are based on a cash balance formula with an annual percentage of eligible pay credited based upon age and years of service.

We have defined contribution plans under which eligible employees accrue benefits for service years beginning January 1, 2010.

We also have other postretirement benefits covering most employees, including health care benefits. Health care benefits are provided through comprehensive hospital, surgical and major medical benefit provisions subject to various cost-sharing features. Other postretirement benefits are not funded in advance.

In connection with the Andeavor Retail acquisition, we assumed a number of additional qualified and nonqualified noncontributory benefit pension plans, covering substantially all former Andeavor employees. Benefits under these plans are determined based on final average compensation and years of service through December 31, 2010 and a cash balance formula for service beginning January 1, 2011. These plans were frozen as of December 31, 2018. Further, as of December 31, 2019, the qualified plans were merged with our existing qualified plans in which the actuarial assumptions were materially the same between the plans. We also assumed a number of additional postretirement benefits covering eligible employees. These benefits were merged with our existing benefits beginning January 1, 2019.

The Speedway-dedicated defined benefit plan is summarized in the tables below.

Obligations and Funded Status

The accumulated benefit obligation for our defined benefit pension plan was $233 million and $194 million as of December 31, 2019 and 2018, respectively.

The following summarizes our defined benefit pension plan that has accumulated benefit obligations in excess of plan assets.

 

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The following summarizes the projected benefit obligations and funded status for our defined benefit pension and other postretirement plans:

 

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Components of Net Periodic Benefit Cost and Other Comprehensive Loss

The following summarizes the net periodic benefit costs and the amounts recognized as other comprehensive loss for our defined benefit pension and other postretirement plans.

 

(a) Net periodic benefit cost reflects a calculated market-related value of plan assets which recognizes changes in fair value over three years.

Pension settlement losses were immaterial in 2019, 2018 and 2017.

The estimated net actuarial loss that will be amortized from accumulated other comprehensive loss into net periodic benefit cost in 2020 for our defined benefit pension plans and other defined benefit postretirement plans is immaterial.

Plan Assumptions

The following summarizes the assumptions used to determine the benefit obligations at December 31, and net periodic benefit cost for the defined benefit pension and other postretirement plans for 2019, 2018 and 2017.

 

Expected Long-term Return on Plan Assets

The overall expected long-term return on plan assets assumption is determined based on an asset rate-of-return modeling tool developed by a third-party investment group. The tool utilizes underlying assumptions based on

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actual returns by asset category and inflation and takes into account our asset allocation to derive an expected long-term rate of return on those assets. Capital market assumptions reflect the long-term capital market outlook. The assumptions for equity and fixed income investments are developed using a building-block approach, reflecting observable inflation information and interest rate information available in the fixed income markets. Long-term assumptions for other asset categories are based on historical results, current market characteristics and the professional judgment of our internal and external investment teams.

Assumed Health Care Cost Trend

The following summarizes the assumed health care cost trend rates.

 

Increases in the post-65 medical plan premium for the Marathon Petroleum Health Plan and the Marathon Petroleum Retiree Health Plan are the lower of the trend rate or four percent.

Assumed health care cost trend rates effect the amounts reported for defined benefit retiree health care plans. A one percentage point change in assumed health care cost trend rates would have the following effects:

 

Plan Investment Policies and Strategies

The investment policies for our pension plan assets reflect the funded status of the plan and expectations regarding our future ability to make further contributions. Long-term investment goals are to: (1) manage the assets in accordance with the legal requirements of all applicable laws; (2) diversify plan investments across asset classes to achieve an optimal balance between risk and return and between income and growth of assets through capital appreciation; and (3) source benefit payments primarily through existing plan assets and anticipated future returns.

The investment goals are implemented to manage the plan’s funded status volatility and minimize future cash contributions. The asset allocation strategy will change over time in response to changes primarily in funded status, which is dictated by current and anticipated market conditions, the independent actions of our investment committee, required cash flows to and from the plans and other factors deemed appropriate. Such changes in asset allocation are intended to allocate additional assets to the fixed income asset class should the funded status improve. The fixed income asset class shall be invested in such a manner that its interest rate sensitivity correlates highly with that of the plan’s liabilities. Other asset classes are intended to provide additional return with associated higher levels of risk. Investment performance and risk is measured and monitored on an ongoing basis through quarterly investment meetings and periodic asset and liability studies. At December 31, 2019, the plan’s targeted asset allocation was 14 percent return-seeking assets and 86 percent fixed income securities.

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Fair Value Measurements

Plan assets are measured at fair value. The following provides a description of the valuation techniques employed for each major plan asset category at December 31, 2019 and 2018.

Cash and cash equivalents—Cash and cash equivalents include a collective fund serving as the investment vehicle for the cash reserves and cash held by third-party investment managers. The collective fund is valued at net asset value (“NAV”) on a scheduled basis using a cost approach and is considered a Level 2 asset. Cash and cash equivalents held by third-party investment managers are valued using a cost approach and are considered Level 2.

Equity—Equity investments includes common stock, mutual and pooled funds. Common stock investments are valued using a market approach, which are priced daily in active markets and are considered Level 1. Mutual and pooled equity funds are well diversified portfolios, representing a mix of strategies in domestic, international and emerging market strategies. Mutual funds are publicly registered, valued at NAV on a daily basis using a market approach and are considered Level 1 assets. Pooled funds are valued at NAV using a market approach and are considered Level 2.

Fixed Income—Fixed income investments include corporate bonds, U.S. dollar treasury bonds and municipal bonds. These securities are priced on observable inputs using a combination of market, income and cost approaches. These securities are considered Level 2 assets. Fixed income also includes a well-diversified bond portfolio structured as a pooled fund. This fund is valued at NAV on a daily basis using a market approach and is considered Level 2. Other investments classified as Level 1 include mutual funds that are publicly registered, valued at NAV on a daily basis using a market approach.

Alternative investments—Alternative investments include private equity and real estate investments. Private equity investments include interests in limited partnerships which are valued using information provided by external managers for each individual investment held in the fund. Real estate investments consist of interests in limited partnerships which are either appraised or valued using the investment manager’s assessment of assets held. Alternative investments also include two limited liability companies (“LLCs”) with no public market. The LLCs were formed to acquire timberland in the northwest United States. These holdings are either appraised or valued using the investment manager’s assessment of assets held. These holdings are all considered Level 3. Alternative investments classified as Level 1 include publicly traded depository receipts.

The following tables present the fair values of our defined benefit pension plans’ assets, by level within the fair value hierarchy, as of December 31, 2019 and 2018.

 

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

 

Cash Flows

Contributions to defined benefit plans—Our funding policy with respect to the funded pension plans is to contribute amounts necessary to satisfy minimum pension funding requirements, including requirements of the Pension Protection Act of 2006, plus such additional, discretionary, amounts from time to time as determined appropriate by management. In 2019, we made contributions totaling $5 million to our funded pension plans. For 2020, we have an immaterial amount of required funding, but we may also make voluntary contributions to our funded pension plans at our discretion. Cash contributions to be paid from our general assets for the unfunded pension and postretirement plans are estimated to be approximately $3 million and $1 million, respectively, in 2020.

Estimated future benefit payments—The following gross benefit payments, which reflect expected future service, as appropriate, are expected to be paid in the years indicated.

 

Contributions to defined contribution plans—We also contribute to several defined contribution plans for eligible employees. Contributions to these plans totaled $36 million, $26 million and $24 million in 2019, 2018 and 2017, respectively.

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Shared Plans

Shared Plans have been accounted for as multiemployer plans in these combined statements of income. Amounts recorded in the combined financial statements for multiemployer pension and other postretirement expenses for the years ended December 31, 2019, 2018 and 2017 were $2 million, $2 million and $1 million, respectively.

NOTE 15. SHARE-BASED COMPENSATION

Speedway currently does not have any stock or stock-based compensation plans. Instead, the Company’s eligible employees participate in MPC’s stock-based compensation plans.

The following disclosures of stock-based compensation expense recognized by the Company are based on the awards and terms previously granted to the Company’s employees under MPC’s stock-based compensation plans, as well as an allocation of Parent’s corporate and shared functional employee expenses. Accordingly, the amounts presented are not necessarily indicative of future awards and do not necessarily reflect the results that the Company would have experienced as an independent company for the periods presented.

MPC accounts for stock-based compensation in accordance with ASC 718, “Compensation—Stock Compensation” (ASC 718), which requires a fair-value based method for measuring the value of stock-based compensation. Fair value is measured once at the date of grant and is not adjusted for subsequent changes. MPC’s share-based compensation plans include awards of stock options, restricted stock, restricted stock units (RSUs) and performance units (which are settled partially in cash and partially in shares of MPC common stock). Total stock-based compensation expense for Speedway employees was $8 million, $7 million and $5 million during the years ended December 31, 2019, 2018 and 2017, respectively.

NOTE 16. INCOME TAXES

Speedway has historically been included in the consolidated federal and state income tax returns of MPC. Amounts presented in these combined financial statements related to income taxes are determined on a separate return basis. All current income tax liabilities are assumed to be immediately settled with Parent and are relieved through the Parent Company Investment account. The net effect of the settlement of these transactions is reflected in Net Transfers (to) from Parent as a financing activity in the combined statements of cash flows. Therefore, no current income taxes payable are presented in Speedway’s financial statements, as separate state filings are not material.

Income tax provisions (benefits) were:

 

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A reconciliation of the federal statutory income rate applied to income before income taxes to the provision for income taxes follows:

 

The Tax Cuts and Job Act (“TCJA”) was signed into law on December 22, 2017, providing several significant changes to U.S. tax law, including a reduction in the corporate tax rate from 35 percent to 21 percent effective in 2018. Because of the rate change, Speedway was required to calculate the effect of the TCJA on its deferred tax balances as of the enactment date, which was to reduce the net deferred tax liability by $174 million in 2017. This was a significant driver for the rate reconciliation in 2017. The other significant rate reconciling items are related to state income taxes, which were 4 percent, 7 percent and 4 percent, net of federal benefit, for the years ended December 31, 2019, 2018 and 2017, respectively. The primary increase in state income taxes is attributable to the 2018 Andeavor acquisition, which resulted in a change in the Company’s overall state footprint.

Deferred tax assets and liabilities resulted from the following:

 

The Company considered the likelihood that the deferred tax assets presented herein would be realized under a more-likely-than-not standard and whether or not a valuation allowance was appropriate to accurately reflect the amounts presented. Given the nature of the deferred tax assets, the Company’s profitability and tax paying position, there is no material reason to anticipate that any deferred tax assets would not be realized in a reasonable amount of time, therefore, the Company determined that a valuation allowance is not necessary. The Company also has no significant loss carryforwards that could contribute to such a determination.

Total deferred tax liabilities of $519 million and $461 million were included in the noncurrent liabilities section of the combined balance sheets as of December 31, 2019 and December 31, 2018, respectively.

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Speedway historically was included in MPC’s income tax returns, which are continuously undergoing examination by the Internal Revenue Service (“IRS”). Since 2012, MPC participated in the Compliance Assurance Process (“CAP”). MPC’s IRS audits are complete through the 2010 tax year. As of December 31, 2019, our income tax returns remain subject to examination in the following major tax jurisdictions for the tax years indicated:

 

As of December 31, 2019, 2018 and 2017, Speedway has not recorded any unrecognized tax benefits. The Company does not believe that its historical operations gave rise to any material tax exposures. The Company did not identify issues that did not meet the recognition threshold or would be impacted by the measurement provisions of the uncertain tax position guidance. Accordingly, there are no associated interest and penalties.

NOTE 17. COMMITMENTS AND CONTINGENCIES

The Company is involved in various litigations, claims and administrative proceedings, including those related to environmental and asset retirement matters. In accordance with ASC 450, “Contingencies” (ASC 450), the Company records accruals for loss contingencies when it is both probable that a liability will be incurred and the amount of the loss can be reasonably estimated. Amounts recorded for identified contingent liabilities are estimates, which are reviewed periodically and adjusted to reflect additional information when it becomes available. Subject to the uncertainties inherent in estimating future costs for contingent liabilities, except as expressly set forth in this note, management believes that any liability which may result from these legal matters would not have a material adverse effect on the financial condition, results of operations, liquidity or cash flows of the Company.

Environmental Matters

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

At December 31, 2019 and 2018, accrued liabilities for remediation totaled $37 million and $40 million, respectively. It is not presently possible to estimate the ultimate amount of all remediation costs that might be incurred or the penalties if any that may be imposed. Receivables for recoverable costs from certain states, under programs to assist companies in clean-up efforts related to underground storage tanks at presently or formerly owned or operated retail marketing sites, were $20 million and $23 million at December 31, 2019 and 2018, respectively.

Governmental and other entities in various states have filed lawsuits against coal, gas, oil and petroleum companies, including the Company. The lawsuits allege damages as a result of climate change and the plaintiffs are seeking unspecified damages and abatement under various tort theories. Similar lawsuits may be filed in other jurisdictions. At this early stage, the ultimate outcome of these matters remains uncertain, and neither the likelihood of an unfavorable outcome nor the ultimate liability, if any, can be determined.

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

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Asset Retirement Obligations

Our short-term asset retirement obligations were $4 million and $2 million at December 31, 2019 and 2018, respectively, which are included in other current liabilities in our combined balance sheets. Our long-term asset retirement obligations were $22 million and $23 million at December 31, 2019 and 2018, respectively, which are included in Other long-term liabilities in our combined balance sheets.

Legal Matters

In May 2007, the Kentucky attorney general filed a lawsuit against MPC and Marathon Oil in state court in Franklin County, Kentucky for alleged violations of Kentucky’s emergency pricing and consumer protection laws following Hurricanes Katrina and Rita in 2005. The lawsuit alleged that MPC overcharged customers by $89 million during September and October 2005. The complaint sought disgorgement of these sums, as well as penalties, under Kentucky’s emergency pricing and consumer protection laws. In May 2011, the Kentucky attorney general amended his complaint to include a request for immediate injunctive relief as well as unspecified damages and penalties related to MPC’s wholesale gasoline pricing in April and May 2011 under statewide price controls that were activated by the Kentucky governor on April 26, 2011, and which have since expired. A settlement agreement was reached on July 25, 2019 in which MPC agreed to pay $22 million. Speedway was allocated $11 million which was included in Operating, general and administrative expenses in the combined financial statements.

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

Insurance

We are self-insured for workers’ compensation, general liability, and automobile claims. Actual claim settlements and expenses incident thereto may differ from the provisions for loss.

Other guarantees – We have entered into other guarantees with maximum potential undiscounted payments totaling $10 million as of December 31, 2019, which consist primarily of a commitment to contribute cash to an equity method investee for certain catastrophic events in lieu of procuring insurance coverage and leases of assets containing general lease indemnities and guaranteed residual values.

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

Contractual Commitments and Contingencies

Our contractual commitments to acquire property, plant and equipment totaled $13 million at December 31, 2019. There were no such commitments at December 31, 2018.

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NOTE 18. LEASES

We lease a portion of our properties under non-cancelable operating and finance leases. The lease term included in the measurement of right of use assets and lease liabilities includes options to extend or terminate our leases that we are reasonably certain to exercise. Operating lease expenses are recognized straight-line over the lease term and presented in Operating, general and administrative expenses. Finance lease expenses are front-loaded and consist of interest expense on the lease liability and amortization of the right-of-use asset, which is presented as part of Property, plant and equipment. Right-of-use assets and lease liabilities are recognized for all leases except those with lease terms less than 12 months after our adoption of ASC 842 as of January 1, 2019.

For further information regarding the adoption of ASC 842, including the method of adoption and practical expedients elected, see Note 3.

Lessee

As a lessee, we have a wide variety of lease agreements covering many of our properties. Our remaining lease terms range from less than one year to 33 years. Most long-term leases include renewal options ranging from less than one year to 50 years and, in certain leases, also include purchase options. Options were included in the lease term primarily for retail store sites where we constructed property, plant and equipment on leased land that is expected to exist beyond the initial lease term.

Under ASC 842, the components of lease cost were as follows:

 

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Supplemental balance sheet data related to leases were as follows:

 

Assets and liabilities recognized for favorable and unfavorable leases acquired in business combinations are accounted for as part of right of use assets after adoption of ASC 842 (i.e., beginning January 1, 2019). Prior to adoption of ASC 842, such assets and liabilities were recognized separately in Other noncurrent assets and Other noncurrent liabilities, respectively. Speedway has historically operated as part of MPC and currently uses MPC’s weighted average discount rate. This rate may differ when Speedway separates from MPC.

As of December 31, 2019, maturities of lease liabilities for operating lease obligations and finance lease obligations having initial or remaining non-cancellable lease terms in excess of one year are as follows:

 

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Presented in accordance with ASC 840, future minimum commitments as of December 31, 2018 for operating lease obligations and capital lease obligations having initial or remaining non-cancellable lease terms in excess of one year were as follows:

 

There were no new capital leases entered into during periods ended 2018 and 2017 (except those acquired through business combination).

Supplemental cash flow disclosures for leases, including the adoption of ASC 842 were as follows:

 

NOTE 19. SUBSEQUENT EVENTS

The Company has evaluated subsequent events after the balance sheet date of December 31, 2019 through June 11, 2020, the date the combined financial statements were available to be issued. During this period, there were no subsequent events that required disclosure.

NOTE 20. SUBSEQUENT EVENTS (UNAUDITED)

In connection with the reissuance of the combined financial statements, the Company has evaluated subsequent events through January 25, 2021, the date the combined financial statements were available to be issued. During this period, the following subsequent events occurred:

•On August 2, 2020, MPC entered into an agreement to sell Speedway to 7-Eleven, Inc. for $21 billion in cash, subject to certain adjustments based on the levels of cash, debt (as defined in the agreement) and working capital at closing and certain other items. This transaction is targeted to be completed by the first quarter of 2021, subject to market, regulatory and certain other customary conditions.

•During the fourth quarter of 2020, Pilot Travel Centers LLC exercised an option to purchase our 29 percent interest in PFJ Southeast LLC, subject to customary closing conditions and regulatory approvals. We expect the purchase to close in 2021 and to account for our equity method investment in PFJ Southeast LLC as an asset held for sale beginning in the fourth quarter of 2020.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE SPEEDWAY BUSINESS

On August 2, 2020, 7-Eleven, Inc. (“7-Eleven”) entered into a purchase and sale agreement with Marathon Petroleum Corporation (“MPC”) and certain of MPC’s subsidiaries set forth therein pursuant to which 7-Eleven will acquire the assets and liabilities constituting MPC’s convenience store business, including the sale of transportation fuel and the operation of convenience stores (the “Speedway Business”) from MPC (the “Acquisition”). This management’s discussion and analysis of financial condition and results of operations of the Speedway Business (“MD&A”) is provided to assist readers in understanding the results of the operations, financial condition and cash flows of the Speedway Business. The following discussion and analysis of the financial condition and results of operations of the Speedway Business covers periods prior to the consummation of the Acquisition and certain related transactions contemplated in connection with the Acquisition (collectively, the “Transactions”). Accordingly, the discussion and analysis of historical periods does not reflect the impact that the Transactions will have on the Speedway Business. You should read the following discussion of the financial condition and results of operations of the Speedway Business in conjunction with (i) the unaudited combined financial statements of the Speedway Business and the related notes of the Speedway Business as of September 30, 2020, 2019, which is furnished as Exhibit 99.1 to MPC’s Current Report on Form 8-K, dated January 25, 2021 (the “MPC Form 8-K”), and (ii) the audited combined financial statements and related notes of the Speedway Business for the years ended December 31, 2019, 2018 and 2017, which is furnished as Exhibit 99.2 to the MPC Form 8-K. This discussion contains forward-looking statements and involves numerous risks and uncertainties. Actual results may differ materially from those contained in any forward-looking statements. See the section entitled “Cautionary Note Regarding Forward-Looking Statements” set forth below.

The combined financial statements of the Speedway Business have been derived from the consolidated financial statements and accounting records of MPC. We believe that the assumptions underlying the combined financial statements of the Speedway Business are reasonable. However, the combined financial statements of the Speedway Business may not necessarily reflect the results of operations, financial position and cash flows of the Speedway Business for future periods or what they would have been had the Speedway Business been a separate, stand-alone company during the periods presented.

References as used in this MD&A, unless the context requires otherwise, to “Speedway,” “we,” “our,” “us,” and other similar terms refer to the business and operations of MPC’s Speedway transportation fuels and convenience store business (excluding MPC’s direct-dealer retail locations), primarily operated under the Speedway brand, that will be acquired by 7-Eleven in connection with the consummation of the Acquisition before giving effect to the Acquisition.

Corporate Overview

Speedway owns and operates a chain of convenience stores across the U.S., with approximately 3,850 locations primarily under the Speedway brand as of September 30, 2020. Our convenience stores sell transportation fuels and a wide variety of merchandise for our “on-the-go” customers, including beverages, snacks, prepared and pre-packaged foods, health and beauty products, tobacco products and general convenience items. Speedway also owns a 29{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} interest in PFJ Southeast LLC (“PFJ Southeast”), which is a joint venture between Speedway and Pilot Travel Centers LLC (“PTC”) with 125 travel center locations primarily in the Southeast U.S. Our operations consist of one reportable operating segment.

Background on Speedway Operations

Our margin for transportation fuel (primarily gasoline and diesel), which is the price paid by consumers less the cost of transportation fuels, including transportation and consumer excise taxes, impacts profitability. Transportation fuel prices are volatile and are impacted by changes in supply and demand in the regions where we operate. Numerous factors impact transportation fuel demand throughout the year, including local competition, seasonal demand fluctuations, the available wholesale supply, the level of economic activity in our marketing areas and weather conditions. Demand for transportation fuel is generally higher during the spring and summer months than during the winter months in most of our markets, primarily due to seasonal increases in highway traffic. As a result, the operating results for Speedway for the first and fourth quarters may be lower than for those in the second and third quarters of each calendar year. The margin on merchandise sold at our convenience stores historically has been less volatile and has contributed substantially to our margin.

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Inventories are carried at the lower of cost or market value. Costs of transportation fuels and merchandise 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. As of September 30, 2020, market values for transportation fuel inventories were lower than their cost basis, and, therefore, there is a lower of cost or market (“LCM”) inventory market valuation reserve of $25 million. Based on movements of refined product prices, future inventory valuation adjustments could have an effect on earnings. LCM inventory market valuation reserves are subject to reversal in subsequent periods if prices recover.

The following is a rollforward of store growth for the nine months ended September 30, 2020 and 2019:

(a)Store count excludes franchised store locations.

The following is a rollforward of store growth through December 31, 2019:

(a)The 1,098 retail sites acquired from Andeavor are included in Speedway’s results of operations beginning October 1, 2018.

(b)Store count excludes franchised store locations.

In connection with the Acquisition and at the consummation of the Acquisition, 7-Eleven’s wholly owned subsidiary, SEI Fuel Services, Inc. (“SEI Fuels”) and MPC’s wholly owned subsidiary, Marathon Petroleum Company LP (“Marathon LP”), will enter into a fuel supply agreement (the “Fuel Supply Agreement”), pursuant to which Marathon LP will provide an amount of fuel to the Speedway Business that will be determined by SEI Fuels and Marathon LP and set forth in the Fuel Supply Agreement. The Fuel Supply Agreement will have an initial term of 15 years, subject to a single renewal term of three additional years, unless either party notifies the other of its non-renewal intent.

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Recent Developments

PTC’s Repurchase of Speedway’s Interest in PFJ Southeast

    On October 30, 2020, PTC provided MPC notice of PTC’s intent to exercise the right to repurchase Speedway’s interest in PFJ Southeast (the “Repurchase Right”) under the limited liability company agreement of PFJ Southeast, pursuant to which PTC will repurchase Speedway’s interest in PFJ Southeast. The repurchase is expected to close in the first quarter of 2021 and Speedway will account for the equity method investment in PFJ Southeast LLC as an asset held for sale in the fourth quarter of 2020.

Acquisition of Andeavor

On October 1, 2018, MPC acquired Andeavor (formerly Tesoro Corporation), an integrated oil and gas refining, logistics and marketing company. The subset of Andeavor’s operations consisting primarily of company-owned and operated convenience stores (collectively, “Andeavor Retail”) is included in the historical results of operations, financial position and cash flows of Speedway. As a part of the acquisition, MPC and Speedway began a fast-paced transformation initiative to convert the acquired locations to the Speedway brand. As of September 30, 2020, 699, or approximately 64{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}, of the acquired locations have been converted to the Speedway brand and business model. Refer to Note 4 to our audited combined financial statements for further discussion around the financial impact of Andeavor to Speedway’s operations.

Other Acquisitions

During the fourth quarter of 2018, Speedway acquired 78 transportation fuel and convenience store

locations from Petr-All Petroleum Consulting Corporation for total consideration of $266 million. These stores

are located primarily in the Syracuse, Rochester and Buffalo markets in New York and operated under the

Express Mart brand. Additionally, during the third quarter of 2019, MPC acquired an asphalt terminal and 33 NOCO Express retail stores in Buffalo, Syracuse and Rochester, New York, from NOCO for total consideration of $135 million. The 33 NOCO Express retail stores were integrated into Speedway and are reflected in the Company’s financial results from July 2019, with close occurring over a two-week period from July 15 to July 25. These acquisitions expanded our footprint and assembled workforce in the Syracuse, Rochester and Buffalo markets. Refer to Note 4 to our audited combined financial statements for the year ended December 31, 2019 for further discussion around the financial impact to Speedway’s operations.

Pilot Travel Centers LLC Branding Agreement

Speedway and PTC entered into a diesel branding agreement effective October 1, 2019, pursuant to which PTC supplies, prices and sells diesel fuel at certain Speedway and PTC locations. As of September 30, 2020, this agreement included approximately 350 Speedway and PTC fueling locations across 15 states, including approximately 200 Speedway commercial fueling locations. Under the terms of the agreement, both companies agreed to share the diesel fuel margins captured as a result of the sourcing efficiencies and logistical economies of scale. Refer to Note 4 to our unaudited condensed combined financial statements for the nine months ended September 30, 2020 for further discussion around the financial impact to Speedway’s operations.

COVID-19

In late 2019, a novel strain of coronavirus, COVID-19, was first reported in Wuhan, China. The coronavirus has since spread rapidly to many other countries, including the U.S. Global health concerns relating to the coronavirus pandemic have had significant and widespread effects on the macroeconomic environment, including on the convenience store industry in the U.S. The convenience store industry in particular is experiencing acute challenges related to the COVID-19 pandemic. Our stores have been impacted by a reduction in traffic, changing customer behaviors, reduced store hours and temporary closures, although substantially all impacted stores have re-opened and have returned to normal operating hours as of September 30, 2020. As a result of restrictions related to the COVID-19 pandemic, 40 of our stores were temporarily closed and one of our convenience stores remains temporarily closed as of September 30, 2020. Various state “stay-at-home” orders have negatively impacted fuel demand and overall convenience store traffic and merchandise sales. For example, we experienced significant declines in customer traffic during March and April 2020, with recovery beginning in May 2020. Merchandise margins were impacted due to increased mix of tobacco and alcohol, which carry lower margins than fresh food and

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other general merchandise. At the same time, fuel margins have significantly benefited from the oil commodity market, which has offset our declines in fuel volumes and merchandise gross profit. In addition, convenience store operators have taken measures to increase the safety of employees and customers. We incurred approximately $44 million in incremental expenses related to the COVID-19 pandemic during the nine months ended September 30, 2020, and there is great uncertainty around the duration of the disruption from the pandemic, any worsening of the pandemic and the availability of one or more vaccines. Global economic and political events, supply disruptions, new and changing government regulations and significant decreases in consumer demand (like that caused by the COVID-19 pandemic) could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Results of Operations

The following discussion includes comments and analysis relating to our results of operations for the nine months ended September 30, 2020 and 2019 and the years ended December 31, 2019, 2018 and 2017. The historical consolidated financial data as of and for each of the three years ended December 31, 2019 has been derived from the audited consolidated financial statements and the notes thereto of the Speedway Business. The unaudited historical consolidated financial data as of and for the nine months ended September 30, 2020 and 2019 has been derived from the unaudited, interim combined financial statements and the notes thereto of the Speedway Business. The unaudited combined financial statements of the Speedway Business have been prepared on the same basis as the audited financial statements the Speedway Business and, in the opinion of the Speedway Business’s management, reflect all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of this data. The Speedway Business’s historical operating results are not necessarily indicative of the results that may be expected for any future period. The historical combined financial statements of Speedway do not necessarily reflect what the financial position, results of operations and cash flows would have been had it operated as a separate, stand-alone company during the periods presented. Actual costs that may have been incurred if the Speedway Business had been a standalone company would depend on a number of factors, including the organizational structure, whether functions were outsourced or performed by employees, and strategic decisions made in areas such as information technology and infrastructure. These amounts include the results of NOCO from the acquisition date forward.

(a)Cost of sales includes related party purchases of fuel. Cost of sales excludes depreciation and amortization, which are reflected in a separate line item.

(b)Operating, general and administrative expenses exclude depreciation and amortization, which are reflected in a separate line item.

(c)Depreciation and amortization includes property, plant and equipment impairment charges of $11 million and $1 million for the nine months ended September 30, 2020 and 2019.

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(a)    Same store comparison includes only locations owned at least 13 months.

(b)    Excludes cigarettes.

Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019

Sales

Sales decreased $5.5 billion, or 27{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}, primarily due to the effects of the COVID-19 pandemic which resulted in restricted travel, social distancing and reduced business operations. Speedway’s fuel sales decreased by $5.6 billion due to a $0.42 per gallon decrease in average fuel sales prices and a decrease of 1.4 billion gallons sold. In addition, fuel sales volumes decreased as a result of an agreement between Speedway and PTC, effective October 1, 2019, in which PTC supplies, prices and sells diesel fuel at certain Speedway and PTC locations with both companies sharing in the diesel fuel margins. The decrease in fuel sales was offset slightly by a $56 million increase in merchandise sales as a result of increased sales in the beer, wine and cigarettes product categories.

Equity Investment Income

Equity investment income reflects our proportionate share of net income generated by our equity method investee, PFJ Southeast. Equity investment increased by $12 million, or 21{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}, mainly due to an increase in income for PFJ Southeast.

Diesel Branding Agreement Income

Diesel branding agreement income increased $110 million due to our diesel branding agreement with PTC, effective October 1, 2019, in which PTC agreed to supply, price and sell fuel at certain Speedway and PTC locations.

Cost of Sales

Cost of sales (“COS”) includes all costs incurred to acquire transportation fuels and merchandise inventories, including the purchase price, freight-in, transportation costs to stores, purchasing costs and shrinkage. COS decreased $5.6 billion, or 33{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}, primarily due to the effects of the COVID-19 pandemic on fuel costs, which decreased by $5.7 billion directly impacted by a decrease in volume of 1.4 billion gallons and a decrease in costs of $0.11 per gallon. This decrease was partially offset by an increase in merchandise costs of $61 million driven by increased sales in the beer, wine and cigarettes product categories.

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Operating, General and Administrative Expenses

Operating, general and administrative expenses primarily consist of salaries and wages, rent, bankcard processing fees, purchased services and other general corporate overhead charges. Operating, general and administrative expenses decreased $124 million, or 6{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}, year over year primarily due to decreases of $61 million in bankcard processing fees and decreases in operating costs resulting from closed and sold stores. Operating costs for stores acquired in 2019 were included in our results beginning on the acquisition dates.

Depreciation and Amortization

Depreciation and amortization increased $27 million, or 9{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}, primarily due to significant capital expenditures and assets placed into service after September 30, 2019. $17 million of the increase is primarily for the conversion of Andeavor Retail stores to Speedway branding. The remaining increase is predominantly due to asset impairments of $10 million.

Interest Expense

Interest expense decreased $16 million, or 18{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}, primarily due to a $17 million decrease in related party interest expense as a result of the partial settlement of related party loans during the quarter ended September 30, 2020. See Note 4 to our unaudited condensed combined financial statements for the nine months ended September 30, 2020 for further details on related party debt.

Income Taxes

Income tax expense increased $97 million, or 60{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}, primarily due to increased pre-tax income of $364 million combined with a higher effective tax rate for the nine months ended September 30, 2020. The effective tax rates of 25.7{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} and 25.1{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} for the nine months ended September 30, 2020 and 2019 respectively are higher than the U.S. statutory rate of 21 percent primarily due to state and local income taxes.

Year Ended December 31, 2019 Compared to Year Ended December 31, 2018

Sales

Sales increased $4.6 billion, or 21{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}, primarily due to increased fuel and merchandise sales of $5.2 billion resulting from the Andeavor Retail acquisition on October 1, 2018. Excluding the impact of the Andeavor Retail acquisition, Speedway sales decreased by $621 million, driven primarily by a decrease in fuel sales of $969 million due to a $0.13 per gallon decrease in average fuel sales prices and a decrease of 81 million gallons sold. The decrease in fuel sales was partially offset by an increase in merchandise sales of $352 million driven by increased sales in the beer, wine, food service and cigarettes product categories.

Equity Investment Income

Equity investment income reflects our proportionate share of net income generated by our equity method investee, PFJ Southeast. Equity investment increased by $8 million, or 11{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}, mainly due to an increase in income for PFJ Southeast.

Diesel Branding Agreement Income

Diesel branding agreement income increased $28 million due to our diesel branding agreement with PTC, effective October 1, 2019, in which PTC agreed to supply, price and sell fuel at certain Speedway and PTC locations.

Cost of Sales

COS includes all costs incurred to acquire transportation fuels and merchandise inventories, including the purchase price, freight-in, transportation costs to stores, purchasing costs and shrink. COS increased $3.6 billion, or 19{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}, primarily due to increases in costs of fuel and merchandise of $4.3 billion resulting from the Andeavor Retail acquisition. The increase was partially offset by a decrease in Speedway COS (excluding the impact of the Andeavor Retail acquisition) of $727 million primarily driven by a $975 million decrease in fuel costs directly impacted by a

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decrease in costs of $0.13 per gallon offset by an increase in merchandise costs of $248 million in the beer, wine, food service and cigarettes product categories.

Operating, General and Administrative Expenses

Operating, general and administrative expenses primarily consist of salaries and wages, rent, bankcard processing fees, purchased services and other general corporate overhead charges. Operating, general and administrative expenses increased $719 million, or 34{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}, year-over-year primarily due our acquisitions of Andeavor Retail, NOCO and Express Mart and increased corporate overhead charges from MPC. Operating costs for stores acquired in 2019 and 2018 were included in our results beginning on the acquisition dates.

Depreciation and Amortization

Depreciation and amortization increased $93 million, or 29{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}, primarily due to higher fixed asset depreciation and intangible asset amortization of $50 million as a result of the Andeavor Retail acquisition and other acquisitions in 2018 and 2019. Depreciation and amortization also increased due to asset impairments of $21 million. The remaining increase is due to higher capital expenditures and the related assets placed into service in 2019 compared to 2018.

Interest Expense

Interest expense increased $1 million, or 0.1{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}, mainly due to a $6 million increase in interest expense related to finance lease obligations assumed as part of the Andeavor Retail acquisition, partially offset by a $5 million decrease in related-party interest expense as a result of lower average LIBOR rates in 2019 compared to 2018. See Note 6 to our audited combined financial statements for further details on related-party debt.

Income Taxes

Our income tax expense increased to $221 million, or 30{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}, and resulted in an effective tax rate of 25{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} in 2019 that was higher than the U.S. statutory rate of 21{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}. This was primarily due to state and local income taxes being partially offset by tax credits. The income tax expense of $170 million resulted in an effective tax rate of 26{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} in 2018 that was higher than the U.S. statutory rate of 21{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}. This was primarily due to state and local income taxes (inclusive of the remeasurement of deferred taxes related to a change in the effective state income tax rates), which was partially offset by tax credits. See Note 16 to our audited combined financial statements for further details.

Year Ended December 31, 2018 Compared to Year Ended December 31, 2017

Sales

Sales increased $2.9 billion, or 15{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}. The majority of this increase was due to $1.7 billion of revenues resulting from the acquisition of Andeavor Retail on October 1, 2018. Excluding the impact of the Andeavor Retail acquisition, Speedway sales increased by $1.2 billion. The increase was driven primarily by an increase in fuel sales of $1.9 billion due to a 9 million increase in gallons sold and a $0.32 per gallon increase in average fuel sales prices. Merchandise sales increased $124 million due to an increase in sales across the cigarettes, beer, wine, and food service categories. These increases were partially offset by our election to present revenues net of certain taxes under ASC Topic 606 prospectively from January 1, 2018, which resulted in a decrease in revenues of $844 million in 2018 for Speedway (excluding the impact of Andeavor Retail). See Note 3 to our audited combined financial statements for additional information.

Equity Investment Income

Equity investment income reflects our proportionate share of net income generated by our equity method investee, PFJ Southeast. Equity investment increased by $5 million, or 7{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}, mainly due to an increase in income for PFJ Southeast.

Cost of Sales

COS increased by $2.5 billion, or 15{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}, primarily due to increases in costs of fuel and merchandise of $1.4 billion resulting from the Andeavor Retail acquisition. Excluding the impact of the Andeavor Retail acquisition,

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Speedway COS increased $1.1 billion primarily driven by increases in fuel costs of $1.8 billion directly impacted by an increase of $0.30 per gallon, partially offset by our election to present revenues net of certain taxes under ASC Topic 606 prospectively from January 1, 2018, which resulted in a decrease in COS of $844 million in 2018 for Speedway (excluding the impact of the Andeavor Retail acquisition). The remaining difference is driven by changes in cost of merchandise.

Operating, General and Administrative Expenses

Operating, general and administrative expenses increased $315 million, or 18{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}, year-over-year primarily due to the inclusion of three months of operating, general and administrative expenses of Andeavor Retail and increased corporate overhead charges from MPC.

Depreciation and Amortization:

Depreciation and amortization increased $47 million, or 17{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}, primarily due to higher capital expenditures and the related assets placed into service which increased depreciation and amortization by $32 million (excluding the impact of the Andeavor Retail acquisition) in 2018 compared to 2017. Depreciation also increased $15 million due to the acquisition of Andeavor Retail.

Interest Expense

Interest expense increased $4 million, or 4{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}, due to an increase in related-party interest expense as a result of higher average LIBOR rates in 2018 compared to 2017.

Income Taxes

Our income tax expense increased to $170 million, or 286{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}, and resulted in an effective tax rate of 26{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} in 2018 that was higher than the U.S. statutory rate of 21{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}. This was primarily due to state and local income taxes (inclusive of the remeasurement of deferred taxes related to a change in the effective state income tax rates), which was partially offset by tax credits. The income tax expense of $44 million resulted in an effective tax rate of 8{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} in 2017 that was lower than the U.S. statutory rate of 35{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}. This was primarily due to a tax benefit of $174 million recorded for the remeasurement of deferred taxes related to the decrease in the U.S. statutory rate from 35{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} to 21{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} as a result of the TCJA, which was partially offset by state and local income taxes. See Note 16 to our audited combined financial statements for further details.

Historical Liquidity and Capital Resources

Funding and Liquidity Strategy

Speedway has historically participated in MPC’s centralized treasury management, including centralized cash pooling and overall financing arrangements. Transfers of cash both to and from these arrangements are reflected as a component of Parent company investment in the condensed combined balance sheets. However, historically, we have generated operating cash flow sufficient to fund our working capital, capital expenditure and financing requirements.

Following the Transactions, the capital structure and sources of liquidity for Speedway are expected to change significantly. We will no longer participate in MPC’s centralized treasury management. Instead, our ability to fund our capital needs will depend on our ongoing ability to generate cash from operations, our access to bank lines of credit and the capital markets, and any intercompany arrangements entered into with 7-Eleven.

Cash Flows

Our cash and cash equivalents balance was $111 million and $198 at September 30, 2020 and 2019, respectively, and $165 million, $212 million and $166 million at December 31, 2019, 2018 and 2017, respectively. Net cash provided by (used in) operating activities, investing activities and financing activities for the nine months ended September 30, 2020 and 2019 and the years ended December 31, 2019, 2018 and 2017 are presented in the following table.

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Operating Activities

Net cash provided by operating activities increased $253 million in the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019, primarily due to an increase in operating results, which was offset by an unfavorable change in working capital of $102 million.

Net cash provided by operating activities increased $230 million in 2019 compared to 2018, primarily due to an increase in operating results, which was offset by an unfavorable change in working capital of $15 million. Net cash provided by operating activities increased $232 million in 2018 compared to 2017, primarily due to an increase in operating results and favorable change in working capital of $13 million.

Investing Activities

Cash flows used in investing activities decreased $69 million in the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. The decrease in the first nine months of 2020 is primarily attributable to reduced capital expenditures of $60 million, driven primarily by Andeavor Retail store conversions that took place at a higher rate in 2019 compared to 2020 due to a $250 million reduction in the annual capital forecast for 2020 as a result of the COVID-19 pandemic. This was partially offset by an increase in cash proceeds from sales of property, plant and equipment of $9 million.

Cash flows used in investing activities increased $107 million in 2019 compared to 2018. The increase in 2019 was primarily attributable to additional capital expenditures of $155 million primarily due to a full year of Andeavor Retail store conversions in 2019. This was partially offset by an increase in cash proceeds from sales of property, plant and equipment of $48 million. Cash flows used in investing activities remained consistent in 2018 compared to 2017.

The unaudited condensed combined statements of cash flows for the nine months ended September 30, 2020 and 2019 exclude changes to the unaudited condensed combined balance sheets that did not affect cash. The audited combined statements of cash flows for the years ended December 31, 2019, 2018 and 2017 exclude changes to the combined balance sheets that did not affect cash. A reconciliation of additions to property, plant and equipment to total capital expenditures and investments follows for the nine months ended September 30, 2020 and 2019 and the years ended December 31, 2019, 2018 and 2017.

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Financing Activities

Cash used for or provided by financing activities is due to transfers to and from our parent, MPC, and repayments of related-party debt. The components of net transfers include: (i) cash transfers from Speedway to MPC, (ii) cash investments from MPC used to fund operations, capital expenditures and acquisitions, (iii) charges (benefits) for income taxes, and (iv) allocations of MPC’s corporate expenses. See Note 4 to our unaudited combined financial statements and Note 6 to our audited combined financial statements for more information.

Capital Requirements

Capital Spending and Contractual Cash Obligations

As of September 30, 2020, Speedway’s remaining 2020 forecasted capital expenditures of approximately $40 million is focused on site acquisitions and conversion of acquired locations to the Speedway brand and systems, growth in existing and new markets, commercial fueling/diesel expansion, food service through store remodels and high-quality acquisitions.

Major capital projects over the last three years included converting recently acquired locations to the Speedway brand and systems, building new store locations, remodeling and rebuilding existing locations in core markets and building out our network of commercial fueling lane locations to capitalize on diesel demand.

The outstanding balance on Speedway’s $875 million 5.25{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} Senior Note due September 15, 2022 was settled during the quarter ended September 30, 2020, with the settlement reflected as a component of Transfers (to) / from MPC, net in the condensed combined statements of cash flows. Speedway’s $875 million 5.5{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} Senior Note due September 15, 2024 was partially settled during the quarter ended September 30, 2020 with a remaining balance of $739 million as of September 30, 2020, which is expected to be paid off in connection with the consummation of the Acquisition. At September 30, 2020, our contractual commitments to purchase services and materials totaled $29 million; there were no such material commitments at December 31, 2019.

Off-Balance Sheet Arrangements

Off-balance sheet arrangements comprise those arrangements that may potentially impact our liquidity and capital resources and results of operations, even though such arrangements are not recorded as liabilities under GAAP. Our off-balance sheet arrangements are limited to indemnities and guarantees. See Note 17 to our audited combined financial statements for further discussion of guarantees. Although these arrangements serve a variety of our business purposes, we are not dependent on them to maintain our liquidity and capital resources, and we are not aware of any circumstances that are reasonably likely to cause the off-balance sheet arrangements to have a material adverse impact on liquidity and capital resources.

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 and clean-up efforts related to underground storage tanks at presently or formerly owned or operated retail locations. 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 locations and underground storage tanks or marketing areas related to retail operations.

Legislation and regulations pertaining to fuel specifications, climate change and greenhouse gases 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 the nine months ended September 30, 2020 and 2019 and the years ended December 31, 2019, 2018 and 2017 were:

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(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.

Our environmental capital expenditures accounted for 4{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}, 4{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}, 4{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}, 4{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} and 2{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} of capital expenditures for the nine months ended September 30, 2020 and 2019 and the years ended December 31, 2019, 2018 and 2017, respectively, excluding acquisitions.

We accrue for environmental remediation activities when the responsibility to remediate is probable and the amount of associated costs can be reasonably estimated. Accruals are not discounted for state reimbursement funds or insurance proceeds. 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, including under the Biden administration, 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.

In certain instances, Speedway can obtain reimbursement from state underground storage tank funds for certain remedial costs associated with tank releases. Receivables from state government agencies related to a portion of Speedway’s remedial obligations amounted to approximately $20 million at September 30, 2020 and December 31, 2019. We continuously assess the probability of collection of state reimbursement receivables based on each state’s fund balance, revenue sources, existing claims backlog, status of clean-up activity, the sunset status of each state’s fund, and our claim ranking, which can result in periodic adjustments to reimbursement receivables. Changes in these factors could result in periodic adjustments to our reimbursement receivables.

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 combined 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. The most significant areas involving management judgments and estimates are described below. Actual results could differ from the estimates and assumptions used.

Impairment Assessments of Long-Lived 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 margins on products sold. Our estimates of future product margins are based on our analysis of various supply and demand factors, which include, among other things, 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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•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.

We base our fair value estimates on projected financial information, which we believe to be reasonable. However, actual results may differ materially from these projections.

The need to test for impairment can be based on several indicators, including a significant reduction in demand for our products, a poor outlook for profitability, a significant reduction in fuel margins, other changes to contracts or changes in the regulatory environment.

Long-Lived Assets

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 company-owned convenience store locations and 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

Unlike long-lived assets, goodwill is subject to annual, or more frequent if necessary, impairment testing. 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. As of September 30, 2020 and December 31, 2019, we had a total of $4.4 billion and $4.4 billion of goodwill recorded on our combined balance sheet, respectively.

Prior to performing our annual impairment assessment as of November 30, 2019, we determined that no significant adjustments to the carrying value of goodwill were necessary. The annual impairment assessment for these resulted in the fair value of our reporting unit exceeding its carrying value by approximately 140{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}.

Significant assumptions used to estimate the reporting units’ fair value included estimates of future cash flows and market information for comparable assets. If estimates for future cash flows, which are impacted by consumer demand at retail locations and store performance, were to decline, the overall reporting units’ fair value 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. See Note 10 to our audited combined financial statements for additional information on our goodwill, including a table summarizing our recorded goodwill. See Note 11 to our audited combined financial statements for additional information on our intangible assets.

Equity Method Investments

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 September 30, 2020 and December 31, 2019, we had $315 million and $330 million, respectively, of investments in equity method investments recorded on our consolidated balance sheet.

An estimate of the sensitivity to net income resulting from impairment calculations is not practicable, given the numerous assumptions (e.g., pricing, volumes and discount rates) that can materially affect our estimates. That is, unfavorable adjustments to some of the above listed assumptions may be offset by favorable adjustments in other assumptions.

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See Note 8 to our audited combined financial statements for additional information on our equity method investments.

Acquisitions

In accounting for business combinations, acquired assets, assumed liabilities and contingent consideration are recorded based on estimated fair values as of the date of acquisition. The excess or shortfall of the purchase price when compared to the fair value of the net tangible and identifiable intangible assets acquired, if any, is recorded as goodwill or a bargain purchase gain, respectively. A significant amount of judgment is involved in estimating the individual fair values of property, plant and equipment, intangible assets, contingent consideration and other assets and liabilities. We use all available information to make these fair value determinations and, for certain acquisitions, engage third-party consultants for valuation assistance.

The fair value of assets and liabilities, including contingent consideration, as of the acquisition date are often estimated using a combination of approaches, including the income approach, which requires us to project future cash flows and apply an appropriate discount rate; the cost approach, which requires estimates of replacement costs and depreciation and obsolescence estimates; and the market approach, which uses market data and adjusts for entity-specific differences. The estimates used in determining fair values are based on assumptions believed to be reasonable but which are inherently uncertain. Accordingly, actual results may differ materially from the projected results used to determine fair value. See Note 4 to our audited combined financial statements for additional information on our acquisitions. See Note 13 to our audited combined financial statements for additional information on fair value measurements.

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 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 by 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 $250 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 2.85{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} for our pension plans and 3.25{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} for our other postretirement benefit plans by 0.25{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} would increase pension obligations and other postretirement benefit plan obligations by $4.8 billion and $174 million, respectively, and would increase defined benefit pension expense and other postretirement benefit plan expense by $55 million and $18 million, respectively.

The long-term asset rate of return assumption considers the asset mix of the plans (currently targeted at approximately 14{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} equity securities and 86{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} 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

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inflation and returns. In 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{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} long-term rate of return to determine our 2019 defined benefit pension expense. After evaluating activity in the capital markets, along with the current and projected plan investments, we decreased the asset rate of return for our primary plan to 4.50{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} effective for 2020. Decreasing the 5{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} asset rate of return assumption by 0.25{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} would increase our defined benefit pension expense by $464 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 2019 mortality tables from the U.S. Society of Actuaries.

Note 14 to our audited combined financial statements 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.

Recently Issued and Adopted Accounting Standards

Refer to Note 2 to our unaudited combined financial statements and Note 3 to our audited combined financial statements for discussion of recently issued and adopted accounting standards.

Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

Speedway has historically participated in MPC’s centralized treasury management, including centralized cash pooling and overall financing arrangements. We have transferred cash to MPC daily and MPC has funded our operations and investing activities, as needed. Excluding certain intercompany notes and finance lease obligations, we have no other third-party debt or financial instruments where we are exposed to interest rate risks.

Commodity Price Risk

Speedway is exposed to market risks related to the volatility in the price of transportation fuels (primarily gasoline and diesel). We have not historically hedged or managed our price risk as the time between purchase of our gasoline and diesel fuel inventory and sales to our customers is very short.

Foreign Currency Risk

All of our operations are in the U.S.; as such, we have no exposure to foreign currency fluctuations.

Cautionary Note Regarding Forward Looking Statements

This MD&A includes forward-looking statements that are subject to risks, contingencies or uncertainties. You can identify forward-looking statements by words such as “anticipate,” “believe,” “commitment,” “could,” “design,” “estimate,” “expect,” “forecast,” “goal,” “guidance,” “imply,” “intend,” “may,” “objective,” “opportunity,” “outlook,” “plan,” “policy,” “position,” “potential,” “predict,” “priority,” “project,” “proposition,” “prospective,” “pursue,” “seek,” “should,” “strategy,” “target,” “will,” “would” or other similar expressions that convey the uncertainty of future events or outcomes. MPC’s forward-looking statements are not guarantees of future performance, and you should not rely unduly on them, as they involve risks, uncertainties and assumptions that MPC cannot predict. Material differences between actual results and any future performance suggested in MPC’s forward-looking statements could result from a variety of factors, such as the severity and duration of the COVID-19 pandemic and its impact on global economic conditions and MPC’s ability to successfully complete the planned Speedway sale within the expected timeframe or at all. Many of such factors are beyond MPC’s control. These factors also include such risks and uncertainties detailed in MPC’s periodic public filings with the SEC, including but not limited to those discussed under “Risk Factors” in the MPC’s annual report on Form 10-K for the year ended December 31, 2019 and its quarterly Form 10-Q filings, and in other MPC investor communications from time to

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time. MPC undertakes no obligation to update any forward-looking statement except to the extent required by applicable law.