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| Acquisitions and Investments |
Acquisition of Refinery and Related Logistics and Marketing Assets
On February 1, 2013, we acquired from BP Products North America Inc. and BP Pipelines (North America) Inc. (collectively, “BP”) the 451,000 barrel per calendar day refinery in Texas City, Texas, three intrastate natural gas liquid pipelines originating at the refinery, four light product terminals, branded-jobber marketing contract assignments for the supply of approximately 1,200 branded sites, a 1,040 megawatt electric cogeneration facility and a 50,000 barrel per day allocation of space on the Colonial Pipeline. We refer to these assets as the “Galveston Bay Refinery and Related Assets.” We paid $1.49 billion for these assets, which included $935 million for inventory. Pursuant to the purchase and sale agreement, we may also be required to pay to BP a contingent earnout of up to an additional $700 million over six years, subject to certain conditions as discussed below. These assets complement our current geographic footprint and align with our strategic initiative of growing in existing and contiguous markets to enhance our portfolio. The transaction was funded with cash on hand.
As of the acquisition date, we recorded a contingent liability of $600 million, representing the preliminary fair value of contingent consideration we expect to pay to BP related to the earnout provision. The fair value of the contingent consideration was estimated using an income approach. The amount of cash to be paid under the arrangement is based on both a market-based crack spread and refinery throughput volumes for the months during which the contract applies, as well as established thresholds that cap the annual and total payment. The earnout payment cannot exceed $200 million per year for the first three years of the arrangement or $250 million per year for the last three years of the arrangement, with the total cumulative payment capped at $700 million over the six-year period. Any excess or shortfall from the annual cap for a current year’s earnout calculation will not affect subsequent years’ calculations. We used internal and external forecasts for the crack spread and internal forecasts for refinery throughput volumes and applied an appropriate risk-adjusted discount rate to the range of cash flows indicated by various scenarios to determine the fair value of the arrangement. The fair value of the contingent consideration is reassessed each quarter, with changes in fair value recorded in cost of revenues. The fair value of the contingent consideration was $625 million at December 31, 2013, which includes $159 million classified as current. See Note 17 for additional information.
The transaction provided for a post-closing adjustment for inventory, which was finalized for $9 million, reducing our total consideration.
The components of the fair value of consideration transferred are as follows:
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(In millions) | |
Cash | $ | 1,491 |
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Fair value of contingent consideration as of acquisition date | 600 |
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Payable to seller | 6 |
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Post-closing adjustment | (9 | ) |
Total consideration | $ | 2,088 |
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During the fourth quarter of 2013, an independent appraisal of the assets acquired and liabilities assumed and other evaluations were completed and finalized. Minor updates to the preliminary fair value measurements of assets acquired and liabilities assumed were made during the second and third quarters of 2013. The following table summarizes the final amounts assigned to the assets acquired and liabilities assumed as of the acquisition date.
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(In millions) | |
Inventories | $ | 935 |
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Other current assets | 1 |
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Property, plant and equipment, net | 1,274 |
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Other noncurrent assets | 88 |
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Accounts payable | (12 | ) |
Payroll and benefits payable | (14 | ) |
Long-term debt due within one year(a) | (2 | ) |
Other current liabilities | (6 | ) |
Long-term debt(a) | (58 | ) |
Defined benefit postretirement plan obligations | (43 | ) |
Deferred credits and other liabilities | (75 | ) |
Total | $ | 2,088 |
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(a) | Represents a capital lease obligation assumed. |
Neither goodwill nor a gain from a bargain purchase was recognized in conjunction with the Galveston Bay Refinery and Related Assets acquisition.
Other noncurrent assets consist of a $20 million intangible asset related to customer relationships and a $68 million intangible asset related to prepaid licensed refinery technology agreements. The intangible assets related to customer relationships and prepaid licensed refinery technology agreements are being amortized on a straight-line basis over four and 15 years, respectively. The weighted average life over which these acquired intangibles are being amortized is approximately 13 years.
We recognized $7 million of acquisition-related costs associated with the Galveston Bay Refinery and Related Assets acquisition. These costs were expensed and were included in selling, general and administrative expenses.
Our refineries and related assets are operated as an integrated system. As the information is not available by refinery, it is not practicable to disclose the revenues and net income associated with the acquisition that were included in our consolidated statements of income for 2013.
The following unaudited pro forma financial information presents consolidated results assuming the Galveston Bay Refinery and Related Assets acquisition occurred on January 1, 2012. The pro forma financial information does not give effect to potential synergies that could result from the acquisition and is not necessarily indicative of the results of future operations.
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(In millions, except per share data) | 2013 | | 2012 |
Sales and other operating revenues (including consumer excise taxes) | $ | 102,120 |
| | $ | 104,165 |
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Net income attributable to MPC | 2,167 |
| | 3,625 |
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Net income attributable to MPC per share - basic | $ | 6.88 |
| | $ | 10.66 |
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Net income attributable to MPC per share - diluted | 6.84 |
| | 10.60 |
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The pro forma information includes adjustments to align accounting policies, an adjustment to depreciation expense to reflect the fair value of property, plant and equipment, increased amortization expense related to identifiable intangible assets and the related income tax effects. The pro forma information reflects revisions made during the second and third quarters of 2013 to the estimated fair values of assets acquired and liabilities assumed.
Acquisitions of Convenience Stores
During 2013, Speedway acquired nine convenience stores located in Tennessee, western Indiana and western Pennsylvania. In connection with these acquisitions, our Speedway segment recorded $8 million of goodwill.
In July 2012, Speedway acquired 10 convenience stores located in the northern Kentucky and southwestern Ohio regions from Road Ranger LLC in exchange for cash and a truck stop location in the Chicago metropolitan area. In connection with this acquisition, our Speedway segment recorded $5 million of goodwill.
In May 2012, Speedway acquired 87 convenience stores situated throughout Indiana and Ohio from GasAmerica Services, Inc., along with the associated inventory, intangible assets and two parcels of undeveloped real estate. In connection with this acquisition, our Speedway segment recorded $83 million of goodwill.
In May 2011, Speedway acquired 23 convenience stores in Indiana and Illinois. In connection with this acquisition, our Speedway segment recorded $9 million of goodwill.
The goodwill associated with these acquisitions is deductible for income tax purposes.
These acquisitions support our strategic initiative to increase our Speedway segment sales and profitablity. The principal factors contributing to a purchase price resulting in goodwill included the acquired stores complementing our existing network in our Midwest market, access to our refined product transportation systems and the potential for higher merchandise sales.
Assuming these transactions had been made at the beginning of any period presented, the consolidated pro forma results would not be materially different from reported results.
Investments in Ethanol Companies
On August 1, 2013, we acquired from Mitsui & Co. (U.S.A.), Inc. its interests in three ethanol companies for $75 million. Under the purchase agreement, we acquired an additional 24 percent interest in The Andersons Clymers Ethanol LLC ("TACE"), bringing our ownership interest to 60 percent; a 34 percent interest in The Andersons Ethanol Investment LLC ("TAEI"), which holds a 50 percent ownership in The Andersons Marathon Ethanol LLC ("TAME"), bringing our direct and indirect ownership interest in TAME to 67 percent; and a 40 percent interest in The Andersons Albion Ethanol LLC ("TAAE"), which owns an ethanol production facility in Albion, Michigan. On October 1, 2013, our ownership interest in TAAE increased to 43 percent as a result of TAAE acquiring one of the owner's interest. We hold a noncontrolling interest in each of these entities and account for them using the equity method of accounting since the minority owners have substantive participating rights.
Investment in Pipeline
During 2013, we made initial contributions of $24 million to acquire an ownership interest in North Dakota Pipeline Company LLC ("North Dakota Pipeline"). These contributions funded 37.5 percent of the construction costs incurred to-date on the Sandpiper pipeline project. In conjunction with our commitment to be an anchor shipper for the Sandpiper pipeline and our investment in the project, we will earn an approximate 27 percent equity interest in Enbridge Energy Partner L.P.'s North Dakota System when the Sandpiper pipeline is placed into service in 2016. We will also have the option to increase our ownership interest to approximately 30 percent through additional investments in future system improvements. We account for our interest in North Dakota Pipeline using the equity method of accounting. See Note 25 for information on future contributions to North Dakota Pipeline.
