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MPLX > SEC Filings for MPLX > Form 10-Q on 8-Aug-2013All Recent SEC Filings

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Form 10-Q for MPLX LP


8-Aug-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the unaudited financial statements and accompanying footnotes included under Item 1. Financial Statements and in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2012.

Management's Discussion and Analysis of Financial Condition and Results of Operations includes various forward-looking statements concerning trends or events potentially affecting our business. You can identify our forward-looking statements by words such as "anticipate," "believe," "estimate," "expect," "forecast," "goal," "intend," "plan," "predict," "project," "seek," "target," "could," "may," "should," "would" or "will" or other similar expressions that convey the uncertainty of future events or outcomes. In accordance with "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, these statements are accompanied by cautionary language identifying important factors, though not necessarily all such factors, which could cause future outcomes to differ materially from those set forth in forward-looking statements.

INITIAL PUBLIC OFFERING

On October 26, 2012, the Partnership's common units began trading on the New York Stock Exchange under the ticker symbol "MPLX." On October 31, 2012, MPLX LP closed the initial public offering (the "Offering") of 19,895,000 common units which included a 2,595,000 common unit over-allotment option that was exercised in full by the underwriters. Unless the context otherwise requires, references to "MPLX LP," the "Partnership," "we," "our," "us," or like terms used in the present tense or for periods starting on or after October 31, 2012, refer to MPLX LP and its subsidiaries, including MPLX Operations LLC ("MPLX Operations") and MPLX Terminal and Storage LLC ("MPLX Terminal and Storage"), both wholly-owned subsidiaries, and MPLX Pipe Line Holdings LP ("Pipe Line Holdings"), of which MPLX LP owned a 56.0 percent general partner interest at June 30, 2013. Pipe Line Holdings owns 100.0 percent of Marathon Pipe Line LLC ("MPL") and Ohio River Pipe Line LLC ("ORPL"). References to the "Predecessor," "we," "our," "us," or like terms, when used for periods prior to October 31, 2012, refer to MPLX LP Predecessor, our predecessor for accounting purposes. References to "MPC" refer collectively to Marathon Petroleum Corporation and its subsidiaries, other than the Partnership. For information on the various agreements between the Partnership and MPC see Item 1. Financial Statements - Note 3.

PARTNERSHIP OVERVIEW

We are a fee-based, growth-oriented master limited partnership formed by MPC to own, operate, develop and acquire pipelines and other midstream assets related to the transportation and storage of crude oil, refined products and other hydrocarbon-based products. As of June 30, 2013, our primary assets consisted of:

a 56.0 percent general partner interest in Pipe Line Holdings, an entity that owns a 100.0 percent interest in MPL and ORPL, which in turn collectively own:

a network of pipeline systems that includes approximately 1,004 miles of common carrier crude oil pipelines and approximately 1,902 miles of common carrier product pipelines extending across nine states. This network includes approximately 230 miles of common carrier crude oil and product pipelines that we operate under long-term leases with third parties;

a barge dock located on the Mississippi River near Wood River, Illinois with approximately 80 thousand barrels per day (mbpd) of crude oil and product throughput capacity; and

crude oil and product tank farms located in Patoka, Wood River and Martinsville, Illinois and Lebanon, Indiana.

a 100.0 percent interest in a butane cavern located in Neal, West Virginia with approximately 1.0 million barrels of storage capacity that serves MPC's Catlettsburg, Kentucky refinery.

As the sole general partner of Pipe Line Holdings, we control all aspects of management of Pipe Line Holdings, including its cash distribution policy. On May 1, 2013, we acquired an additional 5.0 percent interest in Pipe Line Holdings from MPC for consideration of $100.0 million in cash, increasing our ownership interest to 56.0 percent. The purchase was financed with cash on hand. We believe our network of petroleum pipelines is one of the largest in the United States, based on total annual volumes delivered. Our assets are integral to the success of MPC's operations.

HOW WE EVALUATE OUR OPERATIONS

Our management uses a variety of financial and operating metrics to analyze our performance. These metrics are significant factors in assessing our operating results and profitability and include the non-U.S. GAAP financial measures of Adjusted EBITDA and Distributable Cash Flow.


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We define Adjusted EBITDA as net income before depreciation, provision for income taxes, non-cash equity-based compensation and net interest and other financial costs (income). Although we have not quantified distributable cash flow for our Predecessor, subsequent to the Offering, the Partnership uses Distributable Cash Flow, which we define as Adjusted EBITDA less net cash interest paid, income taxes paid and maintenance capital expenditures paid, plus increase (decrease) in deferred revenue for committed volume deficiencies. Distributable Cash Flow and Adjusted EBITDA are not presentations made in accordance with U.S. GAAP.

Under our transportation services agreements, if MPC fails to transport its minimum throughput volumes during any quarter, then MPC will pay us a deficiency payment equal to the volume of the deficiency multiplied by the tariff rate then in effect. Such a payment is an increase in deferred revenue for committed volume deficiencies and included in the calculation of Distributable Cash Flow. These payments are not included in Adjusted EBITDA for the period in which they occurred. MPC may then apply the amount of any such deficiency payments as a credit for volumes transported on the applicable pipeline system in excess of its minimum volume commitment during the following four quarters or eight quarters under the terms of the applicable transportation services agreement. We recognize revenues for the deficiency payments when credits are used for volumes transported in excess of minimum quarterly volume commitments, when it becomes impossible to physically transport volumes necessary to utilize the credits or upon the expiration of the applicable four or eight quarter period. When credits are used or expire, the associated revenue is included within Adjusted EBITDA while the use or expiration of the credits is a decrease in deferred revenue for committed volume deficiencies in the calculation of Distributable Cash Flow.

Adjusted EBITDA and Distributable Cash Flow are non-U.S. GAAP supplemental financial measures that management and external users of our consolidated financial statements, such as industry analysts, investors, lenders and rating agencies, may use to assess:

our operating performance compared to other publicly traded partnerships in our industry, without regard to historical cost basis or, in the case of Adjusted EBITDA, financing methods;

the ability of our assets to generate sufficient cash flow to make distributions to our unitholders;

our ability to incur and service debt and fund capital expenditures; and

the viability of acquisitions and other capital expenditure projects and the returns on investment of various investment opportunities.

We believe that the presentation of Adjusted EBITDA and Distributable Cash Flow provides useful information to investors in assessing our financial condition and results of operations. The U.S. GAAP measures most directly comparable to Adjusted EBITDA and Distributable Cash Flow are net income and net cash provided by operating activities. Adjusted EBITDA and Distributable Cash Flow should not be considered as alternatives to U.S. GAAP net income or net cash provided by operating activities. Adjusted EBITDA and Distributable Cash Flow have important limitations as analytical tools because they exclude some but not all items that affect net income and net cash provided by operating activities or any other measure of financial performance or liquidity presented in accordance with U.S. GAAP. Adjusted EBITDA and Distributable Cash Flow should not be considered in isolation or as substitutes for analysis of our results as reported under U.S. GAAP. Additionally, because Adjusted EBITDA and Distributable Cash Flow may be defined differently by other companies in our industry, our definitions of Adjusted EBITDA and Distributable Cash Flow may not be comparable to similarly titled measures of other companies, thereby diminishing their utility.

For reconciliations of Adjusted EBITDA and Distributable Cash Flow to their most comparable measures calculated and presented in accordance with U.S. GAAP, see - Results of Operations.

FACTORS AFFECTING THE COMPARABILITY OF OUR FINANCIAL RESULTS

Our results of operations subsequent to the Offering are not comparable to our Predecessor's historical results of operations for the reasons described below:

Joint Interest Assets. Our Predecessor's results of operations historically included revenues and expenses relating to our Predecessor's minority undivided joint interests in the Capline and Maumee crude oil pipeline systems. We refer to our Predecessor's minority undivided joint interests in these pipeline systems as the joint interest assets. While third parties operate the joint interest assets, our Predecessor published tariffs and collected revenues from shippers that utilized capacity attributable to our Predecessor's undivided interest portion of the joint interest assets, and paid the operator of the joint interest assets for our Predecessor's proportionate share of all costs and expenses related to the operation and maintenance of the joint interest assets. MPC did not contribute the joint interest assets to us in connection with the Offering and our results of operations subsequent to the Offering do not include the joint interest assets.


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General Partner Interest in Pipe Line Holdings. Our Predecessor's results of operations historically included 100.0 percent of the revenues and expenses relating to the assets that were contributed to us, as well as the joint interest assets that were not contributed to us. At the closing of the Offering, MPC contributed to us a 51.0 percent general partner interest in Pipe Line Holdings. For periods subsequent to the Offering through April 30, 2013, we consolidated the results of operations of Pipe Line Holdings and then recorded a 49.0 percent noncontrolling interest deduction for the limited partner interest in Pipe Line Holdings retained by MPC. On May 1, 2013, we acquired an additional 5.0 percent interest in Pipe Line Holdings from MPC for consideration of $100.0 million in cash. Following the acquisition, we continued to consolidate the results of operations of Pipe Line Holdings and then recorded a 44.0 percent noncontrolling interest deduction for the limited partner interest in Pipe Line Holdings retained by MPC.

Neal Butane Cavern. Our Predecessor's results of operations historically have included no revenues or expenses associated with our Neal butane cavern. The cavern was placed into service on August 1, 2012, and was contributed to the Partnership at the closing of the Offering.

Revenues. Following the Offering, most of our revenues are generated from the transportation and storage services agreements that we entered into with MPC in conjunction with the Offering and under which MPC pays us fees for transporting crude oil and products on our pipeline systems, for handling crude oil and products at our barge dock and for providing storage services at our tank farms and butane cavern. These contracts contain minimum quarterly volume commitments. Historically, our Predecessor did not have long-term transportation and storage arrangements with MPC. In addition, we expect to generate revenue generally not previously recognized by our Predecessor related to the following:

a tariff increase that went into effect in October 2012 on our Patoka, Illinois to Catlettsburg, Kentucky crude oil pipeline related to upgrades on that pipeline;

a tariff increase that went into effect in October 2012 on our Robinson, Illinois to Mt. Vernon, Indiana product pipeline to more accurately reflect our costs of operating the pipeline; and

general tariff increases that went into effect on a majority of our pipeline systems on July 1, 2013 in accordance with the Federal Energy Regulatory Commission indexing methodology.

General and Administrative Expenses. Our Predecessor's general and administrative expenses included direct charges for the management and operation of our assets and certain overhead and shared services expenses allocated by MPC for general and administrative services, such as information technology, engineering, legal, human resources and other financial and administrative services. These expenses were charged or allocated to our Predecessor based on the nature of the expenses and our Predecessor's proportionate share of utilization, capital employed, wages or headcount. Following the Offering, MPC continues to charge us administrative and operational services, which are projected to be higher than those charged to our Predecessor due to MPC's provision of additional services, and a fixed annual fee for the provision of executive management services by certain executive officers of our general partner. We also incur incremental annual general and administrative expenses as a result of being a stand-alone publicly traded partnership.

Financing. There are differences in the way we finance our operations as compared to the way our Predecessor financed its operations. Historically, our Predecessor's operations were financed as part of MPC's integrated operations and our Predecessor did not record any separate costs associated with financing its operations. Additionally, our Predecessor largely relied on internally generated cash flows and capital contributions from MPC to satisfy its capital expenditure requirements. Following the Offering, we intend to make quarterly cash distributions to our unitholders. Based on the terms of our cash distribution policy, we expect that we will distribute to our unitholders and our general partner most of the excess cash generated by our operations. We expect to fund future expansion capital expenditures beyond amounts funded with proceeds retained from the Offering primarily from external sources, including borrowings under our $500.0 million revolving credit facility and potential future issuances of equity and debt securities.

RESULTS OF OPERATIONS

The unaudited consolidated statements of income in Item 1. Financial Statements represent the results of operations of our Predecessor for the three months and six months ended June 30, 2012, and results of the Partnership for the three months and six months ended June 30, 2013. Our results of operations subsequent to the Offering may not be comparable to our Predecessor's historical results of operations for the reasons discussed above under - Factors Affecting the Comparability of Our Financial Results.


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                                                                Three Months Ended June 30,                          Six Months Ended June 30,
(In millions, unless otherwise noted)                     2013              2012           Variance           2013              2012           Variance
                                                                        Predecessor                                         Predecessor
Revenues and other income:
Sales and other operating revenues                     $      18.8      $       18.1      $       0.7      $      39.6      $       33.9      $       5.7
Sales to related parties                                      97.3              87.5              9.8            186.4             169.2             17.2
Loss on sale of assets                                          -               (0.3 )            0.3               -               (0.3 )            0.3
Other income                                                   0.9               1.7             (0.8 )            2.1               3.3             (1.2 )
Other income - related parties                                 5.2               3.4              1.8              8.8               6.4              2.4

Total revenues and other income                              122.2             110.4             11.8            236.9             212.5             24.4

Costs and expenses:
Cost of revenues (excludes items below)                       35.6              44.4             (8.8 )           66.1              82.5            (16.4 )
Purchases from related parties                                23.8               7.3             16.5             45.6              13.6             32.0
Depreciation                                                  11.9               9.2              2.7             23.6              18.4              5.2
General and administrative expenses                           13.9              17.0             (3.1 )           27.4              26.9              0.5
Other taxes                                                    1.8               3.0             (1.2 )            3.5               6.7             (3.2 )

Total costs and expenses                                      87.0              80.9              6.1            166.2             148.1             18.1

Income from operations                                        35.2              29.5              5.7             70.7              64.4              6.3
Related party interest and other financial income               -                0.4             (0.4 )             -                0.8             (0.8 )
Interest and other financial income (costs)                   (0.3 )              -              (0.3 )           (0.5 )              -              (0.5 )

Income before income taxes                                    34.9              29.9              5.0             70.2              65.2              5.0
Provision for income taxes                                     0.1               0.1              -                0.1               0.2             (0.1 )

Net income                                                    34.8              29.8              5.0             70.1              65.0              5.1
Less: Net income attributable to MPC-retained
interest                                                      16.2                -              16.2             33.9                -              33.9

Net income attributable to MPLX LP                            18.6      $       29.8      $     (11.2 )           36.2      $       65.0      $     (28.8 )

Less: General partner's interest in net income
attributable to MPLX LP                                        0.3                                                 0.7

Limited partners' interest in net income
attributable to MPLX LP                                $      18.3                                         $      35.5


Adjusted EBITDA attributable to MPLX LP (1)            $      26.7      $       38.7      $     (12.0 )    $      51.8      $       82.8      $     (31.0 )
Distributable Cash Flow attributable to MPLX LP (1)           27.2                                                55.2

Pipeline throughput (mbpd):
Crude oil pipelines                                          1,075             1,193             (118 )          1,075             1,157              (82 )
Product pipelines                                              959               954                5              939               935                4

Total                                                        2,034             2,147             (113 )          2,014             2,092              (78 )


Average tariff rates ($ per barrel): (2)
Crude oil pipelines                                    $      0.60      $       0.55      $      0.05      $      0.59      $       0.53      $      0.06
Product pipelines                                             0.56              0.48             0.08             0.54              0.48             0.06
Total pipelines                                               0.58              0.52             0.06             0.57              0.51             0.06

(1) Non-U.S. GAAP financial measure. See the following tables for reconciliations to the most directly comparable U.S. GAAP measures.

(2) Average tariff rates calculated using pipeline transportation revenues divided by pipeline throughput barrels.


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The following tables present reconciliations of Adjusted EBITDA and Distributable Cash Flows to net income and net cash provided by operating activities, the most directly comparable U.S. GAAP financial measures, for each of the periods presented.

                                          Three Months Ended June 30,                 Six Months Ended June 30,
(In millions)                             2013                  2012                 2013                   2012
                                                             Predecessor                                Predecessor
Reconciliation of Adjusted EBITDA
attributable to MPLX LP and
Distributable Cash Flow
attributable to MPLX LP to Net
Income:
Net income                            $        34.8         $        29.8        $        70.1         $         65.0
Less: Net income attributable to
MPC-retained interest                          16.2                    -                  33.9                     -

Net income attributable to MPLX
LP                                             18.6                  29.8                 36.2                   65.0
Plus: Net income attributable to
MPC-retained interest                          16.2                    -                  33.9                     -
Depreciation                                   11.9                   9.2                 23.6                   18.4
Provision for income taxes                      0.1                   0.1                  0.1                    0.2
Non-cash equity-based
compensation                                    0.3                    -                   0.5                     -
Net interest and other financial
costs (income)                                  0.3                  (0.4 )                0.5                   (0.8 )

Adjusted EBITDA                                47.4                  38.7                 94.8                   82.8
Less: Adjusted EBITDA
attributable to MPC-retained
interest                                       20.7                    -                  43.0                     -

Adjusted EBITDA attributable to
MPLX LP                                        26.7         $        38.7                 51.8         $         82.8

Less: Cash interest paid, net                    -                                         0.2
Income taxes paid                                -                                          -
Maintenance capital expenditures
paid                                            2.3                                        3.8
Plus: Increase (decrease) in
deferred revenue for committed
volume deficiencies                             2.8                                        7.4

Distributable Cash Flow
attributable to MPLX LP               $        27.2                              $        55.2

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