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MPLX > SEC Filings for MPLX > Form 10-Q on 5-May-2014All Recent SEC Filings

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Form 10-Q for MPLX LP


5-May-2014

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, 2013.

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.

PARTNERSHIP OVERVIEW

The Partnership was formed on March 27, 2012, as a Delaware limited partnership. On October 31, 2012, the Partnership completed its initial public offering (the "Offering") of 19,895,000 common units (including 2,595,000 common units issued pursuant to the exercise of the underwriters' over-allotment option), representing limited partner interests. Unless the context otherwise requires, references in this report to "MPLX LP," the "Partnership," "we," "our," "us," or like terms 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 69.0 percent general partner interest at March 31, 2014. Pipe Line Holdings owns 100 percent of Marathon Pipe Line LLC ("MPL") and Ohio River Pipe Line LLC ("ORPL"). References to "MPC" refer collectively to Marathon Petroleum Corporation and its subsidiaries, other than the Partnership.

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. 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. As of March 31, 2014, our primary assets consisted of:
a 69.0 percent general partner interest in Pipe Line Holdings, an entity that owns a 100 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 84 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 percent interest in a butane cavern located in Neal, West Virginia
      with approximately one 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 a 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. Effective March 1, 2014, we acquired a 13.0 percent interest in Pipe Line Holdings from MPC for consideration of $310.0 million. Subsequent to this transaction, our ownership in Pipe Line Holdings is 69.0 percent. This purchase was financed with $40.0 million of cash on hand and $270.0 million of borrowings on our bank revolver.

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 (benefit) for income taxes, non-cash equity-based compensation and net interest and other financial costs. The Partnership also uses Distributable Cash Flow, which we define as Adjusted EBITDA plus the current period deferred revenue for committed volume deficiencies less net cash interest paid, income taxes paid, maintenance capital expenditures paid and volume deficiency credits. Adjusted EBITDA and Distributable Cash Flow 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. The deficiency amounts are recorded as an increase in deferred revenue for committed volume deficiencies and included in the calculation of Distributable Cash Flow. The deficiencies 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, expire or can no longer be utilized, the associated revenue is included within Adjusted EBITDA and is also reflected as a decrease 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 a reconciliation 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.


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RESULTS OF OPERATIONS
Combined Overview
The following table and discussion is a summary of our results of operations for
the three months ended March 31, 2014 and 2013, including a reconciliation of
Adjusted EBITDA and Distributable Cash Flow from net income and net cash
provided by operating activities, the most directly comparable U.S. GAAP
financial measures.
                                                              Three Months Ended March 31,
(In millions, unless otherwise noted)                        2014         2013       Variance
Revenues and other income:
Sales and other operating revenues                       $     16.9     $  20.8     $    (3.9 )
Sales to related parties                                      113.8        89.1          24.7
Other income                                                    1.5         1.2           0.3
Other income - related parties                                  5.1         3.6           1.5
Total revenues and other income                               137.3       114.7          22.6
Costs and expenses:
Cost of revenues (excludes items below)                        26.6        30.5          (3.9 )
Purchases from related parties                                 24.0        21.8           2.2
Depreciation                                                   12.6        11.7           0.9
General and administrative expenses                            15.9        13.5           2.4
Other taxes                                                     1.9         1.7           0.2
Total costs and expenses                                       81.0        79.2           1.8
Income from operations                                         56.3        35.5          20.8
Net interest and other financial costs                          0.6         0.2           0.4
Income before income taxes                                     55.7        35.3          20.4
Provision for income taxes                                        -           -             -
Net income                                                     55.7        35.3          20.4
Less: Net income attributable to MPC-retained interest         21.5        17.7           3.8
Net income attributable to MPLX LP                             34.2        17.6          16.6
Less: General partner's interest in net income
attributable to MPLX LP                                         1.0         0.4           0.6
Limited partners' interest in net income attributable to
MPLX LP                                                  $     33.2     $  17.2     $    16.0

Adjusted EBITDA attributable to MPLX LP (1)              $     43.8     $  25.1     $    18.7
Distributable Cash Flow attributable to MPLX LP (1)            37.7        28.0           9.7
Pipeline throughput (mbpd):
Crude oil pipelines                                             982       1,076           (94 )
Product pipelines                                               819         917           (98 )
Total                                                         1,801       1,993          (192 )
Average tariff rates ($ per barrel): (2)
Crude oil pipelines                                      $     0.68     $  0.59     $    0.09
Product pipelines                                              0.62        0.52          0.10
Total pipelines                                                0.65        0.56          0.09

(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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                                                               Three Months Ended March 31,
(In millions)                                                      2014              2013
Reconciliation of Adjusted EBITDA attributable to MPLX LP
and Distributable Cash Flow attributable to MPLX LP from Net
Income:
Net income                                                   $          55.7     $     35.3
Less: Net income attributable to MPC-retained interest                  21.5           17.7
Net income attributable to MPLX LP                                      34.2           17.6
Plus: Net income attributable to MPC-retained interest                  21.5           17.7
Depreciation                                                            12.6           11.7
Non-cash equity-based compensation                                       0.4            0.2
Net interest and other financial costs                                   0.6            0.2
Adjusted EBITDA                                                         69.3           47.4
Less: Adjusted EBITDA attributable to MPC-retained interest             25.5           22.3
Adjusted EBITDA attributable to MPLX LP                                 43.8           25.1
Plus: Current period deferred revenue for committed volume
deficiencies                                                             7.7            4.7
Less: Cash interest paid, net                                            0.4            0.2
 Maintenance capital expenditures paid                                   1.9            1.5
 Volume deficiency credits                                              11.5            0.1
Distributable Cash Flow attributable to MPLX LP              $          37.7     $     28.0



                                                                  Three Months Ended March 31,
(In millions)                                                       2014                 2013
Reconciliation of Adjusted EBITDA attributable to MPLX LP and
Distributable Cash Flow attributable to MPLX LP from Net Cash
Provided by Operating Activities:
Net cash provided by operating activities                     $        71.9         $        46.7
Less: Changes in working capital items                                  4.3                  (2.3 )
 All other, net                                                        (0.5 )                 2.4
Plus: Non-cash equity-based compensation                                0.4                   0.2
 Net interest and other financial costs                                 0.6                   0.2
 Asset retirement expenditures                                          0.2                   0.4
Adjusted EBITDA                                                        69.3                  47.4
Less: Adjusted EBITDA attributable to MPC-retained interest            25.5                  22.3
Adjusted EBITDA attributable to MPLX LP                                43.8                  25.1
Plus: Current period deferred revenue for committed volume
deficiencies                                                            7.7                   4.7
Less: Cash interest paid, net                                           0.4                   0.2
 Maintenance capital expenditures paid                                  1.9                   1.5
 Volume deficiency credits                                             11.5                   0.1
Distributable Cash Flow attributable to MPLX LP               $        37.7         $        28.0

Sales and other operating revenues decreased $3.9 million in the first quarter of 2014 compared to the first quarter of 2013. This decrease was due to a $4.9 million decrease related to a 77 mbpd decrease in third-party crude oil and products volumes shipped, offset by a $1.0 million increase due to higher average tariffs received on the volumes of crude oil and products shipped.

Sales to related parties increased $24.7 million in the first quarter of 2014 compared to the first quarter of 2013. This increase was primarily related to a $5.7 million increase due to higher average tariffs received on the volumes of crude oil and products shipped and a $7.8 million increase related to an 65 mbpd increase in related party crude oil and product volumes shipped on higher tariff pipelines, offset by a $4.7 million decrease related to a 174 mbpd decrease in related party crude oil and product volumes shipped on lower tariff pipelines. This increase is also due to an $16.6 million increase in revenue related to volume deficiency credits.


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Other income and other income - related parties increased $1.8 million in the first quarter of 2014 compared to the first quarter of 2013. The increases were primarily due to an increase in fees received for operating MPC's private pipeline systems.

Cost of revenues decreased $3.9 million in the first quarter of 2014 compared to the first quarter of 2013. This decrease is primarily related to a decrease in contract services used and lower volumes of crude oil and products shipped in the first quarter of 2014 as compared to the first quarter of 2013.

Purchases from related parties increased $2.2 million in the first quarter of 2014 compared to the first quarter of 2013. The increase is primarily related to increased compensation expenses provided under the omnibus and employee services agreements with MPC.

Depreciation expense increased $0.9 million in the first quarter of 2014 compared to the first quarter of 2013 due to completed capital projects being in service during the 2014 period.

General and administrative expenses increased $2.4 million in the first quarter of 2014 compared to the first quarter of 2013. The increase is primarily related to increased services provided under the omnibus and employee services agreements with MPC.

During the first quarter of 2014, MPC did not ship its minimum committed volumes on certain of our pipeline systems. As a result, for the first quarter, MPC was obligated to make a $11.1 million deficiency payment, which we have recorded as deferred revenue-related parties on our consolidated balance sheet. During the first quarter of 2014, there was $16.6 million of volume deficiency credits, which we have recorded as revenue. At March 31, 2014, the cumulative balance of deferred revenue-related parties on our consolidated balance sheet was $28.5 million. The following table presents the future expiration dates of the associated deferred revenue credits:

(In millions)
June 30, 2014        $  1.4
September 30, 2014      5.1
December 31, 2014      10.9
March 31, 2015         11.1
Total                $ 28.5

We will recognize revenue for the deficiency payments in future periods at the earlier of when volumes are transported in excess of the minimum quarterly volume commitments, when it becomes impossible to physically transport volumes necessary to utilize the accumulated credits or upon expiration of the make-up period. However, deficiency payments are included in the determination of Distributable Cash Flow in the period in which a deficiency occurs.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

Our cash and cash equivalents balance was $40.6 million at March 31, 2014
compared to $54.1 million at December 31, 2013. The change in cash and cash
equivalents was due to the factors discussed below. Net cash provided by (used
in) operating activities, investing activities and financing activities for the
three months ended March 31, 2014 and 2013 were as follows:

                                   Three Months Ended
                                        March 31,
(In millions)                       2014           2013
Net cash provided by (used in):
Operating activities            $     71.9       $ 46.7
Investing activities                  (6.6 )       (9.2 )
Financing activities                 (78.8 )      (26.3 )
Total                           $    (13.5 )     $ 11.2


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Net cash provided by operating activities increased $25.2 million in the first three months of 2014 compared to the first three months of 2013, primarily due to a $6.6 million favorable impact from changes in working capital and a $20.4 million increase in net income, offset by a $1.8 million decrease in non-cash adjustments.
For the first three months of 2014, changes in working capital were a net $4.3 million source of cash, primarily due to an increase in net liabilities to related parties, partially offset by a decrease in third-party accounts payable and accrued liabilities. Net liabilities to related parties increased $6.3 million, primarily due to an increase in payables to related parties and an increase in deferred revenue from related parties, partially offset by an increase in receivables from related parties. Third-party accounts payable and accrued liabilities decreased $2.3 million primarily due to the timing of project expenditures.

For the first three months of 2013, changes in working capital were a net $2.3 million use of cash, primarily due to an decrease in third-party accounts payable and accrued liabilities, partially offset by a decrease in third-party receivables. Accounts payable and accrued liabilities decreased $7.1 million primarily due to the timing of project expenditures. Third-party receivables decreased $3.6 million due to payments received on outstanding receivables.

Net cash used in investing activities decreased $2.6 million in the first three months of 2014 compared to the first three months of 2013, primarily due to a $4.1 million decrease in additions to property, plant and equipment. Additions to property, plant and equipment of $5.1 million in the first three months of 2013 and $9.2 million in the first three months of 2013 were primarily due to capital expenditures.

Net cash used in financing activities increased $52.5 million in the first three months of 2014 compared to the first three months of 2013. The increase in cash used is primarily due to distributions to MPC of $310.0 million related to the acquisition of the 13.0 percent interest in Pipe Line Holdings in the first quarter of 2014, increased quarterly distributions of $12.5 million to unitholders and MPC for its retained noncontrolling interest in Pipe Line Holdings, partially offset by $270.0 million in borrowings on our revolving credit agreement.

Capital Resources

We expect our ongoing sources of liquidity to include cash generated from operations, borrowings under our revolving credit agreements, and issuances of additional debt and equity securities. We believe that cash generated from these sources will be sufficient to meet our short-term working capital requirements and long-term capital expenditure requirements and to make quarterly cash distributions. MPC manages our cash and cash equivalents on our behalf directly with third-party institutions as part of the treasury services that it provides to us under our omnibus agreement.

Our revolving credit agreement ("Credit Agreement") contains representations and warranties, affirmative and negative covenants and events of default that we consider usual and customary for an agreement of that type and that could, among other things, limit our ability to pay distributions to our unitholders. The financial covenant requires us to maintain a ratio of Consolidated Total Debt (as defined in the Credit Agreement) as of the end of each fiscal quarter to Consolidated EBITDA (as defined in the Credit Agreement) for the prior four fiscal quarters of not greater than 5.0 to 1.0 (or 5.5 to 1.0 during the six-month period following certain acquisitions). At March 31, 2014, we were in compliance with this financial covenant with a ratio of Consolidated Total Debt to Consolidated EBITDA of 2.2 to 1.0, as well as other covenants contained in the Credit Agreement. As of March 31, 2014, we had $270.0 million outstanding under the Credit Agreement.

On March 31, 2014, Pipe Line Holdings entered into a credit agreement with MPL Investment LLC, a subsidiary of MPC, providing for a $50.0 million revolving credit facility which is scheduled to terminate on March 31, 2019. This facility allows the partnership more efficient use of our bank revolver. The agreement requires that we remain in compliance with the covenants, terms and conditions to which we are subject under the aforementioned Credit Agreement. Borrowings of revolving loans under this credit facility bear interest at the one-month term LIBO Rate plus 1.375 percent. As of March 31, 2014, there were no borrowings outstanding under this facility.

Capital Requirements

Our operations are capital intensive, requiring investments to expand, upgrade or enhance existing operations and to meet environmental and operational regulations. Our capital requirements consist of maintenance capital expenditures and expansion capital expenditures. Examples of maintenance capital expenditures are those made to replace partially or fully depreciated assets, to maintain the existing operating capacity of our assets and to extend their useful lives, or other capital expenditures that are incurred in maintaining existing system volumes and related cash flows. In contrast, expansion capital expenditures are those incurred for acquisitions or capital improvements that we expect will increase our operating capacity or operating income


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over the long term. Examples of expansion capital expenditures include the acquisition of equipment or the construction, development or acquisition of additional pipeline or storage capacity.

Our capital expenditures for the three months ended March 31, 2014 and 2013 are shown in the table below:

                                                             Three Months Ended March 31,
(In millions)                                                    2014              2013
Maintenance                                                $           2.4     $      2.2
Expansion                                                              3.0           10.4
Total capital expenditures                                             5.4           12.6
Less: Increase in capital accruals                                     0.1            3.0
Asset retirement expenditures                                          0.2            0.4
Additions to property, plant and equipment                 $           5.1     $      9.2

. . .

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