MPLX LP (MPLX) 2015 Q1 法說會逐字稿

Welcome to the MPLX LP first quarter 2015 earnings conference call. My name is Hilda and I will be your operator for today. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Ms. Geri Ewing. Ms. Ewing, you may begin.

Thank you, Hilda. Good afternoon and welcome to the MPLX first quarter 2015 earnings webcast and conference call. The synchronized slides that accompany this call can be found on mplx.com under the Investor tab. On the call today are Pam Beall, President of MPLX; and Tim Griffith, its Chief Financial Officer. We invite you to read the Safe Harbor statement on slide 2. It's a reminder that we will be making forward-looking statements during the presentation and during the question-and-answer session. Some of the forward-looking statements might relate to MPLX's sponsor, Marathon Petroleum Corporation. Actual results may differ materially from what we expect today. Factors that could cause actual results to differ are included here as well as in our filings of both MPLX and Marathon Petroleum with the SEC.

Now, I will turn the call over to Pam Beall for opening remarks.

Thank you, Geri, and good afternoon. MPLX reported solid financial results for the first quarter with a performance that continues to support the growth in distributable cash flows to the partnership. Adjusted EBITDA was $64.2 million for the quarter generating distributable cash flow of $57.4 million. Our Board of Directors declared a distribution of $0.41 per unit for the first quarter, which represents a 25.2% increase over the first quarter of 2014 and a 7.2% increase from the fourth quarter of 2014. MPLX has provided distribution increases in each of the nine quarters since IPO representing a compound annual growth rate of 21.9% over the minimum quarterly distribution established at the partnership's formation. We continue to execute our strategy to accelerate the partnership's growth to evolve into a large cap diversified MLP.

Now, this is exemplified by the announcement that Marathon Petroleum Corporation's Board authorized the sale of its marine logistics business to MPLX. Pending the approval of the MPLX Board, this transaction is expected to close in the next several months. If you'll turn to slide 4, we highlight MPC's marine transportation business, which is a fully integrated waterborne transportation service provider consisting primarily of three groups of assets. The base business includes 18 towboats and approximately 200 tank barges, which are capable of moving light products, heavy oils, crude oil, renewable fuels, chemicals, and feedstocks throughout the Midwest and Gulf Coast regions of the US. The assets also include a state-of-the-art marine repair facility near Catlettsburg, Kentucky that's expected to enable us to minimize downtime and maximize asset utilization.

The third group includes fleeting properties, which are strategically located staging areas in key markets along the Ohio River and provide easy access to loading and unloading docks. The marine business to be acquired represents about 60% of the volume of MPC's inland marine movements. In addition to providing transportation services with acquired assets, MPLX would provide additional marine logistics services including managing the 40% of the volume of MPC's inland marine movement provided by third parties and Jones Act blue water movements that are provided 100% today by third parties. MPC's marine requirements have increased significantly in the past several years with its acquisition of Galveston Bay refinery and the Hess retail business along the Atlantic coast.

The contract structure with MPC is expected to be on a fee for capacity basis, which would provide further stable earnings to MPLX's predominantly fee-based earnings profile and provide a platform for future potential growth in the marine services area. The proposed acquisition of the marine business is expected to generate approximately $115 million of annual EBITDA. If MPLX's Board of Directors approves the transaction, we expect it will be financed with a combination of debt and equity, which could include transactions with MPC. Now, we can turn back to slide 3 and I'll continue these opening remarks. The anticipated growth in MPLX's earnings associated with these assets would help support a targeted average annual distribution growth rate in the mid-20% range over the next five years, including an expected 29% growth in distributions in 2015.

We expect our increased size and scale will provide us greater flexibility to fund organic projects and to pursue acquisition opportunities independently from our sponsor, Marathon Petroleum Corporation, and provide the partnership with improved access to the capital markets. This is highlighted by the partnership's inaugural $500 million investment grade bond offering that we completed in the first quarter. MPLX's growth strategy also includes organic projects such as the Cornerstone Pipeline, the Robinson butane cavern, and the Patoka to Lima expansion. We recently completed the binding open season for the Cornerstone Pipeline project, which will transport liquid production from the Utica shale region in Eastern Ohio to Ohio River Pipe Line's tank farm in East Sparta and to Marathon Petroleum Company's refinery in Canton, Ohio.

The pipeline will be routed to provide the opportunity for connections to various condensate stabilization, fractionation, and cryogenic facilities, along with potential gathering and storage facilities. The pipeline will be a batch system with the ability to transport condensate, natural gasoline, diluent, and butane. While Marathon Petroleum has committed to be an anchor shipper on Cornerstone, the diameter of the pipeline is being increased to 16 inches to provide an industry solution, including opportunities to connect many Midwest refineries to production from Utica shale with the potential to ultimately reach the Chicago area refineries and pipelines that supply diluent to Western Canada. The larger diameter pipeline and related tank farm project, which is necessary to accommodate the larger pipeline, is estimated to cost approximately $250 million and is expected to be completed by the end of 2016.

We continue to be very enthusiastic about the logistics and infrastructure buildout in this region and view Cornerstone as a critical piece of that development. Given the macro oil price environment that we've seen over the last six months, we want to remind investors that MPLX is a sponsored Master Limited Partnership with a strong fee-based earnings profile and almost no direct exposure to commodity risk. Most of the crude oil and refined product movements that underpin these earnings are related to Marathon Petroleum Corporation's crude oil and refined product movements under long-term contracts that are not directly impacted by the lower crude oil prices. Additionally, nearly all of these contracts contain minimum volume commitments, which further protect the cash flows of the partnership. The addition of the MPC marine assets would expand this fee-based earnings profile.

MPLX is focused on participating in the energy industry's midstream infrastructure buildout and we believe it is very well positioned to participate in this growth and continue to generate attractive returns for the partnership's unitholders over an extended period of time. I'll now turn the call over to Tim Griffith to review the financial results for the quarter.

Thanks, Pam. The bridge on slide 5 shows the change in net income during the first quarter of 2015 on a 100% basis compared to the first quarter of 2014 as well as the adjustment for the small retained interest in Pipe Line Holdings retained by MPC. The primary drivers for the decrease in net income from last year were the recognition of lower revenue related to volume deficiency credits and higher general, administrative, and interest expenses. The higher interest costs were attributable to the new debt issued to fund the Pipe Line Holdings acquisition in December. Partially offsetting these negative impacts on income was an increase in transportation revenue primarily due to higher average tariff rates.

Although not shown on this slide, net income attributable to MPLX increased $11.4 million from the first quarter of 2014, which was primarily due to an increase in MPLX's ownership interest in Pipe Line Holdings, partially offset by the decreases just mentioned. As you can see on slide 6, distributable cash flow for the quarter was $57.4 million compared to $37.3 million of distributable cash flow for the first quarter of 2014. During the first quarter of 2015, MPC did not ship its minimum committed volume on certain MPLX pipeline systems resulting in $12.6 million of deficiency payments in the quarter. Although these deficiency payments in the quarter do not immediately enter into the termination of income, they are included in the $57.4 million of distributable cash flow in the quarter.

Conversely, adjusted EBITDA attributable to MPLX included $9.9 million of revenue resulting from recognizing volume deficiency credits that were generated in prior quarters, which were not part of the distributable cash flow in the first quarter. Distributions for the first quarter were $36.9 million. This represents a coverage ratio of 1.56 times compared to our target coverage of 1.1 times. Our coverage ratio will fluctuate from period to period primarily due to the seasonality in maintenance spending and the timing of dropdowns in acquisitions. As you can see here, coverage in the first quarter tends to be higher within the calendar year. In addition, the accelerated growth profile of the partnership's earnings may result in distribution coverage above our 1.1 times target for a more extended period of time.

Slide 7 provides adjusted EBITDA and distributable cash flow by quarter for MPLX since the formation of the partnership and continues to demonstrate the focused growth in earnings and distributable cash flow in the partnership over time. As we highlighted last quarter, we expect the partnership's run rate EBITDA to be at least $450 million by the end of this year. The acquisition of the marine assets Pam just discussed could be an important part of that growth. Slide 8 provides some selected balance sheet information. As Pam alluded to, MPLX completed its inaugural $500 million 10-year debt offering during the first quarter, which was rated investment grade by all three of the major agencies. We used the proceeds of this bond offering to repay our revolving credit facility resulting in the full $1 billion of availability on our bank credit facility.

The partnership also maintains the ability to borrow from its sponsor if desired or necessary. This availability in addition to the $132.5 million of cash and ready access to the capital markets should provide us with sufficient liquidity to pursue the growth opportunities that expands the growing base of distributable cash flow including the accelerated pace of earnings growth we are now pursuing. Our consolidated total debt represents about 3.3 times consolidated EBITDA, well below the maximum in our credit facility of 5 times and continues to provide great financial flexibility for the partnership. Slide 9 demonstrates our commitment to grow the distributable cash flow to grow and distribute cash flow to our unitholders.

The bars illustrate our distribution history since the IPO and highlight the strong and consistent growth in LP distributions. MPLX's first quarter 2015 distributions represent a 25.2% increase over the first quarter of 2014 and a 21.9% compound annual growth rate over the minimum quarterly distribution established at the partnership's formation. As Pam mentioned earlier, we expect to increase LP distributions by 29% in calendar year 2015 and average an annual growth rate in the mid-20%s over the next five years. This substantial growth is part of our intent to evolve MPLX into a large-cap diversified MLP, which will provide an attractive return to our unitholders over an extended period of time.

With that, let me turn the call back over to Geri Ewing. Geri?

Thanks, Tim. With that, we will open the call for questions.

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Brian Zarahn, Barclays.

Appreciate the color on the marine transportation business. In terms of contracts, would you expect the duration to be similar to your prior dropdowns for this business?

We'll have contract length and it will be attractive for these kind of assets. I would say that generally in the inland marine business in the spot markets, the contract length is pretty short in duration, anywhere from one to three years, and we would expect we would provide contracts between MPLX and MPC for a greater period of time than that. But I don't know that we're prepared to disclose all that until we finalize the transaction, Brian.

Brian, I might just add to that. As Pam described, the marine business for MPC is so fundamental to how the business operates that if there is any contracting risk at all, it frankly just relates to potentially what those rates could look like over time. But highly unlikely that we would ever step away from MPC's marine business given its importance to the refining business.

Okay. And then it sounds like there's third parties who provide some marine transportation services to MPC. Do you view this as a potential growth vehicle for MPLX in marine transportation or is it more providing services to MPC for now and then you'll see how the business evolves?

Brian, just based on the fact that only 60% of MPC's needs are being met today with its own marine assets that are proposed to become part of MPLX, we think that there is significant growth potential just to move those services that today are provided by third parties to MPLX. So, that's an inherent built-in growth opportunity for MPLX and 100% of the blue water movements are chartered today to third parties. So, both of those represent attractive growth opportunities for MPLX and really that growth in the requirement that MPC has is really based on its growth in its recent acquisitions of Galveston Bay and the Hess retail business. So, really we see a nice path toward growth just with the sponsors and then yes, we'll look to expand the services to third parties over time.

And then on timing, I know you mentioned several months. Would you view that as greater than three months for this transaction to close or how do you view the timing of several months?

I think there is a process that we need to go through and I really couldn't give you anything more definitive than what we've already provided.

Then last one from me on 2015 expansion CapEx, is $220 million still a reasonable number?

What we have been talking about for Cornerstone when we were contemplating just the 12-inch pipe was about $200 million that was a component of that $260 million and the addition of the tank farm buildout at this point along with the increase in the size of the pipe from 12 inch to 16 inch, that project alone the increase, the project total goes up to $250 million. Now of course not all that's in 2015, but a portion of it would be. So, we haven't really updated the guidance on exactly what we think our 2015 CapEx will be, but could be more because of the expanded scope for Cornerstone.

Okay. We'll stay tuned. Thank you.

Gabe Moreen, Bank of America-Merrill Lynch.

Quick question for you in terms of just expectations around maintenance CapEx for the marine transportation assets and just how you'd be viewing that, whether it's going to be higher or lower than I guess the base MPLX business is?

So, the maintenance capital for the current MPLX businesses is predominantly the pipeline business and so a lot of that is that maintenance capital. For the marine business, most of the maintenance actually is expensed so the maintenance capital tends to be quite low.

Got it. I know there's drydocking and things like in the marine transportation business so or is it fair to say that some of those expenses may be I guess somewhat lumpy in terms of the profile going forward?

Yes, it would be. And when we close the transaction, I'm sure we'll be able to provide some more definitive guidance around what you should expect. But the marine or the maintenance capital would be maybe 1% or 2% of EBITDA, quite a bit lower than the pipeline business.

Gabe, I think you're right to separate the amount of maintenance capital from replacement capital, which for a marine business could get lumpy at different points in time depending on when specific vessels need to be replaced and where they are in their useful lives. So, I think we would expect over time as this becomes part of MPLX that that replacement capital could be lumpy at different points in time.

Got it. I guess I'll stay tuned for guidance when the transaction happens, just how that will ultimately be treated. I guess my follow-up question to that is more conceptual just in terms of among all the dropdown opportunities that you've got, is it just because the business has grown so much over the last year or two and you see the potential for further growth or is there other reasons behind that?

Well, I think we've been in the process of readying a number of asset classes kind of simultaneously and this was an asset class that was ready sooner than some of the others in terms of all the accounting and carveouts and permits and transfers of assets that are required to get these assets ready for movement into MPLX and it does provide a nice platform for growth within MPLX. So, I think a combination of factors there.

Got it. Thanks, Pam. Thanks, Tim.

Jeremy Tonet, JP Morgan.

Just want to think about minimum volume commitments that could be associated with this next dropdown, I don't think that was mentioned at this point and it might be premature. But I'm just wondering conceptually as far as price you're willing to pay for dropdowns versus how long the MPCs to the contract could be or what percentage of cash flow is covered by MPCs. Could you walk us through how you how you think about the tradeoff?

Well, for this transaction, think of it more like the contract that we have for the butane cavern that's already part of MPLX. When we talk about fee for capacity, MPC will pay a fee to have the equipment available whether it's used or not. Now since it's only 60% of its water movements today, MPC's marine assets have always been very highly utilized, but the compensation's not tied to that utilization. We have to have the equipment available for MPC to use and we take into consideration the maintenance that needs to occur. But it's not like a minimum volume commitment, MPC will pay to have that capacity at its disposal and discretion. And then in addition, there's a flat monthly rate or fee associated with managing the rest of the marine water movements for MPC and managing the third-party chartered business.

Got you. That makes sense. And maybe just asking a bit differently, but conceptually if the other contracts are 5 to 10 years for a lot of the other assets that you guys own, it sounds like this might be something a little bit of a shorter duration. How do you guys think about the tradeoff with valuation there? Does that enter the equation as far as the multiple that you could see in the dropdown in this type of business?

So, I don't know that the length of the contract will be less than 5 to 10 years. I was just trying to illustrate that in this market I would say more normal would be one to three years, but that doesn't mean that's the agreement that we will have with MPC. We would expect to have a longer-term agreement than what is typical in the industry today.

Got it. And if I could, as far as the replacement CapEx that you talked about, what is the average useful life of these vessels? How should we think about that?

A lot of vessels can be used up to 40 years and I would say that when you look across the industry and the fleet across the industry, average age of our fleet is relatively young by comparison. So again, I think at the time that we complete the acquisition, we'll be sharing more detailed information about the business.

That's helpful. And just going back to Cornerstone for a minute and I think you touched on a bit as far as this could be a platform for additional growth opportunities. I was wondering if you might be able to expand a little bit there as far as any other specific things that you see where Cornerstone could lead to other opportunities?

So, we talked a little bit about the buildout opportunities for Cornerstone and that would include taking these natural gas liquids west and south out of the Ohio River Pipe Line East Sparta terminal down to Heath, Ohio and then back up to Findlay and jump on a system to go up to Toledo or down to Lima where there are refineries located in those markets. So, that would use existing pipeline that Marathon Pipe Line and Ohio River Pipe Line have in the ground today and there's also opportunity to buildout at the origin. And let me just ask Craig Pierson to add some color as well. So, Craig is the President of Marathon Pipe Line.

At the origin of the pipeline, there's some other opportunities associated with some existing fractionation facilities to extend the origin to those facilities and some potential other pipeline connections.

Between the origin of Cornerstone and Southeastern Ohio whether there's another I will say concentration similar plants, there's a gap there and there is potential to connect some pipes that are in that area with the Cornerstone origination point and I think it would provide the producers a lot more flexibility in terms of accessing pipeline markets. So again, we think that there is opportunity to move natural gasoline; certainly diluent, we could make the connections to some of the pipes that are proposing to go west into Canada to access the diluent market. And we think through existing and upsized pipelines, we could provide movement of these products over to MPC's Robinson refinery and then back up to the Chicago area refineries as well. So, we think that there's interest in accessing the production that's coming out of the Utica and Marcellus and we think that the Cornerstone pipeline is going to be a real key contributor to connecting the demand with the supply sources.

That's very helpful. Thank you.

Timm Schneider, Evercore ISI.

Just a quick question or a quick follow-up for me on Cornerstone. You said this is a batch pipeline. Can you just remind us what kind of products can run through that?

So condensate, natural gasoline, and a form of natural gasoline that would be diluent with a different quality, and then butane are the products that we would expect to move in the pipe.

Got it. Is there any way that at some point propane can start moving through that pipeline?

That's not our focus. It's just the liquids that I mentioned.

Okay, got it. Can you quantify what the storage is that you have in the caverns?

We have a number of different caverns. Catlettsburg is a million barrels, Robinson right now is being configured for 1.4 million although we are considering if that's the appropriate size or if it should be a little bit larger, and then MPC has retained assets that we expect at some point could be offered to MPLX to acquire so MPC does have caverns near the Canton area and also the Detroit refinery.

Got it. And then I actually have a follow-up. On the propane side, I mean if you look at what's going on in the Northeast right now specifically kind of the seasonality around propane, the market is getting massively oversupplied and kind of that shoulder season Q2, Q3 and there's a lack of intraregion storage. So, wouldn't it make sense to have Cornerstone also move propane west especially if you get into the Chicago market eventually?

Again, it's not our focus for Cornerstone to move propane. There are quite a few existing lines and proposed lines that would have the ability to move propane and ethane north up to Sarnia and there are some other lines that are natural gas lines today that other parties may be considering. So, Chicago has been kind of an interesting area because you have a lot of supply now out of Utica and Marcellus and historically there's also been a lot of supply coming from the Rockies and then even up from the Gulf Coast. But that's not the focus of our use for Cornerstone and the buildout projects.

Okay, got it. Thank you.

Ryan Levine, Citigroup.

I just wanted to get an update on the dropdown inventory at the parent, is it still $1.6 billion and what portion of that is subject to PLRs and what's the latest in terms your pursuit of that? Thanks.

So before the announcement that was made about offering the marine business to MPLX, we've been talking about a backlog or dropdown portfolio potential of about $1.6 billion.

And what portion of that is subject to PLR?

To private letter ruling, okay. We've been talking about the fuels distribution component of that portfolio that we are evaluating and that we'll probably seek a PLR for.

Is there any update on timing?

We've estimated that at a very high level to be about $600 million of potential EBITDA and that's just been described at a high level as 20 billion gallons of product that we sell each year and attaching a $0.03 margin. And so we continue to evaluate how we want the structure of the fuels distribution business to look and so as soon as we conclude that process, we'll be seeking a PLR, but we can't really give you any specific timing around that at this point.

Okay. Thanks.

Kristina Kazarian, Deutsche Bank.

Can you just talk a little bit about what this incremental $115 million of EBITDA? Obviously the coverage grows quite a bit closer to 2 times. Are you guys going to run higher coverage on a go-forward base? Does this mean there is a chance for accelerated DPU growth, slowdown in future pace of acquisitions? How do I balance those three all in my head?

Kristina, as I mentioned during the call, it's possible that the earnings of the partnership will outpace the growth of distributions even given the mid-20%s five-year growth that we've provided. So, it is possible that over the first year or two that we'll run coverage that will be higher than the 1.1 times. I don't think we're going to revisit distribution growth strategy. We think that that mid-20%s five-year growth is already robust and attractive for investors and we don't think we need to go beyond that at this point.

Is there a point that gets too high?

Based on how we've looked at the business and our own modeling in terms of what things look like, I think we're comfortable that although it could be higher than our target that it doesn't put us in a situation where we need to revisit it.

Okay. Thank you.

(Operator Instructions)

Hilda, if there's no other questions, we'll close the Q&A.

Thank you. We don't show further questions, I would like to turn the call back over to Ms. Ewing for any final remarks.

I just like to thank everyone for joining us today and thank you for your interest in MPLX. Should you have any additional questions or like clarification on anything that was discussed today, please contact Teresa Homan or myself, we will be available for your call. Thank you.

Ladies and gentlemen, this concludes today's conference. We thank you for your participation. You may now disconnect.