Attached files
| file | filename |
|---|---|
| EX-32.2 - EXHIBIT 32.2 - MPLX LP | mplx-2017630xex322.htm |
| EX-32.1 - EXHIBIT 32.1 - MPLX LP | mplx-2017630xex321.htm |
| EX-31.2 - EXHIBIT 31.2 - MPLX LP | mplx-2017630xex312.htm |
| EX-31.1 - EXHIBIT 31.1 - MPLX LP | mplx-2017630xex311.htm |
| EX-10.1 - EXHIBIT 10.1 - MPLX LP | mplx-2017630xex101.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________
FORM 10-Q
_____________________________________________
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended June 30, 2017
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 001-35714
_____________________________________________
MPLX LP
(Exact name of registrant as specified in its charter)
_____________________________________________
Delaware | 27-0005456 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
200 E. Hardin Street, Findlay, Ohio | 45840 | |
(Address of principal executive offices) | (Zip code) | |
(419) 421-2414
(Registrant’s telephone number, including area code)
_____________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.) Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | x | Accelerated filer | ¨ |
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Emerging growth company | ¨ | ||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ¨ No x
MPLX LP had 388,521,088 common units and 7,929,000 general partner units outstanding at July 27, 2017.
MPLX LP
Form 10-Q
Quarter Ended June 30, 2017
INDEX
Page | |
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”), MPLX Terminal and Storage LLC (“MPLX Terminal and Storage”), MarkWest Energy Partners, L.P. (“MarkWest”), MarkWest Hydrocarbon, L.L.C. (“MarkWest Hydrocarbon”), MPLX Pipe Line Holdings LLC (“Pipe Line Holdings”), Marathon Pipe Line LLC (“MPL”), Ohio River Pipe Line LLC (“ORPL”), Hardin Street Marine LLC (“HSM”), Hardin Street Transportation LLC (“HST”), Woodhaven Cavern LLC (“WHC”) and MPLX Terminals LLC (“MPLXT”). We have partial ownership interests in a number of joint venture legal entities, including MarkWest Pioneer, L.L.C. (“MarkWest Pioneer”), MarkWest Utica EMG, L.L.C. (“MarkWest Utica EMG”) and its subsidiary Ohio Gathering Company, L.L.C. (“Ohio Gathering”), Ohio Condensate Company, L.L.C. (“Ohio Condensate”), Wirth Gathering Partnership (“Wirth”), MarkWest EMG Jefferson Dry Gas Gathering Company, L.L.C. (“Jefferson Dry Gas”), Sherwood Midstream LLC (“Sherwood Midstream”), Sherwood Midstream Holdings LLC (“Sherwood Midstream Holdings”), MarEn Bakken Company, LLC (“MarEn Bakken”), Johnston County Terminal, LLC (“Johnston Terminal”) and Guilford County Terminal Company, LLC (“Guilford Terminal”). References to “MPC” refer collectively to Marathon Petroleum Corporation and its subsidiaries, other than the Partnership. Unless otherwise specified, references to “Predecessor” refer collectively to HSM’s, HST’s, WHC’s and MPLXT’s related assets, liabilities and results of operations prior to the dates of their respective acquisitions effective January 1, 2014 for HSM, January 1, 2015 for HST and WHC and April 1, 2016 for MPLXT.
1
Glossary of Terms
The abbreviations, acronyms and industry technology used in this report are defined as follows.
ATM Program | A continuous offering, or at-the-market program, by which the Partnership may offer common units in amounts, at prices and on terms to be determined by market conditions and other factors at the time of any offerings, as defined by the prospectus supplement filed with the SEC on August 4, 2016 |
Bbl | Barrels |
Bcf/d | One billion cubic feet of natural gas per day |
Btu | One British thermal unit, an energy measurement |
Condensate | A natural gas liquid with a low vapor pressure mainly composed of propane, butane, pentane and heavier hydrocarbon fractions |
DCF (a non-GAAP financial measure) | Distributable Cash Flow |
Dth/d | Dekatherms per day |
EBITDA (a non-GAAP financial measure) | Earnings Before Interest, Taxes, Depreciation and Amortization |
EPA | United States Environmental Protection Agency |
FASB | Financial Accounting Standards Board |
GAAP | Accounting principles generally accepted in the United States of America |
Gal | Gallon |
Gal/d | Gallons per day |
Initial Offering | Initial public offering on October 31, 2012 |
LIBOR | London Interbank Offered Rate |
MarkWest Merger | On December 4, 2015, a wholly-owned subsidiary of the Partnership merged with MarkWest Energy Partners, L.P. |
mbpd | Thousand barrels per day |
MMBtu | One million British thermal units, an energy measurement |
MMcf/d | One million cubic feet of natural gas per day |
Net operating margin (a non-GAAP financial measure) | Segment revenue, less segment purchased product costs, less realized derivative gains (losses) related to purchased product costs |
NGL | Natural gas liquids, such as ethane, propane, butanes and natural gasoline |
OTC | Over-the-Counter |
Predecessor | Collectively: - HSM’s related assets, liabilities and results of operations prior to the date of its acquisition, March 31, 2016, effective January 1, 2015. - HST’s, WHC’s and MPLXT’s related assets, liabilities and results of operations prior to the date of the acquisition, March 1, 2017, effective January 1, 2015 for HST and WHC and April 1, 2016 for MPLXT. |
Realized derivative gain/loss | The gain or loss recognized when a derivative matures or is settled |
SEC | U.S. Securities and Exchange Commission |
SMR | Steam methane reformer, operated by a third party and located at the Javelina gas processing and fractionation complex in Corpus Christi, Texas |
Unrealized derivative gain/loss | The gain or loss recognized on a derivative due to changes in fair value prior to the instrument maturing or settling |
VIE | Variable interest entity |
WTI | West Texas Intermediate |
2
Part I—Financial Information
Item 1. Financial Statements
MPLX LP
Consolidated Statements of Income (Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
(In millions, except per unit data) | 2017 | 2016(1) | 2017 | 2016(1) | |||||||||||
Revenues and other income: | |||||||||||||||
Service revenue | $ | 286 | $ | 233 | $ | 546 | $ | 462 | |||||||
Service revenue - related parties | 270 | 246 | 525 | 423 | |||||||||||
Rental income | 70 | 71 | 139 | 141 | |||||||||||
Rental income - related parties | 70 | 66 | 137 | 104 | |||||||||||
Product sales | 191 | 137 | 394 | 237 | |||||||||||
Product sales - related parties | 2 | 3 | 4 | 6 | |||||||||||
Gain on sale of assets | — | — | 1 | — | |||||||||||
Income (loss) from equity method investments | 1 | (83 | ) | 6 | (78 | ) | |||||||||
Other income | 1 | 1 | 3 | 3 | |||||||||||
Other income - related parties | 25 | 24 | 47 | 45 | |||||||||||
Total revenues and other income | 916 | 698 | 1,802 | 1,343 | |||||||||||
Costs and expenses: | |||||||||||||||
Cost of revenues (excludes items below) | 139 | 113 | 252 | 207 | |||||||||||
Purchased product costs | 140 | 114 | 271 | 193 | |||||||||||
Rental cost of sales | 13 | 15 | 25 | 29 | |||||||||||
Rental cost of sales - related parties | 1 | 1 | 1 | 1 | |||||||||||
Purchases - related parties | 109 | 99 | 216 | 177 | |||||||||||
Depreciation and amortization | 164 | 151 | 351 | 287 | |||||||||||
Impairment expense | — | 1 | — | 130 | |||||||||||
General and administrative expenses | 57 | 63 | 115 | 116 | |||||||||||
Other taxes | 13 | 13 | 26 | 25 | |||||||||||
Total costs and expenses | 636 | 570 | 1,257 | 1,165 | |||||||||||
Income from operations | 280 | 128 | 545 | 178 | |||||||||||
Related party interest and other financial costs | — | — | — | 1 | |||||||||||
Interest expense (net of amounts capitalized of $11 million, $7 million, $18 million and $14 million, respectively) | 74 | 52 | 140 | 107 | |||||||||||
Other financial costs | 13 | 12 | 25 | 24 | |||||||||||
Income before income taxes | 193 | 64 | 380 | 46 | |||||||||||
Provision (benefit) for income taxes | 2 | (8 | ) | 2 | (12 | ) | |||||||||
Net income | 191 | 72 | 378 | 58 | |||||||||||
Less: Net income attributable to noncontrolling interests | 1 | 1 | 2 | 1 | |||||||||||
Less: Net income attributable to Predecessor | — | 52 | 36 | 98 | |||||||||||
Net income (loss) attributable to MPLX LP | 190 | 19 | 340 | (41 | ) | ||||||||||
Less: Preferred unit distributions | 17 | 9 | 33 | 9 | |||||||||||
Less: General partner’s interest in net income attributable to MPLX LP | 74 | 46 | 136 | 85 | |||||||||||
Limited partners’ interest in net income (loss) attributable to MPLX LP | $ | 99 | $ | (36 | ) | $ | 171 | $ | (135 | ) | |||||
Per Unit Data (See Note 6) | |||||||||||||||
Net income (loss) attributable to MPLX LP per limited partner unit: | |||||||||||||||
Common - basic | $ | 0.26 | $ | (0.11 | ) | $ | 0.46 | $ | (0.43 | ) | |||||
Common - diluted | 0.26 | (0.11 | ) | 0.46 | (0.43 | ) | |||||||||
Weighted average limited partner units outstanding: | |||||||||||||||
Common - basic | 377 | 331 | 370 | 316 | |||||||||||
Common - diluted | 382 | 331 | 374 | 316 | |||||||||||
Cash distributions declared per limited partner common unit | $ | 0.5625 | $ | 0.5100 | $ | 1.1025 | $ | 1.0150 | |||||||
(1) | Financial information has been retrospectively adjusted for the acquisition of HST, WHC and MPLXT from MPC. See Notes 1 and 3. |
The accompanying notes are an integral part of these consolidated financial statements.
3
MPLX LP
Consolidated Balance Sheets (Unaudited)
(In millions) | June 30, 2017 | December 31, 2016 | |||||
Assets | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 293 | $ | 234 | |||
Receivables, net | 284 | 299 | |||||
Receivables - related parties | 173 | 247 | |||||
Inventories | 62 | 55 | |||||
Other current assets | 31 | 33 | |||||
Total current assets | 843 | 868 | |||||
Equity method investments | 3,368 | 2,471 | |||||
Property, plant and equipment, net | 11,638 | 11,408 | |||||
Intangibles, net | 473 | 492 | |||||
Goodwill | 2,245 | 2,245 | |||||
Long-term receivables - related parties | 16 | 11 | |||||
Other noncurrent assets | 18 | 14 | |||||
Total assets | $ | 18,601 | $ | 17,509 | |||
Liabilities | |||||||
Current liabilities: | |||||||
Accounts payable | $ | 144 | $ | 140 | |||
Accrued liabilities | 178 | 232 | |||||
Payables - related parties | 93 | 87 | |||||
Deferred revenue | 3 | 2 | |||||
Deferred revenue - related parties | 39 | 38 | |||||
Accrued property, plant and equipment | 171 | 146 | |||||
Accrued taxes | 39 | 38 | |||||
Accrued interest payable | 94 | 53 | |||||
Other current liabilities | 29 | 27 | |||||
Total current liabilities | 790 | 763 | |||||
Long-term deferred revenue | 26 | 12 | |||||
Long-term deferred revenue - related parties | 33 | 19 | |||||
Long-term debt | 6,666 | 4,422 | |||||
Deferred income taxes | 7 | 6 | |||||
Deferred credits and other liabilities | 170 | 177 | |||||
Total liabilities | 7,692 | 5,399 | |||||
Commitments and contingencies (see Note 17) | |||||||
Redeemable preferred units | 1,000 | 1,000 | |||||
Equity | |||||||
Common unitholders - public (284 million and 271 million units issued and outstanding) | 8,360 | 8,086 | |||||
Class B unitholders (4 million and 4 million units issued and outstanding) | 133 | 133 | |||||
Common unitholder - MPC (90 million and 86 million units issued and outstanding) | 1,161 | 1,069 | |||||
Common unitholder - GP (9 million and 0 units issued and outstanding) | 351 | — | |||||
General partner - MPC (8 million and 7 million units issued and outstanding) | (242 | ) | 1,013 | ||||
Equity of Predecessor | — | 791 | |||||
Total MPLX LP partners’ capital | 9,763 | 11,092 | |||||
Noncontrolling interests | 146 | 18 | |||||
Total equity | 9,909 | 11,110 | |||||
Total liabilities, preferred units and equity | $ | 18,601 | $ | 17,509 | |||
The accompanying notes are an integral part of these consolidated financial statements.
4
MPLX LP
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended June 30, | |||||||
(In millions) | 2017 | 2016(1) | |||||
Increase (decrease) in cash and cash equivalents | |||||||
Operating activities: | |||||||
Net income | $ | 378 | $ | 58 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Amortization of deferred financing costs | 25 | 23 | |||||
Depreciation and amortization | 351 | 287 | |||||
Impairment expense | — | 130 | |||||
Deferred income taxes | 1 | (13 | ) | ||||
Asset retirement expenditures | (1 | ) | (2 | ) | |||
Gain on disposal of assets | (1 | ) | — | ||||
(Income) loss from equity method investments | (6 | ) | 78 | ||||
Distributions from unconsolidated affiliates | 66 | 78 | |||||
Changes in: | |||||||
Current receivables | 17 | (20 | ) | ||||
Inventories | (2 | ) | (3 | ) | |||
Fair value of derivatives | (22 | ) | 25 | ||||
Current accounts payable and accrued liabilities | (16 | ) | 19 | ||||
Receivables from / liabilities to related parties | 22 | (12 | ) | ||||
All other, net | 32 | 22 | |||||
Net cash provided by operating activities | 844 | 670 | |||||
Investing activities: | |||||||
Additions to property, plant and equipment | (652 | ) | (606 | ) | |||
Acquisitions, net of cash acquired | (220 | ) | — | ||||
Disposal of assets | 3 | — | |||||
Investments - net related party loans | 80 | 37 | |||||
Investments in unconsolidated affiliates | (640 | ) | (39 | ) | |||
Distributions from unconsolidated affiliates - return of capital | 24 | — | |||||
All other, net | 1 | 5 | |||||
Net cash used in investing activities | (1,404 | ) | (603 | ) | |||
Financing activities: | |||||||
Long-term debt - borrowings | 2,241 | 434 | |||||
- repayments | (1 | ) | (1,311 | ) | |||
Related party debt - borrowings | 12 | 1,853 | |||||
- repayments | (12 | ) | (1,861 | ) | |||
Debt issuance costs | (21 | ) | — | ||||
Net proceeds from equity offerings | 443 | 321 | |||||
Issuance of redeemable preferred units | — | 984 | |||||
Distribution to MPC for acquisition | (1,511 | ) | — | ||||
Distributions to preferred unitholders | (33 | ) | — | ||||
Distributions to unitholders and general partner | (505 | ) | (391 | ) | |||
Distributions to noncontrolling interests | (2 | ) | (1 | ) | |||
Contributions from noncontrolling interests | 128 | 2 | |||||
All other, net | (7 | ) | (1 | ) | |||
Distributions to MPC from Predecessor | (113 | ) | (104 | ) | |||
Net cash provided by (used in) financing activities | 619 | (75 | ) | ||||
Net increase (decrease) in cash and cash equivalents | 59 | (8 | ) | ||||
Cash and cash equivalents at beginning of period | 234 | 43 | |||||
Cash and cash equivalents at end of period | $ | 293 | $ | 35 | |||
(1) | Financial information has been retrospectively adjusted for the acquisition of HST, WHC and MPLXT from MPC. See Notes 1 and 3. |
The accompanying notes are an integral part of these consolidated financial statements.
5
MPLX LP
Consolidated Statements of Equity (Unaudited)
Partnership | |||||||||||||||||||||||||||||||
(In millions) | Common Unitholders Public | Class B Unitholders Public | Common Unitholder MPC | Common Unitholder GP | General Partner MPC | Non-controlling Interests | Equity of Predecessor(1) | Total | |||||||||||||||||||||||
Balance at December 31, 2015 | $ | 7,691 | $ | 266 | $ | 465 | $ | — | $ | 819 | $ | 13 | $ | 692 | $ | 9,946 | |||||||||||||||
Distributions to MPC from Predecessor | — | — | — | — | — | — | (104 | ) | (104 | ) | |||||||||||||||||||||
Issuance of units under ATM Program | 315 | — | — | — | 6 | — | — | 321 | |||||||||||||||||||||||
Net (loss) income | (107 | ) | — | (28 | ) | — | 85 | 1 | 98 | 49 | |||||||||||||||||||||
Allocation of MPC's net investment at acquisition | — | — | 669 | — | (337 | ) | — | (332 | ) | — | |||||||||||||||||||||
Distributions to unitholders and general partner | (248 | ) | — | (57 | ) | — | (86 | ) | — | — | (391 | ) | |||||||||||||||||||
Distributions to noncontrolling interests | — | — | — | — | — | (1 | ) | — | (1 | ) | |||||||||||||||||||||
Contributions from noncontrolling interests | — | — | — | — | — | 2 | — | 2 | |||||||||||||||||||||||
Non-cash contribution from MPC | — | — | — | — | — | — | 334 | 334 | |||||||||||||||||||||||
Equity-based compensation | 5 | — | — | — | — | — | — | 5 | |||||||||||||||||||||||
Deferred income tax impact from changes in equity | 2 | — | — | — | (2 | ) | — | — | — | ||||||||||||||||||||||
Balance at June 30, 2016 | $ | 7,658 | $ | 266 | $ | 1,049 | $ | — | $ | 485 | $ | 15 | $ | 688 | $ | 10,161 | |||||||||||||||
Balance at December 31, 2016 | $ | 8,086 | $ | 133 | $ | 1,069 | $ | — | $ | 1,013 | $ | 18 | $ | 791 | $ | 11,110 | |||||||||||||||
Distributions to MPC from Predecessor | — | — | — | — | — | — | (113 | ) | (113 | ) | |||||||||||||||||||||
Issuance of units under ATM Program | 434 | — | — | — | 9 | — | — | 443 | |||||||||||||||||||||||
Net income | 127 | — | 41 | 3 | 136 | 2 | 36 | 345 | |||||||||||||||||||||||
Contribution from MPC | — | — | — | — | — | — | 12 | 12 | |||||||||||||||||||||||
Allocation of MPC's net investment at acquisition | — | — | 573 | 350 | (197 | ) | — | (726 | ) | — | |||||||||||||||||||||
Distribution to MPC for acquisition | — | — | (430 | ) | — | (1,081 | ) | — | — | (1,511 | ) | ||||||||||||||||||||
Distributions to unitholders and general partner | (289 | ) | — | (92 | ) | (2 | ) | (122 | ) | — | — | (505 | ) | ||||||||||||||||||
Distributions to noncontrolling interests | — | — | — | — | — | (2 | ) | — | (2 | ) | |||||||||||||||||||||
Contributions from noncontrolling interests | — | — | — | — | — | 128 | — | 128 | |||||||||||||||||||||||
Equity-based compensation | 2 | — | — | — | — | — | — | 2 | |||||||||||||||||||||||
Balance at June 30, 2017 | $ | 8,360 | $ | 133 | $ | 1,161 | $ | 351 | $ | (242 | ) | $ | 146 | $ | — | $ | 9,909 | ||||||||||||||
(1) | Financial information has been retrospectively adjusted for the acquisition of HST, WHC and MPLXT from MPC. See Notes 1 and 3. |
The accompanying notes are an integral part of these consolidated financial statements.
6
Notes to Consolidated Financial Statements (Unaudited)
1. Description of the Business and Basis of Presentation
Description of the Business – MPLX LP is a diversified, growth-oriented master limited partnership formed by Marathon Petroleum Corporation. MPLX LP and its subsidiaries (collectively, the “Partnership”) are engaged in the gathering, processing and transportation of natural gas; the gathering, transportation, fractionation, storage and marketing of NGLs; and the transportation, storage and distribution of crude oil and refined petroleum products principally for our sponsor.
The Partnership’s business consists of two segments based on the nature of services it offers: Logistics and Storage (“L&S”) focused on crude oil and refined petroleum products and Gathering and Processing (“G&P”) focused on natural gas and NGLs. See Note 9 for additional information regarding operations.
Basis of Presentation – The Partnership’s consolidated financial statements include all majority-owned and controlled subsidiaries. For non-wholly-owned consolidated subsidiaries, the interests owned by third parties have been recorded as Noncontrolling interests in the accompanying Consolidated Balance Sheets. Intercompany investments, accounts and transactions have been eliminated. The Partnership’s investments in which the Partnership exercises significant influence but does not control and does not have a controlling financial interest are accounted for using the equity method. The Partnership’s investments in a VIE in which the Partnership exercises significant influence but does not control and is not the primary beneficiary are also accounted for using the equity method.
Effective March 1, 2017, the Partnership acquired pipeline, storage and terminal businesses that are operated through HST, WHC and MPLXT (collectively with HSM, “Predecessor”) from MPC. The acquisition from MPC was considered a transfer between entities under common control. Accordingly, the Partnership recorded the acquisition from MPC on its Consolidated Balance Sheets at MPC’s historical basis instead of fair value. Transfers of businesses between entities under common control require prior periods to be retrospectively adjusted to furnish comparative information since inception of common control. Therefore, the accompanying consolidated financial statements and related notes of MPLX LP have been retrospectively adjusted to include the historical results of the businesses acquired from MPC prior to the effective dates of the acquisition. See Note 3 for additional information regarding the HST, WHC and MPLXT acquisition. The accompanying financial statements and related notes present the combined financial position, results of operations, cash flows and equity of Predecessor at historical cost. The financial statements of Predecessor have been prepared from the separate records maintained by MPC and may not necessarily be indicative of the conditions or the results of operations that would have existed if Predecessor had been operated as an unaffiliated entity.
In preparing the Consolidated Statements of Equity, net income attributable to MPLX LP is allocated to preferred unitholders based on a fixed distribution schedule, as discussed in Note 8, and subsequently allocated to the general partner and limited partner unitholders. Distributions, although earned, are not accrued for until declared. However, when distributions related to the incentive distribution rights are made, earnings equal to the amount of those distributions are first allocated to the general partner before the remaining earnings are allocated to the limited partner unitholders based on their respective ownership percentages. The allocation of net income attributable to MPLX LP for purposes of calculating net income per limited partner unit is described in Note 6.
The accompanying interim consolidated financial statements are unaudited; however, in the opinion of the Partnership’s 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. These interim consolidated financial statements, including the notes, have been prepared in accordance with the rules and regulations of the 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 consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2016, as updated by our Current Report on Form 8-K filed on May 1, 2017. The results of operations for the three and six months ended June 30, 2017 are not necessarily indicative of the results to be expected for the full year.
7
2. Accounting Standards
Recently Adopted
In October 2016, the FASB issued an accounting standard update to amend the consolidation guidance issued in February 2015 to require that a decision maker consider, in the determination of the primary beneficiary, its indirect interest in a VIE held by a related party that is under common control on a proportionate basis only. The change was effective for the financial statements for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The Partnership was required to apply the standard retrospectively to January 1, 2016, the date on which the Partnership adopted the consolidation guidance issued in February 2015. The Partnership adopted this accounting standard update in the first quarter of 2017 and it did not have an impact on the consolidated financial statements.
In March 2016, the FASB issued an accounting standard update on the accounting for employee share-based payments. This update requires the recognition of income tax effects of awards through the income statement when awards vest or are settled. It also increases the amount an employer can withhold for tax purposes without triggering liability accounting. Lastly, it allows employers to make a policy election to account for forfeitures as they occur. The changes were effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Under the new guidance, the Partnership will continue estimating forfeiture rates to calculate compensation cost. The Partnership adopted this accounting standard update in the first quarter of 2017 and it did not have a material impact on the consolidated financial statements.
Not Yet Adopted
In May 2017, the FASB issued an accounting standard update to provide guidance about when changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. An entity should account for the effects of a modification unless the fair value, vesting conditions and balance sheet classification of the modified award is the same as the original award immediately before the original award is modified. The update is effective for annual periods beginning after December 15, 2017, and interim periods within that annual period. Early adoption is permitted. This update should be applied prospectively to an award modified on or after the adoption date. The Partnership is in the process of determining the impact of the accounting standard update on the consolidated financial statements.
In February 2017, the FASB issued an accounting standard update addressing the derecognition of nonfinancial assets. The guidance defines in-substance nonfinancial assets, and states that the derecognition of business activities should be evaluated under the consolidation guidance, with limited exceptions related to conveyances of oil and gas mineral rights or contracts with customers. The standard eliminates the previous exclusion for businesses that are in-substance real estate, and eliminates some differences based on whether a transferred set is that of assets or a business and whether the transfer is to a joint venture. The standard must be implemented in conjunction with the implementation date of the revenue recognition accounting standard update, which the Partnership will implement January 1, 2018. The Partnership plans to adopt the new standard using the modified retrospective method and is in the process of determining the impact of the accounting standard update on the consolidated financial statements together with its evaluation of the new revenue recognition standard, as described further below.
In January 2017, the FASB issued an accounting standard update which simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under the new guidance, the recognition of an impairment charge is calculated based on the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The guidance should be applied on a prospective basis, and is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Partnership is in the process of determining the impact of the accounting standard update on the consolidated financial statements.
In January 2017, the FASB issued an accounting standard update to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The standard is intended to narrow the definition of a business by specifying the minimum inputs and processes and by narrowing the definition of outputs. The change is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The guidance will be applied prospectively and early adoption is permitted for certain transactions. The Partnership is in the process of determining the impact of the accounting standard update on the consolidated financial statements.
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In November 2016, the FASB issued an accounting standard update requiring that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The change is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. Retrospective application is required. The application of this accounting standard update will not have a material impact on the Consolidated Statements of Cash Flows.
In August 2016, the FASB issued an accounting standard update related to the classification of certain cash flows. The accounting standard update provides specific guidance on eight cash flow classification issues, including debt prepayment or debt extinguishment costs and distributions received from equity method investees. The change is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. The Partnership does not expect application of this accounting standard update to have a material impact on the Consolidated Statements of Cash Flows.
In June 2016, the FASB issued an accounting standard update related to the accounting for credit losses on certain financial instruments. The guidance requires that for most financial assets, losses are 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 Partnership does not expect application of this accounting standard update to have a material impact on the consolidated financial statements.
In February 2016, the FASB issued an accounting standard update requiring lessees to record virtually all leases on their balance sheets. The accounting standard update also requires expanded disclosures to help financial statement users better understand the amount, timing and uncertainty of cash flows arising from leases. For lessors, this amended guidance modifies the classification criteria and the accounting for sales-type and direct financing leases. The change will be effective on a modified retrospective basis for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. The Partnership is currently evaluating the impact of this standard on the Partnership’s financial statements and disclosures, internal controls, and accounting policies. This evaluation process includes reviewing all forms of leases, performing a completeness assessment over the lease population and analyzing the practical expedients in order to determine the best path to implementation. The Partnership does not plan to early adopt the standard. The Partnership believes the impact will be material on the consolidated financial statements as all operating leases will generate a right of use asset and lease obligation.
In January 2016, the FASB issued an accounting standard update requiring unconsolidated equity investments, not accounted for under the equity method, to be measured at fair value with changes in fair value recognized in net income. The update also requires the use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes and the separate presentation of financial assets and liabilities by measurement category and form on the balance sheet and accompanying notes. The update eliminates the requirement to disclose the methods and assumptions used in estimating the fair value of financial instruments measured at amortized cost. Lastly, the accounting standard update requires separate presentation in other comprehensive income of the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when electing to measure the liability at fair value in accordance with the fair value option for financial instruments. The changes are effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2017. Early adoption is permitted only for guidance regarding presentation of the liability’s credit risk. The application of this accounting standard update will not have a material impact on the Partnership’s consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09 which created Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers” (“ASC 606”). The guidance in the ASC 606 states that revenue is recognized when a customer obtains control of a good or service. Recognition of the revenue will involve a multiple step approach including identifying the contract, identifying the separate performance obligations, determining the transaction price, allocating the price to the performance obligations and recognizing the revenue as the obligations are satisfied. Additional disclosures will be required to provide adequate information to understand the nature, amount, timing and uncertainty of reported revenues and revenues expected to be recognized. The change will be effective on a retrospective or modified retrospective basis for fiscal years beginning after December 15, 2017, and interim periods within those years, with early adoption permitted no earlier than January 1, 2017.
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The Partnership is currently evaluating the impact of the revenue recognition standard on its consolidated financial statements and disclosures, internal controls and accounting policies. This evaluation process includes a phased approach, the first phase of which includes reviewing a sample of contracts and transaction types across segments. This phase is substantially complete; however, the Partnership continues to evaluate our accounting for certain items such as principal versus agent treatment in relation to commodity sales.
Based on the results of the first phase assessment to date, the Partnership has reached tentative conclusions for most contract types and does not believe revenue recognition patterns for fee-based or percent-of-proceeds contracts will change materially. The Partnership does expect certain amounts to be grossed up in revenue as a result of implementation, specifically related to third-party reimbursements from customers and commodities received as consideration in service agreements. In the second quarter of 2017, the Partnership reached a tentative conclusion on the valuation of noncash consideration received in the form of a commodity product. The Partnership has started the second phase of implementation, which includes the calculation of the impact of the new standard on results and the development of new policies and procedures related to the application upon adoption. The Partnership will provide updates as qualitative and quantitative conclusions are reached throughout 2017.
The Partnership will adopt the revenue recognition standard during the first quarter of 2018. The Partnership plans to adopt the new standard using the modified retrospective method which will result in a cumulative effect adjustment as of the date of adoption. By selecting this adoption method, the Partnership will disclose the amount by which each financial statement line item is affected by the standard in the current reporting period after adoption as compared with the guidance that was in effect before adoption.
3. Acquisitions
Acquisition of Hardin Street Transportation LLC, Woodhaven Cavern LLC and MPLX Terminals LLC
MPC contributed the assets of HST, WHC and MPLXT to newly created and wholly-owned subsidiaries and entered into commercial agreements related to services provided by these new entities to MPC on January 1, 2015 for HST and WHC and April 1, 2016 for MPLXT. Pursuant to a Membership Interests Contributions Agreement (the “Contributions Agreement”) entered into on March 1, 2017 by the Partnership with MPLX GP LLC (“MPLX GP”), MPLX Logistics Holdings LLC (“MPLX Logistics”), MPLX Holdings Inc. (“MPLX Holdings”) and MPC Investment LLC (“MPC Investment”), each a wholly-owned subsidiary of MPC, MPC Investment agreed to contribute the outstanding membership interests in HST, WHC and MPLXT through a series of intercompany contributions to the Partnership for approximately $1.5 billion in cash and equity consideration valued at approximately $504 million (the “Transaction”). The number of common units representing the equity consideration was determined by dividing the contribution amount by the simple average of the ten day trailing volume weighted average New York Stock Exchange price of a common unit for the ten trading days ending at market close on February 28, 2017. The fair value of the common and general partner units issued was approximately $503 million, as recorded on the Consolidated Statements of Equity, and consisted of (i) 9,197,900 common units representing limited partner interests in the Partnership to MPLX GP, (ii) 2,630,427 common units to MPLX Logistics and (iii) 1,132,049 common units to MPLX Holdings. The Partnership also issued 264,497 general partner units to MPLX GP in order to maintain its two percent general partner interest (“GP Interest”) in the Partnership. MPC agreed to waive two-thirds of the first quarter 2017 distributions on the MPLX LP common units issued in connection with the Transaction. As a result of this waiver, MPC did not receive two-thirds of the general partner distributions or incentive distribution rights that would have otherwise accrued on such MPLX LP common units with respect to the first quarter 2017 distributions. The value of these waived distributions was $6 million.
HST owns and operates various private crude oil and refined product pipeline systems and associated storage tanks. As of the acquisition date, these pipeline systems consisted of 174 miles of crude oil pipelines and 430 miles of refined products pipelines. WHC owns and operates nine butane and propane storage caverns located in Michigan with approximately 1.8 million barrels of natural gas liquids storage capacity. As of the acquisition date, MPLXT owned and operated 59 terminals for the receipt, storage, blending, additization, handling and redelivery of refined petroleum products. Additionally, MPLXT operated one leased terminal and had partial ownership interest in two terminals. Collectively, these 62 terminals have a combined shell capacity of approximately 23.6 million barrels. The terminal facilities are located primarily in the Midwest, Gulf Coast and Southeast regions of the United States. The Partnership accounts for these businesses within its L&S segment.
The Partnership retrospectively adjusted the historical financial results for all periods to give effect to the acquisition of HST and WHC effective January 1, 2015 and the acquisition of MPLXT effective April 1, 2016, as required for transactions between entities under common control. Prior to these dates, these entities were not considered businesses and, therefore, there are no financial results from which to recast.
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The following tables present the Partnership’s previously reported unaudited Consolidated Statements of Income for the three and six months ended June 30, 2016, retrospectively adjusted for the acquisition of HST, WHC and MPLXT:
Three Months Ended June 30, 2016 | |||||||||||||||||||
(In millions, except per unit data) | MPLX LP (Previously Reported) | HST/WHC | MPLXT | Eliminations(1) | MPLX LP (Currently Reported) | ||||||||||||||
Revenues and other income: | |||||||||||||||||||
Service revenue | $ | 233 | $ | — | $ | — | $ | — | $ | 233 | |||||||||
Service revenue - related parties | 145 | 27 | 74 | — | 246 | ||||||||||||||
Rental income | 71 | — | — | — | 71 | ||||||||||||||
Rental income - related parties | 29 | 11 | 26 | — | 66 | ||||||||||||||
Product sales | 137 | — | — | — | 137 | ||||||||||||||
Product sales - related parties | 3 | — | — | — | 3 | ||||||||||||||
Loss from equity method investments | (83 | ) | — | — | — | (83 | ) | ||||||||||||
Other income | 1 | — | — | — | 1 | ||||||||||||||
Other income - related parties | 28 | — | — | (4 | ) | 24 | |||||||||||||
Total revenues and other income | 564 | 38 | 100 | (4 | ) | 698 | |||||||||||||
Costs and expenses: | |||||||||||||||||||
Cost of revenues (excludes items below) | 84 | 9 | 20 | — | 113 | ||||||||||||||
Purchased product costs | 114 | — | — | — | 114 | ||||||||||||||
Rental cost of sales | 14 | 1 | — | — | 15 | ||||||||||||||
Rental cost of sales - related parties | — | 1 | — | — | 1 | ||||||||||||||
Purchases - related parties | 78 | 4 | 21 | (4 | ) | 99 | |||||||||||||
Depreciation and amortization | 137 | 4 | 10 | — | 151 | ||||||||||||||
Impairment expense | 1 | — | — | — | 1 | ||||||||||||||
General and administrative expenses | 49 | 2 | 12 | — | 63 | ||||||||||||||
Other taxes | 11 | 1 | 1 | — | 13 | ||||||||||||||
Total costs and expenses | 488 | 22 | 64 | (4 | ) | 570 | |||||||||||||
Income from operations | 76 | 16 | 36 | — | 128 | ||||||||||||||
Interest expense (net of amounts capitalized) | 52 | — | — | — | 52 | ||||||||||||||
Other financial costs | 12 | — | — | — | 12 | ||||||||||||||
Income before income taxes | 12 | 16 | 36 | — | 64 | ||||||||||||||
Benefit for income taxes | (8 | ) | — | — | — | (8 | ) | ||||||||||||
Net income | 20 | 16 | 36 | — | 72 | ||||||||||||||
Less: Net income attributable to noncontrolling interests | 1 | — | — | — | 1 | ||||||||||||||
Less: Net income attributable to Predecessor | — | 16 | 36 | — | 52 | ||||||||||||||
Net income attributable to MPLX LP | 19 | — | — | — | 19 | ||||||||||||||
Less: Preferred unit distributions | 9 | — | — | — | 9 | ||||||||||||||
Less: General partner’s interest in net income attributable to MPLX LP | 46 | — | — | — | 46 | ||||||||||||||
Limited partners’ interest in net loss attributable to MPLX LP | $ | (36 | ) | $ | — | $ | — | $ | — | $ | (36 | ) | |||||||
(1) | Represents intercompany transactions eliminated during the consolidation process, in accordance with GAAP. |
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Six Months Ended June 30, 2016 | |||||||||||||||||||
(In millions, except per unit data) | MPLX LP (Previously Reported) | HST/WHC | MPLXT | Eliminations(1) | MPLX LP (Currently Reported) | ||||||||||||||
Revenues and other income: | |||||||||||||||||||
Service revenue | $ | 462 | $ | — | $ | — | $ | — | $ | 462 | |||||||||
Service revenue - related parties | 295 | 54 | 74 | — | 423 | ||||||||||||||
Rental income | 141 | — | — | — | 141 | ||||||||||||||
Rental income - related parties | 55 | 23 | 26 | — | 104 | ||||||||||||||
Product sales | 237 | — | — | — | 237 | ||||||||||||||
Product sales - related parties | 6 | — | — | — | 6 | ||||||||||||||
Loss from equity method investments | (78 | ) | — | — | — | (78 | ) | ||||||||||||
Other income | 3 | — | — | — | 3 | ||||||||||||||
Other income - related parties | 52 | — | — | (7 | ) | 45 | |||||||||||||
Total revenues and other income | 1,173 | 77 | 100 | (7 | ) | 1,343 | |||||||||||||
Costs and expenses: | |||||||||||||||||||
Cost of revenues (excludes items below) | 173 | 14 | 20 | — | 207 | ||||||||||||||
Purchased product costs | 193 | — | — | — | 193 | ||||||||||||||
Rental cost of sales | 28 | 1 | — | — | 29 | ||||||||||||||
Rental cost of sales - related parties | — | 1 | — | — | 1 | ||||||||||||||
Purchases - related parties | 154 | 9 | 21 | (7 | ) | 177 | |||||||||||||
Depreciation and amortization | 269 | 8 | 10 | — | 287 | ||||||||||||||
Impairment expense | 130 | — | — | — | 130 | ||||||||||||||
General and administrative expenses | 101 | 3 | 12 | — | 116 | ||||||||||||||
Other taxes | 22 | 2 | 1 | — | 25 | ||||||||||||||
Total costs and expenses | 1,070 | 38 | 64 | (7 | ) | 1,165 | |||||||||||||
Income from operations | 103 | 39 | 36 | — | 178 | ||||||||||||||
Related party interest and other financial income | 1 | — | — | — | 1 | ||||||||||||||
Interest expense (net of amounts capitalized) | 107 | — | — | — | 107 | ||||||||||||||
Other financial costs | 24 | — | — | — | 24 | ||||||||||||||
(Loss) income before income taxes | (29 | ) | 39 | 36 | — | 46 | |||||||||||||
Benefit for income taxes | (12 | ) | — | — | — | (12 | ) | ||||||||||||
Net (loss) income | (17 | ) | 39 | 36 | — | 58 | |||||||||||||
Less: Net income attributable to noncontrolling interests | 1 | — | — | — | 1 | ||||||||||||||
Less: Net income attributable to Predecessor | 23 | 39 | 36 | — | 98 | ||||||||||||||
Net loss attributable to MPLX LP | (41 | ) | — | — | — | (41 | ) | ||||||||||||
Less: Preferred unit distributions | 9 | — | — | — | 9 | ||||||||||||||
Less: General partner’s interest in net income attributable to MPLX LP | 85 | — | — | — | 85 | ||||||||||||||
Limited partners’ interest in net loss attributable to MPLX LP | $ | (135 | ) | $ | — | $ | — | $ | — | $ | (135 | ) | |||||||
(1) | Represents intercompany transactions eliminated during the consolidation process, in accordance with GAAP. |
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The following table presents the Partnership’s previously reported unaudited Consolidated Statements of Cash Flows, retrospectively adjusted for the acquisition of HST, WHC and MPLXT:
Six Months Ended June 30, 2016 | |||||||||||||||
(In millions) | MPLX LP (Previously Reported) | HST/WHC | MPLXT | MPLX LP (Currently Reported) | |||||||||||
Increase (decrease) in cash and cash equivalents | |||||||||||||||
Operating activities: | |||||||||||||||
Net (loss) income | $ | (17 | ) | $ | 39 | $ | 36 | $ | 58 | ||||||
Adjustments to reconcile net (loss) income to net cash provided by operating activities: | |||||||||||||||
Amortization of deferred financing costs | 23 | — | — | 23 | |||||||||||
Depreciation and amortization | 269 | 8 | 10 | 287 | |||||||||||
Impairment expense | 130 | — | — | 130 | |||||||||||
Deferred income taxes | (13 | ) | — | — | (13 | ) | |||||||||
Asset retirement expenditures | (2 | ) | — | — | (2 | ) | |||||||||
Loss from equity method investments | 78 | — | — | 78 | |||||||||||
Distributions from unconsolidated affiliates | 78 | — | — | 78 | |||||||||||
Changes in: | |||||||||||||||
Current receivables | (20 | ) | — | — | (20 | ) | |||||||||
Inventories | (3 | ) | — | — | (3 | ) | |||||||||
Fair value of derivatives | 25 | — | — | 25 | |||||||||||
Current accounts payable and accrued liabilities | 18 | (1 | ) | 2 | 19 | ||||||||||
Receivables from / liabilities to related parties | 6 | — | (18 | ) | (12 | ) | |||||||||
All other, net | 21 | 3 | (2 | ) | 22 | ||||||||||
Net cash provided by operating activities | 593 | 49 | 28 | 670 | |||||||||||
Investing activities: | |||||||||||||||
Additions to property, plant and equipment | (569 | ) | (23 | ) | (14 | ) | (606 | ) | |||||||
Investments - net related party loans | 77 | (26 | ) | (14 | ) | 37 | |||||||||
Investments in unconsolidated affiliates | (39 | ) | — | — | (39 | ) | |||||||||
All other, net | 5 | — | — | 5 | |||||||||||
Net cash used in investing activities | (526 | ) | (49 | ) | (28 | ) | (603 | ) | |||||||
Financing activities: | |||||||||||||||
Long-term debt - borrowings | 434 | — | — | 434 | |||||||||||
- repayments | (1,311 | ) | — | — | (1,311 | ) | |||||||||
Related party debt - borrowings | 1,853 | — | — | 1,853 | |||||||||||
- repayments | (1,861 | ) | — | — | (1,861 | ) | |||||||||
Net proceeds from equity offerings | 321 | — | — | 321 | |||||||||||
Issuance of redeemable preferred units | 984 | — | — | 984 | |||||||||||
Distributions to unitholders and general partner | (391 | ) | — | — | (391 | ) | |||||||||
Distributions to noncontrolling interests | (1 | ) | — | — | (1 | ) | |||||||||
Contributions from noncontrolling interests | 2 | — | — | 2 | |||||||||||
All other, net | (1 | ) | — | — | (1 | ) | |||||||||
Distributions to MPC from Predecessor | (104 | ) | — | — | (104 | ) | |||||||||
Net cash used in financing activities | (75 | ) | — | — | (75 | ) | |||||||||
Net decrease in cash and cash equivalents | (8 | ) | — | — | (8 | ) | |||||||||
Cash and cash equivalents at beginning of period | 43 | — | — | 43 | |||||||||||
Cash and cash equivalents at end of period | $ | 35 | $ | — | $ | — | $ | 35 | |||||||
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Acquisition of Ozark Pipeline
On March 1, 2017, the Partnership acquired the Ozark pipeline from Enbridge Pipelines (Ozark) LLC for approximately $219 million, including purchase price adjustments made in the second quarter of 2017. Based on the preliminary fair value estimates of assets acquired and liabilities assumed at the acquisition date, the purchase price was primarily allocated to property, plant and equipment. The Ozark pipeline is a 433-mile, 22-inch crude oil pipeline originating in Cushing, Oklahoma, and terminating in Wood River, Illinois, capable of transporting approximately 230 mbpd. The Partnership accounts for the Ozark pipeline within its L&S segment.
The amounts of revenue and income from operations associated with the acquisition included in the Consolidated Statements of Income, since the March 1, 2017 acquisition date, are as follows:
(In millions) | Three Months Ended June 30, 2017 | Four Months Ended June 30, 2017 | |||||
Revenues and other income | $ | 19 | $ | 26 | |||
Income from operations | 9 | 11 | |||||
Assuming the acquisition of the Ozark pipeline had occurred on January 1, 2016, the consolidated pro forma results would not have been materially different from reported results.
Acquisition of Hardin Street Marine LLC
On March 14, 2016, the Partnership entered into a Membership Interests Contribution Agreement (the “Contribution Agreement”) with MPLX GP, MPLX Logistics and MPC Investment, each a wholly-owned subsidiary of MPC, related to the acquisition of HSM, MPC’s inland marine business, from MPC. Pursuant to the Contribution Agreement, the transaction was valued at $600 million consisting of a fixed number of common units and general partner units of 22,534,002 and 459,878, respectively. The general partner units maintain MPC’s two percent GP Interest in the Partnership. The acquisition closed on March 31, 2016 and the fair value of the common units and general partner units issued was $669 million and $14 million, respectively, as recorded on the Consolidated Statements of Equity. MPC agreed to waive distributions in the first quarter of 2016 on MPLX LP common units issued in connection with this transaction. As a result of this waiver, MPC did not receive general partner distributions or incentive distribution rights that would have otherwise accrued on such MPLX LP common units with respect to the first quarter 2016 distributions. The value of these waived distributions was $15 million.
The inland marine business, comprised of 18 tow boats and 219 owned and leased barges as of the acquisition date, which transport light products, heavy oils, crude oil, renewable fuels, chemicals and feedstocks in the Midwest and U.S. Gulf Coast regions, accounted for nearly 60 percent of the total volumes MPC shipped by inland marine vessels as of March 31, 2016. The Partnership accounts for HSM within its L&S segment.
4. Investments and Noncontrolling Interests
Summarized financial information for the Partnership’s equity method investments for the six months ended June 30, 2017 and 2016 is as follows:
Six Months Ended June 30, 2017 | |||||||||||||||
(In millions) | MarkWest Utica EMG | Other VIEs | Non-VIEs | Total | |||||||||||
Revenues and other income | $ | 88 | $ | 21 | $ | 91 | $ | 200 | |||||||
Costs and expenses | 48 | 17 | 73 | 138 | |||||||||||
Income from operations | 40 | 4 | 18 | 62 | |||||||||||
Net income | 40 | 4 | 17 | 61 | |||||||||||
Income (loss) from equity method investments(1) | 2 | (1 | ) | 5 | 6 | ||||||||||
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Six Months Ended June 30, 2016 | |||||||||||||||
(In millions) | MarkWest Utica EMG | Other VIEs(2) | Non-VIEs | Total | |||||||||||
Revenues and other income | $ | 113 | $ | 10 | $ | 70 | $ | 193 | |||||||
Costs and expenses | 45 | 104 | 52 | 201 | |||||||||||
Income (loss) from operations | 68 | (94 | ) | 18 | (8 | ) | |||||||||
Net income (loss) | 68 | (94 | ) | 18 | (8 | ) | |||||||||
Income (loss) from equity method investments(1) | 7 | (88 | ) | 3 | (78 | ) | |||||||||
(1) | Income (loss) from equity method investments includes the impact of any basis differential amortization or accretion. |
(2) | Includes an impairment charge of $89 million for the six months ended June 30, 2016 related to the Partnership’s investment in Ohio Condensate, which does not appear separately in this table. |
Summarized balance sheet information for the Partnership’s equity method investments as of June 30, 2017 and December 31, 2016 is as follows:
June 30, 2017 | |||||||||||||||
(In millions) | MarkWest Utica EMG(1) | Other VIEs | Non-VIEs | Total | |||||||||||
Current assets | $ | 72 | $ | 49 | $ | 33 | $ | 154 | |||||||
Noncurrent assets | 2,103 | 881 | 2,421 | 5,405 | |||||||||||
Current liabilities | 26 | 69 | 18 | 113 | |||||||||||
Noncurrent liabilities | 2 | 13 | — | 15 | |||||||||||
December 31, 2016 | |||||||||||||||
(In millions) | MarkWest Utica EMG(1) | Other VIEs | Non-VIEs | Total | |||||||||||
Current assets | $ | 45 | $ | 2 | $ | 40 | $ | 87 | |||||||
Noncurrent assets | 2,173 | 132 | 390 | 2,695 | |||||||||||
Current liabilities | 30 | 4 | 26 | 60 | |||||||||||
Noncurrent liabilities | 2 | 13 | — | 15 | |||||||||||
(1) | MarkWest Utica EMG’s noncurrent assets include its investment in its subsidiary Ohio Gathering, which does not appear elsewhere in this table. The investment was $794 million as of June 30, 2017 and December 31, 2016. |
As of June 30, 2017 and December 31, 2016, the carrying value of the Partnership’s equity method investments exceeded the underlying net assets of its investees by $1.1 billion. This basis difference is being amortized or accreted into net income over the remaining estimated useful lives of the underlying net assets, except for $459 million of excess related to goodwill.
MarkWest Utica EMG
Effective January 1, 2012, MarkWest Utica Operating Company, LLC (“Utica Operating”), a wholly-owned and consolidated subsidiary of MarkWest, and EMG Utica (together the “Members”) executed agreements to form a joint venture, MarkWest Utica EMG, to develop significant natural gas gathering, processing and NGL fractionation, transportation and marketing infrastructure in eastern Ohio. The related limited liability company agreement has been amended from time to time (the limited liability company agreement currently in effect is referred to as the “Amended LLC Agreement”). The aggregate funding commitment of EMG Utica was $950 million (the “Minimum EMG Investment”). Thereafter, Utica Operating was required to fund, as needed, 100 percent of future capital for MarkWest Utica EMG until the aggregate capital that had been contributed by the Members reached $2.0 billion, which occurred prior to the MarkWest Merger. Until such time as the investment balances of Utica Operating and EMG Utica are in the ratio of 70 percent and 30 percent, respectively (such time being referred to as the “Second Equalization Date”), EMG Utica will have the right, but not the obligation, to fund up to 10 percent of each capital call for MarkWest Utica EMG, and Utica Operating will be required to fund all remaining capital not elected to be funded by EMG Utica. After the Second Equalization Date, Utica Operating and EMG Utica will have the right, but not the obligation, to fund their pro rata portion (based on their respective investment balances) of any additional required capital and may also fund additional capital that the other party elects not to fund. As of June 30, 2017, EMG Utica has
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contributed approximately $1.2 billion and Utica Operating has contributed approximately $1.5 billion to MarkWest Utica EMG.
Under the Amended LLC Agreement, prior to December 31, 2016, EMG Utica’s investment balance was increased by a quarterly special non-cash allocation of income (“Preference Amount”), calculated based upon the amount of capital contributed by EMG Utica in excess of $500 million. After December 31, 2016, no Preference Amount will accrue to EMG Utica’s investment balance. EMG Utica received a Preference Amount totaling approximately $4 million and $8 million for the three and six months ended June 30, 2016, respectively.
Under the Amended LLC Agreement, after December 31, 2016, cash generated by MarkWest Utica EMG that is available for distribution will be allocated to the Members in proportion to their respective investment balances. As of June 30, 2017, Utica Operating’s investment balance in MarkWest Utica EMG was approximately 56 percent.
MarkWest Utica EMG is deemed to be a VIE. Utica Operating is not deemed to be the primary beneficiary, due to EMG Utica’s voting rights on significant matters. The Partnership’s investment in MarkWest Utica EMG’s, which was $2.2 billion at June 30, 2017 and December 31, 2016, is reported under the caption Equity method investments on the Consolidated Balance Sheets. The Partnership’s maximum exposure to loss as a result of its involvement with MarkWest Utica EMG includes its equity investment, any additional capital contribution commitments and any operating expenses incurred by the subsidiary operator in excess of its compensation received for the performance of the operating services. The Partnership did not provide any financial support to MarkWest Utica EMG that it was not contractually obligated to provide during the three and six months ended June 30, 2017 and 2016, respectively. The Partnership receives management fee revenue for engineering and construction and administrative services for operating MarkWest Utica EMG, and is also reimbursed for personnel services (“Operational Service revenue”). Operational Service revenue is reported as Other income-related parties in the Consolidated Statements of Income. The amount of Operational Service revenue related to MarkWest Utica EMG for the three and six months ended June 30, 2017, totaled approximately $4 million and $8 million, respectively. The amount of Operational Service revenue related to MarkWest Utica EMG for the three and six months ended June 30, 2016, totaled $5 million and $7 million, respectively.
Ohio Gathering
Ohio Gathering is a subsidiary of MarkWest Utica EMG and is engaged in providing natural gas gathering services in the Utica Shale in eastern Ohio. Ohio Gathering is a joint venture between MarkWest Utica EMG and Summit Midstream Partners, LLC. As of June 30, 2017, the Partnership has an approximate 34 percent indirect ownership interest in Ohio Gathering. As Ohio Gathering is a subsidiary of MarkWest Utica EMG, which is accounted for as an equity method investment, the Partnership reports its portion of Ohio Gathering’s net assets as a component of its investment in MarkWest Utica EMG. The Partnership receives Operational Service revenue for operating Ohio Gathering which is reported as Other income-related parties in the Consolidated Statements of Income. The amount of Operational Service revenue related to Ohio Gathering for the three and six months ended June 30, 2017, was approximately $4 million and $8 million, respectively. The amount of Operational Service revenue related to Ohio Gathering for the three and six months ended June 30, 2016, totaled $3 million and $7 million, respectively.
Sherwood Midstream
Effective January 1, 2017, MarkWest Liberty Midstream & Resources, L.L.C. (“MarkWest Liberty Midstream”), a wholly-owned and consolidated subsidiary of MarkWest, and Antero Midstream Partners, LP (“Antero Midstream”) formed a joint venture, Sherwood Midstream, to support Antero Resources Corporation’s development in the Marcellus Shale. MarkWest Liberty Midstream has a 50 percent ownership interest in Sherwood Midstream. Pursuant to the terms of the related limited liability company agreement (the “LLC Agreement”), MarkWest Liberty Midstream contributed assets then under construction with a fair value of approximately $134 million and cash of approximately $20 million. Antero Midstream made an initial capital contribution of approximately $154 million.
Also effective January 1, 2017, MarkWest Liberty Midstream converted all of its ownership interests in MarkWest Ohio Fractionation Company, L.L.C. (“Ohio Fractionation”), a previously wholly-owned subsidiary, to Class A Interests and amended its LLC Agreement to create Class B-3 Interests, which were sold to Sherwood Midstream for $126 million in cash. The Class B-3 Interests provide Sherwood Midstream with the right to fractionation revenue and the obligation to pay expenses related to 20 mbpd of capacity in the Hopedale 3 fractionator. Sherwood Midstream accounts for its investment in Ohio Fractionation, which is a VIE, as an equity method investment as Sherwood Midstream does not control Ohio Fractionation. MarkWest Liberty Midstream has been deemed to be the primary beneficiary of Ohio Fractionation because it has control over the decisions that could significantly impact its financial performance, and as a result, consolidates Ohio Fractionation. The
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carrying amounts of assets and liabilities included in the Partnership’s Consolidated Balance Sheets pertaining to Ohio Fractionation at June 30, 2017, were current assets of $13 million, non-current assets of $389 million and current liabilities of $377 million. The creditors of Ohio Fractionation do not have recourse to MPLX LP’s general credit through guarantees or other financial arrangements. The assets of Ohio Fractionation are the property of Ohio Fractionation and cannot be used to satisfy the obligations of MPLX LP. Sherwood Midstream’s interests are reflected in Net income attributable to noncontrolling interests in the Consolidated Statements of Income and Noncontrolling interests in the Consolidated Balance Sheets.
Under the LLC Agreement, cash generated by Sherwood Midstream that is available for distribution (the “Distribution”) will be allocated to the members in proportion to their respective investment balances. For the three and six months ended June 30, 2017, there was no cash available for the Distribution.
Sherwood Midstream is deemed to be a VIE. MarkWest Liberty Midstream is not deemed to be the primary beneficiary, due to Antero Midstream’s voting rights on significant matters. The Partnership’s investment in Sherwood Midstream, which was approximately $192 million at June 30, 2017, is reported under the caption Equity method investments on the Consolidated Balance Sheets. The Partnership’s maximum exposure to loss as a result of its involvement with Sherwood Midstream includes its equity investment, any additional capital contribution commitments and any operating expenses incurred by the subsidiary operator in excess of its compensation received for the performance of the operating services. The Partnership did not provide any financial support to Sherwood Midstream that it was not contractually obligated to provide during the six months ended June 30, 2017. The Partnership receives Operational Service revenue for operating Sherwood Midstream. The amount of Operational Service revenue related to Sherwood Midstream for the three and six months ended June 30, 2017 totaled approximately $3 million and $4 million, respectively, and is reported as Other income-related parties in the Consolidated Statements of Income.
Sherwood Midstream Holdings
Effective January 1, 2017, MarkWest Liberty Midstream and Sherwood Midstream formed a joint venture, Sherwood Midstream Holdings, for the purpose of owning, operating and maintaining all of the shared assets that support the operations of the gas plants and other assets owned by Sherwood Midstream and the gas plants and deethanization facilities owned by MarkWest Liberty Midstream. MarkWest Liberty Midstream initially contributed certain real property, equipment and facilities with a fair value of approximately $209 million to Sherwood Midstream Holdings in exchange for a 79 percent initial ownership interest. Sherwood Midstream contributed cash of approximately $44 million to Sherwood Midstream Holdings in exchange for a 21 percent ownership interest. During the three months ended June 30, 2017, true-ups to the initial contributions were made. MarkWest Liberty Midstream contributed certain additional real property, equipment and facilities with a fair value of approximately $10 million to Sherwood Midstream Holdings and Sherwood Midstream contributed cash of approximately $4 million to Sherwood Midstream Holdings. Collectively, the real property, equipment, facilities and cash initially contributed, or that may be subsequently constructed by or contributed, to Sherwood Midstream Holdings are referred to as the “Shared Assets.” The net book value of the contributed assets was approximately $203 million. The contribution was determined to be an in-substance sale of real estate. As such, the Partnership only recognized a gain for the portion attributable to Antero Midstream’s indirect interest of approximately $2 million, included in Gain on sale of assets in the Consolidated Statements of Income. MarkWest Liberty Midstream’s portion of the gain attributable to its direct and indirect interests of approximately $14 million is included in its investment in Sherwood Midstream Holdings and is reported under the caption Equity method investments on the Consolidated Balance Sheets. In connection with the initial contributions, MarkWest Liberty Midstream received a special distribution of approximately $45 million.
MarkWest Liberty Midstream’s and Sherwood Midstream’s ownership interests in Sherwood Midstream Holdings will fluctuate over time. As new Shared Assets are constructed, the members will make additional capital contributions to Sherwood Midstream Holdings. The amount that each member must contribute will be based on the expected utilization of the Shared Asset, as defined in the LLC Agreement. Pursuant to the terms of the LLC Agreement, MarkWest Liberty Midstream will serve as the operator for Sherwood Midstream Holdings.
The Partnership accounts for Sherwood Midstream Holdings, which is a VIE, as an equity method investment as Sherwood Midstream is considered to be the general partner and controls all decisions. The Partnership’s investment in Sherwood Midstream Holdings, which was approximately $165 million at June 30, 2017, is reported under the caption Equity method investments on the Consolidated Balance Sheets. The Partnership’s maximum exposure to loss as a result of its involvement with Sherwood Midstream Holdings includes its equity investment, any additional capital contribution commitments and any operating expenses incurred by the subsidiary operator in excess of its compensation received for the performance of the operating services. The Partnership did not provide any financial support to Sherwood Midstream Holdings that it was not contractually obligated to provide during the six months ended June 30, 2017.
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Sherwood Midstream has been deemed the primary beneficiary of Sherwood Midstream Holdings due to its controlling financial interest through its authority to manage the joint venture. As a result, Sherwood Midstream consolidates Sherwood Midstream Holdings. Therefore, the Partnership also reports its portion of Sherwood Midstream Holdings’ net assets as a component of its investment in Sherwood Midstream. As of June 30, 2017, the Partnership has a 13.9 percent indirect ownership interest in Sherwood Midstream Holdings through Sherwood Midstream.
MarEn Bakken
On February 15, 2017, the Partnership closed on a joint venture, MarEn Bakken, with Enbridge Energy Partners L.P. (“Enbridge Energy Partners”) in which MPLX LP acquired a partial, indirect interest in the Dakota Access Pipeline (“DAPL”) and Energy Transfer Crude Oil Company Pipeline (“ETCOP”) projects, collectively referred to as the Bakken Pipeline system, from Energy Transfer Partners, L.P. (“ETP”) and Sunoco Logistics Partners, L.P. (“SXL”). The Partnership contributed $500 million of the $2.0 billion purchase price paid by MarEn Bakken to acquire a 36.75 percent indirect interest in the Bakken Pipeline system. The Partnership holds, through a subsidiary, a 25 percent interest in MarEn Bakken, which equates to a 9.1875 percent indirect interest in the Bakken Pipeline system.
The Partnership accounts for its investment in MarEn Bakken as an equity method investment and bases the equity method accounting for this joint venture in arrears based on the most recent available information. The Partnership’s investment balance at June 30, 2017 is approximately $519 million and reported under the caption Equity method investments on the Consolidated Balance Sheets. In connection with the Partnership’s acquisition of a partial, indirect equity interest in the Bakken Pipeline system, MPC agreed to waive its right to receive incentive distributions of $1.6 million per quarter for twelve consecutive quarters, beginning with distributions declared in the first quarter of 2017 and paid to MPC in the second quarter, which was prorated to $0.8 million from the acquisition date.
5. Related Party Agreements and Transactions
The Partnership’s material related parties include:
• | MPC, which refines, markets and transports crude oil and petroleum products, primarily in the Midwest, Gulf Coast, East Coast and Southeast regions of the United States. |
• | Centennial Pipeline LLC (“Centennial”), in which MPC has a 50 percent interest as of June 30, 2017. Centennial owns a products pipeline and storage facility. |
• | Muskegon Pipeline LLC (“Muskegon”), in which MPC has a 60 percent interest as of June 30, 2017. Muskegon owns a common carrier products pipeline. |
• | MarkWest Utica EMG, in which MPLX LP has a 56 percent interest as of June 30, 2017. MarkWest Utica EMG is engaged in natural gas processing and NGL fractionation, transportation and marketing in Ohio. |
• | Ohio Gathering, in which MPLX LP has a 34 percent indirect interest as of June 30, 2017. Ohio Gathering is a subsidiary of MarkWest Utica EMG providing natural gas gathering service in the Utica Shale region of eastern Ohio. |
• | Sherwood Midstream, in which MPLX LP has a 50 percent interest as of June 30, 2017. Sherwood Midstream supports the development of Antero Resources Corporation’s Marcellus Shale acreage in the rich-gas corridor of West Virginia. |
• | Sherwood Midstream Holdings, in which MPLX LP has an 86 percent total direct and indirect interest at June 30, 2017. Sherwood Midstream Holdings owns certain infrastructure at the Sherwood Complex that is shared by and supports the operation of both the Sherwood Midstream and MarkWest gas processing plants and deethanization facilities. |
Related Party Agreements
The Partnership has various long-term, fee-based commercial agreements with MPC. Under these agreements, the Partnership provides transportation, terminal and storage services to MPC, and MPC has committed to provide the Partnership with minimum quarterly throughput volumes on crude oil and refined products systems and minimum storage volumes of crude oil, refined products and butane.
In addition, the Partnership is party to a loan agreement with MPC Investment, a wholly-owned subsidiary of MPC. Under the terms of the agreement, MPC Investment will make a loan or loans to the Partnership on a revolving basis as requested by the Partnership and as agreed to by MPC Investment, in an amount or amounts that do not result in the aggregate principal amount
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of all loans outstanding exceeding $500 million at any one time. The entire unpaid principal amount of the loan, together with all accrued and unpaid interest and other amounts (if any), shall become due and payable on December 4, 2020. MPC Investment may demand payment of all or any portion of the outstanding principal amount of the loan, together with all accrued and unpaid interest and other amounts (if any), at any time prior to December 4, 2020. Borrowings under the loan will bear interest at LIBOR plus 1.50 percent. During the six months ended June 30, 2017, the Partnership borrowed $12 million and repaid $12 million, resulting in no outstanding balance at June 30, 2017. Borrowings were at an average interest rate of 2.270 percent, per annum, for the six months ended June 30, 2017. During the year ended December 31, 2016, the Partnership borrowed $2.5 billion and repaid $2.5 billion, resulting in no outstanding balance at December 31, 2016. Borrowings were at an average interest rate of 1.939 percent, per annum, for the year ended December 31, 2016. For additional information regarding the Partnership’s commercial and other agreements with MPC, see Item 1. Business in the Annual Report on Form 10-K for the year ended December 31, 2016.
The Partnership believes the terms and conditions under its agreements with MPC are generally comparable to those with unrelated parties.
HST, WHC and MPLXT Agreements
As discussed in Note 3, the Partnership acquired HST, WHC and MPLXT on March 1, 2017. HST, WHC and MPLXT have various operating, transportation services, terminal services, storage services and employee services agreements with MPC, which were assumed by the Partnership with the closing of the Transaction.
HST is a party to a transportation services agreement with MPC dated January 1, 2015. Under this agreement, HST provides pipeline transportation of crude oil and refined products, as well as related services, for MPC. MPC pays HST for such services based on contractual rates related to MPC crude oil and refined product deliveries as well as any viscosity surcharges, loading, handling, transfers or other related charges. This agreement is set to expire on December 31, 2026 and automatically renews for two additional renewal terms of four years each unless terminated by either party.
On January 1, 2015, HST entered into various three-year term storage services agreements with MPC. Under the storage services agreements, HST receives a monthly fee from MPC based on a contractual rate per barrel multiplied by the total commitment volume respective to each storage tank. The contractual rate per barrel is subject to an annual review and adjustment for inflation. HST is not obligated to measure volume gains and losses per the terms of these agreements.
On January 1, 2015, WHC entered into a long-term, fee-based storage and services agreement with MPC related to storage at its butane and propane caverns with an initial term of 10 years. Under this storage and services agreement, WHC receives a monthly fee from MPC based on a contractual rate per barrel multiplied by the total commitment volume respective to each storage cavern. The contractual rate per barrel includes utilization of the caverns and related services. The agreement is subject to an annual review and adjustment for inflation.
Under the storage services agreements with both HST and WHC, the Partnership is obligated to make available to MPC, on a firm basis, the available storage capacity at the tank farms and butane and propane caverns and MPC pays the Partnership a per-barrel fee for such storage capacity regardless of whether MPC fully utilizes the available capacity.
MPLXT is a party to a terminal services agreement with MPC, dated March 1, 2017. Under this agreement, MPLXT provides terminal storage for refined petroleum products, as well as related services, for MPC. MPC pays MPLXT monthly for such services based on contractual fees relating to MPC product deliveries as well as any viscosity surcharges, loading, handling, transfers or other related charges. This agreement is set to expire on March 31, 2026 and automatically renews for two additional renewal terms of five years each unless terminated by either party.
The Partnership is party to various employee services agreements with MPC under which the Partnership reimburses MPC for employee benefit expenses, along with the provision of operational and management services, including those in support of HST, WHC and MPLXT.
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Related Party Transactions
Sales to related parties were as follows:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
(In millions) | 2017 | 2016 | 2017 | 2016 | |||||||||||
Service revenues | |||||||||||||||
MPC | $ | 270 | $ | 246 | $ | 525 | $ | 423 | |||||||
Rental income | |||||||||||||||
MPC | $ | 70 | $ | 66 | $ | 137 | $ | 104 | |||||||
Product sales(1) | |||||||||||||||
MPC | $ | 2 | $ | 3 | $ | 4 | $ | 6 | |||||||
(1) | There were additional product sales to MPC that net to zero within the consolidated financial statements as the transactions are recorded net due to the terms of the agreements under which such product was sold. For the three and six months ended June 30, 2017, these sales totaled $53 million and $110 million, respectively. For the three and six months ended June 30, 2016, these sales totaled $7 million and $12 million, respectively. |
Related party sales to MPC consist of crude oil and refined products pipeline transportation services based on regulated tariff rates, storage services based on contracted rates and transportation services provided by HSM. Under the Partnership’s pipeline transportation services agreements, if MPC fails to transport its minimum throughput volumes during any quarter, then MPC will pay the Partnership a deficiency payment equal to the volume of the deficiency multiplied by the tariff rate then in effect. The deficiency amounts are recorded as Deferred revenue-related parties. 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 or eight quarters under the terms of the applicable transportation services agreement. The Partnership recognizes 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 credits. The use or expiration of the credits is a decrease in Deferred revenue-related parties.
The revenue received from related parties, included in Other income-related parties on the Consolidated Statements of Income, was as follows:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
(In millions) | 2017 | 2016 | 2017 | 2016 | |||||||||||