MPLX LP All statements in this section, other than statements of historical fact, are forward-looking statements that are inherently uncertain. See "Disclosures Regarding Forward-Looking Statements" and "Risk Factors" for a discussion of the factors that could cause actual results to differ materially from those projected in these statements. The following information concerning our business, results of operations and financial condition should also be read in conjunction with the information included under Item 1. Business, Item 6. Selected Financial Data and Item 8. Financial Statements and Supplementary Data.
MPLX OVERVIEW
We are a diversified, large-cap MLP formed by MPC that owns and operates
midstream energy infrastructure and logistics assets, and provides fuels
distribution services. Our assets include a network of crude oil and refined
product pipelines; an inland marine business; light-product, asphalt, heavy oil
and marine terminals; storage caverns; refinery tanks, docks, loading racks, and
associated piping; crude oil and natural gas gathering systems and pipelines; as
well as natural gas and NGL processing and fractionation facilities. The
operation of these assets are conducted in our Logistics and Storage ("L&S") and
Gathering and Processing ("G&P") operating segments. Our assets are positioned
throughout the United States . Our L&S segment primarily engages in the
transportation, storage, distribution and marketing of crude oil, asphalt and
refined petroleum products. The L&S segment also includes the operation of our
inland marine business, terminals, rail facilities, storage caverns and refining
logistics. Our G&P segment primarily engages in the gathering, processing and
transportation of natural gas as well as the gathering, transportation,
fractionation, storage and marketing of NGLs. The assets and operations of our
L&S and G&P segments described above include the assets and operations of
Andeavor Logistics LP ("ANDX") acquired via merger on July 30, 2019 , which
complemented our existing business in addition to expanding our operations to
the West Coast .
RECENT DEVELOPMENTS
On February 21, 2020 , MPLX, through a wholly-owned subsidiary, formed a joint
venture with Delek US Energy, Inc. ("Delek") (the "WWP Project Financing JV")
for the specific purpose of financing a portion of MPLX's and Delek's combined
construction costs for the Wink to Webster pipeline system. Both MPLX and Delek
contributed their respective 15 percent ownership interests in the Wink to
Webster Pipeline JV to the WWP Project Financing JV. Also on February 21, 2020 ,
the WWP Project Financing JV, through a wholly-owned subsidiary, entered into a
committed term loan facility with a syndicate of lenders providing for up to
approximately $608 million in term loan borrowings to, among other things, fund
future capital calls received from the Wink to Webster Pipeline JV and pay debt
service costs under the term loan facility prior to the commercial operation
date of the Wink to Webster pipeline system. The WWP Project Financing JV
pledged the combined 30 percent interest in the Wink to Webster Pipeline JV
contributed to it by MPLX and Delek to secure its obligations under the term
loan facility.
On
MPC's board of directors has formed a special committee to evaluate strategies
to enhance shareholder value through a review of its Midstream business and to
analyze, among other things, the strategic fit of
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assets with MPC, the ability to realize full valuation credit for midstream earnings and cash flow, balance sheet impacts including liquidity and credit ratings, transaction tax impacts, separation costs, and overall complexity.
SIGNIFICANT FINANCIAL AND OTHER HIGHLIGHTS
During 2019, we were able to focus and execute on our strategic vision by growing our business across the midstream value chain and investing in new or existing assets to enhance the stability of our cash flows, while at the same maintaining our investment grade credit profile. Significant financial and other highlights for the year endedDecember 31, 2019 are shown in the chart below. Refer to the Results of Operations and the Liquidity and Capital Resources sections for further details. [[Image Removed: mdafinancialhighlights.jpg]] (1) Includes goodwill impairment of$1.2 billion within our G&P operating segment. (2) Includes Adjusted EBITDA attributable to Predecessor and DCF adjustments attributable to Predecessor.
Additional highlights for the year ended
• MPLX completed the acquisition of ANDX via Merger on
historical results of ANDX have been incorporated into the MPLX results from
effective time of the Merger, each common unit held by ANDX's public
unitholders was converted into the right to receive 1.135 MPLX common units.
ANDX common units held by certain affiliates of MPC were converted into the
right to receive 1.0328 MPLX common units. The assets of ANDX complement and
enhance MPLX's existing asset base and further expand MPLX's existing
footprint.
• MPLX entered into a joint venture agreement related to the Wink-to-Webster
crude oil pipeline, which remains on schedule to be completed in the first
half of 2021 and has 100 percent of the contractible capacity committed with
minimum volume commitments. This is a 36-inch diameter pipeline with a
capacity of 1.5 million barrels per day which will originate in the Permian
Basin and have destination points in the Houston market, including MPC's
Galveston Bay refinery .
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• We also entered into a joint venture agreement related to the design and
construction of the Whistler Pipeline. The Whistler Pipeline is designed to
be a 42-inch diameter pipeline, which will transport approximately 2 Bcf/d of
natural gas from Waha,
majority of available capacity on the planned pipeline has been committed
with minimum volume commitments. The pipeline is expected to be in service in
the second half of 2021.
• Additionally, we continue to execute on our organic growth plan through
terminal and marine fleet expansions, the expansion of processing and
fractionating capacity at numerous plants, as well as having a continued
focus on the optimization of our portfolio of assets, which could include
asset divestitures.
Financing Activities
• During the year, MPLX: entered into a Term Loan Agreement, which provides for
a committed term loan facility for up to an aggregate of
public offering; increased its borrowing capacity on the MPLX Credit
Agreement to
to
outstanding ANDX 5.5 percent senior notes due 2019 at maturity.
• In connection with the Merger, MPLX also assumed all outstanding ANDX senior
notes, which had an aggregate principal amount of
rates ranging from 3.5 percent to 6.375 percent and maturity dates ranging
from 2019 to 2047. On
amount of ANDX's outstanding senior notes were exchanged for an aggregate
principal amount of
exchange offer and consent solicitation undertaken by MPLX, leaving
million aggregate principal of outstanding senior notes issued by ANDX, of
which
senior notes due 2019 were paid off on
described above.
• During the year ended
under our ATM Program. As of
remain available for issuance through the ATM Program.
NON-GAAP FINANCIAL INFORMATION
Our management uses a variety of financial and operating metrics to analyze our
performance. These metrics are significant factors in assessing our operating
results and profitability and include the non-GAAP financial measures of
Adjusted EBITDA and DCF. The amount of Adjusted EBITDA and DCF generated is
considered by the board of directors of our general partner in approving MPLX's
cash distributions.
We define Adjusted EBITDA as net income adjusted for: (i) depreciation and
amortization; (ii) provision/(benefit) for income taxes; (iii) amortization of
deferred financing costs; (iv) extinguishment of debt; (v) non-cash equity-based
compensation; (vi) impairment expense; (vii) net interest and other financial
costs; (viii) income/(loss) from equity method investments; (ix) distributions
and adjustments related to equity method investments (x) unrealized derivative
gains/(losses); (xi) acquisition costs; (xii) noncontrolling interests and
(xiii) other adjustments as deemed necessary. We also use DCF, which we define
as Adjusted EBITDA adjusted for: (i) deferred revenue impacts; (ii) net interest
and other financial costs; (iii) net maintenance capital expenditures; (iv)
equity method investment capital expenditures paid out; and (v) other non-cash
items. We make a distinction between realized and unrealized gains and losses on
derivatives. During the period when a derivative contract is outstanding,
changes in the fair value of the derivative are recorded as an unrealized gain
or loss. When a derivative contract matures or is settled, the previously
recorded unrealized gain or loss is reversed and the realized gain or loss of
the contract is recorded.
We believe that the presentation of Adjusted EBITDA and DCF provides useful
information to investors in assessing our financial condition and results of
operations. The GAAP measures most directly comparable to Adjusted EBITDA and
DCF are net income and net cash provided by operating activities. Adjusted
EBITDA and DCF should not be considered alternatives to GAAP net income or net
cash provided by operating activities. Adjusted EBITDA and DCF have important
limitations as analytical tools because they exclude some but not all items that
affect net income and net cash provided by operating activities or any
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other measure of financial performance or liquidity presented in accordance with GAAP. Adjusted EBITDA and DCF should not be considered in isolation or as substitutes for analysis of our results as reported under GAAP. Additionally, because Adjusted EBITDA and DCF may be defined differently by other companies in our industry, our definitions of Adjusted EBITDA and DCF may not be comparable to similarly titled measures of other companies, thereby diminishing their utility. For a reconciliation of Adjusted EBITDA and DCF to their most directly comparable measures calculated and presented in accordance with GAAP, see the Results of Operations section. Management also utilizes Segment Adjusted EBITDA in evaluating the financial performance of our segments. The disclosure of this measure allows investors to understand how management evaluates financial performance to make operating decisions and allocate resources.
COMPARABILITY OF OUR FINANCIAL RESULTS
The comparability of our financial results has been impacted by acquisitions,
dispositions, performance of our equity method investments, and impairments
among others (see Item 8. Financial Statements and Supplementary Data - Notes 4,
5 and 14).
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RESULTS OF OPERATIONS
The following table and discussion is a summary of our results of operations for the years ended 2019, 2018 and 2017, including a reconciliation of Adjusted EBITDA and DCF from net income and net cash provided by operating activities, the most directly comparable GAAP financial measures. Prior period financial information has been retrospectively adjusted for common control transactions. (In millions) 2019 2018 $ Change 2017 $ Change Revenues and other income: Service revenue$ 2,498 $ 1,856 $ 642 $ 1,156 $ 700 Service revenue - related parties 3,455 2,404 1,051 1,082 1,322 Service revenue - product related 140 220 (80 ) - 220 Rental income 388 352 36 277 75 Rental income - related parties 1,196 846 350 279 567 Product sales 806 887 (81 ) 889 (2 ) Product sales - related parties 142 87 55 8 79 Income from equity method investments(1) 290 247 43 78 169 Other income 12 7 5 6 1 Other income - related parties 114 99 15 92 7 Total revenues and other income 9,041 7,005 2,036 3,867 3,138 Costs and expenses: Cost of revenues (excludes items below) 1,489 1,096 393 528 568 Purchased product costs 686 824 (138 ) 651 173 Rental cost of sales 141 135 6 62 73 Rental cost of sales - related parties 165 31 134 2 29 Purchases - related parties 1,231 925 306 455 470 Depreciation and amortization 1,254 867 387 683 184 Impairment expense 1,197 - 1,197 - - General and administrative expenses 388 316 72 241 75 Other taxes 113 83 30 54 29 Total costs and expenses 6,664 4,277 2,387 2,676 1,601 Income from operations 2,377 2,728 (351 ) 1,191 1,537 Related party interest and other financial costs 11 5 6 2 3 Interest expense (net of amounts capitalized) 851 590 261 296 294 Other financial costs 53 119 (66 ) 56 63 Income before income taxes 1,462 2,014 (552 ) 837 1,177 Provision for income taxes - 8 (8 ) 1 7 Net income 1,462 2,006 (544 ) 836 1,170 Less: Net income attributable to noncontrolling interests 28 16 12 6 10 Less: Net income attributable to Predecessor 401 172 229 36 136
Net income attributable to
Adjusted EBITDA attributable toMPLX LP (excluding Predecessor results)(2) 4,334 3,475 859 2,004 1,471 Adjusted EBITDA attributable toMPLX LP (including Predecessor results)(3) 5,104 3,810 1,294 2,051 1,759 DCF attributable to GP and LP unitholders (including Predecessor results)(3)$ 3,978 $ 2,950 $ 1,028
(1) Includes impairment expense of
investments in 2019.
(2) Non-GAAP measure. See reconciliation below for the most directly comparable
GAAP measures. Excludes adjusted EBITDA and DCF adjustments attributable to
Predecessor.
(3) Non-GAAP measure. See reconciliation below for the most directly comparable
GAAP measures. Includes adjusted EBITDA and DCF adjustments attributable to
Predecessor.
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(In millions) 2019 2018
2017
Reconciliation of Adjusted EBITDA attributable toMPLX LP and DCF attributable to GP and LP unitholders from Net income: Net income$ 1,462 $ 2,006 $ 836 Provision for income taxes - 8 1 Amortization of deferred financing costs 42 55 53 Loss on extinguishment of debt - 46 - Net interest and other financial costs 873 613 301 Income from operations 2,377 2,728 1,191 Depreciation and amortization 1,254 867 683 Non-cash equity-based compensation 22 23 15 Impairment expense 1,197 - - Income from equity method investments(1) (290 ) (247 ) (78 ) Distributions/adjustments related to equity method investments 562 458 231 Unrealized derivative (gains)/losses(2) (1 ) (5 ) 6 Acquisition costs 14 4 11 Other 1 - - Adjusted EBITDA 5,136 3,828 2,059 Adjusted EBITDA attributable to noncontrolling interests (32 ) (18 ) (8 ) Adjusted EBITDA attributable to Predecessor(3) (770 ) (335 ) (47 ) Adjusted EBITDA attributable to MPLX LP 4,334 3,475
2,004
Deferred revenue impacts 94 28 33 Net interest and other financial costs (873 ) (613 ) (301 ) Maintenance capital expenditures (262 ) (175 ) (103 ) Maintenance capital expenditures reimbursements 53 8 - Equity method investment capital expenditures paid out (28 ) (31 ) (13 ) Other 12 8 6 Portion of DCF adjustments attributable to Predecessor(2) 159 81 2 DCF 3,489 2,781
1,628
Preferred unit distributions(4) (122 ) (85 ) (65 ) DCF attributable to GP and LP unitholders 3,367 2,696
1,563
Adjusted EBITDA attributable to Predecessor(3) 770 335 47 Portion of DCF adjustments attributable to Predecessor(3) (159 ) (81 ) (2 ) DCF attributable to GP and LP unitholders (including Predecessor results)$ 3,978 $ 2,950
(1) Includes impairment expense of
investments in 2019.
(2) MPLX makes a distinction between realized and unrealized gains and losses on
derivatives. During the period when a derivative contract is outstanding,
changes in the fair value of the derivative are recorded as an unrealized
gain or loss. When a derivative contract matures or is settled, the
previously recorded unrealized gain or loss is reversed and the realized gain
or loss of the contract is recorded.
(3) The Adjusted EBITDA and DCF adjustments related to Predecessor are excluded
from Adjusted EBITDA attributable to
LP unitholders prior to the acquisition dates.
(4) Includes MPLX distributions declared on the Series A and Series B preferred
units as well as cash distributions earned by the Series B preferred (as the
Series B preferred units are declared and payable semi-annually) assuming a
distribution is declared by the Board of Directors. Cash distributions
declared/to be paid to holders of the Series A and Series B preferred units
are not available to common unitholders.
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(In millions) 2019 2018
2017
Reconciliation of Adjusted EBITDA attributable toMPLX LP and DCF attributable to GP and LP unitholders from Net cash provided by operating activities: Net cash provided by operating activities$ 4,082 $ 3,071 $ 1,907 Changes in working capital items 108 31 (147 ) All other, net (9 ) (5 ) (28 ) Non-cash equity-based compensation 22 23 15 Net gain/(loss) on disposal of assets 6 (3 ) - Net interest and other financial costs 873 613 301 Loss on extinguishment of debt - 46 - Current income taxes 2 - 2 Asset retirement expenditures 1 7 2 Unrealized derivative (gains)/losses(1) (1 ) (5 ) 6 Acquisition costs 14 4 11 Other adjustments to equity method investment distributions 37 46 (10 ) Other 1 - - Adjusted EBITDA 5,136 3,828 2,059 Adjusted EBITDA attributable to noncontrolling interests (32 ) (18 ) (8 ) Adjusted EBITDA attributable to Predecessor(2) (770 ) (335 ) (47 ) Adjusted EBITDA attributable to MPLX LP 4,334 3,475
2,004
Deferred revenue impacts 94 28 33 Net interest and other financial costs (873 ) (613 ) (301 ) Maintenance capital expenditures (262 ) (175 ) (103 ) Maintenance capital expenditures reimbursements 53 8 - Equity method investment capital expenditures paid out (28 ) (31 ) (13 ) Other 12 8 6 Portion of DCF adjustments attributable to Predecessor(2) 159 81 2 DCF 3,489 2,781
1,628
Preferred unit distributions(3) (122 ) (85 ) (65 ) DCF attributable to GP and LP unitholders 3,367 2,696
1,563
Adjusted EBITDA attributable to Predecessor(2) 770 335 47 Portion of DCF adjustments attributable to Predecessor(2) (159 ) (81 ) (2 ) DCF attributable to GP and LP unitholders (including Predecessor results)$ 3,978 $ 2,950
(1) MPLX makes a distinction between realized and unrealized gains and losses on
derivatives. During the period when a derivative contract is outstanding,
changes in the fair value of the derivative are recorded as an unrealized
gain or loss. When a derivative contract matures or is settled, the
previously recorded unrealized gain or loss is reversed and the realized gain
or loss of the contract is recorded.
(2) The Adjusted EBITDA and DCF adjustments related to Predecessor are excluded
from Adjusted EBITDA attributable to
LP unitholders prior to the acquisition dates.
(3) Includes MPLX distributions declared on the Series A and Series B preferred
units as well as cash distributions earned by the Series B preferred (as the
Series B preferred units are declared and payable semi-annually) assuming a
distribution is declared by the Board of Directors. Cash distributions
declared/to be paid to holders of the Series A and Series B preferred units
are not available to common unitholders.
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2019 Compared to 2018
Service revenue increased$642 million in 2019 compared to 2018, of which$490 million is due to ANDX being included in 2019 results for the full year, but only for the last three months of 2018. Additionally, higher fees from higher volumes in the Marcellus, Southwest and Bakken regions, partially offset by lower cost reimbursement revenue in the Marcellus region resulted in a net increase of$130 million . The remainder of the variance is related to a slight increase in volume and transportation rates of crude and refined products shipped. Service revenue-related parties increased$1,051 million in 2019 compared to 2018, of which$731 million is due to ANDX being included in 2019 results for the full year, but only for the last three months of 2018. The remaining variance was primarily due to an additional$74 million of revenue from the acquisition ofMPLX Refining Logistics LLC ("Refining Logistics") andMPLX Fuels Distribution LLC ("Fuels Distribution") onFebruary 1, 2018 , as well as from annual fee escalations;$98 million from increased volume and transportation rates of crude and refined product shipped; a$24 million increase from additional marine vessels;$8 million from storage services revenue due to increased capacity;$16 million from increased terminal throughput; and$2 million from the recognition of revenue related to volume deficiencies. The remaining variance is due to reclassifications of certain lease revenue between rental income and service revenue as well as to other miscellaneous items. Rental income increased$36 million in 2019 compared to 2018, of which$13 million is due to ANDX being included in 2019 results for the full year, but only for the last three months of 2018. The remaining variance was primarily due to an increase from the acquisition of theMt. Airy Terminal as well as increased volumes in the Marcellus region. Rental income-related parties increased$350 million in 2019 compared to 2018, of which$389 million is due to ANDX being included in 2019 results for the full year, but only for the last three months of 2018. Also contributing to the variance was an additional$46 million of revenue from the acquisition of Refining Logistics; an additional$6 million from the completion of a new butane cavern; a$3 million increase in terminal throughput; and an additional$5 million from the acquisition of theMt. Airy Terminal . These increases were offset by a$96 million decrease due to reclassification of certain lease revenue between rental income and service revenue. Service revenue-product related, product sales and product sales-related parties decreased$106 million in 2019 compared to 2018, primarily due to lower prices in the Southwest, Southern Appalachia and Marcellus region of$422 million offset by volume increases in the Southwest of$162 million . A portion of the volume increase in the Southwest was offset by a volume decrease due to downtime at the Javelina facility. The overall decrease was also offset by an increase of$137 million due to ANDX being included in 2019 results for the full year, but only for the last three months of 2018 and by an increase of$22 million due to stronger margins in the wholesale fuels business. The remainder of the variance is due to a decrease from commodity contracts in 2018. Income (loss) from equity method investments increased$43 million in 2019 compared to 2018, of which$30 million was due to ANDX being included in 2019 results for the full year, but only for the last three months of 2018. The remaining variance was primarily due to increases in ourMarEn Bakken Company, LLC , Sherwood Midstream,MarkWest EMG Jefferson Dry Gas Gathering Company, L.L.C. ("Jefferson Dry Gas "),Lincoln Pipeline LLC , and Utica EMG joint ventures, partially offset by decreases in ourExplorer Pipeline Co. ,Three Rivers Gathering LLC ,Ohio Condensate Company, LLC , andLOCAP L.L.C. joint ventures. This includes impairment charges recognized related to ourOhio Condensate Company, L.L.C. andThree Rivers Gathering LLC joint ventures of$42 million .
Other income and Other income-related parties increased
Cost of revenues increased$393 million in 2019 compared to 2018. This variance was primarily due to an increase of$400 million due to ANDX being included in 2019 results for the full year, but only for the last three months of 2018. The remaining variance was primarily due to increased costs to operate new and 75
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expanded assets such as theMt. Airy Terminal , the expanded Ozark pipeline, additional marine vessels, and the completed Robinson Butane cavern. There was also increased spend on projects, as well as other miscellaneous items. These increases were partially offset by decreases in reimbursable costs as well as certain employee-related costs. Purchased product costs decreased$138 million in 2019 compared to 2018. This was primarily due to lower prices of$280 million in the Southwest and Southern Appalachia as well as a decrease in unrealized derivative gains from prior year. These decreases were partially offset by higher volumes of$119 million in the Southwest and Southern Appalachia and an increase of$20 million is due to ANDX being included in 2019 results for the full year, but only for the last three months of 2018.
Rental cost of sales increased
Rental cost of sales-related parties increased$134 million in 2019 compared to 2018, of which$116 million was due to the Merger. The remainder of the variance relates to the acquisition of theMt. Airy Terminal and other miscellaneous items. Purchases-related parties increased$306 million in 2019 compared to 2018, of which$204 million was due to the Merger. The remaining variance was primarily due the acquisition of Refining Logistics and Fuels Distribution as well as to increases in certain employee-related costs. Depreciation and amortization expense increased$387 million in 2019 compared to 2018, of which$277 million was due to ANDX being included in 2019 results for the full year, but only for the last three months of 2018. The acquisitions of Refining Logistics and theMt. Airy Terminal resulted in an increase of approximately$25 million with the remainder of the variance being related to additions to in-service property, plant and equipment throughout the year.
Impairment expense increased
General and administrative expenses increased$72 million in 2019 compared to 2018. This variance was primarily due to an increase of$65 million due to ANDX being included in 2019 results for the full year, but only for the last three months of 2018; this includes$14 million of acquisition costs related to the Merger. The remaining variance is due to the acquisition of Refining Logistics and Fuels Distribution and other employee-related costs. Other taxes increased$30 million in 2019 compared to 2018. This variance was primarily due to ANDX being included in 2019 results for the full year, but only for the last three months of 2018. Interest expense and other financial costs (including related parties) increased$201 million in 2019 compared to 2018. The increase is primarily due to increased interest and financing costs related to the senior notes issued in the fourth quarter of 2018, interest on the new variable rate notes and term loan issued in the third quarter of 2019 and inclusion of the ANDX senior notes during the full year 2019 but only for the last three months of 2018. 2018 Compared to 2017 Service revenue increased$700 million in 2018 compared to 2017, of which$152 million was attributable to the Merger. The remaining variance was primarily due to a$167 million increase in fees from volume growth in the Marcellus and the Southwest regions; a$13 million increase related to increases in volume and transportation rates of crude oil and refined products shipped, partially attributable to the Ozark pipeline acquisition and expansion; and an increase of$369 million due to ASC 606 gross ups. The remainder of the change can be attributable to impacts related to ASC 606 classification changes and other miscellaneous items. Service revenue-related parties increased$1,322 million in 2018 compared to 2017, of which$245 million was attributable to the Merger. The remaining variance was primarily due to a$947 million increase from the acquisition of Refining Logistics and Fuels Distribution; a$100 million increase related to higher 76
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volumes and transportation rates of related-party crude oil and refined products shipped, partially attributable to the Ozark pipeline acquisition and expansion; a$15 million increase from additional boats and barges; a$10 million increase from higher terminal throughputs; and a$12 million increase in the recognition of revenue related to volume deficiencies. These increases were partially offset by ASC 606 classification changes of$7 million . Service revenue-product related increased$220 million in 2018 compared to 2017, of which$22 million was attributable to the Merger. The remaining variance was primarily due to ASC 606 classification and non-cash changes. Rental income increased$75 million in 2018 compared to 2017, of which$3 million was attributable to the Merger. The remaining variance was primarily due to a$6 million increase from the acquisition of theMt. Airy Terminal as well as$65 million related to higher ASC 606 cost reimbursements. Rental income-related parties increased$567 million in 2018 compared to 2017, of which$128 million was attributable to the Merger. The remaining variance was primarily due to a$411 million increase from the acquisition of Refining Logistics with the remainder of the variance being primarily related to the acquisition of additional marine vessels and the completion of theRobinson Butane Cavern. Product sales and product sales-related parties increased$77 million in 2018 compared to 2017, of which$23 million was attributable to the Merger. The remaining variance was primarily due to higher prices in the Southwest, Northeast and Marcellus regions of$113 million , volume impacts of$9 million as well as a change in unrealized gains associated with derivatives of$10 million , driven by favorable product hedges in 2018 compared to unfavorable product hedges in 2017. These increases were partially offset by ASC 606 classification and non-cash changes of$78 million . Income (loss) from equity method investments increased$169 million in 2018 compared to 2017, of which$7 million was attributable to the Merger. The remaining variance was primarily due to the MarEn Bakken acquisition, the Joint-Interest Acquisition, growth in theJefferson Dry Gas joint venture as a result of an increase in dry gas gathering volumes, as well as growth in the Sherwood Midstream joint venture due to additional plants coming online. This was partially offset by a decrease in our Utica EMG joint venture as a result of decreased volumes and the buy-out of an equity method investment partner.
Other income and Other income-related parties increased
Cost of revenues increased$568 million in 2018 compared to 2017, of which$148 million was attributable to the Merger. The remaining variance was primarily due to ASC 606 gross-ups of$369 million , higher repairs and maintenance and operating costs in the Marcellus and Southwest regions of$32 million as well as from the acquisition of Refining Logistics and the acquisition and expansion of the Ozark pipeline. Purchased product costs increased$173 million in 2018 compared to 2017, of which a$21 million decrease was attributable to the Merger. The remaining variance was primarily due to higher NGL and gas prices and volumes of approximately$68 million and$36 million , respectively, primarily in the Southwest and Northeast areas; and an increase due to ASC 606 imbalances and non-cash consideration of approximately$105 million with the remaining variance being related to derivative activity. Rental cost of sales and rental cost of sales-related parties increased$102 million in 2018 compared to 2017, of which$26 million was attributable to the Merger. The remaining variance was primarily due to ASC 606 gross ups of$65 million in addition to the acquisition ofMt. Airy Terminal and increased maintenance, repairs, and operating costs. Purchases-related parties increased$470 million in 2018 compared to 2017, of which$65 million was attributable to the Merger. The remaining variance was primarily due to$372 million from the acquisition of Refining Logistics and Fuels Distribution with the remainder of the variance primarily being related to increases in employee-related costs. 77
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Depreciation and amortization expense increased$184 million in 2018 compared to 2017, of which$101 million was attributable to the Merger. The remaining variance was primarily due to the acquisitions of Refining Logistics and theMt. Airy Terminal for approximately$76 million , as well as additions to in-service property, plant and equipment, slightly offset by accelerated depreciation expense incurred in 2017 related to decommissioned assets. General and administrative expenses increased$75 million in 2018 compared to 2017, of which$25 million was attributable to the Merger. The remaining variance was primarily due to the acquisition of Refining Logistics and Fuels Distribution as well as increased labor and benefits costs. Other taxes increased$29 million in 2018 compared to 2017, of which$11 million was attributable to the Merger. The remaining variance was primarily due to the acquisition of Refining Logistics as well as the Ozark pipeline acquisition and expansion. Interest expense and other financial costs increased$360 million in 2018 compared to 2017, of which$53 million was attributable to the Merger. The remaining variance was primarily due to increased interest expense due to the new senior notes issued inFebruary 2018 andNovember 2018 and the loss on debt extinguishment associated with the redemption of all of the outstanding 5.5 percent senior notes dueFebruary 2023 .
SEGMENT REPORTING
We classify our business in the following reportable segments: L&S and G&P. Segment Adjusted EBITDA represents Adjusted EBITDA attributable to the reportable segments. Amounts included in net income and excluded from Segment Adjusted EBITDA include: (i) depreciation and amortization; (ii) provision/(benefit) for income taxes; (iii) amortization of deferred financing costs; (iv) extinguishment of debt; (v) non-cash equity-based compensation; (vi) impairment expense; (vii) net interest and other financial costs; (viii) income/(loss) from equity method investments; (ix) distributions and adjustments related to equity method investments; (x) unrealized derivative gains/(losses); (xi) acquisition costs; (xii) noncontrolling interests; and (xiii) other adjustments as deemed necessary. These items are either: (i) believed to be non-recurring in nature; (ii) not believed to be allocable or controlled by the segment; or (iii) are not tied to the operational performance of the segment.
The tables below present information about Segment Adjusted EBITDA for the
reported segments for the years ended
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L&S Segment
L&S Segment Financial Highlights (in millions)[[Image Removed: lsrevenue.jpg]][[Image Removed: lsincomefromops.jpg]][[Image Removed: lssegmentadjebitda.jpg]] (1) Includes results of Predecessor.
(In millions) 2019 2018 $ Change 2017 $ Change Service revenue$ 3,765 $ 2,575 $ 1,190 $ 1,200 $ 1,375 Rental income 1,235 856 379 279 577 Product related revenue 91 23 68 - 23 Income from equity method investments 200 171 29 36 135 Other income 61 47 14 47 - Total segment revenues and other income 5,352 3,672 1,680 1,562 2,110 Cost of revenues 966 536 430 370 166 Purchases - related parties 872 698 174 299 399 Depreciation and amortization 503 308 195 163 145 General and administrative expenses 198 161 37 106 55 Other taxes 61 45 16 22 23 Segment income from operations 2,752 1,924 828 602 1,322 Depreciation and amortization 503 308 195 163 145 Income from equity method investments (200 ) (171 ) (29 ) (36 ) (135 ) Distributions/adjustments related to equity method investments 267 242 25 76 166 Acquisition costs 14 4 10 11 (7 ) Non-cash equity-based compensation 14 12 2 6 6 Other 1 - 1 - - Adjusted EBITDA attributable to Predecessor (603 ) (262 ) (341 ) (47 ) (215 ) Segment Adjusted EBITDA(1)$ 2,748 $ 2,057 $ 691
(1) See the Reconciliation of Adjusted EBITDA attributable to
attributable to GP and LP unitholders from Net income table for the
reconciliation to the most directly comparable GAAP measure.
2019 Compared to 2018
Service revenue increased$1,190 million in 2019 compared to 2018, of which$848 million is due to ANDX being included in 2019 results for the full year, but only for the last three months of 2018. Other impacts include an additional$74 million of revenue from the acquisition of Refining Logistics and Fuels Distribution onFebruary 1, 2018 , as well as from annual fee escalations;$122 million from increased volume and transportation rates of crude and refined product shipped;$24 million from additional marine vessels;$8 million from storage services revenue due to increased capacity;$16 million from increased terminal throughput; and$2 million from the recognition of revenue related to volume deficiencies. The remaining variance is due to a$89 million increase due to reclassification of certain lease revenue between rental income and service revenue as well as to other miscellaneous items. 79
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Rental income increased$379 million in 2019 compared to 2018, of which$402 million is due to ANDX being included in 2019 results for the full year, but only for the last three months of 2018. The remaining variance was primarily due to an additional$46 million of revenue from the acquisition of Refining Logistics onFebruary 1, 2018 ; an additional$6 million from the completion of a new butane cavern; a$3 million increase in terminal throughput; and an additional$21 million from the acquisition of theMt. Airy Terminal . These increases were offset by a$96 million decrease due to reclassification of certain lease revenue between rental income and service revenue and other miscellaneous items. Product related revenue increased$68 million in 2019 compared to 2018, of which$46 million is due to ANDX being included in 2019 results for the full year, but only for the last three months of 2018. The remaining variance is primarily due to stronger margins in the wholesale fuels business. Income from equity method investments increased$29 million in 2019 compared to 2018, of which$19 million is due to ANDX being included in 2019 results for the full year, but only for the last three months of 2018. The remaining variance was due to increases in ourMarEn Bakken Company, LLC andLincoln Pipeline LLC joint ventures due to increased throughput volumes partially offset by decreases in ourExplorer Pipeline Co. joint venture due to an upward adjustment to income in 2018 for a change in the corporate tax rate and ourLOCAP LLC joint venture due to lower throughput volumes.
Other Income increased
Cost of revenues increased$430 million in 2019 compared to 2018, of which$396 million is due to ANDX being included in 2019 results for the full year, but only for the last three months of 2018. The remaining variance was primarily due to increased costs to operate new and expanded assets such as theMt. Airy Terminal , the expanded Ozark pipeline, additional marine vessels, and the completed Robinson Butane cavern. There was also increased spend on projects, as well as other miscellaneous items. These increases were partially offset by a decrease due to certain employee-related costs. Purchases - related parties increased$174 million in 2019 compared to 2018, of which$83 million is due to ANDX being included in 2019 results for the full year, but only for the last three months of 2018. The remaining variance was primarily due to the acquisition of Refining Logistics and Fuels Distribution and increased employee-related costs. Depreciation and amortization increased$195 million in 2019 compared to 2018, of which$162 million is due to ANDX being included in 2019 results for the full year, but only for the last three months of 2018. The remaining variance was primarily due to the acquisitions of Refining Logistics and theMt. Airy Terminal as well as additions to in-service property, plant and equipment throughout the year. General and administrative expenses increased$37 million in 2019 compared to 2018, of which$34 million is due to ANDX being included in 2019 results for the full year, but only for the last three months of 2018. There was also an increase due to acquisition costs incurred during 2019, which were offset by lower employee related costs in the fourth quarter of 2019 when compared to the fourth quarter of 2018 as it relates to ANDX. Other taxes increased$16 million in 2019 compared to 2018 due to ANDX being included in 2019 results for the full year, but only for the last three months of 2018. 2018 Compared to 2017 Service revenue increased$1,375 million in 2018 compared to 2017, of which$286 million was attributable to the Merger. The remaining variance was primarily due to an additional$947 million of revenue from the acquisition of Refining Logistics and Fuels Distribution; a$113 million increase in volume and transportation rates of crude and refined product shipped, partially attributable to the Ozark pipeline acquisition and expansion; a$15 million increase from additional marine vessels; an additional$10 million from increased terminal throughput; and a$12 million increase in the recognition of revenue 80
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related to volume deficiencies. These increases were partially offset by ASC 606 classification changes and other miscellaneous items.
Rental income increased$577 million in 2018 compared to 2017, of which$131 million was attributable to the Merger. The remaining variance was primarily due to an additional$411 million of revenue from the acquisition of Refining Logistics and Fuels Distribution, an additional$16 million from the completion of a new butane cavern, a$14 million increase from additional marine vessels, and an additional$6 million from the acquisition of theMt. Airy Terminal . Product related revenue increased$23 million in 2018 compared to 2017, of which$9 million was attributable to the Merger. The remaining variance was primarily due to ASC 606 classification changes. Income from equity method investments increased$135 million in 2018 compared to 2017, of which$5 million was attributable to the Merger. The remaining variance was primarily due to the Joint-Interest Acquisition and the acquisition of MarEn Bakken. Cost of revenues increased$166 million in 2018 compared to 2017, of which$135 million was attributable to the Merger. The remaining variance was primarily due to an additional$13 million from the acquisition of Refining Logistics and Fuels Distribution,$7 million from the acquisition of Ozark pipeline and related expansion,$4 million from the acquisition of theMt. Airy Terminal and$7 million for other miscellaneous items. Purchases - related parties increased$399 million in 2018 compared to 2017, of which$13 million was attributable to the Merger. The remaining variance was primarily due to a$372 million increase from the acquisition of Refining Logistics and Fuels Distribution as well as an increase in employee-related costs. Depreciation and amortization increased$145 million in 2018 compared to 2017, of which$68 million was attributable to the Merger. The remaining variance was primarily due to the acquisitions of Refining Logistics, Fuels Distribution and theMt. Airy Terminal . General and administrative expenses increased$55 million in 2018 compared to 2017, of which$19 million was attributable to the Merger. The remaining variance was primarily due to an additional$22 million from the acquisition of Refining Logistics and Fuels Distribution as well as increased other miscellaneous expenses. Other taxes increased$23 million in 2018 compared to 2017, of which$9 million was attributable to the Merger. The remaining variance was primarily due to the acquisition of Refining Logistics and Fuels Distribution as well as the Ozark pipeline acquisition and expansion. 81
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G&P Segment
G&P Segment Financial Highlights (in millions)[[Image Removed: gprevenue.jpg]][[Image Removed: gpincomefromops.jpg]][[Image Removed: gpsegmentadjebitda.jpg]] (1) Includes results of Predecessor.
(In millions) 2019 2018 $ Change 2017 $ Change Service revenue$ 2,188 $ 1,685 $ 503 $ 1,038 $ 647 Rental income 349 342 7 277 65 Product related revenue 997 1,171 (174 ) 897 274 Income from equity method investments 90 76 14 42 34 Other income 65 59 6 51 8 Total segment revenues and other income 3,689 3,333 356 2,305 1,028 Cost of revenues 829 726 103 222 504 Purchased product costs 686 824 (138 ) 651 173 Purchases - related parties 359 227 132 156 71 Depreciation and amortization 751 559 192 520 39 Impairment expense 1,197 - 1,197 - - General and administrative expenses 190 155 35 135 20 Other taxes 52 38 14 32 6 Income/(loss) from operations (375 ) 804 (1,179 ) 589 215 Depreciation and amortization 751 559 192 520 39 Impairment expense 1,197 - 1,197 - - Income from equity method investments (90 ) (76 ) (14 ) (42 ) (34 ) Distributions/adjustments related to equity method investments 295 216 79 155 61 Unrealized derivative (gains)/losses(1) (1 ) (5 ) 4 6 (11 ) Non-cash equity-based compensation 8 12 (4 ) 9 3 Adjusted EBITDA attributable to noncontrolling interests (32 ) (19 ) (13 ) (8 ) (11 ) Adjusted EBITDA attributable to Predecessor (167 ) (73 ) (94 ) - (73 ) Segment Adjusted EBITDA(2)$ 1,586 $ 1,418 $ 168 $ 1,229 $ 189
(1) MPLX makes a distinction between realized and unrealized gains and losses on
derivatives. During the period when a derivative contract is outstanding,
changes in the fair value of the derivative are recorded as an unrealized
gain or loss. When a derivative contract matures or is settled, the
previously recorded unrealized gain or loss is reversed and the realized gain
or loss of the contract is recorded.
(2) See the Reconciliation of Adjusted EBITDA attributable to
attributable to GP and LP unitholders from Net income table for the
reconciliation to the most directly comparable GAAP measure.
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2019 Compared to 2018
Service revenue increased$503 million in 2019 compared to 2018, of which$375 million is due to ANDX being included in 2019 results for the full year, but only for the last three months of 2018. The remaining variance is a result of higher fees from higher volumes of$189 million in the Marcellus, Southwest and Bakken regions partially offset by lower cost reimbursement revenue in the Marcellus region of$59 million and other miscellaneous decreases.
Rental income increased
Product related revenue decreased$174 million in 2019 compared to 2018 due to lower prices in the Southwest, Southern Appalachia, Marcellus, Bakken and Rockies regions of$422 million offset by volume increases in the Southwest, Bakken and Rockies of$162 million . A portion of the volume increase in the Southwest was offset by a volume decrease due to downtime at the Javelina facility. The overall decrease was also offset by an increase of$91 million due to ANDX being included in 2019 results for the full year, but only for the last three months of 2018. The remainder of the variance is due to a decrease from commodity contracts in 2018. Income from equity method investments increased$14 million in 2019 compared to 2018, of which$11 million is due to ANDX being included in 2019 results for the full year, but only for the last three months of 2018. There was also an increase of$49 million related to three of our joint ventures. The Sherwood Midstream joint venture increased due to additional plants coming online at the end of 2018 while theJefferson Dry Gas joint venture increased as a result of higher dry gas gathering volumes and assets placed in service and the Utica EMG joint venture increased as a result of assets written off in the prior period. These increases were partially offset by a decrease in ourOhio Condensate Company, LLC andThree Rivers Gathering LLC joint ventures, which had impairments of approximately$42 million in 2019. Additionally,Delaware Basin Residue, LLC joint venture decreased due to unrealized derivative losses. Other income increased$6 million in 2019 compared to 2018. This variance was primarily due to an increase in management fees from our joint ventures and net gains on sales of assets during the year. Cost of revenues increased$103 million in 2019 compared to 2018, of which$122 million is due to ANDX being included in 2019 results for the full year, but only for the last three months of 2018. Additionally, we experienced higher repairs and maintenance costs in the Southwest and Marcellus regions of$37 million which were offset by lower reimbursable costs of$59 million in the same regions. Purchased product costs decreased$138 million in 2019 compared to 2018. This was primarily due to lower prices of$280 million in the Southwest and Southern Appalachia. These decreases were partially offset by higher volumes of$119 million in the Southwest and Southern Appalachia and an increase of$20 million is due to ANDX being included in 2019 results for the full year, but only for the last three months of 2018, as well as a decrease in unrealized derivative gains from prior year. Purchases - related parties increased$132 million in 2019 compared to 2018, of which$121 million is due to ANDX being included in 2019 results for the full year, but only for the last three months of 2018. The remaining variance is attributable to an increases in employee-related costs. Depreciation and amortization increased$192 million in 2019 compared to 2018, of which$115 million is due to ANDX being included in 2019 results for the full year, but only for the last three months of 2018. The remaining variance is attributable to additions to in-service property, plant and equipment throughout 2018 and 2019 and accelerated depreciation recorded in 2019, which was slightly offset by write-downs of equipment no longer in use in the prior year.
Impairment expense increased
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General and administrative expenses increased$35 million in 2019 compared to 2018, of which$20 million is due to ANDX being included in 2019 results for the full year, but only for the last three months of 2018. The remainder of the variance is attributable to higher employee related costs. Other taxes increased$14 million in 2019 compared to 2018, of which$9 million is due to ANDX being included in 2019 results for the full year, but only for the last three months of 2018. The remaining variance is attributable to higher property taxes. 2018 Compared to 2017 Service revenue increased$647 million in 2018 compared to 2017, of which$111 million was attributable to the Merger. The remaining variance was primarily due to ASC 606 cost reimbursements of$369 million and higher fees from higher volumes in the Marcellus and Southwest regions of$167 million .
Rental income increased
Product related revenue increased$274 million in 2018 compared to 2017, of which$36 million was attributable to the Merger. The remaining variance was primarily due to higher prices in the Southwest, Northeast and Marcellus regions of$113 million , volume impacts of$9 million as well as ASC 606 classification and non-cash changes of$106 million . In addition, there was a change in unrealized gains associated with derivatives of$10 million , driven by favorable product hedges in 2018 compared to unfavorable product hedges in 2017. Income from equity method investments increased$34 million in 2018 compared to 2017, of which$2 million was attributable to the Merger. The remaining variance was primarily due to growth in theJefferson Dry Gas joint venture as a result of an increase in dry gas gathering volumes as well as growth in the Sherwood Midstream joint venture due to additional plants coming online. This was partially offset by a decrease in our Utica EMG joint venture as a result of decreased volumes and the buy-out of an equity method investment partner.
Other income increased
Cost of revenues increased$504 million in 2018 compared to 2017, of which$39 million was attributable to the Merger. The remaining variance was primarily due to ASC 606 gross ups of$433 million as well as higher repairs and maintenance and operating costs in the Marcellus and Southwest regions of$32 million . Purchased product costs increased$173 million in 2018 compared to 2017. This variance was primarily due to higher prices of$68 million and volumes of$36 million in the Southwest and Northeast as well as ASC 606 imbalances and non-cash consideration of$105 million . These increases were partially offset by a$21 million decrease due to the Merger and unrealized gains and losses associated with derivatives of$15 million , which was driven by NGL prices creating a smaller fractionation spread. Purchases - related parties increased$71 million in 2018 compared to 2017, of which$52 million was attributable to the Merger. The remaining variance was primarily due to employee-related costs. Depreciation and amortization increased$39 million in 2018 compared to 2017, of which$33 million was attributable to the Merger. The remaining variance primarily relates to accelerated depreciation taken in 2017 of approximately$33 million offset by additions to in-service property, plant and equipment throughout 2017 and 2018 as well as a write-down of construction in progress projects of approximately$10 million , which are no longer expected to be completed. General and administrative expenses increased$20 million in 2018 compared to 2017, of which$6 million was attributable to the Merger. The remaining variance was primarily due to increases in labor and benefits costs and general increases in office expense. 84
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Other taxes increased$6 million in 2018 compared to 2017, of which$2 million was attributable to the Merger. The remaining variance was primarily due to an increase in property taxes.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Our cash, cash equivalents and restricted cash balance was$15 million atDecember 31, 2019 , compared to$85 million atDecember 31, 2018 . The change in cash and cash equivalents was due to the factors discussed below. Net cash provided by (used in) operating activities, investing activities and financing activities for the past three years were as follows: (In millions) 2019 2018 2017 Net cash provided by/(used in): Operating activities$ 4,082 $ 3,071 $ 1,907 Investing activities (3,063 ) (2,878 ) (2,308 ) Financing activities (1,089 ) (117 ) 171 Total$ (70 ) $ 76 $ (230 ) Cash Flows Provided by Operating Activities. Net cash provided by operating activities increased$1,011 million in 2019 compared to 2018. This change is a result of a decrease in net income of$544 million offset by a goodwill impairment recognized in the amount of approximately$1.2 billion . Changes related to depreciation and amortization, equity method investments and working capital items also had an impact on the overall change from prior year, most of which were directly impacted by the Merger. Net cash provided by operating activities increased$1,164 million in 2018 compared to 2017, of which$245 million is due to the Merger. The majority of the remaining$919 million increase is related to the increase in net income net of non-cash adjustments of approximately$931 million period over period. 2018 includes Refining Logistics and Fuels Distribution as ofFebruary 1, 2018 as well as Joint-Interest Acquisition assets as ofSeptember 1, 2017 . Cash Flows Used in Investing Activities. Net cash used in investing activities increased$185 million in 2019 compared to 2018 primarily due to spending related to the capital budget as well as increased investments in equity method investments, offset by a decrease in cash used for acquisitions due to theMt. Airy Terminal acquisition in 2018. Net cash used in investing activities increased$570 million in 2018 compared to 2017, of which$192 million is due to the Merger. The majority of the remaining$378 million increase was primarily due to theMt. Airy Terminal acquisition as well as various capital projects that have taken place throughout 2018 in-line with MPLX's capital growth plan. The impact of this activity in 2018 was partially offset by the Ozark pipeline acquisition and higher investments in unconsolidated affiliates which occurred in 2017. Cash Flows Used in and Provided by Financing Activities. The change in financing activities was a$1,089 million use of cash in 2019 compared to a$117 million use of cash in 2018. The uses of cash in 2019 primarily consisted of$8,719 million of repayments of borrowings under loan agreements with MPC, the$500 million redemption of the 5.5 percent senior notes dueOctober 2019 ,$7,424 million of repayments under the MPLX and ANDX Credit Agreements and including payments on financing leases, debt issuance costs of$20 million , distributions of$102 million and$30 million to preferred unitholders and noncontrolling interests respectively, distributions of$2,435 million to unitholders related to the increase in units outstanding as well as an increase in the distribution per limited partner unit, and distributions of$502 million to common and preferred unitholders of the Predecessor. This was partially offset by sources of cash primarily related to$6,174 million of proceeds from the MPLX and ANDX Credit Agreements,$2.0 billion of net proceeds from the floating rate senior notes issued onSeptember 9, 2019 ,$1.0 billion of net proceeds from the term loan,$9,313 million of net proceeds from draws on loan agreements with MPC, and$169 million from contributions from MPC and noncontrolling interests. 85
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The change in financing activities was a$117 million use of cash in 2018 compared to a$171 million source of cash in 2017. For 2018,$44 million of the$117 million use of cash was due to the Merger. The remaining$73 million use of cash in 2018 primarily consisted of distributions to MPC of$4.1 billion for the acquisition of Refining Logistics and Fuels Distribution, the$4.1 billion repayment of the 364-day term loan facility, the$4,347 million repayment of borrowings under the MPC Loan Agreement, the$750 million redemption of the 5.5 percent senior notes dueFebruary 2023 and$14 million of related debt extinguishment charges, the$1,915 million repayment of the MPLX Credit Agreement, debt issuance costs and discounts of$76 million and$74 million respectively, distributions of$71 million and$17 million to preferred unitholders and noncontrolling interests respectively, and distributions of$1,819 million to unitholders and our general partner due mainly to the increase in units outstanding as well as an increase in the distribution per limited partner unit. This was partially offset by sources of cash primarily related to$1,410 million of proceeds from the MPLX Credit Agreement,$5.5 billion of net proceeds from the senior notes issued onFebruary 8, 2018 ,$2.25 billion of net proceeds from the senior notes issued onNovember 15, 2018 ,$4.1 billion of net proceeds under the 364-day term loan facility that was drawn onFebruary 1, 2018 , and$3,962 million of net proceeds from draws on the MPC Loan Agreement. The sources of cash in 2017 primarily consisted of$2.2 billion of net proceeds from the senior notes issued inFebruary 2017 ,$670 million of proceeds under the bank revolving credit facility,$129 million in contributions from noncontrolling interests, and$483 million of net proceeds from sales of common units under the ATM Program. These items were partially offset by distributions to MPC of$1.9 billion for the acquisition of HST, WHC and MPLXT and the Joint-Interest Acquisition,$250 million repayment of the term loan facility,$165 million repayment of the bank revolving credit facility, distributions of$65 million to preferred unitholders, and distributions of$1.1 billion to unitholders and our general partner. Long-term debt borrowings and repayments were a net$1.2 billion source of cash in 2019 compared to a$6.5 billion source of cash in 2018 and a$2.5 billion source of cash in 2017. During 2019, we used proceeds from the term loan and floating rate senior notes issued during the year to pay off ANDX's credit facilities, repay ANDX's senior notes maturing in 2019 and for general business purposes. During 2018, we used proceeds from senior notes issued during the year to redeem$750 million of 5.5 percent senior notes dueFebruary 2023 , for the acquisition of Refining Logistics and Fuels Distribution and to repay amounts outstanding under the MPLX Credit Agreement and MPC Loan Agreement, as well as for general business purposes. During 2017, we used proceeds from the issuance of theFebruary 2017 senior notes and MPLX Credit Agreement for general business purposes, including the acquisitions of HST, WHC, MPLXT and the Joint-Interest Acquisition from MPC, the acquisition of our equity interest in MarEn Bakken, the acquisition of the Ozark pipeline and capital expenditures.
Debt and Liquidity Overview
Credit Agreements
OnJuly 30, 2019 , in connection with the closing of the Merger, we amended our previously existing revolving credit facility (the "MPLX Credit Agreement") to, among other things, increase the borrowing capacity from$2.25 billion to$3.5 billion and extend its maturity fromJuly 2022 toJuly 2024 . Borrowings under the MPLX Credit Agreement bear interest at either the Adjusted LIBOR or the Alternate Base Rate (as defined in the MPLX Credit Agreement), at our election, plus a specified margin. We are charged various fees and expenses in connection with the agreement, including administrative agent fees, commitment fees on the unused portion of the bank revolving credit facility and fees with respect to issued and outstanding letters of credit. The applicable margins to the benchmark interest rates and certain fees fluctuate based on the credit ratings in effect from time to time on MPLX's long-term debt. The MPLX Credit Agreement includes letter of credit issuing capacity of up to$300 million and swingline capacity of up to$150 million . The borrowing capacity under the MPLX Credit Agreement may be increased by up to an additional$1.0 billion , subject to certain conditions, including the consent of lenders whose commitments would increase. In addition, the maturity date may be extended for up to two additional one-year periods subject to, among other conditions, the approval of lenders holding the majority of the commitments then outstanding, provided that the commitments of any non-consenting lenders will terminate on the then-effective maturity date. During 2019, we borrowed$5,310 million under the MPLX Credit Agreement, at an average interest rate of 3.547 percent, and repaid$5,310 million of borrowings 86
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under the MPLX Credit Agreement. At
The MPLX Credit Agreement contains certain representations and warranties, affirmative and negative covenants and events of default that we consider usual and customary for an agreement of that type and that could, among other things, limit our ability to pay distributions to our unitholders. The financial covenant requires us to maintain a ratio of Consolidated Total Debt as of the end of each fiscal quarter to Consolidated EBITDA (both as defined in the MPLX Credit Agreement) for the prior four fiscal quarters of no greater than 5.0 to 1.0 (or 5.5 to 1.0 for up to two fiscal quarters following certain acquisitions). Consolidated EBITDA is subject to adjustments for certain acquisitions completed and capital projects undertaken during the relevant period. Other covenants restrict us and/or certain of our subsidiaries from incurring debt, creating liens on our assets and entering into transactions with affiliates. As ofDecember 31, 2019 , we were in compliance with this financial covenant with a ratio of Consolidated Total Debt to Consolidated EBITDA of 3.9 to 1.0, as well as all other covenants contained in the MPLX Credit Agreement. Prior to the Merger, ANDX had revolving credit facilities (the "ANDX credit facilities") totaling$2.1 billion in borrowing capacity, which were set to matureJanuary 29, 2021 . The ANDX credit facilities were terminated upon closing of the Merger and repaid with borrowings under the MPLX revolving credit facility. During the year endedDecember 31, 2019 , there were borrowings of$864 million under the ANDX credit facilities, at an average interest rate of 4.129 percent, and repayments of$2.1 billion .
For further discussion, see Item 8. Financial Statements and Supplementary Data - Note 17.
Term Loan OnSeptember 26, 2019 , MPLX entered into a Term Loan Agreement, which provides for a committed term loan facility for up to an aggregate of$1.0 billion . Borrowings under the Term Loan Agreement bear interest, at MPLX's election, at either (i) the Adjusted LIBO Rate (as defined in the Term Loan Agreement) plus a margin ranging from 75.0 basis points to 100.0 basis points per annum, depending on MPLX's credit ratings, or (ii) the Alternate Base Rate (as defined in the Term Loan Agreement). Amounts borrowed under the Term Loan Agreement are due and payable onSeptember 26, 2021 . As ofDecember 31, 2019 , MPLX had drawn the full$1.0 billion available on the term loan at an average interest rate of 2.561 percent. The proceeds from the borrowings were used to repay existing indebtedness and for general business purposes. The Term Loan Agreement contains representations and warranties, affirmative and negative covenants and events of default that we consider to be customary for an agreement of this type and are substantially similar to those contained in the MPLX Credit Agreement, including a covenant that requires MPLX's ratio of Consolidated Total Debt to Consolidated EBITDA (as both terms are defined in the Term Loan Agreement) for the four prior fiscal quarters not to exceed 5.0 to 1.0 as of the last day of each fiscal quarter (or during the six-month period following certain acquisitions, 5.5 to 1.0). Consolidated EBITDA is subject to adjustments for certain acquisitions completed and capital projects undertaken during the relevant period. Senior Notes As ofDecember 31, 2019 , we had$19.1 billion in aggregate principal amount of senior notes outstanding. The increase compared to year-end 2018 resulted primarily from the assumption of ANDX's senior notes and the issuance of variable rate senior notes as discussed below. As ofDecember 31, 2019 , minimum principal payments due during the next five years include$1.0 billion to repay our floating rate notes dueSeptember 2021 ,$1.0 billion to repay our floating rate notes dueSeptember 2022 ,$300 million to repay our 6.250 percent senior notes dueOctober 2022 ,$500 million to repay our 3.500 percent senior notes dueDecember 2022 ,$500 million to repay our 3.375 percent senior notes dueMarch 2023 ,$1.0 billion to repay our 4.500 percent senior notes dueJuly 2023 ,$450 million to repay our 6.375 percent senior notes dueMay 2024 and$1.15 billion to repay our 4.875 percent senior notes dueDecember 2024 . 87
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OnSeptember 9, 2019 , MPLX issued$2.0 billion aggregate principal amount of floating rate senior notes in a public offering, consisting of$1.0 billion aggregate principal amount of notes dueSeptember 2021 and$1.0 billion aggregate principal amount of notes dueSeptember 2022 (collectively, the "Floating Rate Senior Notes"). The Floating Rate Senior Notes were offered at a price to the public of 100 percent of par. The Floating Rate Senior Notes are callable, in whole or in part, at par plus accrued and unpaid interest at any time on or afterSeptember 10, 2020 . The proceeds were used to repay MPLX's existing indebtedness and for general business purposes. Interest on the Floating Rate Senior Notes is payable quarterly in March, June, September and December, commencing onDecember 9, 2019 . The interest rate applicable to the floating rate senior notes dueSeptember 2021 is LIBOR plus 0.9 percent per annum. The interest rate applicable to the floating rate senior notes dueSeptember 2022 is LIBOR plus 1.1 percent per annum. In connection with the Merger, MPLX assumed ANDX's outstanding senior notes, which had an aggregate principal amount of$3.75 billion , interest rates ranging from 3.5 percent to 6.375 percent and maturity dates ranging from 2019 to 2047. OnSeptember 23, 2019 , approximately$3.06 billion aggregate principal amount of ANDX's outstanding senior notes were exchanged for an aggregate principal amount of approximately$3.06 billion new senior notes (the "Exchange Notes") issued by MPLX in an exchange offer and consent solicitation undertaken by MPLX, leaving approximately$690 million aggregate principal of outstanding senior notes issued by ANDX. Of this,$500 million aggregate principal amount was related to 5.5 percent senior notes due 2019. The aggregate principal amount of$500 million and accrued interest of$13.75 million was paid onOctober 15, 2019 at maturity using net proceeds from the issuance of the Floating Rate Senior Notes and borrowings under the Term Loan Agreement discussed above and includes interest through the payoff date. The Exchange Notes consist of$266 million in aggregate principal amount of 6.25 percent senior notes dueOctober 2022 ,$486 million in aggregate principal amount of 3.5 percent senior notes dueDecember 2022 ,$381 million in aggregate principal amount of 6.375 percent senior notes dueMay 2024 ,$708 million in aggregate principal amount of 5.25 percent senior notes dueJanuary 2025 ,$732 million in aggregate principal amount of 4.25 percent senior notes dueDecember 2027 and$487 million in aggregate principal amount of 5.2 percent senior notes dueDecember 2047 .
For further discussion, see Item 8. Financial Statements and Supplementary Data - Note 17.
Our intention is to maintain an investment grade credit profile. As of
Rating Agency Rating Moody's Baa2 (negative outlook) Fitch BBB (stable outlook)Standard & Poor's BBB (stable outlook) The ratings shown above reflect the respective views of the rating agencies. Although it is our intention to maintain a credit profile that supports an investment grade rating, there is no assurance that these ratings will continue for any given period of time. The ratings may be revised or withdrawn entirely by the rating agencies if, in their respective judgments, circumstances so warrant. The agreements governing our debt obligations do not contain credit rating triggers that would result in the acceleration of interest, principal or other payments in the event that our credit ratings are downgraded. However, any downgrades in the credit ratings of our senior unsecured debt ratings could, among other things, increase the applicable interest rates and other fees payable under the MPLX Credit Agreement and the Term Loan Agreement, which may limit our flexibility to obtain future financing. 88
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Our liquidity totaled
December 31, 2019
Outstanding Available
(In millions) Total Capacity Borrowings Capacity
MPLX LP - bank revolving credit facility
expiring 2024 $ 3,500 $ - $ 3,500
Term Loan Agreement 1,000 (1,000 ) -
MPC Loan Agreement 1,500 (594 ) 906
Total $ 6,000 $ (1,594 ) 4,406
Cash and cash equivalents 15
Total liquidity $ 4,421
We expect our ongoing sources of liquidity to include cash generated from
operations, borrowings under our revolving credit facilities and access to
capital markets. We believe that cash generated from these sources will be
sufficient to meet our short term and long-term funding requirements, including
working capital requirements, capital expenditure requirements, acquisitions,
contractual obligations, and quarterly cash distributions. We may, from time to
time, repurchase notes in the open market, in privately-negotiated transactions
or otherwise in such volumes, at such prices and upon such other terms as we
deem appropriate.
MPC manages our cash and cash equivalents on our behalf directly with
third-party institutions as part of the treasury services that it provides to
us. From time to time, we may also consider utilizing other sources of
liquidity, including the formation of joint ventures or sales of non-strategic
assets.
Equity and Preferred Units Overview
The following table summarizes the changes in the number of units outstanding throughDecember 31, 2019 : (In units) Common Class B General Partner Total Balance at December 31, 2016 357,193,288 3,990,878 7,371,105 368,555,271 Unit-based compensation awards 268,167 - 5,472 273,639 Issuance of units under the ATM Program 13,846,998 - 282,591 14,129,589 Contribution of HST/WHC/Terminals 12,960,376 - 264,497 13,224,873 Class B Conversion 4,350,057 (3,990,878 ) 7,330 366,509 Contribution of the Joint-Interest Acquisition 18,511,134 - 377,778 18,888,912 Balance at December 31, 2017 407,130,020 - 8,308,773 415,438,793 Unit-based compensation awards 348,387 - 140 348,527 Contribution of Refining Logistics and Fuels Distribution 111,611,111 - 2,277,778 113,888,889 Conversion of GP economic interests 275,000,000 - (10,586,691 ) 264,413,309 Balance at December 31, 2018 794,089,518 - - 794,089,518 Unit-based compensation awards 288,031 - - 288,031 Issuance of units in connection with the Merger 262,829,592 - - 262,829,592 Conversion of Series A preferred units 1,148,330 - - 1,148,330 Balance atDecember 31 ,
2019 1,058,355,471 - - 1,058,355,471
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For more details on equity activity, see Item 8. Financial Statements and Supplementary Data - Notes 8 and 9.
Preferred Units
Series A Preferred Units - OnMay 13, 2016 , MPLX completed the private placement of approximately 30.8 million Series A preferred units for a cash purchase price of$32.50 per unit. The aggregate net proceeds of approximately$984 million from the sale of the preferred units were used for capital expenditures, repayment of debt and general business purposes. The Series A preferred units rank senior to all common units with respect to distributions and rights upon liquidation. The holders of the Series A preferred units received cumulative quarterly distributions equal to$0.528125 per unit for each quarter prior to the second quarter of 2018. Beginning with the second quarter of 2018, the holders of the Series A preferred units are entitled to receive a quarterly distribution equal to the greater of$0.528125 per unit or the amount of distributions they would have received on an as converted basis. Distributions paid to Series A preferred unitholders during the years endedDecember 31, 2019 , 2018 and 2017 were$81 million ,$71 million and$65 million , respectively. OnSeptember 20, 2019 , certain holders exercised their right to convert a total of 1.2 million Series A preferred units into common units. As a result of the transaction, approximately 29.6 million Series A preferred units remain outstanding as ofDecember 31, 2019 . Series B Preferred Units - Prior to the Merger, ANDX issued 600,000 units of 6.875 percent Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Units representing limited partner interests of ANDX at a price to the public of$1,000 per unit. Upon completion of the Merger, the ANDX preferred units converted to preferred units of MPLX representing substantially equivalent limited partnership interests in MPLX (the "Series B preferred units"). The Series B preferred units are pari passu with the Series A preferred units with respect to distribution rights and rights upon liquidation. Distributions on the Series B preferred units are payable semi-annually throughFebruary 15, 2023 , and quarterly thereafter. Distributions paid to Series B preferred unitholders during the year endedDecember 31, 2019 were$21 million .
Class
OnJuly 1, 2016 , the previously outstanding 3,990,878 Class B units each automatically converted into 1.09MPLX LP common units and the right to receive$6.20 per unit in cash. MPC funded the$6.20 per unit cash payment, which reduced our liability payable to Class B unitholders by approximately$25 million onJuly 1, 2016 . In connection with the Class B conversion onJuly 1, 2016 , MPLX GP contributed less than$1 million in exchange for 7,330 general partner units to maintain its two percent general partner interest. OnJuly 1, 2017 , all of the remaining 3,990,878 Class B units each automatically converted into 1.09MPLX LP common units and the right to receive$6.20 per unit in cash. MPC funded this cash payment, which reduced our liability payable to Class B unitholders by approximately$25 million onJuly 1, 2017 . In connection with the Class B units conversion onJuly 1, 2017 , MPLX GP contributed less than$1 million in exchange for 7,330 general partner units to maintain its then two percent general partner interest. As common units outstanding as of theAugust 7, 2017 record date, the converted Class B units participated in the second quarter 2017 distribution.
GP/IDR Exchange
OnFebruary 1, 2018 , our general partner's IDRs were eliminated and its two percent economic general partner interest inMPLX LP was converted into a non-economic general partner interest, all in exchange for 275 million newly-issuedMPLX LP common units. As a result of this transaction, the general partner units and IDRs were eliminated, are no longer outstanding, and no longer participate in distributions of cash from MPLX. 90
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ATM Program
OnMarch 13, 2018 , MPLX entered into a Third Amended and Restated Distribution Agreement providing for the at-the-market issuances of common units having an aggregate offering price of up to approximately$1.7 billion , in amounts, at prices and on terms determined by market conditions and other factors at the time of the offerings. There were no issuances made under the ATM Program during the years endedDecember 31, 2019 orDecember 31, 2018 . In 2017, the sale of common units under the ATM Program generated net proceeds of approximately$473 million . MPLX used the net proceeds from sales under the ATM Program for general business purposes, including repayment or refinancing of debt and funding for acquisitions, working capital requirements and capital expenditures.
Distributions
We intend to pay a minimum quarterly distribution of$0.2625 per unit, which equates to$278 million per quarter, or$1,111 million per year, based on the number of common units. OnJanuary 23, 2020 , we announced that the board of directors of our general partner had declared a distribution of$0.6875 per common unit that was paid onFebruary 14, 2020 to common unitholders of record onFebruary 4, 2020 . This represents a 6 percent increase over the fourth quarter 2018 distribution. Although our Partnership Agreement requires that we distribute all of our available cash each quarter, we do not otherwise have a legal obligation to distribute any particular amount per common unit. In connection with MPLX's acquisition of ANDX, MPC waived$12.5 million in quarterly distributions. The waiver was instituted in 2017 under the terms of ANDX's historical partnership agreement and was to remain in effect through 2019, the original term of the waiver agreement. This resulted in total waived distributions by MPLX in 2019 of$37.5 million . MPC also agreed to waive the fourth quarter 2017 distributions on the common units issued in connection with the acquisition of Refining Logistics and Fuels Distribution, which took place onFebruary 1, 2018 . MPC also agreed to waive the portion of the fourth quarter 2017 distributions on common units received onFebruary 1, 2018 in the GP/IDR Exchange in excess of what would have been distributable to MPC for its economic general partner interest, including IDRs, absent the exchange. Together, the value of these waived distributions was$135 million . Additionally, in connection with our acquisition of a partial, indirect equity interest in the Bakken Pipeline system onFebruary 15, 2017 , MPC agreed to waive its right to receive incentive distributions of$1.6 million per quarter for twelve consecutive quarters beginning with the distributions declared in the first quarter of 2017 and paid to MPC in the second quarter of 2017, which was prorated from the acquisition date. This waiver is no longer applicable as a result of the GP/IDR Exchange onFebruary 1, 2018 . The allocation of total quarterly cash distributions to general and limited partners is as follows for the years endedDecember 31, 2019 , 2018 and 2017. Our distributions are declared subsequent to quarter end; therefore, the following table represents total cash distributions applicable to the period in which the distributions were earned. See additional discussion in Item 8. Financial Statements and Supplementary Data - Note 7. 91
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Table of Contents (In millions) 2019 2018 2017 Distribution declared: Limited partner common units - public$ 988 $ 732 $ 656 Limited partner common units - MPC 1,647 1,253
338
General partner units - MPC - -
18
IDRs - MPC - -
211
Total GP & LP distribution declared 2,635 1,985 1,223 Series A preferred units 81 75 65 Series B preferred units 42 - - Total distribution declared$ 2,758 $ 2,060 $ 1,288 Cash distributions declared per limited partner common unit: Quarter ended March 31,$ 0.6575 $ 0.6175 $ 0.5400 Quarter ended June 30, 0.6675 0.6275 0.5625 Quarter ended September 30, 0.6775 0.6375 0.5875 Quarter ended December 31, 0.6875 0.6475 0.6075 Year ended December 31,$ 2.6900 $ 2.5300 $ 2.2975 The distribution on common units for the year endedDecember 31, 2019 includes the impact of the issuance of approximately 102 million units issued to public unitholders and approximately 161 million units issued to MPC in connection with the Merger. Due to the timing of the closing, distributions presented in the table above include second quarter distributions on MPLX common units issued to former ANDX unitholders in connection with the Merger. Due to the waiver mentioned above, the distributions on common units exclude$12.5 million of waived distributions for the three months endedDecember 31, 2019 and$37.5 million of waived distributions for the year endedDecember 31, 2019 . Also included in the table above is$21 million of distributions on the Series B preferred units subsequent to the Merger as well as$21 million of distributions on the Series B units prior to the Merger and declared and paid by MPLX during the third quarter. Capital Expenditures Our operations are capital intensive, requiring investments to expand, upgrade, enhance or maintain existing operations and to meet environmental and operational regulations. Our capital requirements consist of maintenance capital expenditures and growth capital expenditures. Examples of maintenance capital expenditures are those made to replace partially or fully depreciated assets, to maintain the existing operating capacity of our assets and to extend their useful lives, or other capital expenditures that are incurred in maintaining existing system volumes and related cash flows. In contrast, growth capital expenditures are those incurred for acquisitions or capital improvements that we expect will increase our operating capacity to increase volumes gathered, processed, transported or fractionated, decrease operating expenses within our facilities or increase operating income over the long term. Examples of growth capital expenditures include the acquisition of equipment or the construction costs and the development or acquisition of additional pipeline, processing or storage capacity. In general, growth capital includes costs that are expected to generate additional or new cash flow for MPLX. 92
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Our capital expenditures for the past three years are shown in the table below: (In millions) 2019 2018 2017 Capital expenditures(1): Maintenance$ 262 $ 175 $ 103 Maintenance Reimbursements (53 ) (8 ) - Growth 2,001 2,078 1,381 Growth Reimbursements (21 ) (16 ) - Total capital expenditures 2,189 2,229 1,484 Less: Increase (decrease) in capital accruals (146 ) 135
71
Asset retirement expenditures 1 7
2
Additions to property, plant and equipment, net(2) 2,334 2,087
1,411
Investments in unconsolidated affiliates 713 341
761
Acquisitions (6 ) 451
249
Total capital expenditures and acquisitions 3,041 2,879
2,421
Less: Maintenance capital expenditures (including
reimbursements) 209 167 103
Acquisitions (6 ) 451
249
Total growth capital expenditures(3)$ 2,838 $ 2,261
(1) Includes capital expenditures of the Predecessor for all periods presented.
(2) This amount is represented in the Consolidated Statements of Cash Flows as
Additions to property, plant and equipment after excluding growth and
maintenance reimbursements. Reimbursements are shown as Contributions from
MPC within the Financing activities section of the Consolidated Statements of
Cash Flows.
(3) Amount excludes contributions from noncontrolling interests of
2017, respectively, as reflected in the financing section of our Consolidated
Statements of Cash Flows.
Our organic growth capital plan for 2020 is $1.5 billion . The L&S organic growth
capital plan includes the continued expansion of the Mt. Airy Terminal in
addition to projects which increase our long-haul crude oil, natural gas and NGL
pipeline transportation capabilities. Many of our projects also increase our
export capabilities, which provides for additional flexibility and competitive
advantages in how we operate our assets as these projects further enhance our
L&S segment full value chain capture. The G&P segment organic growth capital
plan includes the addition of approximately 580 MMcf/d of processing capacity at
three gas processing plants, one in the Marcellus region and two in the
Southwest region. The G&P segment capital plan also includes the addition of
approximately 80 mbpd of fractionation capacity in the Marcellus and Utica
regions. We continuously evaluate our capital plan and make changes as
conditions warrant.
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Contractual Cash Obligations
The table below provides aggregated information on our consolidated obligations
to make future payments under existing contracts as of
Total 2020 2021-2022 2023-2024 Later Years
Bank revolving credit
facility(1) $ 25 $ 6 $ 11 $ 8 $ -
Term loan(1) 1,044 25 1,019 - -
Intercompany loan(1) 675 18 35 622 -
Floating rate senior notes(1) 2,129 59 2,070 - -
Long-term debt(1) 28,915 804 2,409 4,552 21,150
Finance lease obligations 27 10 4 3 10
Operating leases(2) 1,120 92 164 120 744
Contracts to acquire property,
plant & equipment(3) 753 720 33 - -
Natural gas purchase
obligations(4) 15 5 10 - -
SMR liability(5) 177 17 34 34 92
Transportation and
terminalling(6) 10,811 2,246 4,421 3,953 191
Other long-term liabilities
reflected on the Consolidated
Balance Sheets:
AROs(7) 27 1 - - 26
Other contracts(8) 3,182 146 234 219 2,583
Total contractual cash
obligations $ 48,900 $ 4,149 $ 10,444 $ 9,511 $ 24,796 (1) Amounts represent outstanding borrowings at
commitment and administrative fees and interest.
(2) Amounts relate primarily to facilities and equipment under leases, including
ground leases, building space, office and field equipment, storage facilities
and transportation equipment. See Item 8. Financial Statements and
Supplementary Data - Note 22 for further discussion about our lease
obligations.
(3) Represents purchase orders and contracts related to the purchase or build out
of property, plant and equipment.
(4) Natural gas purchase obligations consist primarily of a purchase agreement
with a producer in our Southern Appalachia Operations. The contract provides
for the purchase of keep-whole volumes at a specific price and is a component
of a broader regional arrangement. The contract price is designed to share a
portion of the frac spread with the producer and as a result, the amounts
reflected for the obligation exceed the cost of purchasing the keep-whole
volumes at a market price. The contract is considered an embedded derivative
(see Item 8. Financial Statements and Supplementary Data - Note 16 for the
fair value of the frac spread sharing component). We use the estimated future
frac spreads as of
counterparty to the contract has the option to renew the gas purchase
agreement and the related keep-whole processing agreement for two successive
five-year terms after 2022, which is not included in the natural gas purchase
obligations line item.
(5) Represents amounts due under a product supply agreement (see Item 8.
Financial Statements and Supplementary Data - Note 23 for further discussion
of the product supply agreement).
(6) Represents transportation and terminalling agreements that obligate us to
minimum volume, throughput or payment commitments over the terms of the
agreements, which will range from four to 20 years. We expect to pass any
minimum payment commitments through to producer customers. Minimum fees due
under transportation agreements do not include potential fee increases as
required by
(7) Excludes estimated accretion expense of
paid is approximately
(8) Other contracts include various service agreements and easements including
right of way obligations.
In addition to the obligations included in the table above, we have omnibus
agreements and employee services agreements with MPC. The omnibus agreements
with MPC addresses our payment of a fixed annual fee to MPC for the provision of
executive management services by certain executive officers of our general
partner and our reimbursement to MPC for the provision of certain general and
administrative services to us. The omnibus agreement remains in full force and
effect as long as MPC controls our general partner.
We also pay MPC additional amounts based on the costs actually incurred by MPC
in providing other services, except for the portion of the amount attributable
to engineering services, which is based on the
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amounts actually incurred by MPC and its affiliates plus six percent of such costs. In addition, we are obligated to reimburse MPC for most out-of-pocket costs and expenses incurred by MPC on our behalf.
MPLX has various employee services agreements with MPC under which MPLX reimburses MPC for employee benefit expenses, along with the provision of operational and management services in support of both our L&S and G&P segments' operations.
We incurred
Off-Balance Sheet Arrangements
As of
Effects of Inflation
Inflation did not have a material impact on our results of operations for the years endedDecember 31, 2019 , 2018 or 2017. Although the impact of inflation has been insignificant in recent years, it is still a factor inthe United States economy and may increase the cost to acquire, build or replace property, plant and equipment. It may also increase the costs of labor and supplies. To the extent permitted by competition, regulation and our existing agreements, we have and expect to continue to pass along all or a portion of increased costs to our customers in the form of higher fees.
TRANSACTIONS WITH RELATED PARTIES
As ofDecember 31, 2019 , MPC owned our general partner and an approximate 62.9 percent limited partner interest in us. We perform a variety of services for MPC related to the transportation of crude and refined petroleum products via pipeline, truck or marine as well as terminal services, storage services and fuels distribution and marketing services, among other. The services that we provide may be based on regulated tariff rates or on contracted rates. In addition, MPC performs certain services for us related to information technology, engineering, legal, accounting, treasury, human resources and other administrative services. We believe that transactions with related parties are conducted under terms comparable to those with unrelated parties. For further discussion of agreements and activity with MPC and related parties see Item 1. Business and Item 8. Financial Statements and Supplementary Data - Note 6. Excluding revenues attributable to volumes shipped by MPC under joint tariffs with third parties that are treated as third-party revenues for accounting purposes, MPC accounted for 54 percent, 48 percent and 36 percent of our total revenues and other income for 2019, 2018 and 2017, respectively. Of our total costs and expenses, MPC accounted for 24 percent, 27 percent and 22 percent for 2019, 2018 and 2017, respectively.
ENVIRONMENTAL MATTERS AND COMPLIANCE COSTS
We are subject to extensive federal, state and local environmental laws and
regulations. These laws, which change frequently, regulate the discharge of
materials into the environment or otherwise relate to protection of the
environment. Compliance with these laws and regulations may require us to
remediate environmental damage from any discharge of hazardous, petroleum or
chemical substances from our facilities or require us to install additional
pollution control equipment on our equipment and facilities. Our failure to
comply with these or any other environmental or safety-related regulations could
result in the assessment of administrative, civil or criminal penalties, the
imposition of investigatory and remedial liabilities, and the issuance of
injunctions that may subject us to additional operational constraints.
Future expenditures may be required to comply with the CAA and other federal,
state and local requirements for our various facilities. The impact of these
legislative and regulatory developments, if enacted or adopted, could result in
increased compliance costs and additional operating restrictions on our
business, each of which could have an adverse impact on our financial position,
results of operations and liquidity. MPC will indemnify us for certain of these
costs.
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If these expenditures, as with all costs, are not ultimately reflected in the fees and tariff rates we receive for our services, our operating results will be adversely affected. We believe that substantially all of our competitors must comply with similar environmental laws and regulations. However, the specific impact on each competitor may vary depending on a number of factors, including, but not limited to, the age and location of its operating facilities. Our environmental expenditures for each of the past three years were: (In millions) 2019 2018 2017 Capital$ 39 $ 29 $ 5 Percent of total capital expenditures 2 % 1 % - % Compliance: Operating and maintenance$ 40 $ 35 $ 26 Remediation(1) 10 9 4 Total$ 50 $ 44 $ 30
(1) These amounts include spending charged against remediation reserves, where
permissible, but exclude non-cash accruals for environmental remediation.
We accrue for environmental remediation activities when the responsibility to remediate is probable and the amount of associated costs can be reasonably estimated. As environmental remediation matters proceed toward ultimate resolution or as additional remediation obligations arise, charges in excess of those previously accrued may be required. New or expanded environmental requirements, which could increase our environmental costs, may arise in the future. We believe we comply with all legal requirements regarding the environment, but since not all of them are fixed or presently determinable (even under existing legislation) and may be affected by future legislation or regulations, it is not possible to predict all of the ultimate costs of compliance, including remediation costs that may be incurred and penalties that may be imposed. Our environmental capital expenditures are expected to approximate$66 million in 2020. Actual expenditures may vary as the number and scope of environmental projects are revised as a result of improved technology or changes in regulatory requirements and could increase if additional projects are identified or additional requirements are imposed.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with GAAP requires us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities as of the date
of the consolidated financial statements and the reported amounts of revenues
and expenses during the respective reporting periods. Accounting estimates are
considered to be critical if (i) the nature of the estimates and assumptions is
material due to the levels of subjectivity and judgment necessary to account for
highly uncertain matters or the susceptibility of such matters to change and
(ii) the impact of the estimates and assumptions on financial condition or
operating performance is material. Actual results could differ from the
estimates and assumptions used.
The policies and estimates discussed below are considered by management to be
critical to an understanding of our financial statements because their
application requires the most significant judgments from management in
estimating matters for financial reporting that are inherently uncertain. See
Item 8. Financial Statements and Supplementary Data - Note 2 for additional
information on these policies and estimates, as well as a discussion of
additional accounting policies and estimates.
Fair Value Estimates
Fair value is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at
the measurement date. There are three approaches for measuring the fair value of
assets and liabilities: the market approach, the income approach and the cost
approach, each of which includes multiple valuation techniques. The market
approach uses prices and other relevant information generated by market
transactions involving identical or comparable assets or liabilities. The income
approach uses valuation techniques to measure fair value by converting future
amounts, such as cash flows or earnings, into a single present value amount
using current market expectations about those
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future amounts. The cost approach is based on the amount that would currently be required to replace the service capacity of an asset. This is often referred to as current replacement cost. The cost approach assumes that the fair value would not exceed what it would cost a market participant to acquire or construct a substitute asset of comparable utility, adjusted for obsolescence. The fair value accounting standards do not prescribe which valuation technique should be used when measuring fair value and do not prioritize among the techniques. These standards establish a fair value hierarchy that prioritizes the inputs used in applying the various valuation techniques. Inputs broadly refer to the assumptions that market participants use to make pricing decisions, including assumptions about risk. Level 1 inputs are given the highest priority in the fair value hierarchy while Level 3 inputs are given the lowest priority. The three levels of the fair value hierarchy are as follows: • Level 1 - Observable inputs that reflect unadjusted quoted prices for
identical assets or liabilities in active markets as of the measurement
date. Active markets are those in which transactions for the asset or
liability occur in sufficient frequency and volume to provide pricing
information on an ongoing basis.
• Level 2 - Observable market-based inputs or unobservable inputs that are
corroborated by market data. These are inputs other than quoted prices in
active markets included in Level 1, which are either directly or
indirectly observable as of the measurement date.
• Level 3 - Unobservable inputs that are not corroborated by market data and
may be used with internally developed methodologies that result in
management's best estimate of fair value.
Valuation techniques that maximize the use of observable inputs are favored.
Assets and liabilities are classified in their entirety based on the lowest
priority level of input that is significant to the fair value measurement. The
assessment of the significance of a particular input to the fair value
measurement requires judgment and may affect the placement of assets and
liabilities within the levels of the fair value hierarchy. We use an income or
market approach for recurring fair value measurements and endeavor to use the
best information available. See Item 8. Financial Statements and Supplementary
Data - Note 15 for disclosures regarding our fair value measurements.
Significant uses of fair value measurements include:
• assessment of impairment of long-lived assets, intangible assets, goodwill
and equity method investments;
• assessment of values for assets in implicit leases;
• recorded values for assets acquired and liabilities assumed in connection
with acquisitions; and
• recorded values of derivative instruments.
Impairment Assessments of Long-Lived Assets, Intangible Assets,Goodwill and Equity Method Investments Fair value calculated for the purpose of testing our long-lived assets, intangible assets, goodwill and equity method investments for impairment is estimated using the expected present value of future cash flows method and comparative market prices when appropriate. Significant judgment is involved in performing these fair value estimates since the results are based on forecasted assumptions. Significant assumptions include: • Future Operating Performance. Our estimates of future operating performance are based on our analysis of various supply and demand factors, which include, among other things, industry-wide capacity, our planned utilization rate, end-user demand, capital expenditures and economic conditions as well as commodity prices. Such estimates are
consistent with those used in our planning and capital investment reviews.
• Future volumes. Our estimates of future throughput of crude oil, natural
gas, NGL and refined product volumes are based on internal forecasts and
depend, in part, on assumptions about our customers' drilling activity
which is inherently subjective and contingent upon a number of variable
factors (including future or expected pricing considerations), many of
which are difficult to forecast. Management considers these volume
forecasts and other factors when developing our forecasted cash flows.
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• Discount rate commensurate with the risks involved. We apply a discount
rate to our cash flows based on a variety of factors, including market and
economic conditions, operational risk, regulatory risk and political risk.
This discount rate is also compared to recent observable market
transactions, if possible. A higher discount rate decreases the net
present value of cash flows.
• Future capital requirements. These are based on authorized spending and
internal forecasts.
We base our fair value estimates on projected financial information which we
believe to be reasonable. However, actual results may differ from these
projections.
The need to test for impairment can be based on several indicators, including a
significant reduction in prices of or demand for commodities, a poor outlook for
profitability, a significant reduction in pipeline throughput volumes, a
significant reduction in natural gas or NGL volumes processed, other changes to
contracts or changes in the regulatory environment in which the asset or equity
method investment is located.
Long-lived assets used in operations are assessed for impairment whenever
changes in facts and circumstances indicate that the carrying value of the
assets may not be recoverable based on the expected undiscounted future cash
flow of an asset group. For purposes of impairment evaluation, long-lived assets
must be grouped at the lowest level for which independent cash flows can be
identified, which is at least at the segment level and in some cases for similar
assets in the same geographic region where cash flows can be separately
identified. If the sum of the undiscounted cash flows is less than the carrying
value of an asset group, fair value is calculated, and the carrying value is
written down if greater than the calculated fair value.
Unlike long-lived assets, goodwill must be tested for impairment at least
annually, and between annual tests if an event occurs or circumstances change
that would more likely than not reduce the fair value of a reporting unit below
its carrying amount. Goodwill is tested for impairment at the reporting unit
level. A goodwill impairment loss is measured as the amount by which a reporting
unit's carrying value exceeds its fair value, without exceeding the recorded
amount of goodwill. As of December 31, 2019 , we had a total of $9.5 billion of
goodwill recorded on the Consolidated Balance Sheets associated with all but one
of our six reporting units.
Prior to performing our annual impairment assessment as of November 30, 2019 ,
MPLX had goodwill totaling approximately $10.7 billion . As part of that
assessment, MPLX recorded approximately $1,197 million of impairment expense in
the fourth quarter of 2019 related to our Western G&P reporting unit within the
G&P operating segment, which brought the amount of goodwill recorded within this
reporting unit to zero. The impairment was primarily driven by updated guidance
related to the slowing of drilling activity which has reduced production growth
forecasts from our producer customers. For the remaining reporting units with
goodwill, we determined that no significant adjustments to the carrying value of
goodwill were necessary. The annual impairment assessment resulted in the fair
value of the reporting units exceeding their carrying value by percentages
ranging from approximately 8 percent to 457 percent. The reporting unit whose
fair value exceeded its carrying amount by 8 percent, our Crude Gathering
reporting unit, had goodwill totaling $1.1 billion at December 31, 2019 . The
operations which make up this reporting unit were acquired through the merger
with ANDX. MPC accounted for its October 1, 2018 acquisition of Andeavor
(including acquiring control of ANDX), using the acquisition method of
accounting, which required Andeavor assets and liabilities to be recorded by MPC
at the acquisition date fair value. The Merger was closed on July 30, 2019 and
has been treated as a common control transaction, which required the recognition
of assets acquired and liabilities assumed using MPC's historical carrying
value. As such, given the short amount of time from when fair value was
established to the date of the annual impairment test, the amount by which the
fair value exceeded the carrying value within this reporting unit is not
unexpected. Our Eastern G&P reporting unit had fair value exceeding its carrying
value of approximately 18 percent and had goodwill totaling $1.8 billion as of
December 31, 2019 . An increase of one percentage point to the discount rate used
to estimate the fair value of this reporting unit would not have resulted in
goodwill impairment as of November 30, 2019 . No other reporting units had had
fair values exceeding carrying values of less than 20 percent.
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Significant assumptions used to estimate the reporting units' fair value included estimates of future cash flows and market information for comparable assets. If estimates for future cash flows, which are impacted primarily by producer customers' development plans, which impact future volumes and capital requirements, were to decline, the overall reporting units' fair value would decrease, resulting in potential goodwill impairment charges. Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions and factors. As a result, there can be no assurance that the estimates and assumptions made for purposes of the impairment tests will prove to be an accurate prediction of the future. See Item 8. Financial Statements and Supplementary Data - Note 14 for additional information relating to our reporting units and goodwill. Equity method investments are assessed for impairment whenever factors indicate an other than temporary loss in value. Factors providing evidence of such a loss include the fair value of an investment that is less than its carrying value, absence of an ability to recover the carrying value or the investee's inability to generate income sufficient to justify our carrying value. During the fourth quarter of 2019, two of the joint ventures in which we have an interest recorded impairments, which impacted the amount of income from equity method investments during the period by approximately$28 million . For one of the joint ventures, we also had a basis difference, which was being amortized over the life of the underlying assets. As a result of the impairment recorded by the joint venture, we also assessed this basis difference for impairment and recorded approximately$14 million of impairment during the quarter related to this investment, which was recorded through "Income from equity method investments". This impairment was largely due to a reduction in forecasted volumes of the joint venture related to the loss of one of its customers. AtDecember 31, 2019 , we had$5.3 billion of equity method investments recorded on the Consolidated Balance Sheets. An estimate of the sensitivity to net income resulting from impairment calculations is not practicable, given the numerous assumptions (e.g., pricing, volumes and discount rates) that can materially affect our estimates. That is, unfavorable adjustments to some of the above listed assumptions may be offset by favorable adjustments in other assumptions. See Item 8. Financial Statements and Supplementary Data - Note 5 for additional information on our equity method investments and Note 14 for additional information on our goodwill and intangibles. Leases In accounting for leases, MPLX may be required to analyze new or existing leases for lease classification. One of the key inputs into the lease classification analysis is the fair value of the leased assets. Significant assumptions used to estimate the leased assets' fair value included market information for comparable assets and cost estimates to replace the service capacity of an asset.
Acquisitions
In accounting for business combinations, acquired assets, assumed liabilities
and contingent consideration are recorded based on estimated fair values as of
the date of acquisition. The excess or shortfall of the purchase price when
compared to the fair value of the net tangible and identifiable intangible
assets acquired, if any, is recorded as goodwill or a bargain purchase gain,
respectively. A significant amount of judgment is involved in estimating the
individual fair values of property, plant and equipment, intangible assets,
contingent consideration and other assets and liabilities. We use all available
information to make these fair value determinations and, for certain
acquisitions, engage third-party consultants for assistance.
The fair value of assets and liabilities, including contingent consideration, as
of the acquisition date are often estimated using a combination of approaches,
including the income approach, which requires us to project related future cash
inflows and outflows and apply an appropriate discount rate; the cost approach,
which requires estimates of replacement costs and depreciation and obsolescence
estimates; and the market approach, which uses market data and adjusts for
entity-specific differences. The estimates used in determining fair values are
based on assumptions believed to be reasonable but which are inherently
uncertain. Accordingly, actual results may differ from the projected results
used to determine fair value.
See Item 8. Financial Statements and Supplementary Data - Note 4 for additional
information on our acquisitions, which includes a discussion of common control
transactions and the related impact of how
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such transactions are recorded. See Item 8. Financial Statements and Supplementary Data - Note 15 for additional information on fair value measurements. Derivatives We record all derivative instruments at fair value on the Consolidated Balance Sheets. To the extent that we have any, our crude oil and natural gas commodity derivatives are Level 2 financial instruments. Our NGL commodity derivatives and any option contracts are Level 3 financial instruments due to option volatilities and NGL prices that are interpolated and extrapolated due to inactive markets. Substantially all of our commodity derivative instruments are traded in OTC markets and are appropriately adjusted for non-performance risk. We have a natural gas purchase commitment embedded in a keep-whole processing agreement with a producer customer in the Southern Appalachian region expiring inDecember 2022 . The customer has the unilateral option to extend the agreements for two consecutive five-year terms throughDecember 2032 . For accounting purposes, the natural gas purchase commitment and term extending options have been aggregated into a single compound embedded derivative which is a Level 3 financial instrument and is appropriately adjusted for non-performance risk (the "Natural Gas Embedded Derivative"). The significant unobservable inputs to the valuation of the Natural Gas Embedded Derivative include: • Probability of Renewal. As ofDecember 31, 2019 , we believe there is a 94 percent and 83 percent probability that the customer will exercise its first and second term extending options, respectively. The customer must exercise the first term extending option in order for the second term extending option to become available.
• Commodity Prices. Third-party forward price curves are not available after
2023, which requires us to extrapolate NGL and natural gas prices.
A ten percent difference in the estimated fair value of the Natural Gas Embedded Derivative atDecember 31, 2019 would have affected income before taxes by$6.0 million for the year endedDecember 31, 2019 . If the probabilities of renewal for the Natural Gas Embedded Derivative were changed to 84 percent and 73 percent, the liability would have been reduced by$5.0 million as ofDecember 31, 2019 . If the probabilities of renewal for the Natural Gas Embedded Derivative were changed to 99 percent and 87 percent, the liability would have been increased by$2.3 million as ofDecember 31, 2019 . Fair value estimation for all our derivative instruments is discussed in Item 8. Financial Statements and Supplementary Data - Note 15 and Note 16. Additional information about derivatives and their valuation may be found in Item 7A. Quantitative and Qualitative Disclosures about Market Risk. Variable Interest Entities We evaluate all legal entities in which we hold an ownership or other pecuniary interest to determine if the entity is a VIE. Our interests in a VIE are referred to as variable interests. Variable interests can be contractual, ownership or other pecuniary interests in an entity that change with changes in the fair value of the VIE's assets. When we conclude that we hold an interest in a VIE we must determine if we are the entity's primary beneficiary. A primary beneficiary is deemed to have a controlling financial interest in a VIE. This controlling financial interest is evidenced by both (i) the power to direct the activities of the VIE that most significantly impact the VIE's economic performance and (ii) the obligation to absorb losses that could potentially be significant to the VIE or the right to receive benefits that could potentially be significant to the VIE. We consolidate any VIE when we determine that we are the primary beneficiary. We must disclose the nature of any interests in a VIE that is not consolidated. Significant judgment is exercised in determining that a legal entity is a VIE and in evaluating our interest in a VIE. We use primarily a qualitative analysis to determine if an entity is a VIE. We evaluate the entity's need for continuing financial support; the equity holder's lack of a controlling financial interest; and/or if an equity holder's voting interests are disproportionate to its obligation to absorb expected losses or receive residual returns. We evaluate our interests in a VIE to determine whether we are the primary beneficiary. We use a primarily qualitative analysis to determine if we are deemed to have a controlling financial interest in the VIE, either on a standalone basis or as part of a related party group. We continually monitor our interests in legal entities for changes in the design or activities of an entity and changes in our interests, 100
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including our status as the primary beneficiary to determine if the changes require us to revise our previous conclusions. Changes in the design or nature of the activities of a VIE, or our involvement with a VIE, may require us to reconsider our conclusions on the entity's status as a VIE and/or our status as the primary beneficiary. Such reconsideration requires significant judgment and understanding of the organization. This could result in the deconsolidation or consolidation of the affected subsidiary, which would have a significant impact on our financial statements. VIEs are discussed in Item 8. Financial Statements and Supplementary Data - Note 5. Contingent Liabilities We accrue contingent liabilities for legal actions, claims, litigation, environmental remediation, tax deficiencies related to operating taxes and third-party indemnities for specified tax matters when such contingencies are both probable and estimable. We regularly assess these estimates in consultation with legal counsel to consider resolved and new matters, material developments in court proceedings or settlement discussions, new information obtained as a result of ongoing discovery and past experience in defending and settling similar matters. Actual costs can differ from estimates for many reasons. For instance, settlement costs for claims and litigation can vary from estimates based on differing interpretations of laws, opinions on degree of responsibility and assessments of the amount of damages. Similarly, liabilities for environmental remediation may vary from estimates because of changes in laws, regulations and their interpretation, additional information on the extent and nature of site contamination and improvements in technology. We generally record losses related to these types of contingencies as cost of revenues or selling, general and administrative expenses on the Consolidated Statements of Income, except for tax deficiencies unrelated to income taxes, which are recorded as other taxes. An estimate of the sensitivity to net income if other assumptions had been used in recording these liabilities is not practical because of the number of contingencies that must be assessed, the number of underlying assumptions and the wide range of reasonably possible outcomes, in terms of both the probability of loss and the estimates of such loss. For additional information on contingent liabilities, see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Environmental Matters and Compliance Costs and Item 8. Financial Statements and Supplementary Data - Note 23.
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