S-1 1 d368024ds1.htm FORM S-1 Form S-1
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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 2, 2012

Registration No. 333-            

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form S-1

REGISTRATION STATEMENT UNDER THE

SECURITIES ACT OF 1933

 

 

MPLX LP

(Exact name of Registrant as Specified in Its Charter)

 

 

 

Delaware   4610   45-5010536

(State or Other Jurisdiction of

Incorporation or Organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer Identification

Number)

200 E. Hardin Street

Findlay, Ohio 45840

(419) 672-6500

(Address, Including Zip Code, and Telephone Number, including

Area Code, of Registrant’s Principal Executive Offices)

J. Michael Wilder

Vice President, General Counsel and Secretary

200 E. Hardin Street

Findlay, Ohio 45840

(419) 672-6500

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)

 

 

Copies to:

 

William N. Finnegan IV

Brett E. Braden

Latham & Watkins LLP

811 Main Street, Suite 3700

Houston, Texas 77002

(713) 546-5400

 

G. Michael O’Leary

William J. Cooper

Andrews Kurth LLP

600 Travis, Suite 4200

Houston, Texas 77002

(713) 220-4200

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

 

 

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨      Accelerated filer   ¨
Non-accelerated filer   x      Smaller reporting company   ¨

(Do not check if a smaller reporting company)

 

 

 

CALCULATION OF REGISTRATION FEE

 

Title of Each Class of

Securities to be Registered

  

Proposed Maximum

Aggregate Offering
Price(1)(2)

    

Amount of

Registration Fee

 

Common units representing limited partner interests

   $ 365,000,000       $ 41,829   

 

(1)   Includes common units issuable upon exercise of the underwriters’ option to purchase additional common units.
(2)   Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) of the Securities Act of 1933.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

PRELIMINARY PROSPECTUS   Subject to Completion   July 2, 2012

 

Common Units

Representing Limited Partner Interests

 

LOGO

MPLX LP

 

 

This is an initial public offering of common units representing limited partner interests of MPLX LP. We were recently formed by Marathon Petroleum Corporation, and no public market currently exists for our common units. We are offering             common units in this offering. We expect that the initial public offering price will be between $         and $         per common unit. We intend to apply to list our common units on the New York Stock Exchange under the symbol “MPLX.” We are an “emerging growth company” as that term is used in the Jumpstart Our Business Startups Act (the “JOBS Act”).

As a result of certain laws and regulations to which we are or may in the future become subject, we may require owners of our common units to certify that they are both U.S. citizens and subject to U.S. federal income taxation on our income. If you are not both a citizen eligible holder and a rate eligible holder, your common units may be subject to redemption.

Investing in our common units involves a high degree of risk. Before buying any common units, you should carefully read the discussion of material risks of investing in our common units in “Risk Factors” beginning on page 23. These risks include the following:

 

Ø  

Marathon Petroleum Corporation and its subsidiaries (“MPC”) account for the substantial majority of our revenues. If MPC changes its business strategy, is unable to satisfy its obligations under our transportation and storage services agreements or significantly reduces the volumes transported through our pipelines or stored at our storage assets, our revenues would decline and our financial condition, results of operations, cash flows, and ability to make distributions to our unitholders would be materially adversely affected.

 

Ø  

We may not have sufficient cash from operations following the establishment of cash reserves and payment of fees and expenses, including cost reimbursements to our general partner and its affiliates, to enable us to pay the minimum quarterly distribution to our unitholders.

 

Ø  

MPC may suspend, reduce or terminate its obligations under our transportation and storage services agreements in some circumstances, which would have a material adverse effect on our financial condition, results of operations, cash flows and ability to make distributions to our unitholders.

 

Ø  

A material decrease in the refining margins at MPC’s refineries could materially reduce the volumes of crude oil and products that we transport, which could materially adversely affect our financial condition, results of operations, cash flows and ability to make distributions to our unitholders.

 

Ø  

Our general partner and its affiliates, including MPC, have conflicts of interest with us and limited duties to us and our unitholders, and they may favor their own interests to our detriment and that of our unitholders. Additionally, we have no control over MPC’s business decisions and operations, and MPC is under no obligation to adopt a business strategy that favors us.

 

Ø  

Unitholders have very limited voting rights and, even if they are dissatisfied, they cannot remove our general partner without its consent.

 

Ø  

Our tax treatment depends on our status as a partnership for federal income tax purposes. If the Internal Revenue Service (“IRS”) were to treat us as a corporation for federal income tax purposes, which would subject us to entity-level taxation, then our cash available for distribution to our unitholders would be substantially reduced.

 

Ø  

Our unitholders’ share of our income will be taxable to them for federal income tax purposes even if they do not receive any cash distributions from us.

Neither the Securities and Exchange Commission nor any other state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

      Per Common Unit    Total
Public offering price    $                                 $                
Underwriting discounts and commissions(1)    $                                 $                
Proceeds, before expenses, to us    $                                 $                
(1)   Excludes an aggregate structuring fee equal to         % of the gross proceeds of this offering payable to UBS Securities LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated. Please read “Underwriting.”

The underwriters may also purchase up to an additional             common units at the public offering price, less the underwriting discounts and commissions and structuring fee payable by us, to cover over-allotments, if any, within 30 days from the date of this prospectus. If the underwriters exercise this option in full, the total underwriting discounts and commissions will be $         and our total proceeds, before expenses, will be $        .

The underwriters are offering the common units as set forth under “Underwriting.” Delivery of the common units will be made on or about                     , 2012.

 

UBS Investment Bank      BofA Merrill Lynch   

                    , 2012


Table of Contents

LOGO

 


Table of Contents

  

 

 

TABLE OF CONTENTS

 

Prospectus summary

     1   

Overview

     1   

Our Assets and Operations

     2   

Business Strategies

     4   

Competitive Strengths

     4   

Our Relationship with Marathon Petroleum Corporation

     5   

Our Transportation and Storage Services Agreements with MPC

     7   

Our Emerging Growth Company Status

     7   

Risk Factors

     8   

The Transactions

     8   

Organizational Structure After the Transactions

     10   

Management of MPLX LP

     11   

Principal Executive Offices and Internet Address

     11   

Summary of Conflicts of Interest and Duties

     11   

The offering

     13   

Summary historical and pro forma financial and operating data

     20   

Risk factors

     23   

Risks Related to Our Business

     23   

Risks Inherent in an Investment in Us

     39   

Tax Risks

     49   

Use of proceeds

     54   

Capitalization

     55   

Dilution

     56   

Cash distribution policy and restrictions on distributions

     58   

General

     58   

Our Minimum Quarterly Distribution

     60   

Unaudited Pro Forma Cash Available for Distribution for the Year Ended December  31, 2011 and the Twelve Months Ended March 31, 2012

     62   

Estimated Cash Available for Distribution for the Twelve Months Ending September 30, 2013

     64   

Assumptions and Considerations

     67   

Provisions of our partnership agreement relating to cash distributions

     79   

Distributions of Available Cash

     79   

Operating Surplus and Capital Surplus

     80   

Capital Expenditures

     82   

Subordinated Units and Subordination Period

     83   

Distributions of Available Cash from Operating Surplus during the Subordination Period

     85   

General Partner Interest and Incentive Distribution Rights

     86   

Percentage Allocations of Available Cash from Operating Surplus

     87   

General Partner’s Right to Reset Incentive Distribution Levels

     87   

Distributions from Capital Surplus

     90   

Adjustment to the Minimum Quarterly Distribution and Target Distribution Levels

     91   

Distributions of Cash Upon Liquidation

     91   

Selected historical and pro forma financial and operating data

     94   

Non-GAAP Financial Measure

     96   

Management’s discussion and analysis of financial condition and results of operations

     98   

Overview

     98   

How We Generate Revenue

     98   

How We Evaluate Our Operations

     99   

Factors Affecting the Comparability of Our Financial Results

     100   

Factors That Impact Our Business

     102   

Results of Operations

     104   

Capital Resources and Liquidity

     108   

Off Balance Sheet Arrangements

     112   

Regulatory Matters

     112   

Critical Accounting Policies and Estimates

     113   

Accounting Standards Not Yet Adopted

     115   

 

 

 

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Qualitative and Quantitative Disclosures about Market Risk

     116   

Seasonality

     116   

Business

     117   

Overview

     117   

Business Strategies

     117   

Competitive Strengths

     118   

Our Assets and Operations

     119   

Our Transportation and Storage Services Agreements with MPC

     123   

Operating and Management Services Agreements with MPC and Third Parties

     130   

Other Agreements with MPC

     131   

Our Relationship with Marathon Petroleum Corporation

     131   

Our Asset Portfolio

     132   

Competition

     139   

MPC’s Operations

     139   

Insurance

     141   

Pipeline Control Operations

     141   

Rate and Other Regulation

     141   

Environmental Regulation

     145   

Title to Properties and Permits

     150   

Employees

     150   

Legal Proceedings

     151   

Management

     152   

Management of MPLX LP

     152   

Directors and Executive Officers of MPLX GP LLC

     153   

Board Leadership Structure

     156   

Board Role in Risk Oversight

     156   

Compensation of Our Officers

     157   

Compensation of Our Directors

     162   

Security ownership and certain beneficial owners and management

     163   

Certain relationships and related party transactions

     164   

Distributions and Payments to Our General Partner and Its Affiliates

     164   

Agreements Governing the Transactions

     166   

Procedures for Review, Approval and Ratification of Related Person Transactions

     169   

Conflicts of interest and duties

     170   

Conflicts of Interest

     170   

Duties of the General Partner

     176   

Description of the common units

     179   

The Units

     179   

Transfer Agent and Registrar

     179   

Transfer of Common Units

     179   

Our partnership agreement

     181   

Organization and Duration

     181   

Purpose

     181   

Cash Distributions

     181   

Capital Contributions

     181   

Voting Rights

     182   

Limited Liability

     183   

Issuance of Additional Securities

     184   

Amendment of Our Partnership Agreement

     185   

Merger, Sale, or Other Disposition of Assets

     187   

Termination and Dissolution

     187   

Liquidation and Distribution of Proceeds

     188   

Withdrawal or Removal of Our General Partner

     188   

Transfer of General Partner Interest

     189   

Transfer of Ownership Interests in Our General Partner

     190   

Transfer of Incentive Distribution Rights

     190   

Change of Management Provisions

     190   

Limited Call Right

     190   

Meetings; Voting

     191   

Status as Limited Partner

     191   

Non-Citizen Assignees; Redemption

     192   

Non-Taxpaying Assignees; Redemption

     192   

Indemnification

     192   

Reimbursement of Expenses

     193   

Books and Reports

     193   

Right to Inspect Our Books and Records

     193   

 

 

 

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Registration Rights

     194   

Units eligible for future sale

     195   

Material federal income tax consequences

     197   

Partnership Status

     198   

Limited Partner Status

     199   

Tax Consequences of Unit Ownership

     199   

Tax Treatment of Operations

     206   

Disposition of Common Units

     208   

Uniformity of Units

     211   

Tax-Exempt Organizations and Other Investors

     211   

Administrative Matters

     213   

Recent Legislative Developments

     216   

State, Local, Foreign and Other Tax Considerations

     216   

Investment in MPLX LP by employee benefit plans

     217   

Underwriting

     219   

Over-Allotment Option

     219   

Commissions and Discounts

     219   

No Sales of Similar Securities

     220   

Indemnification

     220   

New York Stock Exchange

     220   

Price Stabilization, Short Positions

     221   

Determination of Offering Price

     221   

Affiliations (Conflicts of Interest)

     222   

FINRA

     222   

Notice to Investors

     222   

Validity of the common units

     225   

Experts

     225   

Where you can find additional information

     225   

Forward-looking statements

     226   

Index to Financial Statements

     F-1   

Appendix A—Form of First Amended and Restated Agreement of Limited Partnership of MPLX LP

     A-1   

Appendix B—Glossary of Terms

     B-1   

 

You should rely only on the information contained in this prospectus or in any free writing prospectus we may authorize to be delivered to you. We have not, and the underwriters have not, authorized any other person to provide you with information different from that contained in this prospectus and any free writing prospectus. If anyone provides you with different or inconsistent information, you should not rely on it. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of the common units. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where an offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate as of the date on the front cover of this prospectus only. Our business, financial condition, results of operations and prospects may have changed since that date.

Through and including                     , 2012 (the 25th day after the date of this prospectus), federal securities laws may require all dealers that effect transactions in these securities, whether or not participating in this offering, to deliver a prospectus. This requirement is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

This prospectus contains forward-looking statements that are subject to a number of risks and uncertainties, many of which are beyond our control. Please read “Risk Factors” and “Forward-Looking Statements.”

INDUSTRY AND MARKET DATA

The market data and certain other statistical information used throughout this prospectus are based on independent industry publications, government publications or other published independent sources. Some data are also based on our good faith estimates. Although we believe these third-party sources are reliable, we have not independently verified the information and cannot guarantee its accuracy and completeness.

 

 

 

iii


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Prospectus summary

This summary highlights selected information contained elsewhere in this prospectus. You should carefully read the entire prospectus, including “Risk Factors” and the historical and unaudited pro forma combined financial statements and related notes included elsewhere in this prospectus before making an investment decision. Unless otherwise indicated, the information in this prospectus assumes (1) an initial public offering price of $         per common unit (the mid-point of the price range set forth on the cover of this prospectus) and (2) that the underwriters do not exercise their option to purchase additional common units. You should read “Risk Factors” beginning on page 23 for more information about important factors that you should consider before purchasing our common units.

Unless the context otherwise requires, references in this prospectus to “MPLX LP,” “our partnership,” “we,” “our,” “us,” or like terms, when used in a historical context, refer to the assets that MPC is contributing to us in connection with this offering. These assets include a 100.0% interest in MPLX Terminal and Storage LLC, which owns our butane cavern, and our 51.0% general partner interest in MPLX Pipe Line Holdings LP, the 100.0% owner of Marathon Pipe Line LLC and Ohio River Pipe Line LLC, which are the subsidiaries of MPC that own our pipeline systems and associated crude oil and product storage assets. When used in the present tense or prospectively, these terms refer to MPLX LP and its subsidiaries. References to “our general partner” refer to MPLX GP LLC. References to “MPC” refer collectively to Marathon Petroleum Corporation and its subsidiaries, other than us, our subsidiaries and our general partner. References to “Pipe Line Holdings” refer to MPLX Pipe Line Holdings LP. References to “MPL” and “ORPL” refer to Marathon Pipe Line LLC and Ohio River Pipe Line LLC, respectively. While we will only own a 51.0% indirect interest in MPL and ORPL through Pipe Line Holdings, we refer to the assets owned by MPL and ORPL as our assets. In addition, unless otherwise specifically noted, financial results and operating data are shown on a 100.0% basis and are not adjusted to reflect MPC’s 49.0% limited partner interest in Pipe Line Holdings. We have provided definitions for some of the terms we use to describe our business and industry and other terms used in this prospectus in the “Glossary of Terms” beginning on page B-1 of this prospectus.

MPLX LP

OVERVIEW

We are a fee-based, growth-oriented limited partnership recently formed by Marathon Petroleum Corporation to own, operate, develop and acquire crude oil, refined product and other hydrocarbon-based product pipelines and other midstream assets. Our assets primarily consist of a 51.0% indirect interest in a network of common carrier crude oil and product pipeline systems and associated storage assets in the Midwest and Gulf Coast regions of the United States. We believe our network of petroleum pipelines is one of the largest in the United States, based on total annual volumes delivered. MPC has retained a 49.0% interest in our network of pipeline systems and associated storage assets; however, we control and operate these assets and refer to them throughout this prospectus as our pipeline systems and our assets. We also own a 100.0% interest in a butane cavern in Neal, West Virginia with approximately 1.0 million barrels of storage capacity. Our assets are integral to the success of MPC’s operations.

We generate revenue primarily by charging tariffs for transporting crude oil, refined products and other hydrocarbon-based products through our pipelines and at our barge dock and fees for storing crude oil and products at our storage facilities. We are also the operator of additional crude oil and product pipelines owned by MPC and third parties for which we are paid operating fees. We do not take ownership of the crude oil or products that we transport and store for our customers, and we do not engage in the trading of any commodities.

 

 

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MPC historically has been the source of the substantial majority of our revenues. At the closing of this offering, we will enter into long-term, fee-based transportation and storage services agreements with MPC with minimum volume commitments, and MPC will continue to be the source of the substantial majority of our revenues for the foreseeable future. We believe these transportation and storage services agreements will promote stable and predictable cash flows.

MPC has stated that it intends for us to be the primary growth vehicle for its midstream business. Following the completion of this offering, MPC will continue to own a substantial portfolio of other midstream assets, including the remaining 49.0% indirect interest in our network of pipeline systems, our barge dock and our storage tanks. MPC will also retain a significant interest in us through its ownership of our general partner, a     % limited partner interest in us and all of our incentive distribution rights. Given MPC’s significant ownership interest in us following this offering and its stated intent to use us to grow its midstream business, we believe MPC will offer us the opportunity to purchase additional midstream assets that it owns, including additional interests in Pipe Line Holdings. We also may pursue acquisitions jointly with MPC. MPC is under no obligation, however, to offer to sell us additional assets or to pursue acquisitions jointly with us, and we are under no obligation to buy any such additional assets or pursue any such joint acquisitions. We also intend to grow our business by constructing new assets, increasing the utilization of, and revenue generated by, our existing assets and acquiring assets from third parties.

OUR ASSETS AND OPERATIONS

Our primary assets consist of:

 

Ø  

a 51.0% general partner interest in Pipe Line Holdings, a newly-formed entity that owns a 100.0% interest in MPL and ORPL, which in turn collectively own:

 

   

a network of pipeline systems that includes approximately 962 miles of common carrier crude oil pipelines and approximately 1,819 miles of common carrier product pipelines extending across nine states. This network includes approximately 153 miles of common carrier crude oil and product pipelines that we operate under long-term leases with third parties;

 

   

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

 

   

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

 

Ø  

a 100.0% interest in a butane cavern located in Neal, West Virginia, which we refer to as our Neal butane cavern, with approximately 1.0 million barrels of storage capacity that serves MPC’s Catlettsburg, Kentucky refinery.

As the sole general partner of Pipe Line Holdings, we will control all aspects of the management of Pipe Line Holdings, including its cash distribution policy. The only outstanding partnership interests in Pipe Line Holdings will be our 51.0% general partner interest and the 49.0% limited partner interest retained by MPC.

 

 

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The following table sets forth certain information regarding our crude oil pipeline systems, each of which will have an associated transportation services agreement with MPC:

Crude Oil Pipeline Systems

 

System name    Length
(miles)
     Capacity
(mbpd)(1)
     Associated MPC refinery

Patoka to Lima crude system(2)

     302         268       Detroit, MI; Canton, OH

Catlettsburg and Robinson crude system

     484         481       Robinson, IL; Catlettsburg, KY

Detroit crude system(3)

     61         320       Detroit, MI

Wood River to Patoka crude system(4)

     115         307       All Midwest refineries

 

(1)   Capacity shown is 100.0% of the capacity of these pipeline systems on a light equivalent barrel basis. We own a 51.0% interest in these pipeline systems through Pipe Line Holdings.
(2)   Capacity will increase to approximately 290 mbpd on a light equivalent barrel basis by the end of 2012 in connection with the removal of a self-imposed restriction on the operating capacity of the pipeline system related to certain maintenance activities.
(3)   Includes approximately 16 miles of pipeline leased from a third party, plus approximately one mile of pipeline that is currently being constructed and is expected to become operational during the fourth quarter of 2012.
(4)   Includes approximately 58 miles of pipeline leased from a third party.

The following table sets forth certain information regarding our product pipeline systems, each of which will have an associated transportation services agreement with MPC (other than our Louisville Airport products system, which currently transports only third-party volumes):

Product Pipeline Systems

 

System name    Length
(miles)
     Capacity
(mbpd)(1)
     Associated MPC refinery

Garyville products system

     72         389       Garyville, LA

Texas City products system

     42         215       Texas City, TX

Ohio River Pipe Line (ORPL) products system

     518         242       Catlettsburg, KY; Canton, OH

Robinson products system(2)

     1,173         545       Robinson, IL

Louisville Airport products system

     14         29       Robinson, IL

 

(1)   Capacity shown is 100.0% of the capacity of these pipeline systems. We own a 51.0% interest in these pipeline systems through Pipe Line Holdings.
(2)   Includes approximately 79 miles of pipeline leased from a third party.

The following table sets forth certain information regarding our other midstream assets, each of which will have an associated transportation services agreement or storage services agreement with MPC:

Other Midstream Assets

 

System name    Capacity(1)      Associated MPC refineries

Wood River Barge Dock

     80 mbpd       Garyville, LA

Neal Butane Cavern

     1,000 mbbls       Catlettsburg, KY

Patoka Tank Farm

     1,386 mbbls       All Midwest refineries

Wood River Tank Farm

     419 mbbls       All Midwest refineries

Martinsville Tank Farm

     738 mbbls       Detroit, MI; Canton, OH

Lebanon Tank Farm

     750 mbbls       Detroit, MI; Canton, OH

 

(1)   All capacity shown is for 100.0% of the available storage of our butane cavern and tank farms and 100.0% of the barge dock’s average capacity. We own a 51.0% interest in our tank farms and our barge dock through Pipe Line Holdings. We own a 100.0% interest in our butane cavern.

 

 

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For the year ended December 31, 2011 and the three months ended March 31, 2012, on a pro forma basis, we had revenues and other income of approximately $346.6 million and $93.5 million, EBITDA of approximately $114.9 million and $37.4 million and net income of approximately $85.5 million and $29.9 million, respectively. Excluding revenues attributable to volumes shipped by MPC under joint tariffs with third parties that were treated as third party revenues for accounting purposes, MPC accounted for approximately 80% and 81% of our pro forma revenues and other income for those periods, respectively. After excluding the 49.0% interest in Pipe Line Holdings retained by MPC, pro forma EBITDA attributable to MPLX LP was approximately $56.6 million and $18.6 million and pro forma net income attributable to MPLX LP was approximately $41.6 million and $14.7 million for those same periods, respectively. Please read “Selected Historical and Pro Forma Financial and Operating Data” for the definition of the term EBITDA and a reconciliation of EBITDA to our most directly comparable financial measures, calculated and presented in accordance with GAAP.

BUSINESS STRATEGIES

Our primary business objectives are to generate stable cash flows and increase our quarterly cash distribution per unit over time. We intend to accomplish these objectives by executing the following strategies:

 

Ø  

Focus on Fee-Based Businesses.    We are focused on generating stable cash flows by providing fee-based midstream services to MPC and third parties. We also intend to mitigate volatility in cash flows by continuing to minimize our direct exposure to commodity price fluctuations.

 

Ø  

Increase Revenue and Pursue Organic Growth Opportunities.    We intend to increase revenue on our network of pipeline systems by evaluating and capitalizing on organic investment opportunities that may arise from the growth of MPC’s operations and from increased third-party activity in our areas of operations. We will evaluate organic growth projects within our geographic footprint, as well as in new areas, that provide attractive returns.

 

Ø  

Grow Through Acquisitions.    We plan to pursue acquisitions of complementary assets from MPC as well as third parties. We believe MPC will offer us the opportunity to purchase additional midstream assets that it owns, including additional interests in Pipe Line Holdings. We also may pursue acquisitions jointly with MPC. Our third-party acquisition strategy will include midstream assets both within our existing geographic footprint and in new areas.

 

Ø  

Maintain Safe and Reliable Operations.    We believe that providing safe, reliable and efficient services is a key component in generating stable cash flows, and we are committed to maintaining and improving the safety, reliability and efficiency of our operations.

COMPETITIVE STRENGTHS

We believe we are well positioned to execute our business strategies based on the following competitive strengths:

 

Ø  

Strategic Relationship with MPC.    We have a strategic relationship with MPC, which we believe to be the fifth-largest petroleum products refiner in the United States and the largest petroleum products refiner in the Midwest region of the United States based on crude oil refining capacity. MPC is well-capitalized, with an investment grade credit rating, and will own our general partner,     % of our limited partner interests and all of our incentive distribution rights. MPC will also continue to own other substantial midstream assets, including a 49.0% interest in Pipe Line Holdings. We believe that our relationship with MPC will provide us with significant growth opportunities, as well as a stable base of cash flows.

 

 

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Ø  

Stable and Predictable Cash Flows.    Our assets primarily consist of common carrier pipeline systems that generate stable revenue from FERC-based tariffs. We will generate the substantial majority of our revenue under long-term, fee-based transportation and storage services agreements with MPC that include minimum volume commitments. We believe these agreements will enhance cash flow stability and predictability. On a pro forma basis, MPC’s minimum volume commitment would have represented approximately 66% and 73% of our total revenues and other income for each of the year ended December 31, 2011 and the three months ended March 31, 2012, respectively, had those agreements been in effect during those periods. We also expect that MPC will ship volumes on our pipelines in excess of its minimum volume commitments. We have minimal direct exposure to commodity price fluctuations.

 

Ø  

Strategically Located Assets.    Our assets are primarily located in the Midwest and Gulf Coast regions of the United States, which collectively comprised approximately 72% of total U.S. crude distillation capacity and approximately 48% of total U.S. finished products demand for the year ended December 31, 2011, according to the U.S. Energy Information Administration (“EIA”). MPC owns and operates six refineries in the Midwest and Gulf Coast regions that have an aggregate crude oil capacity of 1,193 mbpcd. Our assets are integral to the success of MPC’s operations. Our assets are located near several emerging shale plays including the Marcellus, Utica, New Albany, Antrim and Illinois Basin in Pennsylvania, Ohio, Indiana, Michigan and Illinois. MPC is currently transporting crude oil and feedstocks from the Utica shale play and is actively evaluating similar growth opportunities in other emerging shale plays.

 

Ø  

High-Quality, Well-Maintained Asset Base.    We continually invest in the maintenance and integrity of our assets and have developed various programs to help us efficiently monitor and maintain them. For example, we utilize MPC’s patented integrity management program that employs state-of-the-art mechanical integrity inspection and repair programs to enhance the safety of our pipelines.

 

Ø  

Financial Flexibility.    Upon completion of this offering, we expect to have in place a revolving credit facility with $500.0 million in available capacity. We also expect to retain a significant portion of the net proceeds from this offering to fund certain future capital expenditures related to our assets. We believe that we will have the financial flexibility to execute our growth strategy through our cash reserves, borrowing capacity under our revolving credit facility and access to the debt and equity capital markets.

 

Ø  

Experienced Management Team.    Our management team has substantial experience in the management and operation of pipelines, barge docks, storage facilities and other midstream assets. Our management team also has expertise in acquiring and integrating assets as well as executing growth strategies in the midstream sector. Our management team includes many of MPC’s most senior officers, who average over 31 years of experience in the energy industry and over 30 years of operational experience with our assets.

OUR RELATIONSHIP WITH MARATHON PETROLEUM CORPORATION

One of our principal strengths is our relationship with MPC, which we believe to be the fifth-largest petroleum products refiner in the United States and the largest petroleum products refiner in the Midwest region of the United States based on crude oil refining capacity. MPC owns and operates six refineries and associated midstream transportation and logistics assets in PADD II and PADD III, which consist of states in the Midwest and Gulf Coast regions of the United States, along with an extensive wholesale and retail refined product marketing operation that serves markets primarily in the Midwest and Southeast regions of the United States. MPC markets refined products under the Marathon brand through an extensive network of jobber- and dealer-owned retail locations, and under the Speedway brand through its wholly owned subsidiary, Speedway LLC, which operates what we believe to be the nation’s fourth-

 

 

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largest chain of company-owned and operated retail gasoline and convenience stores. For the year ended December 31, 2011 and the three months ended March 31, 2012, MPC had consolidated revenues of approximately $78.6 billion and $20.3 billion, respectively. Marathon Petroleum Corporation’s common stock trades on the New York Stock Exchange (“NYSE”) under the symbol “MPC.”

MPC’s operations necessitate large-scale movements of crude oil and feedstocks to and among its refineries, as well as large-scale movements of refined products from its refineries to various markets. To this end, MPC has an extensive, integrated network of midstream assets. Following the completion of this offering, MPC will continue to own or lease a substantial portfolio of midstream assets, including:

 

Ø  

a 49.0% interest in our network of pipeline systems, barge dock and tank farms through Pipe Line Holdings;

 

Ø  

over 5,000 miles of additional crude oil and product pipelines;

 

Ø  

three liquefied petroleum gas storage facilities in Woodhaven, Michigan; Canton, Ohio; and Neal, West Virginia with an aggregate capacity of over 2.1 million barrels;

 

Ø  

62 owned and operated light product terminals with 182 transport loading racks;

 

Ø  

21 owned and operated asphalt terminals with 79 transport loading racks;

 

Ø  

over 120 owned transport trucks;

 

Ø  

over 1,900 owned or leased rail cars; and

 

Ø  

one of the largest inland bulk liquid barge fleets in the United States, consisting of 15 towboats and 167 owned and 14 leased barges.

MPC will retain a significant interest in us through its ownership of our general partner, a     % limited partner interest in us and all of our incentive distribution rights. We believe MPC will promote and support the successful execution of our business strategies given its significant ownership in us following this offering and its stated intention to use us to grow its midstream business. As a result, we believe MPC will offer us the opportunity to purchase additional assets from it, including additional interests in Pipe Line Holdings. We also may pursue acquisitions jointly with MPC. However, MPC is under no obligation to offer to sell us additional assets or to pursue acquisitions jointly with us, and we are under no obligation to buy any such additional assets or pursue any such joint acquisitions.

At the closing of this offering, we will enter into long-term, fee-based transportation and storage services agreements with MPC. We refer to those agreements in this prospectus as our transportation and storage services agreements. Under these agreements, we will provide transportation and storage services to MPC, and MPC will commit to provide us with minimum quarterly throughput and storage volumes of crude oil and products and minimum storage volumes of butane.

In addition to our transportation and storage services agreements with MPC, we will enter into an omnibus agreement, management services agreements and employee services agreements with MPC at the closing of this offering. The omnibus agreement will address our reimbursement of MPC for the provision of certain general and administrative services and MPC’s indemnification of us for certain matters, including environmental, title and tax matters. Under our management services agreements with MPC, MPC will pay us fixed annual fees for providing certain management services to MPC with respect to certain of MPC’s retained pipeline assets. Under our employee services agreements with MPC, we will reimburse MPC for the provision of certain operational and management services to us in support of our assets. While not the result of arm’s-length negotiations, we believe the terms of all of our initial agreements with MPC will be, and specifically intend the rates to be, generally no less favorable to either party than those that could have been negotiated with unaffiliated parties with respect to similar services. Please read “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions.”

 

 

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While our relationship with MPC and its subsidiaries is a significant strength, it is also a source of potential conflicts. Please read “Conflicts of Interest and Duties” and “Risk Factors—Risks Inherent in an Investment in Us—Our general partner and its affiliates, including MPC, have conflicts of interest with us and limited duties to us and our unitholders, and they may favor their own interests to our detriment and that of our unitholders. Additionally, we have no control over MPC’s business decisions and operations, and MPC is under no obligation to adopt a business strategy that favors us.”

OUR TRANSPORTATION AND STORAGE SERVICES AGREEMENTS WITH MPC

Our assets are strategically located within, and integral to, MPC’s operations. At the closing of this offering, we will enter into long-term, fee-based transportation and storage services agreements with MPC, which will include the following:

 

Ø  

three separate 10-year transportation services agreements and one five-year transportation services agreement under which MPC will pay us fees for transporting crude oil on each of our crude oil pipeline systems;

 

Ø  

four separate 10-year transportation services agreements under which MPC will pay us fees for transporting products on each of our product pipeline systems;

 

Ø  

a five-year transportation services agreement under which MPC will pay us fees for handling crude oil and products at our Wood River barge dock;

 

Ø  

a 10-year storage services agreement under which MPC will pay us fees for providing storage services at our Neal butane cavern; and

 

Ø  

four separate three-year storage services agreements under which MPC will pay us fees for providing storage services at our tank farms.

Under the transportation services agreements for our pipeline systems and barge dock, we may annually adjust the tariff rates paid by MPC. Each of the transportation services agreements for our crude oil and product pipeline systems (other than our Wood River to Patoka crude system) will automatically renew for up to two additional five-year terms unless terminated by either party no later than six months prior to the end of the term. The transportation services agreement for our Wood River to Patoka crude system and our Wood River barge dock will automatically renew for up to four additional two-year terms unless terminated by either party no later than six months prior to the end of the term. Our butane cavern storage services agreement will not automatically renew after the end of its 10-year term. Each of the storage services agreements for our tank farms will automatically renew for additional one-year terms unless terminated by either party no later than six months prior to the end of the term.

For the year ended December 31, 2011 and the three months ended March 31, 2012, on a pro forma basis, approximately 66% and 73% of our total revenues and other income, respectively, was attributable to MPC’s minimum volume commitments under these agreements.

For additional information about our transportation and storage services agreements with MPC, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—How We Generate Revenue” and “Business—Our Transportation and Storage Services Agreements with MPC.”

OUR EMERGING GROWTH COMPANY STATUS

As a company with less than $1.0 billion in revenue during its last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and we are eligible to take advantage of certain exemptions from various reporting requirements that are

 

 

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applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and reduced disclosure obligations regarding executive compensation in our periodic and annual reports. We may take advantage of some of these exemptions.

In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We may choose to “opt out” of such extended transition period and, if we did so, we would be required to comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. The JOBS Act provides that any decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

We could remain an emerging growth company for up to five years, or until the earliest of (i) the last day of the first fiscal year in which our annual gross revenues exceed $1.0 billion, (ii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended, or the Exchange Act, which would occur if the market value of our common units that are held by non-affiliates exceeds $700.0 million as of the last business day of our most recently completed second fiscal quarter, and (iii) the date on which we have issued more than $1.0 billion in non-convertible debt during the preceding three-year period.

RISK FACTORS

An investment in our common units involves risks associated with our business, our partnership structure and the tax characteristics of our common units. You should carefully consider the risks described in “Risk Factors” and the other information in this prospectus before investing in our common units.

THE TRANSACTIONS

We were formed in March 2012 by MPC to own, operate, develop and acquire crude oil, refined products and other hydrocarbon-based product pipelines and other midstream assets.

At or prior to the closing of this offering the following transactions will occur:

 

Ø  

MPC will convey 100.0% of the ownership interests in MPL and ORPL to Pipe Line Holdings, a recently-formed wholly owned subsidiary of MPC;

 

Ø  

MPC will sell a 100.0% interest in MPC’s butane cavern in Neal, West Virginia to MPLX Terminal and Storage, a recently-formed wholly owned subsidiary of MPC;

 

Ø  

MPC will contribute a 51.0% general partner interest in Pipe Line Holdings to MPLX Operations LLC, our recently-formed wholly owned subsidiary, and will retain a 49.0% limited partner interest in Pipe Line Holdings;

 

Ø  

MPC will contribute 100.0% of the member interests in MPLX Terminal and Storage to MPLX Operations LLC;

 

Ø  

MPC will retain all cash associated with our Predecessor’s operations, as well as the proceeds from certain loans receivable from a related party;

 

Ø  

we will issue              common units and              subordinated units to MPC, representing an aggregate     % limited partner interest in us, and              general partner units, representing a 2.0% general partner interest in us, and all of our incentive distribution rights to our general partner;

 

 

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Ø  

we will issue              common units to the public in this offering, representing a     % limited partner interest in us, and will apply the net proceeds as described in “Use of Proceeds”;

 

Ø  

we will enter into a new $500.0 million revolving credit facility;

 

Ø  

we will enter into multiple long-term transportation and storage services agreements and management services agreements with MPC;

 

Ø  

we will enter into two employee services agreements with MPC and certain of its affiliates; and

 

Ø  

we will enter into an omnibus agreement with MPC and certain of its affiliates, including our general partner.

 

 

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ORGANIZATIONAL STRUCTURE AFTER THE TRANSACTIONS

After giving effect to the transactions described above, our units will be held as follows:

 

Public common units

         

MPC common units

         

MPC subordinated units

     49.0

General partner units

     2.0
  

 

 

 

Total

     100.0
  

 

 

 

The following simplified diagram depicts our organizational structure after giving effect to the transactions described above.

 

LOGO

 

 

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MANAGEMENT OF MPLX LP

We are managed and operated by the board of directors and executive officers of MPLX GP LLC, our general partner. MPC is the sole owner of our general partner and has the right to appoint the entire board of directors of our general partner, including the independent directors appointed in accordance with the listing standards of the NYSE. Unlike shareholders in a publicly traded corporation, our unitholders will not be entitled to elect our general partner or the board of directors of our general partner. Many of the executive officers and directors of our general partner also currently serve as executive officers and directors of MPC. For more information about the directors and executive officers of our general partner, please read “Management—Directors and Executive Officers of MPLX GP LLC.”

In order to maintain operational flexibility, our operations will be conducted through, and our operating assets will be owned by, various operating subsidiaries. However, neither we nor our subsidiaries have any employees. Our general partner has the sole responsibility for providing the personnel necessary to conduct our operations, whether through directly hiring employees or by obtaining the services of personnel employed by MPC or others. All of the personnel that will conduct our business immediately following the closing of this offering will be employed or contracted by our general partner and its affiliates, including MPC, but we sometimes refer to these individuals in this prospectus as our employees.

PRINCIPAL EXECUTIVE OFFICES AND INTERNET ADDRESS

Our principal executive offices are located at 200 E. Hardin Street, Findlay, Ohio 45840, and our telephone number is (419) 672-6500. Following the completion of this offering, our website will be located at www.            .com. We expect to make our periodic reports and other information filed with or furnished to the Securities and Exchange Commission (“SEC”) available, free of charge, through our website, as soon as reasonably practicable after those reports and other information are electronically filed with or furnished to the SEC. Information on our website or any other website is not incorporated by reference into this prospectus and does not constitute a part of this prospectus.

SUMMARY OF CONFLICTS OF INTEREST AND DUTIES

Under our partnership agreement, our general partner has a duty to manage us in a manner it believes is not adverse to the best interests of our partnership. However, because our general partner is a wholly owned subsidiary of MPC, the officers and directors of our general partner have a duty to manage the business of our general partner in a manner not adverse to the best interests of MPC. As a result of this relationship, conflicts of interest may arise in the future between us and our unitholders, on the one hand, and our general partner and its affiliates, including MPC, on the other hand. For example, our general partner will be entitled to make determinations that affect the amount of cash distributions we make to the holders of common units, which in turn has an effect on whether our general partner receives incentive cash distributions. In addition, our general partner may determine to manage our business in a way that directly benefits MPC’s refining or marketing businesses, whether by causing us not to seek higher tariff rates or not to connect our pipelines with those of other third parties or otherwise, rather than indirectly benefitting MPC solely through its ownership interests in us. For a more detailed description of the conflicts of interest and fiduciary duties of our general partner, please read “Conflicts of Interest and Duties.”

Delaware law provides that Delaware limited partnerships may, in their partnership agreements, expand, restrict or eliminate the fiduciary duties owed by the general partner to limited partners and the partnership. Our partnership agreement contains various provisions replacing the fiduciary duties that would otherwise be owed by our general partner with contractual standards governing the duties of the

 

 

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general partner and contractual methods of resolving conflicts of interest. The effect of these provisions is to restrict the remedies available to unitholders for actions that might otherwise constitute breaches of our general partner’s fiduciary duties. Our partnership agreement also provides that affiliates of our general partner, including MPC and its other subsidiaries, are not restricted from competing with us, and neither our general partner nor its affiliates have any obligation to present business opportunities to us. By purchasing a common unit, the purchaser agrees to be bound by the terms of our partnership agreement, and pursuant to the terms of our partnership agreement each holder of common units consents to various actions and potential conflicts of interest contemplated in our partnership agreement that might otherwise be considered a breach of fiduciary or other duties under Delaware law. Please read “Conflicts of Interest and Duties—Duties of the General Partner” for a description of the fiduciary duties imposed on our general partner by Delaware law, the replacement of those duties with contractual standards under our partnership agreement and certain legal rights and remedies available to holders of our common units and subordinated units. For a description of our other relationships with our affiliates, please read “Certain Relationships and Related Party Transactions.”

 

 

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The offering

 

Common units offered to the public

            common units.

 

              common units if the underwriters exercise in full their option to purchase additional common units from us.

 

Units outstanding after this offering

            common units and             subordinated units, each representing a 49.0% limited partner interest in us.

 

Use of proceeds

We expect to receive net proceeds of approximately $         million from the sale of common units offered by this prospectus based on the initial public offering price of $         per common unit (the mid-point of the price range set forth on the cover of this prospectus), after deducting underwriting discounts, structuring fees and estimated offering expenses. We intend to use the net proceeds as follows:

 

  Ø  

approximately $204.0 million will be contributed to Pipe Line Holdings, which Pipe Line Holdings will retain on behalf of us and MPC to fund our respective pro rata portions of certain estimated expansion capital expenditures;

 

  Ø  

$         million will be distributed to MPC in partial consideration of its contribution of assets to us and to reimburse MPC for certain capital expenditures it incurred with respect to these assets;

 

  Ø  

$10.0 million for general partnership purposes, including to fund our working capital needs; and

 

  Ø  

$         million to pay revolving credit facility origination fees.

 

  At the closing of this offering, we will enter into a $500.0 million revolving credit facility.

 

  The net proceeds from any exercise by the underwriters of their option to purchase additional common units from us will be used to redeem from MPC a number of common units equal to the number of common units issued upon exercise of the option at a price per common unit equal to the net proceeds per common unit in this offering before expenses but after deducting underwriting discounts and the structuring fee.

 

 

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Cash distributions

We intend to make a minimum quarterly distribution of $         per unit to the extent we have sufficient cash from operations after establishment of cash reserves and payment of fees and expenses, including payments to our general partner.

 

  For the quarter in which this offering closes, we will pay a prorated distribution on our units covering the period from the completion of this offering through                     , 2012, based on the actual length of that period.

 

  In general, we will pay any cash distributions we make each quarter in the following manner:

 

  Ø  

first, 98.0% to the holders of common units and 2.0% to our general partner, until each common unit has received a minimum quarterly distribution of $         plus any arrearages from prior quarters;

 

  Ø  

second, 98.0% to the holders of subordinated units and 2.0% to our general partner, until each subordinated unit has received a minimum quarterly distribution of $         ; and

 

  Ø  

third, 98.0% to all unitholders, pro rata, and 2.0% to our general partner, until each unit has received a distribution of $        .

 

  If cash distributions to our unitholders exceed $        per unit in any quarter, our general partner will receive, in addition to distributions on its 2.0% general partner interest, increasing percentages, up to 48.0%, of the cash we distribute in excess of that amount. We refer to these distributions as “incentive distributions.” In certain circumstances, our general partner, as the initial holder of our incentive distribution rights, has the right to reset the target distribution levels described above to higher levels based on our cash distributions at the time of the exercise of this reset election. Please read “Provisions of our Partnership Agreement Relating to Cash Distributions.”

 

 

Pro forma cash available for distribution attributable to us that was generated during the year ended December 31, 2011 and the twelve months ended March 31, 2012 was approximately $50.0 million and $53.1 million, respectively. The amount of available cash we need to pay the

 

 

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minimum quarterly distribution for four quarters on our common units and subordinated units to be outstanding immediately after this offering and the corresponding distributions on our general partner’s 2.0% interest is approximately $         million (or an average of approximately $         million per quarter). As a result, for the year ended December 31, 2011 and the twelve months ended March 31, 2012, on a pro forma basis, we would not have generated available cash sufficient to pay the full minimum quarterly distribution on all of our common units and subordinated units and the corresponding distributions on our general partner’s 2.0% interest during those periods. Please read “Cash Distribution Policy and Restrictions on Distributions—Unaudited Pro Forma Cash Available for Distribution for the Year Ended December 31, 2011 and the Twelve Months Ended March 31, 2012.”

 

  We believe, based on our financial forecast and related assumptions included in “Cash Distribution Policy and Restrictions on Distributions—Estimated Cash Available for Distribution for the Twelve Months Ending September 30, 2013” that we will have sufficient available cash to pay the aggregate minimum quarterly distribution of $         million on all of our common units and subordinated units and the corresponding distributions on our general partner’s 2.0% interest for the twelve months ending September 30, 2013. However, we do not have a legal obligation to pay distributions at our minimum quarterly distribution rate or at any other rate except as provided in our partnership agreement, and there is no guarantee that we will make quarterly cash distributions to our unitholders. Please read “Cash Distribution Policy and Restrictions on Distributions.”

 

Subordinated units

MPC will initially own all of our subordinated units. The principal difference between our common units and subordinated units is that for any quarter during the subordination period, the subordinated units will not be entitled to receive any distribution until the common units have received the minimum quarterly distribution for such quarter plus any arrearages in the payment of the minimum quarterly distribution from prior

 

 

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quarters during the subordination period. Subordinated units will not accrue arrearages.

 

Conversion of subordinated units

The subordination period will end on the first business day after we have earned and paid at least (1) $         (the minimum quarterly distribution on an annualized basis) on each outstanding common unit and subordinated unit and the corresponding distributions on our general partner’s 2.0% interest for each of three consecutive, non-overlapping four quarter periods ending on or after                     , 2015 or (2) $         (150.0% of the annualized minimum quarterly distribution) on each outstanding common unit and subordinated unit and the corresponding distributions on our general partner’s 2.0% interest and the incentive distribution rights for the four-quarter period immediately preceding that date, in each case provided there are no arrearages on our common units at that time.

 

  The subordination period also will end upon the removal of our general partner other than for cause if no subordinated units or common units held by the holders of subordinated units or their affiliates are voted in favor of that removal.

 

  When the subordination period ends, all subordinated units will convert into common units on a one-for-one basis, and all common units thereafter will no longer be entitled to arrearages. Please read “Provisions of our Partnership Agreement Relating to Cash Distributions—Subordinated Units and Subordination Period.”

 

Issuance of additional units

Our partnership agreement authorizes us to issue an unlimited number of additional units without the approval of our unitholders. Our unitholders will not have preemptive or participation rights to purchase their pro rata share of any additional units issued. Please read “Units Eligible for Future Sale” and “Our Partnership Agreement—Issuance of Additional Securities.”

 

Limited voting rights

Our general partner will manage and operate us. Unlike the holders of common stock in a corporation, our unitholders will have only limited voting rights on matters affecting our business. Our unitholders will have no right to elect our general partner or its directors on an annual or other continuing basis. Our general partner may

 

 

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not be removed except by a vote of the holders of at least 66 2/3% of the outstanding units, including any units owned by our general partner and its affiliates, voting together as a single class. Upon consummation of this offering, MPC will own an aggregate of     % of our common and subordinated units (or     % of our common and subordinated units, if the underwriters exercise their option to purchase additional common units in full). This will give MPC the ability to prevent the removal of our general partner. Please read “Our Partnership Agreement—Voting Rights.”

 

Limited call right

If at any time our general partner and its affiliates own more than     % of the outstanding common units, our general partner has the right, but not the obligation, to purchase all of the remaining common units at a price equal to the greater of (1) the average of the daily closing price of our common units over the 20 trading days preceding the date that is three days before notice of exercise of the call right is first mailed and (2) the highest per-unit price paid by our general partner or any of its affiliates for common units during the 90-day period preceding the date such notice is first mailed. Please read “Our Partnership Agreement—Limited Call Right.”

 

Redemption of ineligible holders

Units held by persons who our general partner determines are not “citizenship eligible holders” or “rate eligible holders” will be subject to redemption. Citizenship eligible holders are individuals or entities whose nationality, citizenship or other related status does not create a substantial risk of cancellation or forfeiture of any property, including any governmental permit, endorsement or other authorization, in which we have an interest, and will generally include individuals and entities who are U.S. citizens. Rate eligible holders are:

 

  Ø  

individuals or entities subject to U.S. federal income taxation on the income generated by us; or

 

  Ø  

entities not subject to U.S. federal income taxation on the income generated by us, so long as all of the entity’s owners are domestic individuals or entities subject to such taxation.

 

 

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  We will have the right, which we may assign to any of our affiliates, but not the obligation, to redeem all of the common units of any holder that is not a citizenship eligible holder or a rate eligible holder or that has failed to certify or has falsely certified that such holder is a citizenship eligible holder or a rate eligible holder. The redemption price will be equal to the market price of the common units as of the date three days before the date the notice of redemption is mailed. The redemption price will be paid in cash or by delivery of a promissory note, as determined by our general partner. The units held by any person the general partner determines is not a citizenship eligible holder will not be entitled to voting rights.

 

  Please read “Our Partnership Agreement—Non-Citizen Assignees; Redemption” and “Our Partnership Agreement—Non-Taxpaying Assignees; Redemption.”

 

Estimated ratio of taxable income to distributions

We estimate that if you own the common units you purchase in this offering through the record date for distributions for the period ending December 31, 2015, you will be allocated, on a cumulative basis, an amount of federal taxable income for that period that will be     % or less of the cash distributed to you with respect to that period. For example, if you receive an annual distribution of $         per unit, we estimate that your average allocable federal taxable income per year will be no more than approximately $         per unit. Thereafter, the ratio of allocable taxable income to cash distributions to you could substantially increase. Please read “Material Federal Income Tax Consequences—Tax Consequences of Unit Ownership—Ratio of Taxable Income to Distributions” for the basis of this estimate.

 

Material federal income tax consequences

For a discussion of the material federal income tax consequences that may be relevant to prospective unitholders who are individual citizens or residents of the United States, please read “Material Federal Income Tax Consequences.”

 

 

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Exchange listing

We intend to apply to list our common units on the New York Stock Exchange under the symbol “MPLX.”

 

 

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Summary historical and pro forma financial and operating data

The following table shows summary historical combined financial and operating data of MPLX LP Predecessor, our Predecessor for accounting purposes (our “Predecessor”), as of the date and for the periods indicated and summary pro forma combined financial and operating data of MPLX LP as of the date and for the periods indicated. Our Predecessor consists of a 100.0% interest in all of the assets and operations of MPL and ORPL that MPC will contribute to us at the closing of this offering, as well as minority undivided interests in two crude oil pipeline systems, which we refer to as the joint interest assets, that will not be contributed to us. In connection with the closing of this offering, MPC will transfer the joint interest assets from our Predecessor to other MPC subsidiaries and then contribute to us a 51.0% indirect ownership interest in Pipe Line Holdings, which owns our Predecessor’s assets and operations (other than the joint interest assets), and a 100.0% indirect ownership in our butane cavern. However, as required by United States generally accepted accounting principles (“GAAP”), we will continue to consolidate 100.0% of the assets and operations of Pipe Line Holdings in our financial statements. In addition we will record the contribution at historical cost, as it will be considered a reorganization of entities under common control.

The summary historical combined financial and operating data of our Predecessor as of and for the years ended December 31, 2009, 2010 and 2011 are derived from the audited combined financial data of our Predecessor appearing elsewhere in this prospectus. The summary historical interim combined financial data of our Predecessor as of and for the three months ended March 31, 2011 and 2012 are derived from the unaudited interim combined financial statements of our Predecessor appearing elsewhere in this prospectus. The following table should be read together with, and is qualified in its entirety by reference to, the historical audited and unaudited interim combined financial statements and the accompanying notes included elsewhere in this prospectus. The following table should also be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

The summary pro forma combined financial data presented in the following table for the year ended December 31, 2011 and as of and for the three months ended March 31, 2012 are derived from the unaudited pro forma combined financial data included elsewhere in this prospectus. The pro forma balance sheet assumes that the offering and the related transactions occurred as of March 31, 2012, and the pro forma statements of income for the year ended December 31, 2011 and the three months ended March 31, 2012 assume that the offering and the related transactions occurred as of January 1, 2011. These transactions primarily include, and the pro forma financial data give effect to, the following:

 

Ø  

MPC’s transfer of the joint interest assets from our Predecessor to other MPC subsidiaries;

 

Ø  

our Predecessor’s collection of loans receivable from MPC Investment Fund, Inc. (“MPCIF”), a wholly owned subsidiary of MPC, and the distribution to MPC of those proceeds plus our Predecessor’s cash balance prior to the closing of this offering;

 

Ø  

MPC’s contribution to us of a 51.0% indirect ownership interest in Pipe Line Holdings, which owns our Predecessor’s assets and operations (other than the joint interest assets), and a 100.0% interest in the Neal butane cavern. As our butane cavern was not in service during any period presented, the pro forma periods reflect only minimal expenses and no revenues associated with our butane cavern;

 

Ø  

our entry into a new $500.0 million revolving credit facility, which we have assumed was not drawn during the pro forma periods presented, and the amortization of the origination fees associated with the facility;

 

 

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Ø  

our execution of multiple long-term transportation, storage and management services agreements with MPC and recognition of revenues and other income under those agreements that were not recognized by our Predecessor;

 

Ø  

our entry into an omnibus agreement and employee services agreements with MPC;

 

Ø  

approximately $3.9 million of incremental annual general and administrative expenses that we expect to incur as a result of being a separate publicly-traded partnership;

 

Ø  

the consummation of this offering and our issuance of              common units to the public,              general partner units and the incentive distribution rights to our general partner and              common units and              subordinated units to MPC; and

 

Ø  

the application of the net proceeds of this offering as described in “Use of Proceeds.”

 

    MPLX LP Predecessor Historical     MPLX LP Pro Forma  
    Year ended December 31,     Three months ended
March 31,
   

Year ended
December 31,

2011

   

Three
months
ended
March 31,

2012

 
    2009     2010     2011     2011     2012      
(In millions)                     (unaudited)     (unaudited)  

 

 

Combined statements of income data:

             

Sales and other operating revenues

  $ 43.3      $ 49.7      $ 62.1      $ 14.8      $ 15.8      $ 62.1      $ 15.8   

Sales to related parties

    331.4        346.2        334.8        77.4        81.7        270.5        73.0   

Gain on sale of assets

    0.2        —          —          —          —          —          —     

Other income

    1.3        0.4        4.3        0.3        1.6        3.9        1.6   

Other income—related parties

    7.3        8.0        9.4        1.9        3.0        10.1        3.1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues and other income

    383.5        404.3        410.6        94.4        102.1        346.6        93.5   

Total costs and expenses

    260.9        300.9        278.6        57.8        67.2        261.0        63.6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

  $ 122.6      $ 103.4      $ 132.0      $ 36.6      $ 34.9      $ 85.6      $ 29.9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 122.3      $ 103.3      $ 134.0      $ 37.2      $ 35.2      $ 85.5      $ 29.9   

Net income attributable to MPLX LP

            $ 41.6      $ 14.7   

Combined balance sheets data (at period end):

             

Property, plant and equipment, net

  $ 890.8      $ 847.8      $ 866.8      $ 844.0      $ 876.6        $ 792.7   

Total assets

    1,068.8        1,118.0        1,303.1        1,245.9        1,341.8          1,179.1   

Long-term debt(1)

    13.1        12.5        11.9        12.5        11.8          11.8   

Combined statements of cash flows data:

             

Net cash provided by (used in):

             

Operating activities

  $ 145.1      $ 117.3      $ 181.9      $ 60.3      $ 50.4       

Investing activities

    (57.5     (64.6     (218.7     (158.2     (54.2    

Financing activities

    (88.3     (53.0     36.7        97.7        8.9       

Additions to property, plant and equipment(2)

    (57.7     (13.7     (49.8     (5.3     (17.6    

Other financial data:

             

EBITDA(3)

  $ 155.4      $ 156.0      $ 168.3      $ 45.5      $ 44.1      $ 114.9      $ 37.4   

EBITDA attributable to MPLX LP(4)

            $ 56.6      $ 18.6   

 

 

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(1)   Consists of capital lease obligations, including amounts due within one year.
(2)   Represents cash capital expenditures as reflected on combined statements of cash flows for the periods indicated, which are included in cash used in investing activities.
(3)   For a discussion of the non-GAAP financial measure of EBITDA and a reconciliation of EBITDA to our most directly comparable measures calculated and presented in accordance with GAAP, please read “Selected Historical and Pro Forma Financial and Operating Data—Non-GAAP Financial Measure.”
(4)   Represents EBITDA attributable to our 51.0% indirect ownership interest in Pipe Line Holdings, less 100.0% of certain overhead expenses attributable to our butane cavern and 100.0% of estimated annual general administrative expenses that we expect to incur as a result of being a separate publicly-traded partnership. As our butane cavern was not in service during any period presented, the pro forma periods reflect only minimal expenses and no revenues associated with our butane cavern.

 

    MPLX LP Predecessor Historical     MPLX LP Pro Forma  
    Year ended
December 31,
    Three months
ended

March 31,
   

Year ended
December 31,

2011

   

Three
months
ended
March 31,

2012

 
    2009     2010     2011         2011             2012          

 

 

Operating information(1):

             

Pipeline throughput (mbpd)

             

Crude oil pipelines(2)

    1,113        1,204        1,184        1,174        1,121        993        1,012   

Product pipelines

    953        968        1,031        972        917        1,031        917   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    2,066        2,172        2,215        2,146        2,038        2,024        1,929   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Crude oil pipelines (light equivalent barrels)(2)(3)

    1,157        1,276        1,232        1,241        1,158        1,041        1,050   

Average tariff rates ($ per barrel)(4)

             

Crude oil pipelines(2)

  $ 0.48      $ 0.49      $ 0.48      $ 0.47      $ 0.52      $ 0.40      $ 0.47   

Product pipelines

    0.45        0.46        0.46        0.44        0.49        0.46        0.49   

Total pipelines

    0.46        0.48        0.47        0.46        0.50        0.43        0.48   

 

(1)   Operating information relating to the joint interest assets is included in the MPLX LP Predecessor historical periods and excluded in the MPLX LP pro forma periods presented.
(2)  

For all periods presented, excludes volumes transported on the St. James, LA to Garyville, LA crude oil pipeline system that was transferred from common carrier to private service on October 1, 2009.

(3)   For description of the differences between physical barrels of crude oil and light equivalent barrels of crude oil, please read footnote 2 to the table “Crude Oil Volumes Transported” in “Business—Our Assets and Operations.”
(4)   Average tariffs calculated using actual revenues divided by physical barrels.

 

 

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Risk factors

Investing in our common units involves a high degree of risk. You should carefully consider the risks described below with all of the other information included in this prospectus before deciding to invest in our common units. Limited partner interests are inherently different from the capital stock of a corporation, although many of the business risks to which we are subject are similar to those that would be faced by a corporation engaged in a similar business. If any of the following risks actually occur, they may materially harm our business and our financial condition and results of operations. In this event, we might not be able to pay distributions on our common units, the trading price of our common units could decline, and you could lose part or all of your investment.

RISKS RELATED TO OUR BUSINESS

MPC accounts for the substantial majority of our revenues. If MPC changes its business strategy, is unable to satisfy its obligations under our transportation and storage services agreements or significantly reduces the volumes transported through our pipelines or stored at our storage assets, our revenues would decline and our financial condition, results of operations, cash flows, and ability to make distributions to our unitholders would be materially adversely affected.

For the year ended December 31, 2011, excluding revenues attributable to volumes shipped by MPC under joint tariffs with third parties that were treated as third party revenues for accounting purposes, MPC accounted for approximately 80% of our pro forma revenues and other income. MPC is the primary shipper on our pipeline systems and has historically operated our pipelines primarily to supply crude oil and other refinery feedstocks to its refineries located throughout the Midwest and Gulf Coast regions of the United States and to deliver refined products and other hydrocarbon-based products to various markets located throughout the Midwest, Gulf Coast and Southeast regions of the United States. As we expect to continue to derive the substantial majority of our revenues from MPC for the foreseeable future, we are subject to the risk of nonpayment or nonperformance by MPC under our transportation and storage services agreements. Any event, whether in our areas of operation or elsewhere, that materially and adversely affects MPC’s financial condition, results of operations or cash flows may adversely affect our ability to sustain or increase cash distributions to our unitholders. Accordingly, we are indirectly subject to the operational and business risks of MPC, the most significant of which include the following:

 

Ø  

the timing and extent of changes in commodity prices and demand for MPC’s products, and the availability and costs of crude oil and other refinery feedstocks;

 

Ø  

the effects of the global economic downturn on MPC’s business and the business of its suppliers, customers, business partners and lenders;

 

Ø  

the risk of contract cancellation, non-renewal or failure to perform by MPC’s customers, and MPC’s inability to replace such contracts and/or customers;

 

Ø  

disruptions due to equipment interruption or failure at MPC’s facilities or at third-party facilities on which MPC’s business is dependent, including electrical shortages and power grid failures;

 

Ø  

any decision by MPC to temporarily or permanently curtail or shut down operations at one or more of its refineries or other facilities and reduce or terminate its obligations under our transportation and storage services agreements;

 

Ø  

MPC’s ability to remain in compliance with the terms of its outstanding indebtedness;

 

 

 

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Risk factors

 

 

 

Ø  

changes in the cost or availability of third-party pipelines, terminals and other means of delivering and transporting crude oil, feedstocks, refined products and other hydrocarbon-based products, including the construction or modification of new pipelines that would allow MPC to reduce or terminate its obligation under certain of our transportation services agreements;

 

Ø  

state and federal environmental, economic, health and safety, energy and other policies and regulations, and any changes in those policies and regulations;

 

Ø  

environmental incidents and violations and related remediation costs, fines and other liabilities;

 

Ø  

operational hazards and other incidents at MPC’s refineries and other facilities, such as explosions and fires, that result in temporary or permanent shut downs of those refineries and facilities;

 

Ø  

changes in crude oil and product inventory levels and carrying costs; and

 

Ø  

disruptions due to hurricanes, tornadoes or other forces of nature.

Additionally, MPC continually considers opportunities presented by third parties with respect to its assets. These opportunities may include offers to purchase and joint venture propositions. MPC may also change its operations by constructing new facilities, suspending or reducing certain operations, modifying or closing facilities or terminating operations. Changes may be considered to meet market demands, to satisfy regulatory requirements or environmental and safety objectives, to improve operational efficiency or for other reasons. MPC actively manages its assets and operations, and, therefore, changes of some nature, possibly material to its business relationship with us, are likely to occur at some point in the future.

We have no control over MPC, our largest source of revenue and our primary customer, and MPC may elect to pursue a business strategy that does not favor us and our business. Please read “—Risks Inherent in an Investment in Us—Our general partner and its affiliates, including MPC, have conflicts of interest with us and limited duties to us and our unitholders, and they may favor their own interests to our detriment and that of our unitholders. Additionally, we have no control over MPC’s business decisions and operations, and MPC is under no obligation to adopt a business strategy that favors us.”

We may not have sufficient cash from operations following the establishment of cash reserves and payment of fees and expenses, including cost reimbursements to our general partner and its affiliates, to enable us to pay the minimum quarterly distribution to our unitholders.

In order to pay the minimum quarterly distribution of $         per unit per quarter, or $         per unit on an annualized basis, we will require available cash of approximately $         per quarter, or approximately $         per year, based on the number of common units and subordinated units and the general partner interest to be outstanding immediately after completion of this offering. We may not have sufficient available cash from operating surplus each quarter to enable us to pay the minimum quarterly distribution. The amount of cash we can distribute on our units principally depends upon the amount of cash we generate from our operations, which will fluctuate from quarter to quarter based on, among other things:

 

Ø  

the volume of crude oil, refined products and other hydrocarbon-based products we transport;

 

Ø  

the tariff rates with respect to volumes that we transport; and

 

Ø  

prevailing economic conditions.

 

 

 

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Risk factors

 

 

In addition, the actual amount of cash we will have available for distribution will also depend on other factors, some of which are beyond our control, including:

 

Ø  

the amount of our operating expenses and general and administrative expenses, including reimbursements to MPC in respect of those expenses;

 

Ø  

the level of capital expenditures we make;

 

Ø  

the cost of acquisitions, if any;

 

Ø  

our debt service requirements and other liabilities;

 

Ø  

fluctuations in our working capital needs;

 

Ø  

our ability to borrow funds and access capital markets;

 

Ø  

restrictions contained in our revolving credit facility and other debt service requirements;

 

Ø  

the amount of cash reserves established by our general partner; and

 

Ø  

other business risks affecting our cash levels.

The assumptions underlying the forecast of cash available for distribution that we include in “Cash Distribution Policy and Restrictions on Distributions” are inherently uncertain and subject to significant business, economic, financial, regulatory and competitive risks that could cause our actual cash available for distribution to differ materially from our forecast.

The forecast of cash available for distribution set forth in “Cash Distribution Policy and Restrictions on Distributions” includes our forecast of our results of operations, EBITDA and cash available for distribution for the twelve months ending September 30, 2013. Our ability to pay the full minimum quarterly distribution in the forecast period is based on a number of assumptions that may not prove to be correct and that are discussed in “Cash Distribution Policy and Restrictions on Distributions.” Our financial forecast has been prepared by management, and we have neither received nor requested an opinion or report on it from our or any other independent auditor. The assumptions underlying the forecast are inherently uncertain and are subject to significant business, economic, regulatory and competitive risks, including those discussed in this prospectus, which could cause our EBITDA to be materially less than the amount forecasted. If we do not generate the forecasted EBITDA, we may not be able to make the minimum quarterly distribution or pay any amount on our common units or subordinated units, and the market price of our common units may decline materially.

MPC may suspend, reduce or terminate its obligations under our transportation and storage services agreements in some circumstances, which would have a material adverse effect on our financial condition, results of operations, cash flows and ability to make distributions to our unitholders.

Our transportation and storage services agreements with MPC include provisions that permit MPC to suspend, reduce or terminate its obligations under the applicable agreement if certain events occur. These events include MPC being prevented from transporting its full minimum volume commitment because of capacity constraints on our pipelines, our being subject to certain force majeure events that would prevent us from performing some or all of the required services under the applicable agreement and, subject to the provision of twelve months’ advance notice to MPLX LP and certain other conditions, MPC’s determination to suspend refining operations at one of its refineries, either permanently or indefinitely for a period that will continue for at least twelve months. MPC has the discretion to make such decisions notwithstanding the fact that they may significantly and adversely affect us. Further, we

 

 

 

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have no control over MPC’s business decisions and operations. MPC is not required to pursue a business strategy that favors us or utilizes our assets, and could elect to decrease refinery production or shut down or re-configure a refinery. These actions could result in a reduction or suspension of MPC’s obligations under one or more transportation and storage services agreements.

Under our transportation services agreements, if the minimum capacity of our pipelines falls below the level of MPC’s minimum commitment, or if capacity on our pipelines is required to be allocated among shippers because volume nominations exceed available capacity, MPC’s minimum commitment may be reduced accordingly. MPC’s and our obligations will also be proportionately reduced or suspended to the extent that either party is unable to perform under the agreements upon a declaration of a force majeure event. As defined in our transportation and storage services agreements, force majeure events include any acts or occurrences that prevent services from being performed under the applicable agreement, such as:

 

Ø  

acts of God, fires, floods or storms;

 

Ø  

compliance with orders of courts or any governmental authority;

 

Ø  

explosions, wars, terrorist acts, riots, strikes, lockouts or other industrial disturbances;

 

Ø  

accidental disruption of service;

 

Ø  

breakdown of machinery, storage tanks or pipelines and inability to obtain or unavoidable delay in obtaining material or equipment to repair or replace those assets; and

 

Ø  

similar events or circumstances, so long as such events or circumstances are beyond the party’s reasonable control and could not have been prevented by the service provider’s reasonable due diligence.

Accordingly, under our transportation and storage services agreements, these events could result in MPC no longer being required to transport or store its minimum volume commitments on our pipelines and at our storage assets or being required to pay the full amount of fees that would have been associated with its minimum volume commitments. These actions, as well the other activities described above, could result in a reduction or suspension of MPC’s obligations under one or more of our transportation and storage services agreements. Any such reduction or suspension would have a material adverse effect on our financial condition, results of operations, cash flows and ability to make distributions to our unitholders. Please read “Business—Our Transportation and Storage Services Agreements with MPC.”

If MPC satisfies only its minimum obligations under, or if we are unable to renew or extend, the transportation and storage services agreements we have with MPC, our ability to make distributions to our unitholders will be materially adversely affected.

MPC is not obligated to use our services with respect to volumes of crude oil or products in excess of the minimum volume commitments under the transportation services agreements with us. Our ability to make the minimum quarterly distribution on all outstanding units will be materially adversely affected to the extent that we do not transport volumes in excess of the minimum volume commitments under our transportation services agreements or if MPC’s obligations under our transportation and storage services agreements are suspended, reduced or terminated due to a refinery shutdown or any other reason. In addition, the initial terms of MPC’s obligations under those agreements range from three to 10 years. If MPC fails to use our assets and services after expiration of those agreements, or should our transportation and storage services agreements be invalidated for any reason, and we are unable to generate additional revenues from third parties, our ability to make cash distributions to unitholders may be materially adversely affected.

 

 

 

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Risk factors

 

 

Although we believe our transportation services agreements with MPC should provide us with stable throughput volumes on our pipeline systems, the rates charged for transporting such volumes vary by origin and destination. Accordingly, the routing of such throughput volumes could impact the stability of our revenues.

Our transportation services agreements obligate MPC to transport certain minimum volumes on our crude oil and product pipeline systems. Under our transportation services agreements, we will charge MPC for transporting crude oil from various origination points in the Midwest region of the United States to MPC’s refineries, and for transporting products from those refineries to end user markets in the Midwest, Gulf Coast and Southeast regions of the United States pursuant to applicable tariff rates.

The rates and fees charged on our pipeline systems for such transportation services will vary depending on the origin and destination points on the respective pipeline systems. Accordingly, while we believe the agreements should provide us with a stable base of throughput volumes, the revenues we generate on our pipeline systems could be reduced materially by changes to the routing of volumes shipped by MPC. Variances in the mix of rates applied under our transportation services agreements could impact the stability of our revenues and thus the stability of our distributions to our unitholders.

If our tariffs are successfully challenged, we could be required to reduce our tariff rates, which would reduce our revenues and our ability to make distributions to our unitholders.

MPC has agreed not to challenge, or to cause others to challenge or assist others in challenging, our tariff rates in effect during the term of our transportation services agreements with MPC. This agreement does not prevent other shippers or interested persons from challenging our tariff rates or proration rules; nor does it prevent regulators from reviewing our rates and tariffs on their own initiative. At the end of the term of each of our transportation services agreements, if the agreement is not renewed, MPC will be free to challenge, or to cause other parties to challenge or assist others in challenging, our tariffs in effect at that time. If our tariffs are successfully challenged, we could be required to reduce our tariff rates, which would reduce our revenues and our ability to make distributions to our unitholders.

Our operations and MPC’s refining operations are subject to many risks and operational hazards, some of which may result in business interruptions and shutdowns of our or MPC’s facilities and damages for which we may not be fully covered by insurance. If a significant accident or event occurs that results in business interruption or shutdown for which we are not adequately insured, our operations and financial results could be materially adversely affected.

Our operations are subject to all of the risks and operational hazards inherent in transporting and storing crude oil and products, including:

 

Ø  

damages to pipelines and facilities, related equipment and surrounding properties caused by earthquakes, tornados, hurricanes, floods, fires, severe weather, explosions and other natural disasters and acts of terrorism;

 

Ø  

maintenance, repairs, mechanical or structural failures at our facilities or at third-party facilities on which our operations are dependent, including MPC’s facilities;

 

Ø  

curtailments of operations due to severe seasonal weather;

 

Ø  

inadvertent damage to pipelines from construction, farm and utility equipment; and

 

Ø  

other hazards.

 

 

 

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Risk factors

 

 

These risks could result in substantial losses due to personal injury and/or loss of life, severe damage to and destruction of property and equipment and pollution or other environmental damage, as well as business interruptions or shutdowns of our facilities. Any such event or unplanned shutdown could have a material adverse effect on our business, financial condition and results of operations. In addition, MPC’s refining operations, on which our operations are substantially dependent, are subject to similar operational hazards and risks inherent in refining crude oil. A serious accident at our facilities or at MPC’s facilities could result in serious injury or death to our employees or contractors or those of MPC or its affiliates and could expose us to significant liability for personal injury claims and reputational risk. We have no control over the operations at MPC’s refineries and their associated facilities.

We do not maintain insurance coverage against all potential losses and could suffer losses for uninsurable or uninsured risks or in amounts in excess of existing insurance coverage. We carry separate policies for certain property, business interruption and pollution liabilities and are also insured under certain of MPC’s liability policies and are subject to MPC’s policy limits under these policies. The occurrence of an event that is not fully covered by insurance or failure by one or more insurers to honor its coverage commitments for an insured event could have a material adverse effect on our business, financial condition and results of operations.

In addition, our information technology systems and network infrastructure and the information technology systems and network infrastructure of MPC are subject to unauthorized access or attack, which could result in the loss of sensitive business information, systems interruption or the disruption of our business operations or the business operations of MPC. The level of protection from unauthorized access or attacks and disaster recovery capabilities vary from site to site, and there can be no guarantee that such plans, to the extent they are in place, will be totally effective.

A material decrease in the refining margins at MPC’s refineries could materially reduce the volumes of crude oil and products that we transport and store, which could materially adversely affect our financial condition, results of operations, cash flows and ability to make distributions to our unitholders.

The volumes of crude oil and products that we transport and store depend substantially on MPC’s refining margins. Refining margins are dependent both upon the price of crude oil or other refinery feedstocks and the price of refined products. These prices are affected by numerous factors beyond our or MPC’s control, including the global supply and demand for crude oil, gasoline and other refined products. The current global economic weakness and high unemployment in the United States are expected to continue to depress demand for refined products. The impact of low demand has been further compounded by excess global refining capacity and historically high inventory levels. MPC expects these conditions to continue to put significant pressure on refined product margins until the economy improves and unemployment declines. Several refineries in North America and Europe have been temporarily or permanently shut down in response to falling demand and excess refining capacity.

In addition to current market conditions, there are long-term factors that may impact the supply and demand of refined products in the United States. These factors include:

 

Ø  

increased fuel efficiency standards for vehicles;

 

Ø  

more stringent refined products specifications;

 

Ø  

renewable fuels standards;

 

Ø  

availability of alternative energy sources;

 

Ø  

potential and enacted climate change legislation;

 

 

 

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Risk factors

 

 

 

Ø  

the Environmental Protection Agency’s (“EPA”) regulation of greenhouse gases and other pollutants under the Clean Air Act; and

 

Ø  

increased or decreased refining capacity or refining capacity utilization.

If the demand for refined products, particularly in MPC’s primary market areas, decreases significantly, or if there were a material increase in the price of crude oil supplied to MPC’s refineries without an increase in the value of the products produced by those refineries, either temporary or permanent, which caused MPC to reduce production of products at its refineries, there would likely be a reduction in the volumes of crude oil and refined products that we transport and store for MPC. Any such reduction could materially adversely affect our financial condition, results of operations, cash flows and ability to make distributions to our unitholders.

A material decrease in the supply of, or a material increase in the price of, crude oil could materially reduce the volumes of crude oil and products that we transport and store, which could materially adversely affect our financial condition, results of operations, cash flows and ability to make distributions to unitholders.

The volumes of crude oil and products that we may transport on our pipelines in excess of MPC’s contracted minimum volumes will depend on the volume of products produced at MPC’s refineries. The volume of products produced depends, in part, on the availability of attractively-priced crude oil. A significant portion of the crude oil we transport and store for MPC is purchased from various foreign national oil companies, producing companies and trading companies, and MPC’s purchases of this crude oil are subject to political, geographic and economic risks attendant to doing business with foreign suppliers. Further, while MPC expects to acquire substantial supplies from crude oil sources in North America, especially from various shale plays, accessing these supply areas may require that we or MPC extend existing pipelines or construct new pipelines.

In order to maintain or increase product production levels at MPC’s refineries, MPC must continually contract for new crude oil supplies or consider connecting to alternative sources of crude oil. Adverse developments in major oil producing regions around the world could have a significantly greater impact on our financial condition, results of operations and cash flows because of our lack of industry and geographic diversity and substantial reliance on MPC as a customer. Accordingly, in addition to risks related to transporting and storing crude oil and products, we are disproportionately exposed to risks inherent in the broader oil and gas industry, including:

 

Ø  

the volatility and uncertainty of regional pricing differentials for crude oil and products;

 

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the ability of the members of the Organization of Petroleum Exporting Countries (“OPEC”) to agree to and maintain production controls;

 

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litigation and regulation relating to hydraulic fracturing as a recovery technique from shale plays;

 

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the nature and extent of governmental regulation and taxation; and

 

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the anticipated future prices of crude oil and products in markets served by MPC’s refineries.

If as a result of any of these or other factors, the volume of attractively-priced crude oil available to MPC’s refineries is materially reduced for a prolonged period of time, the volume of crude oil and products that we transport and store, and the related fees for those services, could be materially reduced, which could materially adversely affect our financial condition, results of operations, cash flows and ability to make distributions to our unitholders as well as the trading price of our common units.

 

 

 

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Our expansion of existing assets and construction of new assets may not result in revenue increases and will be subject to regulatory, environmental, political, legal and economic risks, which could adversely affect our operations and financial condition.

A portion of our strategy to grow and increase distributions to unitholders is dependent on our ability to expand existing assets and to construct additional assets. The construction of a new pipeline or the extension or expansion of an existing pipeline, such as by adding horsepower or pump stations, involves numerous regulatory, environmental, political and legal uncertainties, most of which are beyond our control. If we undertake these projects, they may not be completed on schedule or at all or at the budgeted cost. Moreover, we may not receive sufficient long-term contractual commitments from customers to provide the revenue needed to support such projects and we may be unable to negotiate acceptable interconnection agreements with third-party pipelines to provide destinations for increased throughput. Even if we receive such commitments or make such interconnections, we may not realize an increase in revenue for an extended period of time. For instance, if we build a new pipeline, the construction will occur over an extended period of time and we will not receive any material increases in revenues until after completion of the project. As a result, new facilities may not be able to attract enough throughput to achieve our expected investment return, which could materially adversely affect our results of operations and financial condition and our ability in the future to make distributions to our unitholders.

If we are unable to make acquisitions on economically acceptable terms from MPC or third parties, our future growth would be limited, and any acquisitions we may make may reduce, rather than increase, our cash flows and ability to make distributions to unitholders.

A portion of our strategy to grow our business and increase distributions to unitholders is dependent on our ability to make acquisitions that result in an increase in distributable cash flow per unit. The acquisition component of our growth strategy is based, in large part, on our expectation of ongoing divestitures of transportation and storage assets by industry participants, including MPC. A material decrease in such divestitures would limit our opportunities for future acquisitions and could adversely affect our ability to grow our operations and increase cash distributions to our unitholders. If we are unable to make acquisitions from MPC or third parties, because we are unable to identify attractive acquisition candidates or negotiate acceptable purchase contracts, we are unable to obtain financing for these acquisitions on economically acceptable terms or we are outbid by competitors, our future growth and ability to increase distributions will be limited. Furthermore, even if we do consummate acquisitions that we believe will be accretive, they may in fact result in a decrease in distributable cash flow per unit. Any acquisition involves potential risks, including, among other things:

 

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mistaken assumptions about revenues and costs, including synergies;

 

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the assumption of unknown liabilities;

 

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limitations on rights to indemnity from the seller;

 

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mistaken assumptions about the overall costs of equity or debt;

 

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internal financial control deficiencies;

 

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the diversion of management’s attention from other business concerns;

 

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unforeseen difficulties operating in new product areas or new geographic areas; and

 

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customer or key employee losses at the acquired businesses.

 

 

 

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If we consummate any future acquisitions, our capitalization and results of operations may change significantly, and unitholders will not have the opportunity to evaluate the economic, financial and other relevant information that we will consider in determining the application of these funds and other resources.

Any reduction in the capacity of, or the allocations to, our shippers in interconnecting, third-party pipelines could cause a reduction of volumes transported on our pipelines.

At times, MPC is dependent upon connections to third-party pipelines to transport crude oil and products on our pipelines. Any reduction of capacities of these interconnecting pipelines due to testing, line repair, reduced operating pressures or other causes could result in reduced volumes of crude oil and products transported on our pipelines. In addition, it is possible that due to prorationing on third-party interconnecting pipelines, the allocations to MPC and other existing shippers on these pipelines could be reduced, which could also reduce volumes transported on our pipelines. Any significant reduction in volumes available for transportation on our pipelines would materially adversely affect our revenues and cash flow and our ability to make distributions to our unitholders.

Our exposure to direct commodity price risk may increase in the future.

We currently generate the substantial majority of our revenues from MPC, primarily pursuant to fee-based transportation and storage services agreements under which we are paid fees based on the volumes of crude oil and products that we transport and store. From time to time, we have pipeline imbalances that result from differences in measurements of volumes entering and exiting our pipeline systems as compared to actual physical volumes. We have direct commodity price exposure with respect to any imbalance volumes. Although we intend to continue to contractually minimize our exposure to direct commodity price risk in the future, our efforts to negotiate such contracts may not be successful. We may also acquire or develop additional assets in the future that have a greater exposure to fluctuations in commodity price risk than our current operations. This or any increased exposure to the volatility of crude oil and product prices in the future could have a material adverse effect on our revenues and cash flow and our ability to make distributions to our unitholders.

We do not own all of the land on which our pipelines are located, which could result in disruptions to our operations.

We do not own all of the land on which our pipelines are located, and we are, therefore, subject to the possibility of more onerous terms and increased costs to retain necessary land use if we do not have valid leases or rights-of-way or if such rights-of-way lapse or terminate. We obtain the rights to construct and operate our pipelines on land owned by third parties and governmental agencies, and some of our agreements may grant us those rights for only a specific period of time. Our loss of these rights, through our inability to renew right-of-way contracts or otherwise, could have a material adverse effect on our business, results of operations, financial condition and ability to make cash distributions to our unitholders.

Restrictions in our revolving credit facility could adversely affect our business, financial condition, results of operations, ability to make cash distributions to our unitholders and the value of our units.

We will be dependent upon the earnings and cash flow generated by our operations in order to meet our debt service obligations and to allow us to make cash distributions to our unitholders. We expect to enter into a revolving credit facility at the closing of this offering. The operating and financial restrictions and covenants in our revolving credit facility and any future financing agreements could restrict our ability to

 

 

 

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finance our future operations or capital needs or to expand or pursue our business activities, which may, in turn, limit our ability to make cash distributions to our unitholders. For example, we expect that our revolving credit facility will restrict our ability to, among other things:

 

Ø  

make certain cash distributions;

 

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incur certain indebtedness;

 

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create certain liens; and

 

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merge or sell all or substantially all of our assets.

Furthermore, we also expect to be subject to certain financial covenants and customary events of default under our revolving credit facility. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Capital Resources and Liquidity—Revolving Credit Facility” for additional information about our revolving credit facility.

The provisions of our revolving credit facility may affect our ability to obtain future financing and pursue attractive business opportunities and our flexibility in planning for, and reacting to, changes in business conditions. In addition, a failure to comply with the provisions of our revolving credit facility could result in an event of default which could enable our lenders, subject to the terms and conditions of our revolving credit facility, to declare the outstanding principal of that debt, together with accrued interest, to be immediately due and payable. If we were unable to repay the accelerated amounts, our lenders could proceed against our assets to satisfy such debt. If the payment of our debt is accelerated, defaults under our other debt instruments, if any, may be triggered, and our assets may be insufficient to repay such debt in full, and the holders of our units could experience a partial or total loss of their investment. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Capital Resources and Liquidity.”

Debt we incur in the future may limit our flexibility to obtain financing and to pursue other business opportunities.

Our future level of debt could have important consequences to us, including the following:

 

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our ability to obtain additional financing, if necessary, for working capital, capital expenditures, acquisitions or other purposes may be impaired, or such financing may not be available on favorable terms;

 

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our funds available for operations, future business opportunities and distributions to unitholders will be reduced by that portion of our cash flow required to make interest payments on our debt;

 

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we may be more vulnerable to competitive pressures or a downturn in our business or the economy generally; and

 

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our flexibility in responding to changing business and economic conditions may be limited.

Our ability to service our debt will depend upon, among other things, our future financial and operating performance, which will be affected by prevailing economic conditions and financial, business, regulatory and other factors, some of which are beyond our control. If our operating results are not sufficient to service any future indebtedness, we will be forced to take actions such as reducing distributions, reducing or delaying our business activities, investments or capital expenditures, selling assets or issuing equity, which could materially adversely affect our financial condition, results of operations, cash flows and ability to make distributions to unitholders, as well as the trading price of our common units. We may not be able to effect any of these actions on satisfactory terms or at all.

 

 

 

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The amount of cash we have available for distribution to holders of our common and subordinated units depends primarily on our cash flow rather than on our profitability, which may prevent us from making distributions, even during periods in which we record net income.

The amount of cash we have available for distribution depends primarily upon our cash flow and not solely on profitability, which will be affected by non-cash items. As a result, we may make cash distributions during periods when we record net losses for financial accounting purposes, and we may not make cash distributions during periods when we record net income for financial accounting purposes.

Increases in interest rates could adversely impact our unit price, our ability to issue equity or incur debt for acquisitions or other purposes, and our ability to make cash distributions at our intended levels.

Interest rates may increase in the future. As a result, interest rates on our debt could be higher than current levels, causing our financing costs to increase accordingly. In addition, we may in the future refinance outstanding borrowings under our revolving credit facility with fixed-term indebtedness. Interest rates payable on fixed-term indebtedness typically are higher than the short-term variable interest rates that we will pay on borrowings under our revolving credit facility. Furthermore, as with other yield-oriented securities, our unit price will be impacted by our cash distributions and the implied distribution yield. The distribution yield is often used by investors to compare and rank yield-oriented securities for investment decision-making purposes. Therefore, changes in interest rates, either positive or negative, may affect the yield requirements of investors who invest in our units, and a rising interest rate environment could have an adverse impact on our unit price and our ability to issue equity or incur debt for acquisitions or other purposes and to make cash distributions at our intended levels.

Our assets and operations are subject to federal, state, and local laws and regulations relating to environmental protection and safety that could require us to make substantial expenditures.

Our assets and operations involve the transportation of crude oil and products, which is subject to increasingly stringent federal, state, and local laws and regulations governing the discharge of materials into the environment and operational safety matters. Our business of transporting crude oil and products involves the risk that crude oil and products may gradually or suddenly be released into the environment. Such releases may result in significant disruptions to our operations and, to the extent not covered by insurance or an indemnity, responding to the release of regulated substances into the environment may cause us to incur potentially material expenditures related to response actions, government penalties, natural resources damages, personal injury or property damage claims from third parties and business interruption.

Transportation of crude oil and products over water or proximate to navigable water bodies involves inherent risks and could subject us to the provisions of the Oil Pollution Act of 1990 (the “Oil Pollution Act”) and similar state environmental laws should a spill occur from our pipelines. Among other things, the Oil Pollution Act requires us to prepare a facility response plan identifying the personnel and equipment necessary to remove to the maximum extent practicable a “worst case discharge.” A few of our facilities are required to maintain such facility response plans. To meet this requirement, we and MPC have contracted with various spill response service companies in the areas in which we transport or store crude oil and products; however, these companies may not be able to adequately contain a “worst case discharge” in all instances, and we cannot ensure that all of their services would be available for our or MPC’s use at any given time. There are many factors that could inhibit the availability of these service

 

 

 

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providers, including, but not limited to, weather conditions, governmental regulations or other global events. In these and other cases, we may be subject to liability in connection with the discharge of crude oil or products into navigable waters.

Our assets are also subject to increasingly strict federal, state, and local laws and regulations that require us to comply with various safety requirements regarding the design, installation, testing, construction, and operational management of our pipeline systems and storage facilities. We could incur potentially significant additional expenses should we determine that any of our assets are not in compliance.

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. Any such penalties or liability could have a material adverse effect on our business, financial condition, or results of operations.

Please read “Business—Environmental Regulation” and “—Rate and Other Regulation.”

Meeting the requirements of evolving environmental, health and safety laws and regulations, such as those affecting climate change and hydraulic fracturing, could adversely affect our financial performance.

Environmental laws and regulations have raised operating costs for the crude oil and products industry and compliance with such laws and regulations may cause us and MPC to incur potentially material capital expenditures associated with the construction, maintenance, and upgrading of equipment and facilities. Various environmental, health and safety laws and regulations have imposed, and are expected to continue to impose, increasingly stringent and costly requirements on our operations. Environmental laws and regulations, in particular, are subject to frequent change, and many of them have become and will continue to become more stringent.

We believe it is likely that the scientific and political attention to issues concerning the extent of, causes of, and responsibility for climate change will continue, with the potential for further laws and regulations that could affect our operations. Currently, various legislative and regulatory measures to address greenhouse gas emissions (including carbon dioxide, methane and other gases) are in various phases of review, discussion or implementation in the United States. These include EPA programs to control greenhouse gas emissions and state actions to develop statewide or regional programs, each of which could impose reductions in greenhouse gas emissions. These actions could result in increased (1) costs to operate and maintain our facilities, (2) capital expenditures to install new emission controls on our facilities and (3) costs to administer and manage any potential greenhouse gas emissions regulations or carbon trading or tax programs. In addition, in 2010, the EPA promulgated a rule establishing greenhouse gas emission standards for new-model passenger cars, light-duty trucks, and medium-duty passenger vehicles. Also in 2010, the EPA promulgated a rule establishing greenhouse gas emission thresholds for the permitting of certain stationary sources, which could require greenhouse gas emission controls for those sources. The EPA has also issued its plan for establishing specific greenhouse gas emission requirements under the Clean Air Act. Under this plan, the EPA is expected to propose broad standards for refineries by the end of 2012, and is expected to issue final standards in 2013. These developments could have an indirect adverse effect on our business if MPC’s refinery operations are adversely affected due to increased regulation of MPC’s facilities or reduced demand for crude oil and refined products, and a direct adverse effect on our business from increased regulation of our facilities.

 

 

 

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Hydraulic fracturing is an important and increasingly common practice that is used to stimulate production of crude oil and/or natural gas from dense subsurface rock formations. Typically regulated by state agencies, the EPA has asserted federal regulatory authority pursuant to the Safe Drinking Water Act, as amended (“SDWA”), over certain hydraulic fracturing activities involving the use of diesel fuel. In addition, legislation has been introduced from time to time in Congress to provide for federal regulation of hydraulic fracturing under the SDWA and to require disclosure of the chemicals used in the hydraulic fracturing process. At the state level, several states have already adopted laws and/or regulations that require disclosure of the chemicals used in hydraulic fracturing and many states are considering legal requirements that could impose more stringent permitting, disclosure and well construction requirements on oil and/or natural gas drilling activities. The EPA is also moving forward with various related regulatory actions, including approving, on April 17, 2012, new regulations requiring, among other matters, “green completions” of hydraulically-fractured wells by 2015 and certain emission requirements for some midstream equipment beginning later in 2012. We do not believe these new regulations will have a direct effect on our operations. Because oil and/or natural gas production using hydraulic fracturing is growing rapidly in the United States, in the event that new or more stringent federal, state or local legal restrictions relating to such drilling activities or to the hydraulic fracturing process are adopted in areas where our shippers’ producer customers operate, those producers could incur potentially significant added costs to comply with such requirements and experience delays or curtailment in the pursuit of production or development activities, which could reduce demand for our transportation and logistics services.

Increases in fuel mileage standards and the increased use of renewable fuels could also decrease demand for refined products, which could have an indirect, but material, adverse effect on our business, financial condition and results of operations. For example, in 2007, Congress passed the Energy Independence and Security Act (“EISA”), which, among other things, sets a target of 35 miles per gallon for the combined fleet of cars and light trucks in the United States by model year 2020, and contains a second Renewable Fuel Standard commonly referred to as RFS2. In December 2011, the EPA and the National Highway Traffic Safety Administration jointly proposed regulations that would establish average industry fleet fuel economy standards as high as 49.6 miles per gallon by model year 2025. The RFS2 presents production and logistics challenges for both the renewable fuels and petroleum refining industries. The RFS2 has required, and may in the future continue to require, additional capital expenditures or expenses by MPC to accommodate increased renewable fuels use. MPC may experience a decrease in demand for refined petroleum products due to an increase in combined fleet mileage or due to refined petroleum products being replaced by renewable fuels.

We have in the past and will continue to dispose of various wastes at lawful disposal sites. Environmental laws, including CERCLA, and similar state laws can impose liability for the entire cost of cleanup on any responsible party, without regard to negligence or fault, and impose liability on us for the conduct of others or conditions others have caused, or for our acts that complied with all applicable requirements when we performed them.

We may be required to address conditions discovered in the future that require environmental response actions or remediation. Also, future environmental, health and safety requirements or changed interpretations of existing requirements may impose more stringent requirements on our assets and operations, which may require us to incur potentially material expenditures to ensure continued compliance. Future developments in federal laws and regulations governing environmental, health and safety and energy matters are especially difficult to predict.

Recently enacted pipeline safety legislation, the Pipeline Safety, Regulatory Certainty, and Job Creation Act of 2011, reauthorizes funding for federal pipeline safety programs, increases penalties for safety

 

 

 

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violations, establishes additional safety requirements for newly constructed pipelines, and requires studies of certain safety issues that could result in the adoption of new regulatory requirements for existing pipelines. The Pipeline Hazardous Materials Safety Administration of the DOT has also published an advanced notice of proposed rulemaking to solicit comments on the need for changes to its safety regulations, including whether to revise the integrity management requirements and add new regulations governing the safety of gathering lines. Such legislative and regulatory changes could have a material effect on our operations and costs of transportation service due to more stringent and comprehensive safety regulation and higher penalties for violations of those regulations.

Our business is impacted by environmental risks inherent in our operations.

Our operation of crude oil and product pipelines is inherently subject to the risks of spills, discharges or other inadvertent releases of petroleum or other hazardous substances. If any of these events have previously occurred or occur in the future, whether in connection with any of our pipelines or storage facilities, or any other facility to which we send or have sent wastes or by-products for treatment or disposal, we could be liable for all costs and penalties associated with the remediation of such facilities under federal, state and local environmental laws or common law. We may also be liable for personal injury or property damage claims from third parties alleging contamination from spills or releases from our facilities or operations. In addition, we will be subject to an aggregate deductible of $500,000 before we are entitled to indemnification from MPC for certain environmental liabilities under our omnibus agreement. Even if we are insured or indemnified against such risks, we may be responsible for costs or penalties to the extent our insurers or indemnitors do not fulfill their obligations to us. The payment of such costs or penalties could be significant and have a material adverse effect on our business, financial condition and results of operations.

Many of our assets have been in service for many years and require significant expenditures to maintain them. As a result, our maintenance or repair costs may increase in the future.

Our pipelines, barge dock and storage assets are generally long-lived assets, and many of them have been in service for many years. Although we maintain various ongoing monitoring and maintenance programs, the age and condition of these assets could result in increased maintenance or repair expenditures in the future. Any significant increase in these expenditures could adversely affect our results of operations, financial position or cash flows, as well as our ability to make cash distributions to our unitholders.

We are subject to regulation by multiple governmental agencies, which could adversely impact our business, results of operations and financial condition.

Our business activities are subject to regulation by multiple federal, state and local governmental agencies. Our historical and projected operating costs reflect the recurring costs resulting from compliance with these regulations, and we do not anticipate material expenditures in excess of these amounts in the absence of future acquisitions, or changes in regulation, or discovery of existing but unknown compliance issues. Additional proposals and proceedings that affect the crude oil and products industry, including the transportation of crude oil and products, are regularly considered by Congress, as well as by state legislatures and federal and state regulatory commissions, agencies and courts. New proposals may be considered and implemented in response to significant events relating to safety, the environment, rates and prices or other matters. We cannot predict when or whether any such proposals may become effective or the magnitude of the impact changes in laws and regulations may have on our business; however, additions or enhancements to the regulatory burden on our industry generally increase the cost of doing business and affect our profitability.

 

 

 

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The tariff rates of our regulated assets are subject to review and possible adjustment by federal and state regulators, which could adversely affect our revenues.

A number of our pipelines provide interstate service that is subject to regulation by the FERC. The FERC uses prescribed rate methodologies for approving regulated tariff rates for interstate oil and products pipelines. In general, the FERC’s indexing methodology allows a pipeline to increase its rates by a percentage linked to the PPI. Currently, under the indexing methodology, a pipeline may increase its rates annually by a percentage factor equal to the change in the PPI plus 2.65%. Many of our rates are subject to this indexing methodology. If the PPI falls, we may be required to reduce rates if they exceed the new maximum allowable rate. In addition, changes in the index might not fully reflect actual increases in our costs.

As an alternative to using the indexing methodology, interstate oil pipelines may elect to support rate filings by using a cost-of-service methodology, market-based rates or agreements with all of the pipeline’s shippers that the rate is acceptable. We may not be able to set rates based on our actual costs or we may incur delays in establishing rates reflecting increased costs. Additionally, changes in the FERC’s approved methodology for approving rates, or challenges to our application of an approved methodology, could adversely affect us. Adverse decisions by the FERC in approving our regulated rates could adversely affect our cash flow.

Shippers may protest (and the FERC may investigate) the lawfulness of current, new or changed tariff rates. The FERC can suspend those tariff rates for up to seven months. It can also require refunds of amounts collected pursuant to rates that are ultimately found to be unlawful and prescribe new rates prospectively. The FERC and interested parties can also challenge tariff rates that have become final and effective. The FERC also can order new rates to take effect prospectively and order reparations for past rates that exceed the just and reasonable level up to two years prior to the date of a complaint. Due to the complexity of rate making, the lawfulness of any rate is never assured. A successful challenge of our rates could adversely affect our revenues.

Our pipelines are common carriers and, as a consequence, we may be required to provide service to customers with credit and other performance characteristics with whom we would choose not to do business if permitted to do so.

Certain of our pipelines provide intrastate service that is subject to regulation by the Illinois Commerce Commission and the Michigan Public Service Commission. Typically state regulation, including regulation in Illinois and Michigan, is operated on a complaint based system, both as to rates and priority of access. The Illinois Commerce Commission and the Michigan Public Service Commission could limit our ability to increase our rates or to set rates based on our costs or could order us to reduce our rates and could require the payment of refunds to shippers. Such regulation or a successful challenge to our intrastate pipeline rates could adversely affect our financial position, cash flows or results of operations.

Portions of our pipeline systems that are not regulated by the FERC may become subject to FERC regulation, which would increase our costs and could adversely affect our business, results of operations and financial condition. We believe the only transportation on our pipelines that is or will be subject to the jurisdiction of the FERC is the transportation specified in the tariffs that we have on file with the FERC. However, we cannot guarantee that the jurisdictional status of transportation on our pipelines and related facilities will remain unchanged. Should circumstances change or if the FERC revises its policies, then currently non-jurisdictional transportation could be found to be FERC-jurisdictional. In that case, the FERC’s ratemaking methodologies may further limit our ability to set rates based on our

 

 

 

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actual costs, may delay the use of rates that reflect increased costs, and may subject us to potentially burdensome and expensive operational, reporting and other requirements. Any of the foregoing could adversely affect our business, results of operations and financial condition.

MPC’s level of indebtedness, the terms of its borrowings and its credit ratings could adversely affect our ability to grow our business and our ability to make cash distributions to our unitholders. Our ability to obtain credit in the future may also be adversely affected by MPC’s credit rating.

MPC must devote a portion of its cash flows from operating activities to service its indebtedness, and therefore cash flows may not be available for use in pursuing its growth strategy. Furthermore, a higher level of indebtedness at MPC in the future increases the risk that it may default on its obligations to us under our transportation and storage services agreements. As of December 31, 2011, MPC had long-term indebtedness of approximately $3.3 billion. The covenants contained in the agreements governing MPC’s outstanding and future indebtedness may limit its ability to borrow additional funds for development and make certain investments and may directly or indirectly impact our operations in a similar manner. Furthermore, if MPC were to default under certain of its debt obligations, there is a risk that MPC’s creditors would attempt to assert claims against our assets during the litigation of their claims against MPC. The defense of any such claims could be costly and could materially impact our financial condition, even absent any adverse determination. If these claims were successful, our ability to meet our obligations to our creditors, make distributions and finance our operations could be materially adversely affected.

MPC’s long-term credit ratings are currently investment grade. If these ratings are lowered in the future, the interest rate and fees MPC pays on its credit facilities may increase. In addition, although we will not have any indebtedness rated by any credit rating agency at the closing of this offering, we may have rated debt in the future. Credit rating agencies will likely consider MPC’s debt ratings when assigning ours because of MPC’s ownership interest in us, the significant commercial relationships between MPC and us, and our reliance on MPC for the substantial majority of our revenues. If one or more credit rating agencies were to downgrade the outstanding indebtedness of MPC, we could experience an increase in our borrowing costs or difficulty accessing the capital markets. Such a development could adversely affect our ability to grow our business and to make cash distributions to our unitholders.

If we fail to develop or maintain an effective system of internal controls, we may not be able to report our financial results accurately or prevent fraud, which would likely have a negative impact on the market price of our common units.

Prior to this offering, we have not been required to file reports with the SEC. Upon the completion of this offering, we will become subject to the public reporting requirements of the Exchange Act. We prepare our financial statements in accordance with GAAP, but our internal accounting controls may not currently meet all standards applicable to companies with publicly traded securities. Effective internal controls are necessary for us to provide reliable financial reports, prevent fraud and to operate successfully as a publicly traded partnership. Our efforts to develop and maintain our internal controls may not be successful, and we may be unable to maintain effective controls over our financial processes and reporting in the future or to comply with our obligations under Section 404 of the Sarbanes-Oxley Act of 2002, which we refer to as Section 404. For example, Section 404 will require us, among other things, to annually review and report on, and our independent registered public accounting firm to attest to, the effectiveness of our internal controls over financial reporting.

 

 

 

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Although we will be required to disclose changes made in our internal control and procedures on a quarterly basis, we will not be required to make our first annual assessment of our internal control over financial reporting pursuant to Section 404 until the fiscal year ending December 31, 2013. In addition, pursuant to the recently enacted JOBS Act, our independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal control over financial reporting until the later of the year following our first annual report required to be filed with the SEC and the date we are no longer an “emerging growth company,” which may be up to five full fiscal years following this offering.

Any failure to develop, implement or maintain effective internal controls or to improve our internal controls could harm our operating results or cause us to fail to meet our reporting obligations. Given the difficulties inherent in the design and operation of internal controls over financial reporting, we can provide no assurance as to our, or our independent registered public accounting firm’s, conclusions about the effectiveness of our internal controls, and we may incur significant costs in our efforts to comply with Section 404. Ineffective internal controls will subject us to regulatory scrutiny and a loss of confidence in our reported financial information, which could have an adverse effect on our business and would likely have a material adverse effect on the trading price of our common units.

RISKS INHERENT IN AN INVESTMENT IN US

Our general partner and its affiliates, including MPC, have conflicts of interest with us and limited duties to us and our unitholders, and they may favor their own interests to our detriment and that of our unitholders. Additionally, we have no control over MPC’s business decisions and operations, and MPC is under no obligation to adopt a business strategy that favors us.

Following the offering, MPC will own a 2.0% general partner interest and a     % limited partner interest in us and will own and control our general partner. Although our general partner has a duty to manage us in a manner that is not adverse to the best interests of our partnership and our unitholders, the directors and officers of our general partner also have a duty to manage our general partner in a manner that is not adverse to the best interests of its owner, MPC. Conflicts of interest may arise between MPC and its affiliates, including our general partner, on the one hand, and us and our unitholders, on the other hand. In resolving these conflicts, the general partner may favor its own interests and the interests of its affiliates, including MPC, over the interests of our common unitholders. These conflicts include, among others, the following situations:

 

Ø  

neither our partnership agreement nor any other agreement requires MPC to pursue a business strategy that favors us or utilizes our assets, which could involve decisions by MPC to increase or decrease refinery production, shut down or reconfigure a refinery, or pursue and grow particular markets. MPC’s directors and officers have a fiduciary duty to make these decisions in the best interests of the stockholders of MPC;

 

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MPC, as our primary customer, has an economic incentive to cause us to not seek higher tariff rates, even if such higher rates or fees would reflect rates and fees that could be obtained in arm’s-length, third-party transactions;

 

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MPC may be constrained by the terms of its debt instruments from taking actions, or refraining from taking actions, that may be in our best interests;

 

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Our partnership agreement replaces the fiduciary duties that would otherwise be owed by our general partner with contractual standards governing its duties, limiting our general partner’s liabilities and

 

 

 

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restricting the remedies available to our unitholders for actions that, without the limitations, might constitute breaches of fiduciary duty;

 

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except in limited circumstances, our general partner has the power and authority to conduct our business without unitholder approval;

 

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our general partner will determine the amount and timing of asset purchases and sales, borrowings, issuance of additional partnership securities and the creation, reduction or increase of cash reserves, each of which can affect the amount of cash that is distributed to our unitholders;

 

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our general partner will determine the amount and timing of many of our cash expenditures and whether a cash expenditure is classified as an expansion capital expenditure, which would not reduce operating surplus, or a maintenance capital expenditure, which would reduce our operating surplus. This determination can affect the amount of cash that is distributed to our unitholders and to our general partner, the amount of adjusted operating surplus generated in any given period and the ability of the subordinated units to convert into common units;

 

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our general partner will determine which costs incurred by it are reimbursable by us;

 

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our general partner may cause us to borrow funds in order to permit the payment of cash distributions, even if the purpose or effect of the borrowing is to make a distribution on the subordinated units, to make incentive distributions or to accelerate expiration of the subordination period;

 

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our partnership agreement permits us to classify up to $         million as operating surplus, even if it is generated from asset sales, non-working capital borrowings or other sources that would otherwise constitute capital surplus. This cash may be used to fund distributions on our subordinated units or to our general partner in respect of the general partner interest or the incentive distribution rights;

 

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our partnership agreement does not restrict our general partner from causing us to pay it or its affiliates for any services rendered to us or entering into additional contractual arrangements with any of these entities on our behalf;

 

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our general partner intends to limit its liability regarding our contractual and other obligations;

 

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our general partner may exercise its right to call and purchase all of the common units not owned by it and its affiliates if it and its affiliates own more than     % of the common units;

 

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our general partner controls the enforcement of obligations owed to us by our general partner and its affiliates, including our transportation and storage services agreements with MPC;

 

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our general partner decides whether to retain separate counsel, accountants or others to perform services for us; and

 

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our general partner may elect to cause us to issue common units to it in connection with a resetting of the target distribution levels related to our general partner’s incentive distribution rights without the approval of the conflicts committee of the board of directors of our general partner, which we refer to as our conflicts committee, or our unitholders. This election may result in lower distributions to our common unitholders in certain situations.

Under the terms of our partnership agreement, the doctrine of corporate opportunity, or any analogous doctrine, does not apply to our general partner or any of its affiliates, including its executive officers, directors and owners. Other than as provided in our omnibus agreement, any such person or entity that becomes aware of a potential transaction, agreement, arrangement or other matter that may be an opportunity for us will not have any duty to communicate or offer such opportunity to us. Any such

 

 

 

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person or entity will not be liable to us or to any limited partner for breach of any fiduciary duty or other duty by reason of the fact that such person or entity pursues or acquires such opportunity for itself, directs such opportunity to another person or entity or does not communicate such opportunity or information to us. This may create actual and potential conflicts of interest between us and affiliates of our general partner and result in less than favorable treatment of us and our unitholders. Please read “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions—Omnibus Agreement” and “Conflicts of Interest and Duties.”

Our partnership agreement requires that we distribute all of our available cash, which could limit our ability to grow and make acquisitions.

Our partnership agreement requires that we distribute all of our available cash to our unitholders. As a result, we expect to rely primarily upon external financing sources, including commercial bank borrowings and the issuance of debt and equity securities, to fund our acquisitions and expansion capital expenditures. Therefore, to the extent we are unable to finance our growth externally, our cash distribution policy will significantly impair our ability to grow. In addition, because we will distribute all of our available cash, our growth may not be as fast as that of businesses that reinvest their available cash to expand ongoing operations. To the extent we issue additional units in connection with any acquisitions or expansion capital expenditures, the payment of distributions on those additional units may increase the risk that we will be unable to maintain or increase our per unit distribution level. There are no limitations in our partnership agreement or our revolving credit facility on our ability to issue additional units, including units ranking senior to the common units as to distribution or liquidation, and our unitholders will have no preemptive or other rights (solely as a result of their status as unitholders) to purchase ony such additional units. The incurrence of additional commercial borrowings or other debt to finance our growth strategy would result in increased interest expense, which, in turn, may reduce the amount of cash available to distribute to our unitholders.

Our partnership agreement replaces our general partner’s fiduciary duties to holders of our common units with contractual standards governing its duties.

Our partnership agreement contains provisions that eliminate the fiduciary standards to which our general partner would otherwise be held by state fiduciary duty law and replaces those duties with several different contractual standards. For example, our partnership agreement permits our general partner to make a number of decisions in its individual capacity, as opposed to in its capacity as our general partner, free of any duties to us and our unitholders other than the implied contractual covenant of good faith and fair dealing, which means that a court will enforce the reasonable expectations of the parties where the language in our partnership agreement does not provide for a clear course of action. This provision entitles our general partner to consider only the interests and factors that it desires and relieves it of any duty or obligation to give any consideration to any interest of, or factors affecting, us, our affiliates or our limited partners. Examples of decisions that our general partner may make in its individual capacity include:

 

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how to allocate business opportunities among us and its other affiliates;

 

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whether to exercise its limited call right;

 

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how to exercise its voting rights with respect to the units it owns;

 

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whether to exercise its registration rights;

 

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whether to elect to reset target distribution levels; and

 

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whether or not to consent to any merger or consolidation of the partnership or amendment to our partnership agreement.

 

 

 

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By purchasing a common unit, a unitholder is treated as having consented to the provisions in our partnership agreement, including the provisions discussed above. Please read “Conflicts of Interest and Duties—Duties of the General Partner.”

Our partnership agreement restricts the remedies available to holders of our common and subordinated units for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty.

Our partnership agreement contains provisions that restrict the remedies available to unitholders for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty under state fiduciary duty law. For example, our partnership agreement:

 

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provides that whenever our general partner makes a determination or takes, or declines to take, any other action in its capacity as our general partner, our general partner is required to make such determination, or take or decline to take such other action, in good faith, meaning that it subjectively believed that the decision was not adverse to the best interests of our partnership, and will not be subject to any other or different standard imposed by our partnership agreement, Delaware law, or any other law, rule or regulation, or at equity;

 

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provides that our general partner will not have any liability to us or our unitholders for decisions made in its capacity as a general partner so long as it acted in good faith;

 

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provides that our general partner and its officers and directors will not be liable for monetary damages to us or our limited partners resulting from any act or omission unless there has been a final and non-appealable judgment entered by a court of competent jurisdiction determining that our general partner or its officers and directors, as the case may be, acted in bad faith or engaged in fraud or willful misconduct or, in the case of a criminal matter, acted with knowledge that the conduct was criminal; and

 

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provides that our general partner will not be in breach of its obligations under our partnership agreement or its fiduciary duties to us or our limited partners if a transaction with an affiliate or the resolution of a conflict of interest is:

 

  (1)   approved by the conflicts committee of the board of directors of our general partner, although our general partner is not obligated to seek such approval;

 

  (2)   approved by the vote of a majority of the outstanding common units, excluding any common units owned by our general partner and its affiliates;

 

  (3)   on terms no less favorable to us than those generally being provided to or available from unrelated third parties; or

 

  (4)   fair and reasonable to us, taking into account the totality of the relationships among the parties involved, including other transactions that may be particularly favorable or advantageous to us.

In connection with a situation involving a transaction with an affiliate or a conflict of interest, any determination by our general partner must be made in good faith. If an affiliate transaction or the resolution of a conflict of interest is not approved by our common unitholders or our conflicts committee and the board of directors of our general partner determines that the resolution or course of action taken with respect to the affiliate transaction or conflict of interest satisfies either of the standards set forth in subclauses (3) and (4) above, then it will be presumed that, in making its decision, the board of directors acted in good faith, and in any proceeding brought by or on behalf of any limited partner or the partnership, the person bringing or prosecuting such proceeding will have the burden of overcoming such presumption. Please read “Conflicts of Interest and Duties.”

 

 

 

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If you are not both a citizenship eligible holder and a rate eligible holder, your common units may be subject to redemption.

In order to avoid (1) any material adverse effect on the maximum applicable rates that can be charged to customers by our subsidiaries on assets that are subject to rate regulation by the FERC or analogous regulatory body, and (2) any substantial risk of cancellation or forfeiture of any property, including any governmental permit, endorsement or other authorization, in which we have an interest, we have adopted certain requirements regarding those investors who may own our common units. Citizenship eligible holders are individuals or entities whose nationality, citizenship or other related status does not create a substantial risk of cancellation or forfeiture of any property, including any governmental permit, endorsement or authorization, in which we have an interest, and will generally include individuals and entities who are U.S. citizens. Rate eligible holders are individuals or entities subject to U.S. federal income taxation on the income generated by us or entities not subject to U.S. federal income taxation on the income generated by us, so long as all of the entity’s owners are subject to such taxation. Please read “Description of the Common Units—Transfer of Common Units.” If you are not a person who meets the requirements to be a citizenship eligible holder or a rate eligible holder, you run the risk of having your units redeemed by us at the market price as of the date three days before the date the notice of redemption is mailed. The redemption price will be paid in cash or by delivery of a promissory note, as determined by our general partner. In addition, if you are not a person who meets the requirements to be a citizenship eligible holder, you will not be entitled to voting rights. Please read “Our Partnership Agreement—Non-Citizen Assignees; Redemption” and “Our Partnership Agreement—Non-Taxpaying Assignees; Redemption.”

Cost reimbursements, which will be determined in our general partner’s sole discretion, and fees due our general partner and its affiliates for services provided will be substantial and will reduce our cash available for distribution to you.

Under our partnership agreement, we are required to reimburse our general partner and its affiliates for all costs and expenses that they incur on our behalf for managing and controlling our business and operations. Except to the extent specified under our omnibus agreement or our employee services agreements, our general partner determines the amount of these expenses. Under the terms of the omnibus agreement we will be required to reimburse MPC for the provision of certain general and administrative services to us. Under the terms of our employee services agreements, we will reimburse MPC for the provision of certain operational and management services to us in support of our pipelines, barge dock, storage cavern and tank farms. Our general partner and its affiliates also may provide us other services for which we will be charged fees as determined by our general partner. Payments to our general partner and its affiliates will be substantial and will reduce the amount of cash available for distribution to unitholders.

Unitholders have very limited voting rights and, even if they are dissatisfied, they cannot remove our general partner without its consent.

Unlike the holders of common stock in a corporation, unitholders have only limited voting rights on matters affecting our business and, therefore, limited ability to influence management’s decisions regarding our business. Unitholders did not elect our general partner or the board of directors of our general partner and will have no right to elect our general partner or the board of directors of our general partner on an annual or other continuing basis. The board of directors of our general partner is chosen by the members of our general partner, which are wholly owned subsidiaries of MPC. Furthermore, if the unitholders are dissatisfied with the performance of our general partner, they will

 

 

 

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have little ability to remove our general partner. As a result of these limitations, the price at which our common units will trade could be diminished because of the absence or reduction of a takeover premium in the trading price.

The unitholders will be unable initially to remove our general partner without its consent because our general partner and its affiliates will own sufficient units upon completion of the offering to be able to prevent its removal. The vote of the holders of at least 66 2/3% of all outstanding common units and subordinated units voting together as a single class is required to remove our general partner. At closing, our general partner and its affiliates will own     % of the common units and subordinated units. Also, if our general partner is removed without cause during the subordination period and common units and subordinated units held by our general partner and its affiliates are not voted in favor of that removal, all remaining subordinated units will automatically be converted into common units, and any existing arrearages on the common units will be extinguished. A removal of our general partner under these circumstances would adversely affect the common units by prematurely eliminating their distribution and liquidation preference over the subordinated units, which would otherwise have continued until we had met certain distribution and performance tests.

“Cause” is narrowly defined under our partnership agreement to mean that a court of competent jurisdiction has entered a final, non-appealable judgment finding the general partner liable for actual fraud or willful or wanton misconduct in its capacity as our general partner. Cause does not include most cases of charges of poor management of the business, so the removal of our general partner because of the unitholders’ dissatisfaction with our general partner’s performance in managing our partnership will most likely result in the termination of the subordination period.

Furthermore, unitholders’ voting rights are further restricted by the partnership agreement provision providing that any units held by a person that owns 20.0% or more of any class of units then outstanding, other than our general partner, its affiliates, their transferees, and persons who acquired such units with the prior approval of the board of directors of our general partner, cannot vote on any matter.

Our partnership agreement also contains provisions limiting the ability of unitholders to call meetings or to acquire information about our operations, as well as other provisions limiting the unitholders’ ability to influence the manner or direction of management.

Our general partner interest or the control of our general partner may be transferred to a third party without unitholder consent.

Our general partner may transfer its general partner interest to a third party in a merger or in a sale of all or substantially all of its assets without the consent of the unitholders. Furthermore, there is no restriction in our partnership agreement on the ability of MPC to transfer its membership interest in our general partner to a third party. The new partners of our general partner would then be in a position to replace the board of directors and officers of our general partner with their own choices and to control the decisions taken by the board of directors and officers.

The incentive distribution rights of our general partner may be transferred to a third party without unitholder consent.

Our general partner may transfer its incentive distribution rights to a third party at any time without the consent of our unitholders. If our general partner transfers its incentive distribution rights to a third party but retains its general partner interest, our general partner may not have the same incentive to

 

 

 

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grow our partnership and increase quarterly distributions to unitholders over time as it would if it had retained ownership of its incentive distribution rights. For example, a transfer of incentive distribution rights by our general partner could reduce the likelihood of MPC selling or contributing additional midstream assets to us, as MPC would have less of an economic incentive to grow our business, which in turn would impact our ability to grow our asset base.

You will experience immediate and substantial dilution in pro forma net tangible book value of $         per common unit.

The assumed initial public offering price of $         per common unit (the mid-point of the price range set forth on the cover of this prospectus) exceeds our pro forma net tangible book value of $         per unit. Based on an assumed initial public offering price of $         per common unit, you will incur immediate and substantial dilution of $         per common unit. This dilution results primarily because the assets contributed by MPC are recorded in accordance with GAAP at their historical cost, and not their fair value. Please read “Dilution.”

We may issue additional units without unitholder approval, which would dilute unitholder interests.

At any time, we may issue an unlimited number of limited partner interests of any type without the approval of our unitholders and our unitholders will have no preemptive or other rights (solely as a result of their status as unitholders) to purchase any such limited partner interests. Further, neither our partnership agreement nor our revolving credit facility prohibits the issuance of equity securities that may effectively rank senior to our common units as to distributions or liquidations. The issuance by us of additional common units or other equity securities of equal or senior rank will have the following effects:

 

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our unitholders’ proportionate ownership interest in us will decrease;

 

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the amount of cash available for distribution on each unit may decrease;

 

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because a lower percentage of total outstanding units will be subordinated units, the risk that a shortfall in the payment of the minimum quarterly distribution will be borne by our common unitholders will increase;

 

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the ratio of taxable income to distributions may increase;

 

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the relative voting strength of each previously outstanding unit may be diminished; and

 

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the market price of our common units may decline.

MPC may sell units in the public or private markets, and such sales could have an adverse impact on the trading price of the common units.

After the sale of the common units offered by this prospectus, MPC will hold              common units and              subordinated units. All of the subordinated units will convert into common units at the end of the subordination period and may convert earlier under certain circumstances. Additionally, we have agreed to provide MPC with certain registration rights. Please read “Units Eligible for Future Sale.” The sale of these units in the public or private markets could have an adverse impact on the price of the common units or on any trading market that may develop.

Our general partner’s discretion in establishing cash reserves may reduce the amount of cash available for distribution to unitholders.

Our partnership agreement requires our general partner to deduct from operating surplus cash reserves that it determines are necessary to fund our future operating expenditures. In addition, the partnership

 

 

 

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agreement permits the general partner to reduce available cash by establishing cash reserves for the proper conduct of our business, to comply with applicable law or agreements to which we are a party, or to provide funds for future distributions to partners. These cash reserves will affect the amount of cash available for distribution to unitholders.

Affiliates of our general partner, including MPC, may compete with us, and neither our general partner nor its affiliates have any obligation to present business opportunities to us.

Neither our partnership agreement nor our omnibus agreement will prohibit MPC or any other affiliates of our general partner from owning assets or engaging in businesses that compete directly or indirectly with us. In addition, MPC and other affiliates of our general partner may acquire, construct or dispose of additional midstream assets in the future without any obligation to offer us the opportunity to purchase any of those assets. As a result, competition from MPC and other affiliates of our general partner could materially adversely impact our results of operations and cash available for distribution to unitholders.

Our general partner may cause us to borrow funds in order to make cash distributions, even where the purpose or effect of the borrowing benefits the general partner or its affiliates.

In some instances, our general partner may cause us to borrow funds under our revolving credit facility from MPC or otherwise from third parties in order to permit the payment of cash distributions. These borrowings are permitted even if the purpose and effect of the borrowing is to enable us to make a distribution on the subordinated units, to make incentive distributions or to hasten the expiration of the subordination period.

Our general partner has a limited call right that may require you to sell your common units at an undesirable time or price.

If at any time our general partner and its affiliates own more than     % of our common units, our general partner will have the right, but not the obligation, which it may assign to any of its affiliates or to us, to acquire all, but not less than all, of the common units held by unaffiliated persons at a price not less than their then-current market price. As a result, you may be required to sell your common units at an undesirable time or price and may not receive any return on your investment. You may also incur a tax liability upon a sale of your units. At the completion of this offering and assuming no exercise of the underwriters’ option to purchase additional common units, our general partner and its affiliates will own approximately     % of our common units. At the end of the subordination period (which could occur as early as             ), assuming no additional issuances of common units (other than upon the conversion of the subordinated units) and no exercise of the underwriters’ option to purchase additional common units, our general partner and its affiliates will own approximately     % of our common units. For additional information about the call right, please read “Our Partnership Agreement—Limited Call Right.”

Your liability may not be limited if a court finds that unitholder action constitutes control of our business.

A general partner of a partnership generally has unlimited liability for the obligations of the partnership, except for those contractual obligations of the partnership that are expressly made non-recourse to the general partner. Our partnership is organized under Delaware law, and we conduct business in a number of other states. The limitations on the liability of holders of limited partner interests for the obligations

 

 

 

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of a limited partnership have not been clearly established in some jurisdictions. You could be liable for our obligations as if you were a general partner if a court or government agency were to determine that:

 

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we were conducting business in a state but had not complied with that particular state’s partnership statute; or

 

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your right to act with other unitholders to remove or replace the general partner, to approve some amendments to our partnership agreement or to take other actions under our partnership agreement constitute “control” of our business.

Please read “Our Partnership Agreement—Limited Liability” for a discussion of the implications of the limitations of liability on a unitholder.

Unitholders may have to repay distributions that were wrongfully distributed to them.

Under certain circumstances, unitholders may have to repay amounts wrongfully distributed to them. Under Section 17-607 of the Delaware Revised Uniform Limited Partnership Act, we may not make a distribution to you if the distribution would cause our liabilities to exceed the fair value of our assets. Delaware law provides that for a period of three years from the date of the impermissible distribution, limited partners who received the distribution and who knew at the time of the distribution that it violated Delaware law will be liable to the limited partnership for the distribution amount. Transferees of common units are liable for the obligations of the transferor to make contributions to the partnership that are known to the transferee at the time of the transfer and for unknown obligations if the liabilities could be determined from our partnership agreement. Liabilities to partners on account of their partnership interest and liabilities that are non-recourse to the partnership are not counted for purposes of determining whether a distribution is permitted.

There is no existing market for our common units, and a trading market that will provide you with adequate liquidity may not develop. The price of our common units may fluctuate significantly, and you could lose all or part of your investment.

Prior to this offering, there has been no public market for our common units. After this offering, there will be only              publicly traded common units. In addition, MPC will own              common units and              subordinated units, representing an aggregate     % limited partner interest in us. We do not know the extent to which investor interest will lead to the development of a trading market or how liquid that market might be. You may not be able to resell your common units at or above the initial public offering price. Additionally, the lack of liquidity may result in wide bid-ask spreads, contribute to significant fluctuations in the market price of the common units and limit the number of investors who are able to buy the common units.

The initial public offering price for the common units offered hereby will be determined by negotiations between us and the representatives of the underwriters and may not be indicative of the market price of the common units that will prevail in the trading market. The market price of our common units may decline below the initial public offering price. The market price of our common units may also be influenced by many factors, some of which are beyond our control, including:

 

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our quarterly distributions;

 

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our quarterly or annual earnings or those of other companies in our industry;

 

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announcements by us or our competitors of significant contracts or acquisitions;

 

 

 

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changes in accounting standards, policies, guidance, interpretations or principles;

 

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general economic conditions;

 

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the failure of securities analysts to cover our common units after this offering or changes in financial estimates by analysts;

 

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future sales of our common units; and

 

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other factors described in these “Risk Factors.”

Our general partner, or any transferee holding incentive distribution rights, may elect to cause us to issue common units and general partner units to it in connection with a resetting of the target distribution levels related to its incentive distribution rights, without the approval of our conflicts committee or the holders of our common units. This could result in lower distributions to holders of our common units.

Our general partner has the right, at any time when there are no subordinated units outstanding and it has received distributions on its incentive distribution rights at the highest level to which it is entitled (48.0%, in addition to distributions paid on its 2.0% general partner interest) for each of the prior four consecutive fiscal quarters, to reset the initial target distribution levels at higher levels based on our distributions at the time of the exercise of the reset election. Following a reset election, the minimum quarterly distribution will be adjusted to equal the reset minimum quarterly distribution, and the target distribution levels will be reset to correspondingly higher levels based on percentage increases above the reset minimum quarterly distribution.

If our general partner elects to reset the target distribution levels, it will be entitled to receive a number of common units and general partner units. The number of common units to be issued to our general partner will be equal to that number of common units that would have entitled their holder to an average aggregate quarterly cash distribution in the prior two quarters equal to the average of the distributions to our general partner on the incentive distribution rights in the prior two quarters. Our general partner will also be issued the number of general partner units necessary to maintain our general partner’s interest in us at the level that existed immediately prior to the reset election. We anticipate that our general partner would exercise this reset right in order to facilitate acquisitions or internal growth projects that would not be sufficiently accretive to cash distributions per common unit without such conversion. It is possible, however, that our general partner could exercise this reset election at a time when it is experiencing, or expects to experience, declines in the cash distributions it receives related to its incentive distribution rights and may, therefore, desire to be issued common units rather than retain the right to receive distributions based on the initial target distribution levels. This risk could be elevated if our incentive distribution rights have been transferred to a third party. As a result, a reset election may cause our common unitholders to experience a reduction in the amount of cash distributions that they would have otherwise received had we not issued new common units and general partner units in connection with resetting the target distribution levels. Additionally, our general partner has the right to transfer all or any portion of our incentive distribution rights at any time, and such transferee shall have the same rights as the general partner relative to resetting target distributions if our general partner concurs that the tests for resetting target distributions have been fulfilled. Please read “Provisions of our Partnership Agreement Relating to Cash Distributions—General Partner’s Right to Reset Incentive Distribution Levels.”

 

 

 

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The NYSE does not require a publicly traded limited partnership like us to comply with certain of its corporate governance requirements.

We intend to apply to list our common units on the NYSE. Because we will be a publicly traded limited partnership, the NYSE does not require us to have a majority of independent directors on our general partner’s board of directors or to establish a compensation committee or a nominating and corporate governance committee. Accordingly, unitholders will not have the same protections afforded to certain corporations that are subject to all of the NYSE corporate governance requirements. Please read “Management—Management of MPLX LP.”

TAX RISKS

In addition to reading the following risk factors, please read “Material Federal Income Tax Consequences” for a more complete discussion of the expected material federal income tax consequences of owning and disposing of common units.

Our tax treatment depends on our status as a partnership for federal income tax purposes. If the Internal Revenue Service were to treat us as a corporation for federal income tax purposes, which would subject us to entity-level taxation, then our cash available for distribution to our unitholders would be substantially reduced.

The anticipated after-tax economic benefit of an investment in the common units depends largely on our being treated as a partnership for federal income tax purposes. We have not requested a ruling from the IRS on this or any other tax matter affecting us.

Despite the fact that we are a limited partnership under Delaware law, it is possible in certain circumstances for a partnership such as ours to be treated as a corporation for federal income tax purposes. Although we do not believe based upon our current operations that we are or will be so treated, a change in our business or a change in current law could cause us to be treated as a corporation for federal income tax purposes or otherwise subject us to taxation as an entity.

If we were treated as a corporation for federal income tax purposes, we would pay federal income tax on our taxable income at the corporate tax rate, which is currently a maximum of 35.0%, and would likely pay state and local income tax at varying rates. Distributions would generally be taxed again as corporate dividends (to the extent of our current and accumulated earnings and profits), and no income, gains, losses, deductions, or credits would flow through to you. Because a tax would be imposed upon us as a corporation, our cash available for distribution to you would be substantially reduced. Therefore, if we were treated as a corporation for federal income tax purposes, there would be material reduction in the anticipated cash flow and after-tax return to our unitholders, likely causing a substantial reduction in the value of our common units.

Our partnership agreement provides that, if a law is enacted or existing law is modified or interpreted in a manner that subjects us to taxation as a corporation or otherwise subjects us to entity-level taxation for federal, state or local income tax purposes, the minimum quarterly distribution amount and the target distribution amounts may be adjusted to reflect the impact of that law on us.

If we were subjected to a material amount of additional entity-level taxation by individual states, it would reduce our cash available for distribution to our unitholders.

Changes in current state law may subject us to additional entity-level taxation by individual states. Because of widespread state budget deficits and other reasons, several states are evaluating ways to

 

 

 

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subject partnerships to entity-level taxation through the imposition of state income, franchise and other forms of taxation. Imposition of any such taxes may substantially reduce the cash available for distribution to you. Our partnership agreement provides that, if a law is enacted or existing law is modified or interpreted in a manner that subjects us to entity-level taxation, the minimum quarterly distribution amount and the target distribution amounts may be adjusted to reflect the impact of that law on us.

The tax treatment of publicly traded partnerships or an investment in our common units could be subject to potential legislative, judicial or administrative changes and differing interpretations, possibly on a retroactive basis.

The present federal income tax treatment of publicly traded partnerships, including us, or an investment in our common units may be modified by administrative, legislative or judicial interpretation at any time. For example, from time to time, members of Congress propose and consider substantive changes to the existing federal income tax laws that affect publicly traded partnerships. Currently, one such legislative proposal would eliminate the qualifying income exception upon which we rely for our treatment as a partnership for U.S. federal income tax purposes. Please read “Material Federal Income Tax Consequences—Partnership Status.” We are unable to predict whether any such changes will ultimately be enacted. However, it is possible that a change in law could affect us and may be applied retroactively. Any such changes could negatively impact the value of an investment in our units.

Our unitholders’ share of our income will be taxable to them for federal income tax purposes even if they do not receive any cash distributions from us.

Because a unitholder will be treated as a partner to whom we will allocate taxable income which could be different in amount than the cash we distribute, a unitholder’s allocable share of our taxable income will be taxable to it, which may require the payment of federal income taxes and, in some cases, state and local income taxes, on its share of our taxable income even if it receives no cash distributions from us. Our unitholders may not receive cash distributions from us equal to their share of our taxable income or even equal to the actual tax liability that results from that income.

If the IRS contests the federal income tax positions we take, the market for our common units may be adversely impacted and the cost of any IRS contest will reduce our cash available for distribution to our unitholders.

We have not requested a ruling from the IRS with respect to our treatment as a partnership for federal income tax purposes or any other matter affecting us. The IRS may adopt positions that differ from the conclusions of our counsel expressed in this prospectus or from the positions we take, and the IRS’s positions may ultimately be sustained. It may be necessary to resort to administrative or court proceedings to sustain some or all of our counsel’s conclusions or the positions we take and such positions may not ultimately be sustained. A court may not agree with some or all of our counsel’s conclusions or the positions we take. Any contest with the IRS, and the outcome of any IRS contest, may have a materially adverse impact on the market for our common units and the price at which they trade. In addition, our costs of any contest with the IRS will be borne indirectly by our unitholders and our general partner because the costs will reduce our cash available for distribution.

Tax gain or loss on the disposition of our common units could be more or less than expected.

If our unitholders sell common units, they will recognize a gain or loss for federal income tax purposes equal to the difference between the amount realized and their tax basis in those common units. Because

 

 

 

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distributions in excess of their allocable share of our net taxable income decrease their tax basis in their common units, the amount, if any, of such prior excess distributions with respect to the common units a unitholder sells will, in effect, become taxable income to the unitholder if it sells such common units at a price greater than its tax basis in those common units, even if the price received is less than its original cost. Furthermore, a substantial portion of the amount realized on any sale of your common units, whether or not representing gain, may be taxed as ordinary income due to potential recapture items, including depreciation recapture. In addition, because the amount realized includes a unitholder’s share of our nonrecourse liabilities, a unitholder that sells common units, may incur a tax liability in excess of the amount of cash received from the sale. Please read “Material Federal Income Tax Consequences—Disposition of Common Units—Recognition of Gain or Loss” for a further discussion of the foregoing.

Tax-exempt entities and non-U.S. persons face unique tax issues from owning our common units that may result in adverse tax consequences to them.

Investment in common units by tax-exempt entities, such as employee benefit plans and individual retirement accounts (known as IRAs), and non-U.S. persons raises issues unique to them. For example, virtually all of our income allocated to organizations that are exempt from federal income tax, including IRAs and other retirement plans, will be unrelated business taxable income and will be taxable to them. Distributions to non-U.S. persons will be reduced by withholding taxes at the highest applicable effective tax rate, and non-U.S. persons will be required to file federal income tax returns and pay tax on their share of our taxable income. If you are a tax-exempt entity or a non-U.S. person, you should consult a tax advisor before investing in our common units.

We will treat each purchaser of common units as having the same tax benefits without regard to the actual common units purchased. The IRS may challenge this treatment, which could adversely affect the value of the common units.

Because we cannot match transferors and transferees of common units and because of other reasons, we will adopt depreciation and amortization positions that may not conform to all aspects of existing Treasury Regulations. A successful IRS challenge to those positions could adversely affect the amount of tax benefits available to you. Our counsel is unable to opine as to the validity of such filing positions. It also could affect the timing of these tax benefits or the amount of gain from your sale of common units and could have a negative impact on the value of our common units or result in audit adjustments to your tax returns. Please read “Material Federal Income Tax Consequences—Tax Consequences of Unit Ownership—Section 754 Election” for a further discussion of the effect of the depreciation and amortization positions we will adopt.

We prorate our items of income, gain, loss and deduction for federal income tax purposes between transferors and transferees of our units each month based upon the ownership of our units on the first day of each month, instead of on the basis of the date a particular unit is transferred. The IRS may challenge this treatment, which could change the allocation of items of income, gain, loss and deduction among our unitholders.

We will prorate our items of income, gain, loss and deduction for federal income tax purposes between transferors and transferees of our units each month based upon the ownership of our units on the first day of each month, instead of on the basis of the date a particular unit is transferred. The use of this proration method may not be permitted under existing Treasury Regulations, and, accordingly, our counsel is unable to opine as to the validity of this method. Recently, however, the U.S. Treasury Department issued proposed regulations that provide a safe harbor pursuant to which publicly traded partnerships may use a similar monthly simplifying convention to allocate tax items among transferor

 

 

 

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and transferee unitholders. Nonetheless, the proposed regulations do not specifically authorize the use of the proration method we will adopt. If the IRS were to challenge this method or new Treasury regulations were issued, we may be required to change the allocation of items of income, gain, loss and deduction among our unitholders. Latham & Watkins LLP has not rendered an opinion with respect to whether our monthly convention for allocating taxable income and losses is permitted by existing Treasury Regulations. Please read “Material Federal Income Tax Consequences—Disposition of Common Units—Allocations Between Transferors and Transferees.”

A unitholder whose common units are loaned to a “short seller” to effect a short sale of common units may be considered as having disposed of those common units. If so, he would no longer be treated for federal income tax purposes as a partner with respect to those common units during the period of the loan and may recognize gain or loss from the disposition.

Because a unitholder whose common units are loaned to a “short seller” to effect a short sale of common units may be considered as having disposed of the loaned common units, he may no longer be treated for federal income tax purposes as a partner with respect to those common units during the period of the loan to the short seller and the unitholder may recognize gain or loss from such disposition. Moreover, during the period of the loan to the short seller, any of our income, gain, loss or deduction with respect to those common units may not be reportable by the unitholder and any cash distributions received by the unitholder as to those common units could be fully taxable as ordinary income. Our counsel has not rendered an opinion regarding the treatment of a unitholder where common units are loaned to a short seller to effect a short sale of common units; therefore, our unitholders desiring to assure their status as partners and avoid the risk of gain recognition from a loan to a short seller are urged to consult a tax advisor to discuss whether it is advisable to modify any applicable brokerage account agreements to prohibit their brokers from loaning their common units.

We will adopt certain valuation methodologies and monthly conventions for federal income tax purposes that may result in a shift of income, gain, loss and deduction between our general partner and our unitholders. The IRS may challenge this treatment, which could adversely affect the value of the common units.

When we issue additional units or engage in certain other transactions, we will determine the fair market value of our assets and allocate any unrealized gain or loss attributable to our assets to the capital accounts of our unitholders and our general partner. Our methodology may be viewed as understating the value of our assets. In that case, there may be a shift of income, gain, loss and deduction between certain unitholders and our general partner, which may be unfavorable to such unitholders. Moreover, under our valuation methods, subsequent purchasers of common units may have a greater portion of their Internal Revenue Code Section 743(b) adjustment allocated to our tangible assets and a lesser portion allocated to our intangible assets. The IRS may challenge our valuation methods, or our allocation of the Section 743(b) adjustment attributable to our tangible and intangible assets, and allocations of taxable income, gain, loss and deduction between our general partner and certain of our unitholders.

A successful IRS challenge to these methods or allocations could adversely affect the amount of taxable income or loss being allocated to our unitholders. It also could affect the amount of taxable gain from our unitholders’ sale of common units and could have a negative impact on the value of the common units or result in audit adjustments to our unitholders’ tax returns without the benefit of additional deductions.

 

 

 

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The sale or exchange of 50.0% or more of our capital and profits interests during any twelve-month period will result in the termination of our partnership for federal income tax purposes.

We will be considered to have technically terminated our partnership for federal income tax purposes if there is a sale or exchange of 50.0% or more of the total interests in our capital and profits within a twelve-month period. For purposes of determining whether the 50.0% threshold has been met, multiple sales of the same interest will be counted only once. Our technical termination would, among other things, result in the closing of our taxable year for all unitholders, which would result in us filing two tax returns (and our unitholders could receive two Schedules K-1 if relief was not available, as described below) for one fiscal year and could result in a deferral of depreciation deductions allowable in computing our taxable income. In the case of a unitholder reporting on a taxable year other than a fiscal year ending December 31, the closing of our taxable year may also result in more than twelve months of our taxable income or loss being includable in his taxable income for the year of termination. Our termination currently would not affect our classification as a partnership for federal income tax purposes, but instead we would be treated as a new partnership for tax purposes. If treated as a new partnership, we must make new tax elections and could be subject to penalties if we are unable to determine that a termination occurred. The IRS has recently announced a publicly traded partnership technical termination relief program whereby, if a publicly traded partnership that technically terminated requests publicly traded partnership technical termination relief and such relief is granted by the IRS, among other things, the partnership will only have to provide one Schedule K-1 to unitholders for the year notwithstanding two partnership tax years. Please read “Material Federal Income Tax Consequences—Disposition of Common Units—Constructive Termination” for a discussion of the consequences of our termination for federal income tax purposes.

As a result of investing in our common units, you may become subject to state and local taxes and return filing requirements in jurisdictions where we operate or own or acquire properties.

In addition to federal income taxes, our unitholders will likely be subject to other taxes, including state and local taxes, unincorporated business taxes and estate, inheritance or intangible taxes that are imposed by the various jurisdictions in which we conduct business or control property now or in the future, even if they do not live in any of those jurisdictions. Our unitholders will likely be required to file state and local income tax returns and pay state and local income taxes in some or all of these various jurisdictions. Further, our unitholders may be subject to penalties for failure to comply with those requirements. We initially expect to conduct business in Illinois, Indiana, Kentucky, Louisiana, Michigan, Ohio, Pennsylvania, Texas and West Virginia. Many of these states currently impose a personal income tax on individuals. As we make acquisitions or expand our business, we may control assets or conduct business in additional states that impose a personal income tax. It is your responsibility to file all federal, state and local tax returns. Our counsel has not rendered an opinion on the state or local tax consequences of an investment in our common units. Please consult your tax advisor.

 

 

 

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Use of proceeds

We expect to receive net proceeds of approximately $        million from the sale of              common units offered by this prospectus, based on an assumed initial public offering price of $         per common unit (the mid-point of the price range set forth on the cover of this prospectus), after deducting underwriting discounts, structuring fees and estimated offering expenses. We intend to use these proceeds as follows:

 

Ø  

approximately $204.0 million will be contributed to Pipe Line Holdings, which Pipe Line Holdings will retain on behalf of us and MPC to fund our respective pro rata portions of certain estimated expansion capital expenditures;

 

Ø  

$        million will be distributed to MPC, in partial consideration of its contribution of assets to us and to reimburse MPC for certain capital expenditures it incurred with respect to these assets;

 

Ø  

$10.0 million for general partnership purposes, including to fund our working capital needs; and

 

Ø  

$        million to pay revolving credit facility origination fees.

At the closing of this offering, we will enter into a $500.0 million revolving credit facility.

The net proceeds from any exercise by the underwriters of their option to purchase additional common units will be used to redeem from MPC a number of common units equal to the number of common units issued upon exercise of the option at a price per common unit equal to the net proceeds per common unit in this offering before expenses but after deducting underwriting discounts and the structuring fee. Accordingly, any exercise of the underwriters’ option will not affect the total number of units outstanding or the amount of cash needed to pay the minimum quarterly distribution on all units. Please read “Underwriting.”

An increase or decrease in the initial public offering price of $1.00 per common unit would cause the net proceeds from the offering, after deducting underwriting discounts, to increase or decrease by $        million, based on an assumed initial public offering price of $         per common unit (the mid-point of the price range set forth on the cover of this prospectus). If the proceeds increase due to a higher initial public offering price or decrease due to a lower initial public offering price, then the cash distribution to MPC from the proceeds of this offering will increase or decrease, as applicable, by a corresponding amount.

 

 

 

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Capitalization

The following table shows:

 

Ø  

the historical cash and cash equivalents and capitalization of our Predecessor as of March 31, 2012; and

 

Ø  

our pro forma capitalization as of March 31, 2012, giving effect to the pro forma adjustments described in our unaudited pro forma combined financial data included elsewhere in this prospectus, including this offering and the application of the net proceeds of this offering in the manner described under “Use of Proceeds” and the other transactions described under “Prospectus Summary—The Transactions.”

This table is derived from, should be read together with and is qualified in its entirety by reference to the historical interim combined financial statements and the accompanying notes and the pro forma combined financial data and accompanying notes included elsewhere in this prospectus.

 

     As of March 31, 2012  
      MPLX LP
Predecessor
Historical
     MPLX LP
Pro
Forma(1)
 
     (in millions, except per
unit data)
 

Cash and cash equivalents

   $ 5.2       $ 214.0 (2) 
  

 

 

    

 

 

 

Debt:

     

Long-term debt(3)

   $ 11.8       $ 11.8   

Revolving credit facility

     —           —     

Net investment/equity:

     

Net investment

   $ 1,283.5       $ —     

Held by public:

     

Common units

     —        

Held by MPC:

     

Common units

     —        

Subordinated units

     —        

General partner units

     —        
  

 

 

    

 

 

 

Total MPLX LP partners’ capital

     —        
  

 

 

    

 

 

 

Non-controlling interest in Pipe Line Holdings

     —        
  

 

 

    

 

 

 

Total net investment/equity

     1,283.5      
  

 

 

    

 

 

 

Total capitalization

   $ 1,295.3       $                
  

 

 

    

 

 

 

 

(1)   Assumes the mid-point of the price range set forth on the cover of this prospectus.
(2)   Includes $204.0 million that will be contributed to Pipe Line Holdings, which Pipe Line Holdings will retain on behalf of us and MPC to fund our respective pro rata portions of certain estimated capital expenditures.
(3)   Consists of capital lease obligations, including amounts due within one year.

 

 

 

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Dilution

Dilution is the amount by which the offering price per common unit in this offering will exceed the pro forma net tangible book value per unit after the offering. On a pro forma basis as of March 31, 2012, after giving effect to the offering of common units and the related transactions, our net tangible book value was approximately $         million, or $         per unit. Purchasers of common units in this offering will experience substantial and immediate dilution in pro forma net tangible book value per common unit for financial accounting purposes, as illustrated in the following table.

 

Assumed initial public offering price per common unit(1)

      $                

Pro forma net tangible book value per unit before the offering(2)

   $                   

Decrease in net tangible book value per unit attributable to purchasers in the offering

     
  

 

 

    

Less: Pro forma net tangible book value per unit after the offering(3)

     
     

 

 

 

Immediate dilution in net tangible book value per common unit to purchasers in the offering(4)(5)

      $     
     

 

 

 

 

(1)   The mid-point of the price range set forth on the cover of this prospectus.
(2)   Determined by dividing the number of units (             common units,              subordinated units and              general partner units) to be issued to the general partner and its affiliates for their contribution of assets and liabilities to us into the pro forma net tangible book value of the contributed assets and liabilities.
(3)   Determined by dividing the number of units to be outstanding after this offering (             total common units,              subordinated units and              general partner units) and the application of the related net proceeds into our pro forma net tangible book value, after giving effect to the application of the net proceeds of this offering.
(4)   If the initial public offering price were to increase or decrease by $1.00 per common unit, then dilution in net tangible book value per common unit would equal $         and $        , respectively.
(5)   Because the total number of units outstanding following this offering will not be impacted by any exercise of the underwriters’ option to purchase additional common units and any net proceeds from such exercise will not be retained by us, there will be no change to the dilution in net tangible book value per common unit to purchasers in this offering due to any such exercise of the option.

The following table sets forth the number of units that we will issue and the total consideration contributed to us by the general partner and its affiliates in respect of their units and by the purchasers of common units in this offering upon consummation of the transactions contemplated by this prospectus.

 

     Units acquired     Total
consideration
 
      Number    %     Amount      %  
     (in millions)     (in thousands)  

General partner and its affiliates(1)(2)(3)

               $                          

Purchasers in this offering

               $                          
  

 

  

 

 

   

 

 

    

 

 

 

Total

        100.0   $                      100.0
  

 

  

 

 

   

 

 

    

 

 

 

 

(1)   Upon the consummation of the transactions contemplated by this prospectus, our general partner and its affiliates will own              common units,              subordinated units and              general partner units.

footnotes continued on following page

 

 

 

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(2)   Assumes the underwriters’ option to purchase additional common units is not exercised.
(3)   The assets contributed by the general partner and its affiliates were recorded at historical cost in accordance with accounting principles generally accepted in the United States. Book value of the consideration provided by the general partner and its affiliates, as of March 31, 2012, after giving effect to the application of the net proceeds of the offering, is as follows:

 

     (in millions)  

Book value of net assets contributed

   $                

Less: Distribution to MPC from net proceeds of this offering

  
  

 

 

 

Total consideration

   $     
  

 

 

 

 

 

 

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Cash distribution policy and restrictions on distributions

The following discussion of our cash distribution policy should be read in conjunction with the specific assumptions included in this section. In addition, “Forward-Looking Statements” and “Risk Factors” should be read for information regarding statements that do not relate strictly to historical or current facts and regarding certain risks inherent in our business.

For additional information regarding our historical and pro forma results of operations, please refer to our historical combined financial statements and accompanying notes and the pro forma combined financial data and accompanying notes included elsewhere in this prospectus.

GENERAL

Rationale for Our Cash Distribution Policy

Our partnership agreement requires that we distribute all of our available cash quarterly. Our cash distribution policy, as expressed in our partnership agreement, reflects a basic judgment that our unitholders will be better served by distributing our available cash rather than retaining it, because, among other reasons, we believe we will generally finance any expansion capital expenditures from external financing sources. Generally, our available cash is our (i) cash on hand at the end of a quarter after the payment of our expenses and the establishment of cash reserves and (ii) cash on hand resulting from working capital borrowings made after the end of the quarter. Because we are not subject to an entity-level federal income tax, we expect to have more cash to distribute than would be the case if we were subject to federal income tax.

Limitations on Cash Distributions and Our Ability to Change Our Cash Distribution Policy

There is no guarantee that we will make quarterly cash distributions to our unitholders. We do not have a legal obligation to pay distributions at our minimum quarterly distribution rate or at any other rate except as provided in our partnership agreement. Our partnership agreement requires that we distribute all of our available cash quarterly. Our cash distribution policy is subject to certain restrictions and may be changed at any time. The reasons for such uncertainties in our stated cash distribution policy include the following factors:

 

Ø  

Our cash distribution policy will be subject to restrictions on cash distributions under our revolving credit facility. Should we be unable to satisfy these restrictions included in our revolving credit facility, we would be prohibited from making cash distributions notwithstanding our cash distribution policy. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Capital Resources and Liquidity—Revolving Credit Facility.”

 

Ø  

Our general partner will have the authority to establish cash reserves for the prudent conduct of our business and for future cash distributions to our unitholders, and the establishment of or increase in those reserves could result in a reduction in cash distributions from levels we currently anticipate pursuant to our stated cash distribution policy. Any decision to establish cash reserves made by our general partner in good faith will be binding on our unitholders.

 

Ø  

While our partnership agreement requires us to distribute all of our available cash, our partnership agreement, including the provisions requiring us to make cash distributions contained therein, may be amended. Our partnership agreement may not be amended during the subordination period without

 

 

 

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the approval of our public common unitholders, except in those limited circumstances when our general partner can amend our partnership agreement without any unitholder approval. However, after the subordination period has ended our partnership agreement may be amended with the consent of our general partner and the approval of a majority of the outstanding common units, including common units owned by our general partner and its affiliates. At the closing of this offering, MPC will own our general partner and will indirectly own an aggregate of approximately     % of our outstanding common units and subordinated units. Please read “Our Partnership Agreement—Amendment of Our Partnership Agreement.”

 

Ø  

Even if our cash distribution policy is not modified, the amount of distributions we make under our cash distribution policy and the decision to make any distribution is determined by our general partner, taking into consideration the terms of our partnership agreement.

 

Ø  

Under Section 17-607 of the Delaware Revised Uniform Limited Partnership Act, or the Delaware Act, we may not make a distribution if the distribution would cause our liabilities to exceed the fair value of our assets.

 

Ø  

We may lack sufficient cash to pay distributions to our unitholders due to cash flow shortfalls attributable to a number of operational, commercial or other factors as well as increases in our operating or general and administrative expenses, principal and interest payments on our debt, tax expenses, working capital requirements and anticipated cash needs. Our cash available for distribution to unitholders is directly impacted by our cash expenses necessary to run our business and will be reduced dollar-for-dollar to the extent such uses of cash increase. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions—Distributions of Available Cash.”

 

Ø  

Our ability to make cash distributions to our unitholders depends on the performance of our subsidiaries and their ability to distribute cash to us. The ability of our subsidiaries to make cash distributions to us may be restricted by, among other things, the provisions of future indebtedness, applicable state partnership and limited liability company laws and other laws and regulations.

 

Ø  

If and to the extent our cash available for distribution materially declines, we may elect to reduce our quarterly distribution rate in order to service or repay our debt or fund expansion capital expenditures.

All available cash distributed by us on any date from any source will be treated as distributed from operating surplus until the sum of all available cash distributed by us since the closing of this offering equals the operating surplus from the closing of this offering through the end of the quarter immediately preceding that distribution. We anticipate that distributions from operating surplus will generally not represent a return of capital. However, operating surplus, as defined in our partnership agreement, includes certain components, including a $         million cash basket, that represent non-operating sources of cash. Consequently, it is possible that all or a portion of specific distributions from operating surplus may represent a return of capital. Any available cash distributed by us in excess of our cumulative operating surplus will be deemed to be capital surplus under our partnership agreement. Our partnership agreement treats a distribution of capital surplus as the repayment of the initial unit price from this initial public offering and as a return of capital. We do not anticipate that we will make any distributions from capital surplus.

Our Ability to Grow is Dependent on Our Ability to Access External Expansion Capital

Our partnership agreement requires us to distribute all of our available cash to our unitholders on a quarterly basis. As a result, we expect that we will rely primarily upon external financing sources, including borrowings under our revolving credit facility and the issuance of debt and equity securities, to

 

 

 

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fund future acquisitions and other expansion capital expenditures. To the extent we are unable to finance growth with external sources of capital, our cash distribution policy will significantly impair our ability to grow. In addition, because we will distribute all of our available cash, our growth may not be as fast as businesses that reinvest all of their available cash to expand ongoing operations. Our revolving credit facility will restrict our ability to incur additional debt, including through the issuance of debt securities. Please read “Risk Factors—Risks Related to Our Business—Restrictions in our revolving credit facility could adversely affect our business, financial condition, results of operations, ability to make cash distributions to our unitholders and the value of our units.” To the extent we issue additional units, the payment of distributions on those additional units may increase the risk that we will be unable to maintain or increase our cash distributions per unit. There are no limitations in our partnership agreement on our ability to issue additional units, including units ranking senior to our common units, and our unitholders will have no preemptive or other rights (solely as a result of their status as unitholders) to purchase any such additional units. If we incur additional debt (under our revolving credit facility or otherwise) to finance our growth strategy, we will have increased interest expense, which in turn will reduce the available cash that we have to distribute to our unitholders. Please read “Risk Factors—Risks Related to Our Business— Debt we incur in the future may limit our flexibility to obtain financing and to pursue other business opportunities.”

OUR MINIMUM QUARTERLY DISTRIBUTION

Upon the consummation of this offering, our partnership agreement will provide for a minimum quarterly distribution of $         per unit for each whole quarter, or $         per unit on an annualized basis. Our ability to make cash distributions at the minimum quarterly distribution rate will be subject to the factors described above under “—General—Limitations on Cash Distributions and Our Ability to Change Our Cash Distribution Policy.” Quarterly distributions, if any, will be made within 45 days after the end of each calendar quarter to holders of record on or about the first day of each such month. If the distribution date does not fall on a business day, we will make the distribution on the first business day immediately preceding the indicated distribution date. We do not expect to make distributions for the period that begins on                     , 2012 and ends on the day prior to the closing of this offering other than the distribution to be made to MPC in connection with the closing of this offering as described in “Prospectus Summary—The Transactions” and “Use of Proceeds.” We will adjust the amount of our first distribution for the period from the closing of this offering through                     , 2012 based on the actual length of the period. The amount of available cash needed to pay the minimum quarterly distribution on all of our common units, subordinated units and general partner units to be outstanding immediately after this offering for one quarter and on an annualized basis is summarized in the table below:

 

          Minimum quarterly
distributions
 
      Number of units    One quarter      Annualized
(four
quarters)
 

Publicly held common units

      $                    $                

Common units held by MPC(1)

        

Subordinated units held by MPC

        

General partner units

        
  

 

  

 

 

    

 

 

 

Total

      $                    $                
  

 

  

 

 

    

 

 

 

 

(1)   Assumes no exercise of the underwriters’ option to purchase additional common units.

 

 

 

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As of the date of this offering, our general partner will be entitled to 2.0% of all distributions that we make prior to our liquidation. Our general partner’s initial 2.0% interest in these distributions may be reduced if we issue additional units in the future and our general partner does not contribute a proportionate amount of capital to us in order to maintain its initial 2.0% general partner interest. Our general partner will also hold the incentive distribution rights, which entitle the holder to increasing percentages, up to a maximum of 48.0%, of the cash we distribute in excess of $         per unit per quarter.

During the subordination period, before we make any quarterly distributions to our subordinated unitholders, our common unitholders are entitled to receive payment of the full minimum quarterly distribution for such quarter plus any arrearages in distributions of the minimum quarterly distribution from prior quarters. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions—Subordinated Units and Subordination Period.” We cannot guarantee, however, that we will pay the minimum quarterly distribution on our common units in any quarter.

Although holders of our common units may pursue judicial action to enforce provisions of our partnership agreement, including those related to requirements to make cash distributions as described above, our partnership agreement provides that any determination made by our general partner in its capacity as our general partner must be made in good faith and that any such determination will not be subject to any other standard imposed by the Delaware Act or any other law, rule or regulation or at equity. Our partnership agreement provides that, in order for a determination by our general partner to be made in “good faith,” our general partner must believe that the determination is in, or not opposed to, our best interest. Please read “Conflicts of Interest and Duties.”

Our cash distribution policy, as expressed in our partnership agreement, may not be modified without amending our partnership agreement; however, as described above, the actual amount of our cash distributions for any quarter is subject to fluctuations based on the amount of cash we generate from our business, the amount of reserves our general partner establishes in accordance with our partnership agreement and the amount of available cash from working capital borrowings.

In the sections that follow, we present in detail the basis for our belief that we will be able to fully fund our annualized minimum quarterly distribution of $        per unit for the twelve months ending September 30, 2013. In those sections, we present two tables, consisting of:

 

Ø  

“Unaudited Pro Forma Cash Available for Distribution,” in which we present the amount of cash we would have had available for distribution on a pro forma basis for the year ended December 31, 2011 and the twelve months ended March 31, 2012, derived from our unaudited pro forma financial data that are included in this prospectus, as adjusted to give pro forma effect to this offering and the related formation transactions; and

 

Ø  

“Estimated Cash Available for Distribution for the Twelve Months Ending September 30, 2013,” in which we provide our estimated forecast of our ability to generate sufficient cash available for distribution for us to pay the minimum quarterly distribution on all units for the twelve months ending September 30, 2013.

 

 

 

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UNAUDITED PRO FORMA CASH AVAILABLE FOR DISTRIBUTION FOR THE YEAR ENDED DECEMBER 31, 2011 AND THE TWELVE MONTHS ENDED MARCH 31, 2012

If we had completed the transactions contemplated in this prospectus on January 1, 2011, our unaudited pro forma cash available for distribution for the year ended December 31, 2011 would have been approximately $50.0 million. If we had completed the transactions contemplated in this prospectus on January 1, 2011, our unaudited pro forma cash available for distribution for the twelve months ended March 31, 2012 would have been approximately $53.1 million. These amounts would have been insufficient to pay the full minimum quarterly distribution on all of our common units and subordinated units during such periods.

We based the pro forma adjustments upon currently available information and specific estimates and assumptions. The pro forma amounts below do not purport to present our results of operations had the transactions contemplated in this prospectus actually been completed as of the dates indicated. In addition, cash available to pay distributions is primarily a cash accounting concept, while our pro forma combined financial data have been prepared on an accrual basis. As a result, you should view the amount of pro forma available cash only as a general indication of the amount of cash available to pay distributions that we might have generated had we been formed in earlier periods.

 

 

 

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The following table illustrates, on a pro forma basis, for the year ended December 31, 2011 and the twelve months ended March 31, 2012, the amount of cash that would have been available for distribution to our unitholders and our general partner, assuming in each case that this offering and the other transactions contemplated in this prospectus had been consummated on January 1, 2011 with respect to each period presented.

MPLX LP

Unaudited Pro Forma Cash Available for Distribution

 

     Pro Forma  
(In millions)    Year ended
December 31, 2011
     Twelve months ended
March 31, 2012
 

Net income attributable to MPLX LP(1)

   $ 41.6       $ 44.3   

Add:

     

Net income attributable to non-controlling interest in Pipe Line Holdings

     43.9         46.6   
  

 

 

    

 

 

 

Net income

     85.5         90.9   

Add:

     

Depreciation

     29.3         29.7   

Provision for income taxes

     0.1         0.1   

Net interest and other financial income (costs)

     —           —     
  

 

 

    

 

 

 

EBITDA(2)

     114.9         120.7   

Less:

     

EBITDA attributable to non-controlling interest in Pipe Line Holdings

     58.3         61.2   
  

 

 

    

 

 

 

EBITDA attributable to MPLX LP(3)

     56.6         59.5   

Less:

     

Cash interest paid, net(4)

     —           —     

Maintenance capital expenditures(5)

     6.6         6.4   

Expansion capital expenditures(5)

     72.4         84.2   

Add:

     

Offering proceeds retained to fund expansion capital expenditures(5)

     72.4         84.2   
  

 

 

    

 

 

 

Cash available for distribution attributable to
MPLX LP

   $ 50.0       $ 53.1   
  

 

 

    

 

 

 

Cash distributions:

     

Annual distribution per unit (based on a minimum quarterly distribution rate of $         per unit)

   $         $     

Distributions to public common unitholders

   $         $     

Distributions to MPC:

     

Common units

     

Subordinated units

     

General partner units

     
  

 

 

    

 

 

 

Total annualized minimum quarterly distributions

   $         $     
  

 

 

    

 

 

 

Excess (shortfall)

   $         $     
  

 

 

    

 

 

 

Percent of annualized minimum quarterly cash distributions payable to common unitholders

     %         %   

Percent of annualized minimum quarterly cash distributions payable to subordinated unitholders

     %         %   

footnotes on following page

 

 

 

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(1)   Reflects pro forma net income attributable to our 51.0% indirect ownership interest in Pipe Line Holdings and our 100.0% ownership interest in our butane cavern for the periods indicated. For additional information, please read our unaudited pro forma financial data and accompanying notes included elsewhere in this prospectus.
(2)   EBITDA is defined in “Selected Historical and Pro Forma Financial and Operating Data— Non-GAAP Financial Measure.”
(3)   Represents EBITDA attributable to our 51.0% indirect ownership interest in Pipe Line Holdings, less 100.0% of certain overhead expenses attributable to our butane cavern and 100.0% of estimated annual general and administrative expenses we expect to incur as a result of being a separate publicly-traded partnership.
(4)   Includes interest expense on our capital lease on a 51.0% basis and commitment fees on our revolving credit facility on a 100.0% basis that would have been paid had our revolving credit facility been in place during the periods presented, less capitalized interest related to the construction of our butane cavern.
(5)   Represents capital expenditures attributable to our 51.0% indirect ownership interest in Pipe Line Holdings and our 100.0% ownership interest in our butane cavern. For purposes of determining our pro forma cash available for distribution for the year ended December 31, 2011 and the twelve months ended March 31, 2012, we have assumed that we contributed $72.4 million and $84.2 million, respectively to Pipe Line Holdings from the net proceeds of this offering to fund our portion of the total cost of the expansion capital expenditures for such periods. Historically, we have not made a distinction between maintenance capital expenditures and expansion capital expenditures. For a discussion of maintenance and expansion capital expenditures, please read “Provisions of our Partnership Agreement Relating to Cash Distributions—Capital Expenditures.”

ESTIMATED CASH AVAILABLE FOR DISTRIBUTION FOR THE TWELVE MONTHS ENDING SEPTEMBER 30, 2013

We forecast that our estimated cash available for distribution for the twelve months ending September 30, 2013 will be approximately $82.1 million. This amount would exceed by $         million the amount needed to pay the total annualized minimum quarterly distributions of $         million on all of our units for the twelve months ending September 30, 2013. We own a 51.0% general partner interest in Pipe Line Holdings, which owns a 100.0% interest in MPL and ORPL. As the sole general partner of Pipe Line Holdings, we will control the management of Pipe Line Holdings, including its cash distribution policy. MPC has retained a 49.0% limited partner interest in Pipe Line Holdings. The number of outstanding units on which we have based our belief does not include any common units that may be issued under the incentive compensation plan that our general partner will adopt prior to the closing of this offering.

We do not, as a matter of course, make public projections as to future operations, earnings or other results of our business. However, our management has prepared the forecast of estimated cash available for distribution and related assumptions set forth below to supplement our historical combined financial statements in support of our belief that we will generate sufficient cash available for distribution to pay the total annualized minimum quarterly distributions on all of our units for the twelve months ending September 30, 2013. This forecast is a forward-looking statement and should be read together with the historical combined financial statements and the accompanying notes included elsewhere in this prospectus and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The accompanying prospective financial information was not prepared with a view toward

 

 

 

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complying with the published guidelines of the SEC or guidelines established by the American Institute of Certified Public Accountants with respect to prospective financial information, but, in the view of our management, was prepared on a reasonable basis, reflects the best currently available estimates and judgments, and presents, to the best of management’s knowledge and belief, the assumptions on which we base our belief that we will generate sufficient cash available for distribution to pay the total annualized minimum quarterly distributions on all of our units for the twelve months ending September 30, 2013. However, this information is not fact and should not be relied upon as being necessarily indicative of future results, and readers of this prospectus are cautioned not to place undue reliance on the prospective financial information.

The prospective financial information included in this registration statement has been prepared by, and is the responsibility of, our management. Neither PricewaterhouseCoopers LLP, nor any other independent accountants, have examined, compiled or performed any procedures with respect to the accompanying prospective financial information and, accordingly, PricewaterhouseCoopers LLP does not express an opinion or any other form of assurance with respect thereto. The PricewaterhouseCoopers LLP reports included in this prospectus relate to our historical financial information. Those reports do not extend to the prospective financial information and should not be read to do so.

When considering our financial forecast, you should keep in mind the risk factors and other cautionary statements under “Risk Factors.” Any of the risks discussed in this prospectus, to the extent they occur, could cause our actual results of operations to vary significantly from those that would enable us to generate sufficient cash available for distribution to pay the total annualized minimum quarterly distribution on all of our units for the twelve months ending September 30, 2013.

We are providing the forecast of estimated cash available for distribution and related assumptions set forth below to supplement our historical combined financial statements included elsewhere in this prospectus in support of our belief that we will have sufficient cash available for distribution to allow us to pay the total annualized minimum quarterly distributions on all of our units for the twelve months ending September 30, 2013. Please read below under “—Assumptions and Considerations” for further information as to the assumptions we have made for the financial forecast.

We do not intend to release publicly the results of any future revisions we may make to the forecast or to update this forecast to reflect events or circumstances after the date of this prospectus. In light of this, the statement that we believe that we will have sufficient cash available for distribution to allow us to pay the total annualized minimum quarterly distributions on all of our units for the twelve months ending September 30, 2013, should not be regarded as a representation by us, the underwriters or any other person that we will make such distributions. Therefore, you are cautioned not to place undue reliance on this information.

 

 

 

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MPLX LP

Estimated Cash Available for Distribution

 

(in millions)   

Twelve months ending

September 30, 2013

 

Revenues and other income:

  

Sales and other operating revenues(1)

   $ 79.5   

Sales to related parties

     383.6   

Other income

     4.5   

Other income—related parties

     12.9   
  

 

 

 

Total revenues and other income

     480.5   
  

 

 

 

Costs and expenses:

  

Cost of revenues (excludes items below)

     148.4   

Purchases from related parties(2)

     91.9   

Depreciation

     40.7   

General and administrative expenses(3)

     44.5   

Other taxes

     7.4   
  

 

 

 

Total costs and expenses

     332.9   
  

 

 

 

Income from operations

     147.6   

Net interest and other financial costs(4)

     2.3   
  

 

 

 

Income before income taxes

     145.3   

Provision for income taxes

     0.2   
  

 

 

 

Net income

     145.1   

Less:

  

Net income attributable to non-controlling interest in Pipe Line Holdings

     71.9   
  

 

 

 

Net income attributable to MPLX LP(5)

     73.2   

Add:

  

Net income attributable to non-controlling interest in Pipe Line Holdings

     71.9   

Depreciation

     40.7   

Provision for income taxes

     0.2   

Net interest and other financial costs(4)

     2.3   
  

 

 

 

Estimated EBITDA(6)

     188.3   

Less:

  

Estimated EBITDA attributable to non-controlling interest in Pipe Line Holdings

     88.3   
  

 

 

 

Estimated EBITDA attributable to MPLX LP(7)

   $ 100.0   

Less:

  

Cash interest paid, net(8)

     1.5   

Income taxes paid

     0.1   

Maintenance capital expenditures(9)

     16.3   

Expansion capital expenditures(10)

     63.5   

Add:

  

Offering proceeds retained to fund expansion capital expenditures(10)

     63.5   
  

 

 

 

Estimated cash available for distribution attributable to MPLX LP

   $ 82.1   
  

 

 

 

Distributions to public common unitholders

   $     

Distributions to MPC:

  

Common units

  

Subordinated units

  

General partner units

  
  

 

 

 

Total annualized minimum quarterly distributions

   $     
  

 

 

 

Excess of cash available for distribution over total annualized minimum quarterly distributions

   $     

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(1)   Includes revenue from volumes shipped by MPC on various pipelines under joint tariffs with third parties. For accounting purposes, this revenue is classified as third party revenue because we receive payment from those third parties with respect to volumes shipped under the joint tariffs; however, the volumes associated with this revenue are applied towards MPC’s minimum volume commitments on the applicable pipelines because MPC is the shipper of record.
(2)   Consists primarily of employee compensation and benefits expense with respect to the MPC employees that will provide employee services to us under the employee services agreements that we will enter into with MPC at the closing of this offering, as well as reimbursements to MPC for various shared services costs, such as engineering and information technology services.
(3)   Includes approximately $3.9 million of estimated annual general and administrative expenses that we expect to incur as a result of being a separate publicly-traded partnership.
(4)   Includes, on a 100.0% basis: amortization of debt issuance costs relating to our revolving credit facility; interest expense attributable to our capital lease; interest income on approximately $204.0 million of the net proceeds of this offering that Pipe Line Holdings will retain on behalf of MPC and us to fund certain expansion capital expenditures; and interest income on approximately $10.0 million of the net proceeds of this offering that we will retain for general partnership purposes.
(5)   Represents net income attributable to our 51.0% indirect ownership interest in Pipe Line Holdings, plus net income attributable to 100.0% of our butane cavern, less estimated annual general and administrative expenses that we expect to incur as a result of being a separate publicly-traded partnership.
(6)   EBITDA is defined in “Selected Historical and Pro Forma Financial and Operating Data—Non-GAAP Financial Measure.”
(7)   Represents estimated EBITDA attributable to our 51.0% indirect ownership interest in Pipe Line Holdings, plus estimated EBITDA attributable to 100.0% of our butane cavern, less 100.0% of estimated annual general and administrative expenses we expect to incur as a result of being a separate publicly-traded partnership.
(8)   Includes interest expense on our capital lease on a 51.0% basis and commitment fees on our revolving credit facility on a 100.0% basis. We do not expect to make any borrowings under our revolving credit facility during the forecast period.
(9)   Represents estimated maintenance capital expenditures attributable to our 51.0% indirect ownership interest in Pipe Line Holdings.
(10)   Includes estimated expansion capital expenditures attributable to our 51.0% indirect ownership interest in Pipe Line Holdings and amounts associated with certain non-recurring expenditures classified as asset retirement expenditures relating to the upgrade project on our Patoka to Catlettsburg crude oil pipeline. We intend to fund these expenditures with a portion of the net proceeds retained from this offering. Please read “—Assumptions and Considerations—Capital Expenditures.”

ASSUMPTIONS AND CONSIDERATIONS

The forecast has been prepared by and is the responsibility of management. The forecast reflects our judgment as of the date of this prospectus of conditions we expect to exist and the course of action we expect to take during the twelve months ending September 30, 2013. While the assumptions disclosed in this prospectus are not all-inclusive, the assumptions listed below are those that we believe are material to our forecasted results of operations and any assumptions not discussed below were not deemed to be material. We believe we have a reasonable objective basis for these assumptions. We believe our actual results of operations will approximate those reflected in our forecast, but we can give no assurance that our forecasted results will be achieved. There will likely be differences between our forecast and the actual results and those differences could be material. If the forecast is not achieved, we may not be able to make cash distributions on our common units at the minimum quarterly distribution rate or at all.

 

 

 

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General Considerations

As discussed in this prospectus, a substantial majority of our revenues and certain of our expenses will be determined by contractual arrangements that we will enter into with MPC at the closing of this offering. Accordingly, our forecasted results are not directly comparable with historical periods. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Affecting the Comparability of Our Financial Results.” Most of our revenues will be fee-based under long-term transportation and storage services agreements with MPC that include minimum volume commitments. We have, however, assumed for purposes of this forecast that we will transport volumes for MPC in excess of the minimum volume commitments under our transportation services agreements. We are not directly exposed to material commodity price risk. As we do not take ownership of the crude oil or products that we transport and store for our customers, do not engage in the trading of any commodities and have not forecasted any gains or losses from commodity imbalances, we have not made any assumptions regarding future commodity price levels in developing our forecast of estimated cash available for distribution for the twelve months ending September 30, 2013.

Revenues and Volumes

Overview

We estimate that we will generate total revenues and other income of $480.5 million for the twelve months ending September 30, 2013, as compared to pro forma total revenues and other income of $346.6 million and $362.0 million for the year ended December 31, 2011 and the twelve months ended March 31, 2012, respectively. This amount represents the forecasted revenues attributable to 100.0% of the assets that will be owned by MPL and ORPL following the closing of this offering, as well as our butane cavern, which we expect will be placed into service during the third quarter of 2012. We own a 51.0% indirect ownership interest in MPL and ORPL through our ownership interest in Pipe Line Holdings, and we own 100.0% of our butane cavern.

We expect approximately $349.6 million, or 72.8%, of our total forecasted revenues and other income to be supported by MPC’s minimum volume commitments under our transportation and storage services agreements with MPC. We expect that approximately $65.7 million, or 13.7%, of our total forecasted revenues and other income to be generated by pipeline transportation volumes from MPC in excess of its minimum volume commitments. We also expect approximately $47.8 million, or 9.9%, of our total forecasted revenues and other income to be generated by providing transportation services to third parties, which excludes revenues attributable to volumes shipped by MPC under joint tariffs with third parties that are treated as third party revenues for accounting purposes. We expect that approximately $17.4 million, or 3.6%, of our total forecasted revenues and other income will be categorized as other income and reflect fees for providing operating and management services to MPC and third parties.

Based on our assumptions for the twelve months ending September 30, 2013, we expect approximately $428.2 million, or 89.1%, of our total forecasted revenues and other income to be generated by MPC and related parties.

Our forecasted revenues have been determined by reference to historical volumes handled by us for MPC and third parties for the year ended December 31, 2011 and the twelve months ended March 31, 2012. The forecasted revenues also take into account the minimum volume commitments under the transportation and storage services agreements that we will enter into with MPC at the closing of this offering, forecasted volumes from MPC above the minimum throughput commitments, an increase in third party crude oil volumes and increases in various tariff rates.

 

 

 

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We expect that any variances between actual revenues during the forecast period and forecasted revenues will be driven by differences between actual volumes during the forecast period and forecasted volumes (subject to the minimum volume commitments of MPC), changes in uncommitted volumes from MPC and third parties, changes in the weighted average tariff paid for volumes of crude oil and products that we handle and variations between the weighted average tariff per barrel and actual tariffs applied to such volumes.

We estimate that our revenues and other income for the forecast period will increase by approximately $133.9 million as compared to pro forma revenues and other income for the year ended December 31, 2011, due primarily to the following reasons:

 

Ø  

an approximate $98.4 million increase related to tariff adjustments, including:

 

   

approximately $60.9 million related to general tariff increases on July 1, 2012 and July 1, 2013 on a majority of our pipeline systems in accordance with FERC’s indexing methodology;

 

   

approximately $32.2 million related to tariff increases in January 2012 and October 2012 on our Patoka to Catlettsburg crude oil pipeline related to historical and planned upgrades on that pipeline; and

 

   

approximately $5.3 million related to a tariff increase in October 2012 on our Robinson to Mt. Vernon product pipeline to more accurately reflect our costs of operating the pipeline;

 

Ø  

an approximate $17.6 million increase related to volume adjustments, including:

 

   

approximately $12.0 million related to volume adjustments on our crude systems, primarily attributable to increased light equivalent MPC volumes on our Detroit crude system and increased light equivalent third party volumes on our Patoka to Lima crude system; and

 

   

approximately $5.6 million related to volume adjustments on our products systems, primarily attributable to increased MPC volumes on our ORPL products system and partially offset by decreases in third party volumes on our Texas City and Wood River to Clermont products systems; and

 

Ø  

approximately $17.9 million of other revenue and income, primarily related to $15.0 million of storage services revenue associated with our Neal butane cavern, which we expect will be placed into service during the third quarter of 2012, that was not included in the pro forma periods presented.

Volumes

The following table compares forecasted volumes to historical volumes shipped on our pipeline systems and barge dock and the aggregate storage capacities of our tank farms and butane cavern, contrasted with MPC’s minimum volume commitments on our pipeline systems and barge dock and reserved storage capacity at our tank farms and butane cavern.

While the tariff revenues we generate from shipments on our pipeline systems and barge dock are calculated using physical barrels, our crude oil transportation services agreements with MPC are based on light equivalent barrels in order to account for viscosity surcharges based on the type of crude oil we transport. For this reason, all crude oil volumes discussed or included in tables in this subsection “Volumes” are presented in light equivalent barrels. For a description of the differences between physical barrels of crude oil and light equivalent barrels of crude oil, please read footnote 2 to the table “Crude Oil Volumes Transported” in “Business—Our Assets and Operations.”

 

 

 

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     Pro Forma      Forecasted      MPC Contracted  
      Year ended
December 31,
2011
     Twelve
months ended
March 31,
2012
     Twelve months
ending
September 30,
2013
     Minimum      Minimum as a
percentage of
forecast
 

Crude oil throughput (mbpd)(1)(2):

              

Third parties

     203         200         241         —           —     

Related parties

     838         847         925         745         81
  

 

 

    

 

 

    

 

 

    

 

 

    

Total:

     1,041         1,047         1,166         745         64
  

 

 

    

 

 

    

 

 

    

 

 

    

Products throughput (mbpd)(1):

              

Third parties

     60         69         56         —           —     

Related parties(3)

     971         948         1,001         801         80
  

 

 

    

 

 

    

 

 

    

 

 

    

Total:

     1,031         1,017         1,057         801         76
  

 

 

    

 

 

    

 

 

    

 

 

    

Available storage capacity (mbbl):

              

Tank farms (mbbl)(4)

     3,293         3,293         3,293         3,293         100

Butane cavern (mbbl)

     —           —           1,000         1,000         100

 

(1)   Reflects 100.0% of the volumes shipped on the crude oil and product pipeline systems and barge dock owned by MPL and ORPL during the time periods presented. We own a 51.0% indirect ownership interest in MPL and ORPL.
(2)   Crude oil throughput is presented on a light equivalent barrel basis.
(3)   Includes volumes shipped by MPC on various pipelines under joint tariffs with third parties. For accounting purposes, revenue attributable to these volumes is classified as third party revenue because we receive payment from those third parties with respect to volumes shipped under the joint tariffs; however, these volumes are applied towards MPC’s minimum volume commitments on the applicable pipelines because MPC is the shipper of record.
(4)   Reflects 100.0% of the capacity at the tank farms owned by MPL that is available to MPC on a firm basis under our storage services agreements. We own a 51.0% indirect ownership interest in MPL through Pipe Line Holdings.

 

 

 

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The following tables includes additional information about our transportation and storage services agreements, including MPC’s minimum volume commitments under the agreements.

 

     Initial
term
(years)
   

MPC
minimum
commitment

(mbpd)

    2011 MPC
throughput
(mbpd)
    MPC
forecasted
throughput
(mbpd)(1)
    Weighted
average
tariff
($ per
bbl)(2)
    MPC
annual
minimum
revenue
(in
millions)(2)
 

Crude Systems

           

Patoka to Lima

    10        40        132        132      $ 0.51      $ 7.5   

Catlettsburg and Robinson

    10        380        428        433      $ 0.73      $ 101.6   

Detroit

    10        155        107        174      $ 0.25      $ 14.3   

Wood River to Patoka

    5        130        133        146      $ 0.22      $ 10.4   

Wood River Barge Dock(3)

    5        40        38        40      $ 1.30      $ 19.0   
   

 

 

   

 

 

   

 

 

     

 

 

 

Total

      745        838        925        $ 152.8   
   

 

 

   

 

 

   

 

 

     

 

 

 

Products Systems

           

Garyville to Zachary(4)

    10        222        258        257      $ 0.54      $ 43.7   

Zachary to Connecting Pipelines

    10        80        132        120      $ 0.04      $ 1.3   

Texas City to Pasadena(4)

    10        81        85        89      $ 0.26      $ 7.8   

Pasadena to Connecting Pipelines

    10        81        50        89      $ 0.07      $ 1.9   

Ohio River Pipe Line (ORPL)(5)

    10        128        126        147      $ 1.23      $ 57.7   

Robinson(4)

    10        209        320        299      $ 0.66      $ 50.4   
   

 

 

   

 

 

   

 

 

     

 

 

 

Total

      801        971        1,001        $ 162.8   
   

 

 

   

 

 

   

 

 

     

 

 

 

 

(1)   For the twelve months ending September 30, 2013.
(2)   Based on estimated tariff rates for the twelve months ending September 30, 2013. Annual minimum revenue is based on MPC’s minimum volume commitments under our transportation services agreements.
(3)   We have forecasted only crude oil volumes for our barge dock; however our barge dock can handle products as well as crude oil.
(4)   Includes volumes shipped by MPC on various pipelines under joint tariffs with third parties. For accounting purposes, revenue attributable to these volumes is classified as third party revenue because we receive payment from those third parties with respect to volumes shipped under the joint tariffs; however, the volumes associated with this revenue are applied towards MPC’s minimum volume commitments on the applicable pipelines because MPC is the shipper of record.
(5)   The estimated weighted average tariff for the ORPL products system assumes that MPC ships only its minimum throughput commitment. Once MPC has satisfied its minimum throughput commitment on any of our ORPL pipelines for any quarter, all excess volumes shipped by MPC on those pipelines will be at a reduced incentive tariff rate.

 

 

 

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     Initial
term
(years)
    MPC
minimum
commitment
(mbbls)
    2011
capacity
contracted
to MPC
(mbbls)
    

MPC
forecasted

storage
volumes

(mbbls)(1)

    Weighted
average
fee ($ per
barrel per
month)(2)
     MPC
annual
minimum
revenue
(in
millions)(2)
 

Neal Butane Cavern(3)

    10        1,000        —           1,000      $ 1.25       $ 15.0   

Patoka Tank Farm

    3        1,386        1,386         1,386      $ 0.48       $ 8.0   

Wood River Tank Farm

    3        419        419         419      $ 0.48       $ 2.4   

Martinsville Tank Farm

    3        738        738         738      $ 0.48       $ 4.3   

Lebanon Tank Farm

    3        750        750         750      $ 0.48       $ 4.3   
   

 

 

   

 

 

    

 

 

      

 

 

 

Total

      4,293        3,293         4,293         $ 34.0   
   

 

 

   

 

 

    

 

 

      

 

 

 

 

(1)   Tank farm volumes represent the total available capacity (in mbbls) contracted to MPC on a firm basis.
(2)   Based on estimated fees for the twelve months ending September 30, 2013.
(3)   Our Neal butane cavern will be placed into service during the third quarter of 2012.

We estimate that MPC will ship approximately 925 mbpd on our crude systems for the twelve months ending September 30, 2013 as compared to approximately 838 mbpd for the year ended December 31, 2011. We expect that this increase will be primarily due to additional light equivalent crude barrels being shipped on our Detroit crude system. This increase is directly related to the completion of the heavy oil upgrading and expansion project at MPC’s Detroit refinery. We also expect that MPC will increase its shipments on our recently-activated Roxanna to Patoka crude oil pipeline. We forecast that volumes during the forecast period on the remainder of our crude systems will be consistent with volumes for the year ended December 31, 2011.

We estimate that third parties will ship approximately 241 mbpd on our crude systems for the twelve months ending September 30, 2013 as compared to approximately 203 mbpd for the year ended December 31, 2011. We expect this increase to be due to increased shipments on our Patoka to Lima crude system and our Wood River to Patoka crude system. We expect that capacity on our Patoka to Lima crude system will increase from 268 mbpd to approximately 290 mbpd by the end of 2012 in connection with the removal of a self-imposed restriction on the operating capacity of the pipeline related to certain maintenance activities. Based on current demand trends, we expect third parties to utilize this increased capacity.

We estimate that MPC will ship approximately 1,001 mbpd on our products systems for the twelve months ending September 30, 2013 as compared to approximately 971 mbpd for the year ended December 31, 2011. We expect this increase to be primarily due to increased shipments on our ORPL products system due to the recent reactivation of the Columbus to Dayton portion of our Heath to Dayton product pipeline. We also expect to see increased MPC shipments on our Texas City products system for the twelve months ending September 30, 2013. We forecast that volumes for the twelve months ending September 30, 2013 on the remainder of our products systems will be consistent with volumes for the year ended December 31, 2011.

We estimate that third parties will ship approximately 56 mbpd on our products systems for the twelve months ending September 30, 2013 as compared to approximately 60 mbpd for the year ended December 31, 2011. Based on current throughput trends, we expect this decrease will be primarily on our Texas City to Pasadena products system and our Wood River to Clermont product pipeline.

We are forecasting storage services revenue based on the aggregate available capacity contracted to MPC at our tank farms and butane cavern under our storage services agreements.

 

 

 

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Revenues

The following table shows our total revenues attributable to the services we provide on our pipeline systems and at our storage assets and our revenue per barrel for each of the periods indicated.

 

     Pro Forma      Forecasted  
     

Year ended

December 31,
2011

     Twelve months
ended March 31,
2012
    

Twelve months
ending

September 30,

2013

 
     (in millions, except per barrel amounts)  

Revenues and other income:

        

Sales and other operating revenues(1)(2)(3)

   $ 62.1       $ 63.1       $ 79.5   

Sales to related parties:

        

Pipeline transportation services to MPC(2)

     251.4         263.3         349.6   

Storage services to MPC—tank farms(2)

     19.1         19.1         19.0   

Storage services to MPC—butane cavern

     —           —           15.0   

Other income(4)

     3.9         5.3         4.5   

Other income—related parties(5)

     10.1         11.2         12.9   
  

 

 

    

 

 

    

 

 

 

Total revenues and other income

   $ 346.6       $ 362.0       $ 480.5   
  

 

 

    

 

 

    

 

 

 

Revenues:

        

Pipeline transportation services(2)

   $ 313.5       $ 326.4       $ 429.1   

Per barrel(6)(7)

     0.42         0.44         0.53   

Storage services—tank farms(2)

     19.1         19.1         19.0   

Per barrel (per month)(6)

     0.48         0.48         0.48   

Storage services—butane cavern

     —           —           15.0   

Per barrel (per month)

     —           —           1.25   

 

(1)   Represents pipeline transportation services revenues from third party shippers.
(2)   Amounts shown reflect 100.0% of the revenues attributable to MPL and ORPL. We own a 51.0% indirect ownership interest in MPL and ORPL through Pipe Line Holdings. Our pipeline transportation services revenue includes MPC’s minimum volume commitment on our Wood River barge dock.
(3)   Includes revenues from volumes shipped by MPC on various pipelines under joint tariffs with third parties. For accounting purposes, this revenue is classified as third party revenue because we receive payment from those third parties with respect to volumes shipped under the joint tariffs; however, the volumes associated with this revenue are applied towards MPC’s minimum volume commitments on the applicable pipelines because MPC is the shipper of record.
(4)   Primarily represents operating fees from third parties for the operation of pipelines by MPL. We own a 51.0% indirect ownership interest in MPL through Pipe Line Holdings.
(5)   MPL is party to various operating agreements and management services agreements with MPC and other related parties under which MPL receives fees for operating and managing certain pipelines. We own a 51.0% indirect ownership interest in MPL through Pipe Line Holdings.
(6)   Amounts shown reflect 100.0% of the per barrel revenues attributable to MPL and ORPL. We own a 51.0% indirect ownership interest in MPL and ORPL through Pipe Line Holdings.
(7)   Amounts shown were calculated based on the weighted average tariff applied to actual volumes throughput on our pipeline systems with respect to the year ended December 31, 2011 and the twelve months ended March 31, 2012, and to forecasted volumes we expect will be throughput on our pipeline systems for the twelve months ending September 30, 2013.

 

 

 

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Pipeline Transportation Services Revenues.    We estimate that total pipeline transportation revenues will be approximately $429.1 million, or 89.3% of our total revenues and other income, for the twelve months ending September 30, 2013, as compared to $313.5 million for the year ended December 31, 2011. Of our forecasted total pipeline transportation revenues, $315.6 million relates to MPC’s minimum throughput commitments to ship an average of at least 1,546 mbpd of crude oil and products on our pipeline systems and at our barge dock under the pipeline transportation services agreements that we will enter into with MPC at the closing of this offering. Approximately $65.7 million of forecasted pipeline transportation revenues relates to MPC throughput volumes in excess of MPC’s minimum throughput commitments. Approximately $47.8 million of forecasted pipeline transportation revenues relates to third party volumes, which excludes revenue attributable to volumes shipped by MPC under joint tariffs with third parties. This revenue is reflected as third party sales and other operating revenue in the table above because we receive payment from third parties with respect to volumes shipped under the joint tariffs; however, the volumes associated with this revenue are applied towards MPC’s minimum volume commitments on the applicable pipelines. Our forecast includes:

 

Ø  

an approximate $60.9 million increase in revenues attributable to index-related tariff increases on July 1, 2012 and July 1, 2013 along a majority of our pipeline systems;

 

Ø  

an approximate $32.2 million increase in revenues attributable to tariff increases in January 2012 and October 2012 in connection with a major upgrade project on our Patoka to Catlettsburg crude oil pipeline that we expect to complete in September 2014;

 

Ø  

an approximate $17.6 million increase in revenues attributable to increased volumes on our pipeline systems as described above; and

 

Ø  

an approximate $5.3 million increase in revenues attributable to a tariff increase on our Robinson to Mt. Vernon product pipeline that will take effect in October 2012 and is designed to more accurately reflect our actual costs of operating the pipeline.

Storage Services Revenues.    We estimate that our storage services revenues will be approximately $34.0 million, or 7.1% of our total revenues and other income, for the twelve months ending September 30, 2013, as compared to $19.1 million for the year ended December 31, 2011. Under the storage services agreements for our tank farms that we will enter into with MPC, we will provide approximately 3.3 million barrels of tank shell capacity at our tank farms to MPC at a rate of $0.48 per barrel of tank shell capacity per month. Under the storage services agreement for our butane cavern, we will provide approximately 1.0 million barrels of storage capacity to MPC at a rate of $1.25 per barrel of capacity per month. We expect that the butane cavern will be placed into service during the third quarter of 2012 and, as a result, our pro forma revenues and other income for the year ended December 31, 2011 and the twelve months ended March 31, 2012 do not include any revenues attributable to our butane cavern.

Other Income.    We estimate that our total other income will be approximately $17.4 million, or 3.6% of our total revenues and other income, for the twelve months ending September 30, 2013, as compared to $14.0 million for the year ended December 31, 2011. This increase is primarily attributable to our renegotiation of our existing operating agreements in July 2011 with MPC and third parties to reflect inflationary increases in the fees we charge to operate certain MPC and third-party owned pipelines. Approximately $12.9 million, or 74.1% of our forecasted other income for the twelve months ending September 30, 2013, will be generated under our management services agreements that we will enter into with MPC at the closing of this offering, as well as under our existing operating agreements with MPC and its affiliates. We also expect that approximately $4.5 million, or 25.9%, of our forecasted total other income for the twelve months ending September 30, 2013 will be generated under our existing operating agreements with third parties.

 

 

 

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Cost of Revenues

Our cost of revenues includes fuel and power costs, repairs and maintenance expenses and lease costs. We estimate that we will incur cost of revenues of approximately $148.4 million for the twelve months ending September 30, 2013 as compared to pro forma cost of revenues of $96.8 million for the year ended December 31, 2011. The increase in our forecasted cost of revenues as compared to pro forma cost of revenues for the year ended December 31, 2011 is primarily due to the following reasons:

 

Ø  

an increase of approximately $32.5 million in pipeline integrity and repair and maintenance expenses, including $18.0 million associated with mechanical integrity expenses on our pipeline systems, $6.5 million associated with our corrosion prevention program, and approximately $8.0 million associated with other operating and maintenance programs.

 

Ø  

an additional annual lease payment of approximately $6.0 million on one of our crude oil pipeline systems;

 

Ø  

an increase of approximately $4.0 million in fuel and power costs due to new assets being placed into service and increases in throughput volumes;

 

Ø  

an increase of approximately $3.5 million due to salary inflation;

 

Ø  

the recognition of an approximately $3.0 million oil measurement gain for the year ended December 31, 2011, which reduced our cost of revenues for that period (we have not forecasted any crude oil or product measurement gains);

 

Ø  

an increase of approximately $1.5 million in connection with operating and maintenance costs associated with our new butane cavern; and

 

Ø  

an increase of approximately $1.1 million in connection with miscellaneous pipeline expense projects.

Our transportation and storage services agreements with MPC contain inflation adjustment provisions that should substantially mitigate inflation-related increases in cost of revenues in rising cost environments.

Purchases from Related Parties

We estimate that our purchases from related parties will be approximately $91.9 million for the twelve months ending September 30, 2013, as compared to pro forma purchases from related parties of $91.8 million and approximately $91.6 million for the year ended December 31, 2011 and the twelve months ended March 31, 2012, respectively. Purchases from related parties consist primarily of the following:

 

Ø  

employee compensation and benefits expenses with respect to the MPC employees that will provide services to us under the employee services agreements that we will enter into with MPC at the closing of this offering; and

 

Ø  

fixed fees and other reimbursements to MPC in connection with various shared services, such as engineering, information technology, legal and certain executive management services that MPC will provide to us under the omnibus agreement that we will enter into with MPC at the closing of this offering.

We do not forecast any significant changes in our purchases from related parties as compared to the year ended December 31, 2011.

Depreciation

We estimate that depreciation will be approximately $40.7 million for the twelve months ending September 30, 2013, as compared to pro forma depreciation of approximately $29.3 million and $29.7

 

 

 

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million for the year ended December 31, 2011 and the twelve months ended March 31, 2012, respectively. Depreciation is expected to increase during the forecast period primarily due to approximately $7.7 million of depreciation relating to our butane cavern, approximately $3.0 million of increased depreciation related to capital expenditures associated with our upgrade project on our Patoka to Catlettsburg crude oil pipeline, and various capital expenditures related to the activation of our Roxanna to Patoka crude oil pipeline and portions of our Heath to Dayton product pipeline.

General and Administrative Expenses

We estimate that our general and administrative expenses will be approximately $44.5 million for the twelve months ending September 30, 2013, as compared to pro forma general and administrative expenses of $37.1 million and $39.5 million for the year ended December 31, 2011 and the twelve months ended March 31, 2012, respectively. The increase in our forecasted general and administrative expenses of approximately $7.4 million and $5.0 million compared to pro forma general and administrative expenses for the year ended December 31, 2011 and the twelve months ended March 31, 2012, respectively, relate primarily to additional insurance premiums as a result of being a separate publicly traded partnership, with the remainder being attributable to increases in personnel needed to operate and manage our assets and businesses and inflationary increases in costs of labor.

Our forecasted general and administrative expenses consist of:

 

Ø  

approximately $19.4 million of general and administrative expenses that will be allocated to us by MPC under our omnibus agreement that we will enter into with MPC at the closing of this offering. These expenses primarily relate to information technology, human resources and other financial and administrative services that will be provided to us by MPC, as well as our allocated share of insurance costs associated with covering our operations under MPC’s corporate property, casualty, pollution and general liability policies. We will reimburse MPC for our allocated share of these expenses on the basis of costs actually incurred by MPC in providing these services to us. We will also reimburse MPC for any direct charges incurred on our behalf;

 

Ø  

approximately $12.0 million of direct costs for estimated employee-related expenses relating to the management and operation of our assets under our employee services agreements with MPC that are not included in purchases from related parties;

 

Ø  

approximately $6.5 million of expenses relating to insurance premiums for our stand-alone property, casualty, pollution and general liabilities policies that will supplement the coverage that we are allocated under MPC’s corporate policies;

 

Ø  

approximately $3.9 million of incremental annual expenses as a result of being a separate publicly traded partnership, such as costs associated with annual and quarterly reports to unitholders, financial statement audit, tax return and Schedule K-1 preparation and distribution, investor relations activities, registrar and transfer agent fees, incremental director and officer liability insurance premiums and independent director compensation; and

 

Ø  

fixed annual fees in the amount of $2.7 million in the aggregate that we will pay to MPC under our omnibus agreement for the provision of executive management services by certain executive officers of our general partner.

For a more complete description of our omnibus agreement and the related services, reimbursements and fees, please read “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions—Omnibus Agreement.” For a more complete description of our employee services and the related services and costs, please read “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions—Employee Services Agreements.”

 

 

 

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Capital Expenditures

We estimate that total capital expenditures on a 100.0% basis will be approximately $156.5 million for the twelve months ending September 30, 2013 as compared to pro forma capital expenditures of $105.0 million and $123.5 million for the year ended December 31, 2011 and the twelve months ended March 31, 2012, respectively. Based on our 51.0% indirect interest in Pipe Line Holdings and our 100.0% interest in our butane cavern, our estimated total capital expenditures for the twelve months ending September 30, 2013 will be approximately $79.8 million as compared to pro forma capital expenditures of $79.0 million and $90.6 million for the year ended December 31, 2011 and the twelve months ended March 31, 2012, respectively. Our forecast estimate is based on the following assumptions:

 

Ø  

Maintenance Capital Expenditures.    We estimate that our maintenance capital expenditures will be approximately $32.0 million on a 100.0% basis ($16.3 million on a 51.0% basis) for the twelve months ending September 30, 2013. Estimated maintenance capital expenditures were $12.8 million ($6.6 million on a 51.0% basis) and $12.6 million ($6.4 million on a 51.0% basis) for the year ended December 31, 2011 and the twelve months ended March 31, 2012 on a pro forma basis, respectively. The estimated maintenance capital expenditures relate primarily to increased safety and security expenditures and increased costs related to valve replacement and electrical system maintenance.

 

Ø  

Expansion Capital Expenditures.    We estimate that our expansion capital expenditures will be approximately $124.5 million on a 100.0% basis ($63.5 million on a 51.0% basis) for the twelve months ending September 30, 2013. We estimate that the total cost of these projects on a 100.0% basis will be approximately $204.0 million over a two-year period. Of this total cost, we estimate that our portion, based on our 51.0% indirect ownership interest in Pipe Line Holdings, will be approximately $104.0 million, while MPC’s portion, based on its 49.0% ownership interest in Pipe Line Holdings, will be approximately $100.0 million. Our estimated expansion capital expenditures include the following:

 

   

approximately $78.8 million on a 100.0% basis ($40.2 million on a 51.0% basis) relating to a major upgrade project on our Patoka to Catlettsburg crude oil pipeline;

 

   

approximately $20.9 million on a 100.0% basis ($10.7 million on a 51.0% basis) relating to various projects to add connections and increase operating capacity;

 

   

approximately $17.9 million on a 100.0% basis ($9.1 million on a 51.0% basis) relating to the installation of crude oil blending equipment at our Patoka tank farm; and

 

   

approximately $6.9 million on a 100.0% basis ($3.5 million on a 51.0% basis) relating to our SCADA system upgrade.

In order to fund the total cost of these projects, we will contribute approximately $204.0 million from the net proceeds of this offering to Pipe Line Holdings, which Pipe Line Holdings will retain on behalf of us and MPC in order to fund our respective pro rata portions of the estimated total cost of certain expansion capital expenditures over the next two years. Pro forma expansion capital expenditures on a 100.0% basis were $92.2 million and $110.9 million for the year ended December 31, 2011 and the twelve months ended March 31, 2012, respectively. Based on our 51.0% interest in Pipe Line Holdings and our 100.0% interest in our butane cavern, pro forma expansion capital expenditures were $72.4 million and $84.2 million for those periods, respectively. These pro forma capital expenditures primarily related to the construction of our butane cavern and the first phase of our Patoka to Catlettsburg upgrade project.

As we expect our butane cavern to be placed in service in the third quarter of 2012, we have not forecasted any maintenance or expansion capital expenditures associated with our butane cavern for the twelve months ended September 30, 2013.

 

 

 

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Financing

We estimate that net interest and other financial costs will be approximately $2.3 million on a 100.0% basis for the twelve months ending September 30, 2013, as compared to no pro forma net interest income and other financial costs for the year ended December 31, 2011 and the twelve months ended March 31, 2012. Our forecasted net interest and other financial costs for the twelve months ending September 30, 2013 is based on the following assumptions:

 

Ø  

we do not anticipate having any borrowings under our revolving credit facility through September 30, 2013;

 

Ø  

our interest expense will include commitment fees for the unused portion of our revolving credit facility;

 

Ø  

our interest expense will also include the amortization of debt issuance costs incurred in connection with our revolving credit facility;

 

Ø  

we will have interest income based on the net proceeds of this offering that we will contribute to Pipe Line Holdings to fund certain estimated expansion capital expenditures; and

 

Ø  

we will remain in compliance with the financial and other covenants in our revolving credit facility.

Regulatory, Industry and Economic Factors

Our forecast of estimated EBITDA for the twelve months ending September 30, 2013 is based on the following significant assumptions related to regulatory, industry and economic factors:

 

Ø  

MPC will not default under any of our transportation and storage services agreements or reduce, suspend or terminate its obligations, nor will any events occur that would be deemed a force majeure event, under such agreements;

 

Ø  

all forecasted increases in our tariff rates will occur on schedule, and there will be no challenges to our tariff rates;

 

Ø  

there will not be any new federal, state or local regulation, or any interpretation of existing regulation, of the portions of the industries in which we operate that will be materially adverse to our business;

 

Ø  

there will not be any material accidents, weather-related incidents, unscheduled downtime or similar unanticipated events with respect to our assets or MPC’s refineries;

 

Ø  

there will not be a shortage of skilled labor; and

 

Ø  

there will not be any material adverse changes in the refining industry, the midstream energy industry, or overall economic conditions.

 

 

 

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Provisions of our partnership agreement relating to cash distributions

Set forth below is a summary of the significant provisions of our partnership agreement that relate to cash distributions.

DISTRIBUTIONS OF AVAILABLE CASH

General

Our partnership agreement requires that, within 45 days after the end of each quarter, beginning with the quarter ending                      2012, we distribute 100.0% of our available cash to unitholders of record on the applicable record date. We will adjust the amount of the minimum quarterly distribution for the period from the closing of this offering through                     , 2012 based on the actual length of the period.

Definition of Available Cash

Available cash generally means, for any quarter, all cash and cash equivalents on hand at the end of that quarter:

 

Ø  

less, the amount of cash reserves established by our general partner at the date of determination of available cash for that quarter to:

 

   

provide for the proper conduct of our business (including reserves for our future capital expenditures, anticipated future credit needs and refunds of collected rates reasonably likely to be refunded as a result of a settlement or hearing related to FERC rate proceedings or rate proceedings under applicable law subsequent to that quarter);

 

   

comply with applicable law, any of our debt instruments or other agreements; and

 

   

provide funds for distributions to our unitholders and to our general partner for any one or more of the next four quarters (provided that our general partner may not establish cash reserves for distributions on our subordinated units unless it determines that the establishment of those reserves will not prevent us from distributing the minimum quarterly distribution on all common units and any cumulative arrearages on such common units for the current quarter and the next four quarters);

 

Ø  

plus, if our general partner so determines, all or any portion of the cash on hand on the date of determination of available cash for the quarter resulting from working capital borrowings made subsequent to the end of such quarter.

The purpose and effect of the last bullet point above is to allow our general partner, if it so decides, to use cash from working capital borrowings made after the end of the quarter but on or before the date of determination of available cash for that quarter to pay distributions to unitholders. Under our partnership agreement, working capital borrowings are generally borrowings that are made under a credit facility, commercial paper facility or similar financing arrangement, and in all cases are used solely for working capital purposes or to pay distributions to partners and with the intent of the borrower to repay such borrowings within twelve months with funds other than from additional working capital borrowings.

 

 

 

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Intent to Distribute the Minimum Quarterly Distribution

We intend to make a minimum quarterly distribution to the holders of our common units and subordinated units of $          per unit, or $          per unit on an annualized basis, to the extent we have sufficient cash from our operations after the establishment of cash reserves and the payment of costs and expenses, including reimbursements of expenses to our general partner. However, there is no guarantee that we will pay the minimum quarterly distribution or any amount on our units in any quarter. Even if our cash distribution policy is not modified, the amount of distributions paid under our policy and the decision to make any distribution will be determined by our general partner, taking into consideration the terms of our partnership agreement. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Capital Resources and Liquidity—Revolving Credit Facility” for a discussion of the restrictions to be included in our revolving credit facility that may restrict our ability to make distributions.

General Partner Interest and Incentive Distribution Rights

Initially, our general partner will be entitled to 2.0% of all quarterly distributions that we make prior to our liquidation. This general partner interest will be represented by             general partner units. Our general partner has the right, but not the obligation, to contribute capital to us in order to maintain its current general partner interest. The general partner’s initial 2.0% interest in these distributions will be reduced if we issue additional units in the future and our general partner does not contribute a proportionate amount of capital to us to maintain its 2.0% general partner interest.

Our general partner also currently holds incentive distribution rights that entitle it to receive increasing percentages, up to a maximum of 48.0%, of the cash we distribute from operating surplus (as defined below) in excess of $        per unit per quarter. The maximum distribution of 48.0% does not include any distributions that our general partner or its affiliates may receive on common units, subordinated units or general partner units that they own. Please read “—General Partner Interest and Incentive Distribution Rights” for additional information.

OPERATING SURPLUS AND CAPITAL SURPLUS

General

All cash distributed to unitholders will be characterized as either being paid from “operating surplus” or “capital surplus.” We treat distributions of available cash from operating surplus differently than distributions of available cash from capital surplus.

Operating Surplus

We define operating surplus as:

 

Ø  

$         million (as described below); plus

 

Ø  

all of our cash receipts after the closing of this offering, excluding cash from interim capital transactions (as defined below); plus

 

Ø  

working capital borrowings made after the end of a quarter but on or before the date of determination of operating surplus for that quarter; plus

 

Ø  

cash distributions paid on equity issued (including incremental distributions on incentive distribution rights), other than equity issued on the closing date of this offering, to finance all or a portion of the construction, acquisition, development or improvement of a capital improvement or replacement of a

 

 

 

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capital asset (such as equipment or facilities) in respect of the period beginning on the date that we enter into a binding obligation to commence the construction, acquisition, development or improvement of a capital improvement or replacement of a capital asset and ending on the earlier to occur of the date the capital improvement or capital asset commences commercial service and the date that it is abandoned or disposed of; plus

 

Ø  

cash distributions paid on equity issued to pay the construction-period interest on debt incurred, or to pay construction-period distributions on equity issued, to finance the capital improvements or capital assets referred to above; less

 

Ø  

all of our operating expenditures (as defined below) after the closing of this offering and the completion of the transactions described in “Prospectus Summary—The Transactions”; less

 

Ø  

the amount of cash reserves established by our general partner to provide funds for future operating expenditures; less

 

Ø  

all working capital borrowings either not repaid within twelve months after having been incurred, or repaid within such 12-month period with the proceeds from additional working capital borrowings.

As described above, operating surplus does not reflect actual cash on hand that is available for distribution to our unitholders and is not limited to cash generated by our operations. For example, it includes a provision that will enable us, if we choose, to distribute as operating surplus up to $             million of cash we receive in the future from non-operating sources such as asset sales, issuances of securities and long-term borrowings that would otherwise be distributed as capital surplus. In addition, the effect of including, as described above, certain cash distributions on equity interests in operating surplus would be to increase operating surplus by the amount of any such cash distributions. As a result, we may also distribute as operating surplus up to the amount of any such cash that we receive from non-operating sources.

The proceeds of working capital borrowings increase operating surplus and repayments of working capital borrowings are generally operating expenditures, as described below, and thus reduce operating surplus when made. However, if a working capital borrowing is not repaid during the twelve-month period following the borrowing, it will be deemed repaid at the end of such period, thus decreasing operating surplus at such time. When such working capital borrowing is in fact repaid, it will be excluded from operating expenditures because operating surplus will have been previously reduced by the deemed repayment.

We define interim capital transactions as (i) borrowings, refinancings or refundings of indebtedness (other than working capital borrowings and items purchased on open account in the ordinary course of business) and sales of debt securities, (ii) sales of equity securities, (iii) sales or other dispositions of assets, other than sales or other dispositions of inventory, accounts receivable and other assets in the ordinary course of business and sales or other dispositions of assets as part of ordinary course asset retirements or replacements, (iv) the termination of commodity hedge contracts or interest rate hedge contracts prior to the termination date specified therein (provided that cash receipts from any such termination will be included in operating surplus in equal quarterly installments over the remaining scheduled life of the contract), (v) capital contributions received and (vi) corporate reorganizations or restructurings.

We define operating expenditures as all of our cash expenditures, including, but not limited to, taxes, reimbursements of expenses to our general partner, interest payments, payments made in the ordinary course of business under interest rate hedge contracts and commodity hedge contracts (provided that (i) with respect to amounts paid in connection with the initial purchase of an interest rate hedge contract

 

 

 

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or a commodity hedge contract, such amounts will be amortized over the life of the applicable interest rate hedge contract or commodity hedge contract and (ii) payments made in connection with the termination of any interest rate hedge contract or commodity hedge contract prior to the expiration of its stipulated settlement or termination date will be included in operating expenditures in equal quarterly installments over the remaining scheduled life of such interest rate hedge contract or commodity hedge contract), director and officer compensation, repayment of working capital borrowings and non-pro rata repurchases of our units; provided, however, that operating expenditures will not include:

 

Ø  

repayments of working capital borrowings where such borrowings have previously been deemed to have been repaid (as described above);

 

Ø  

payments (including prepayments and prepayment penalties) of principal of and premium on indebtedness other than working capital borrowings;

 

Ø  

expansion capital expenditures;

 

Ø  

payment of transaction expenses (including, but not limited to, taxes) relating to interim capital transactions;

 

Ø  

distributions to partners (including distributions in respect of our incentive distribution rights);

 

Ø  

non-pro rata purchases of any class of our units made with the proceeds of an interim capital transaction (excluding repurchases we make to satisfy obligations under employee benefit plans); or

 

Ø  

any other payments made in connection with this offering that are described under “Use of Proceeds.”

Capital Surplus

Capital surplus is defined in our partnership agreement as any distribution of available cash in excess of our cumulative operating surplus. Accordingly, except as described above, capital surplus would generally be generated by:

 

Ø  

borrowings other than working capital borrowings;

 

Ø  

sales of our equity and debt securities; and

 

Ø  

sales or other dispositions of assets, other than inventory, accounts receivable and other assets sold in the ordinary course of business or as part of ordinary course retirement or replacement of assets.

Characterization of Cash Distributions

Our partnership agreement requires that we treat all available cash distributed as coming from operating surplus until the sum of all available cash distributed since the closing of this offering equals the operating surplus from the closing of this offering through the end of the quarter immediately preceding that distribution. Our partnership agreement requires that we treat any amount distributed in excess of operating surplus, regardless of its source, as capital surplus. We do not anticipate that we will make any distributions from capital surplus.

CAPITAL EXPENDITURES

Maintenance capital expenditures are cash expenditures (including expenditures for the addition or improvement to, or the replacement of, our capital assets or for the acquisition of existing, or the construction or development of new, capital assets) made to maintain our operating capacity or operating income over the long term. We expect that a primary component of maintenance capital expenditures will include capital expenditures associated with the repair, refurbishment and replacement

 

 

 

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of pipelines and storage facilities, to maintain equipment reliability, integrity and safety and to address environmental laws and regulations. Maintenance capital expenditures will also include interest (and related fees) on debt incurred and distributions on equity issued (including incremental distributions on incentive distribution rights) to finance all or any portion of the construction or development of a replacement asset that is paid in respect of the period that begins when we enter into a binding obligation to commence constructing or developing a replacement asset and ending on the earlier to occur of the date that any such replacement asset commences commercial service and the date that it is abandoned or disposed of.

Expansion capital expenditures are cash expenditures incurred for acquisitions or capital improvements that we expect will increase our operating capacity or operating income over the long term. Expansion capital expenditures include interest payments (and related fees) on debt incurred and distributions on equity issued to finance the construction or development of such capital improvement and paid in respect of the period beginning on the date that we enter into a binding obligation to commence construction of the capital improvement and ending on the earlier to occur of the date that such capital improvement commences commercial service or the date that such capital improvement is abandoned or disposed of. Examples of expansion capital expenditures include the acquisition of equipment, or the construction, development or acquisition of additional pipeline or storage capacity, to the extent such capital expenditures are expected to expand our long-term operating capacity or operating income.

Capital expenditures that are made in part for maintenance capital purposes and in part for expansion capital purposes will be allocated as maintenance capital expenditures and expansion capital expenditures by our general partner.

SUBORDINATED UNITS AND SUBORDINATION PERIOD

General

Our partnership agreement provides that, during the subordination period (which we define below), our common units will have the right to receive distributions of available cash from operating surplus each quarter in an amount equal to $         per common unit, which amount is defined in our partnership agreement as the minimum quarterly distribution, plus any arrearages in the payment of the minimum quarterly distribution on our common units from prior quarters, before any distributions of available cash from operating surplus may be made on our subordinated units. These units are deemed “subordinated” because for a period of time, referred to as the subordination period, our subordinated units will not be entitled to receive any distributions until the common units have received the minimum quarterly distribution plus any arrearages from prior quarters. Furthermore, no arrearages will accrue or be paid on the subordinated units. The practical effect of the subordinated units is to increase the likelihood that, during the subordination period, we will have available cash to distribute on our common units.

Subordination Period

Except as described below, the subordination period will begin upon the date of this offering and expire on the first business day of any quarter beginning after                     , 2015, that each of the following tests are met:

 

Ø  

distributions of available cash from operating surplus on each of the outstanding common units and subordinated units equaled or exceeded $         (the annualized minimum quarterly distribution) for each of the three consecutive, non-overlapping four-quarter periods immediately preceding that date;

 

 

 

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Ø  

the adjusted operating surplus (as defined below) generated during each of the three consecutive, non-overlapping four-quarter periods immediately preceding that date equaled or exceeded the sum of (i) $         (the annualized minimum quarterly distribution) on all of the outstanding common units and subordinated units during that period on a fully diluted weighted average basis and (ii) the corresponding distribution on our 2.0% general partner interest; and

 

Ø  

there are no arrearages in payment of the minimum quarterly distribution on our common units.

Early Termination of the Subordination Period

Notwithstanding the foregoing, the subordination period will automatically terminate on the first business day after a distribution to unitholders has been made in respect of any quarter, if each of the following has occurred:

 

Ø  

distributions of available cash from operating surplus on each of the outstanding common and subordinated units exceeded $             (150.0% of the annualized minimum quarterly distribution) for the four-quarter period immediately preceding that date;

 

Ø  

the “adjusted operating surplus” (as defined below) generated during the four-quarter period immediately preceding that date equaled or exceeded the sum of (i) $             (150.0% of the annualized minimum quarterly distribution) on all of the outstanding common and subordinated units during that period on a fully diluted, weighted-average basis and (ii) the distributions made on the incentive distribution rights; and

 

Ø  

there are no arrearages in the payment of the minimum quarterly distribution on the common units.

Expiration of the Subordination Period Upon Removal of the General Partner Other than for Cause

In addition, if our general partner is removed other than for cause:

 

Ø  

the subordinated units held by any person will immediately and automatically convert into common units on a one-for-one basis, provided (i) neither such person nor any of its affiliates voted any of its units in favor of the removal and (ii) such person is not an affiliate of the successor general partner; and

 

Ø  

if all of the subordinated units convert pursuant to the foregoing, all cumulative common unit arrearages on the common units will be extinguished and the subordination period will end.

Effect of the Expiration of the Subordination Period

When the subordination period ends, each outstanding subordinated unit will convert into one common unit and will thereafter participate pro rata with the other common units in distributions of available cash. In addition, if our general partner is removed other than for cause and no units held by our general partner and its affiliates are voted in favor of such removal:

 

Ø  

the subordination period will end and each subordinated unit will immediately convert into one common unit;

 

Ø  

any existing arrearages in payment of the minimum quarterly distribution on our common units will be extinguished; and

 

Ø  

our general partner will have the right to convert its general partner interest and its incentive distribution rights into common units or to receive cash in exchange for those interests.

 

 

 

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Definition of Adjusted Operating Surplus

Adjusted operating surplus is intended to reflect the cash generated from operations during a particular period and therefore excludes net increases in working capital borrowings and net drawdowns of reserves of cash generated in prior periods. Adjusted operating surplus for a period consists of:

 

Ø  

operating surplus generated with respect to that period (excluding the first bullet of the definition of operating surplus); less

 

Ø  

any net increase in working capital borrowings with respect to such period; less

 

Ø  

any net decrease in cash reserves for operating expenditures with respect to that period not relating to an operating expenditure made with respect to that period; plus

 

Ø  

any net decrease in working capital borrowings with respect to such period; plus

 

Ø  

any net decrease made in subsequent periods to cash reserves for operating expenditures initially established with respect to such period to the extent such decrease results in a reduction in adjusted operating surplus in subsequent periods pursuant to the third bullet point above; plus

 

Ø  

any net increase in cash reserves for operating expenditures with respect to that period required by any debt instrument for the repayment of principal, interest or premium.

DISTRIBUTIONS OF AVAILABLE CASH FROM OPERATING SURPLUS DURING THE SUBORDINATION PERIOD

We will make distributions of available cash from operating surplus for any quarter during the subordination period in the following manner:

 

Ø  

first, 98.0% to the common unitholders, pro rata, and 2.0% to our general partner, until we distribute for each outstanding common unit an amount equal to the minimum quarterly distribution for that quarter;

 

Ø  

second, 98.0% to the common unitholders, pro rata, and 2.0% to our general partner, until we distribute for each outstanding common unit an amount equal to any arrearages in payment of the minimum quarterly distribution on our common units for any prior quarters during the subordination period;

 

Ø  

third, 98.0% to the subordinated unitholders, pro rata, and 2.0% to our general partner, until we distribute for each outstanding subordinated unit an amount equal to the minimum quarterly distribution for that quarter; and

 

Ø  

thereafter, in the manner described in “—General Partner Interest and Incentive Distribution Rights” below.

The preceding discussion is based on the assumptions that our general partner maintains its 2.0% general partner interest and that we do not issue additional classes of equity securities.

Distributions of Available Cash from Operating Surplus after the Subordination Period

We will make distributions of available cash from operating surplus for any quarter after the subordination period in the following manner:

 

Ø  

first, 98.0% to all unitholders, pro rata, and 2.0% to our general partner, until we distribute for each outstanding unit an amount equal to the minimum quarterly distribution for that quarter; and

 

Ø  

thereafter, in the manner described in “—General Partner Interest and Incentive Distribution Rights” below.

 

 

 

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The preceding discussion is based on the assumptions that our general partner maintains its 2.0% general partner interest and that we do not issue additional classes of equity securities.

GENERAL PARTNER INTEREST AND INCENTIVE DISTRIBUTION RIGHTS

Our partnership agreement provides that our general partner initially will be entitled to 2.0% of all distributions that we make prior to our liquidation. Our general partner has the right, but not the obligation, to contribute a proportionate amount of capital to us in order to maintain its 2.0% general partner interest if we issue additional units. Our general partner’s 2.0% interest, and the percentage of our cash distributions to which it is entitled from such 2.0% interest, will be proportionately reduced if we issue additional units in the future (other than the issuance of common units upon exercise by the underwriters of their option to purchase additional common units in this offering, the issuance of common units upon conversion of outstanding subordinated units or the issuance of common units upon a reset of the incentive distribution rights) and our general partner does not contribute a proportionate amount of capital to us in order to maintain its 2.0% general partner interest. Our partnership agreement does not require that the general partner fund its capital contribution with cash and our general partner may fund its capital contribution by the contribution to us of common units or other property.

Incentive distribution rights represent the right to receive an increasing percentage (13.0%, 23.0% and 48.0%) of quarterly distributions of available cash from operating surplus after the minimum quarterly distribution and the target distribution levels have been achieved. Our general partner currently holds the incentive distribution rights, but may transfer these rights separately from its general partner interest, subject to restrictions in our partnership agreement.

The following discussion assumes that our general partner maintains its 2.0% general partner interest, that there are no arrearages on common units and that our general partner owns all of the incentive distribution rights.

If for any quarter:

 

Ø  

we have distributed available cash from operating surplus to all unitholders (including the holders of subordinated units) in an amount equal to the minimum quarterly distribution; and

 

Ø  

we have distributed available cash from operating surplus on outstanding common units and the general partner interest in an amount necessary to eliminate any cumulative arrearages in payment of the minimum quarterly distribution to the common unitholders;

then, we will distribute any additional available cash from operating surplus for that quarter among the unitholders and our general partner in the following manner:

 

Ø  

first, 98.0% to all unitholders, pro rata, and 2.0% to our general partner, until each unitholder receives a total of $         per unit for that quarter (the “first target distribution”);

 

Ø  

second, 85.0% to all unitholders, pro rata, and 15.0% to our general partner, until each unitholder receives a total of $         per unit for that quarter (the “second target distribution”);

 

Ø  

third, 75.0% to all unitholders, pro rata, and 25.0% to our general partner, until each unitholder receives a total of $         per unit for that quarter (the “third target distribution”); and

 

Ø  

thereafter, 50.0% to all unitholders, pro rata, and 50.0% to our general partner.

 

 

 

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PERCENTAGE ALLOCATIONS OF AVAILABLE CASH FROM OPERATING SURPLUS

The following table illustrates the percentage allocations of available cash from operating surplus between the unitholders and our general partner based on the specified target distribution levels. The amounts set forth under “Marginal percentage interest in distributions” are the percentage interests of our general partner and the unitholders in any available cash from operating surplus we distribute up to and including the corresponding amount in the column “Total quarterly distribution per unit target amount.” The percentage interests shown for our unitholders and our general partner for the minimum quarterly distribution are also applicable to quarterly distribution amounts that are less than the minimum quarterly distribution. The percentage interests set forth below for our general partner include its 2.0% general partner interest and assume that our general partner has contributed any additional capital necessary to maintain its 2.0% general partner interest, our general partner has not transferred its incentive distribution rights and that there are no arrearages on common units.

 

     Total quarterly distribution
per unit target amount
     Marginal percentage interest in
distributions
 
      Unitholders     General Partner  

 

 

Minimum Quarterly Distribution

   $              98.0     2.0

First Target Distribution

   above $                    up to $                      98.0     2.0

Second Target Distribution

   above $         up to $           85.0     15.0

Third Target Distribution

   above $         up to $           75.0     25.0

Thereafter

   above $              50.0     50.0

GENERAL PARTNER’S RIGHT TO RESET INCENTIVE DISTRIBUTION LEVELS

Our general partner, as the initial holder of our incentive distribution rights, has the right under our partnership agreement to elect to relinquish the right to receive incentive distribution payments based on the initial target distribution levels and to reset, at higher levels, the minimum quarterly distribution amount and target distribution levels upon which the incentive distribution payments to our general partner would be set. If our general partner transfers all or a portion of the incentive distribution rights in the future, then the holder or holders of a majority of the incentive distribution rights will be entitled to exercise this right. The following discussion assumes that our general partner owns all of the incentive distribution rights at the time that a reset election is made. Our general partner’s right to reset the minimum quarterly distribution amount and the target distribution levels upon which the incentive distributions payable to our general partner are based may be exercised, without approval of our unitholders or our conflicts committee, at any time when there are no subordinated units outstanding and we have made cash distributions to the holders of the incentive distribution rights at the highest level of incentive distribution for each of the four consecutive fiscal quarters immediately preceding such time. If our general partner and its affiliates are not the holders of a majority of the incentive distribution rights at the time an election is made to reset the minimum quarterly distribution amount and the target distribution levels, then the proposed reset will be subject to the prior written concurrence of the general partner that the conditions described above have been satisfied. The reset minimum quarterly distribution amount and target distribution levels will be higher than the minimum quarterly distribution amount and the target distribution levels existing immediately prior to the reset such that our general partner will not receive any incentive distributions under the reset target distribution levels until cash distributions per unit following the reset increase as described below. We anticipate that our general partner would exercise this reset right in order to facilitate acquisitions or internal growth projects that would otherwise not be sufficiently accretive to cash distributions per common unit, taking into account the existing levels of incentive distribution payments being made to our general partner.

 

 

 

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In connection with the resetting of the minimum quarterly distribution amount and the target distribution levels and the corresponding relinquishment by our general partner of the right to future incentive distribution payments based on the target distribution levels in effect prior to the reset, our general partner will be entitled to receive a number of newly issued common units and general partner units based on a predetermined formula described below that takes into account the “cash parity” value of the average cash distributions related to the incentive distribution rights received by our general partner for the two calendar quarters immediately preceding the reset event as compared to the average cash distributions per common unit during that two-quarter period. Concurrently with the issuance of common units upon a reset, we will issue to our general partner the number of general partner units necessary to maintain our general partner’s interest in us immediately prior to the reset election.

The number of common units that our general partner would be entitled to receive from us in connection with a resetting of the minimum quarterly distribution amount and the target distribution levels then in effect would be equal to the quotient determined by dividing (x) the average aggregate amount of cash distributions received by our general partner in respect of its incentive distribution rights during the two consecutive calendar quarters ended immediately prior to the date of such reset election by (y) the average of the amount of cash distributed per common unit during each of these two quarters.

Following a reset election, the minimum quarterly distribution amount will be reset to an amount equal to the average cash distribution amount paid per unit for the two calendar quarters immediately preceding the reset election (which amount we refer to as the “reset minimum quarterly distribution”) and the target distribution levels will be reset to be correspondingly higher such that we would distribute all of our available cash from operating surplus for each quarter thereafter as follows:

 

Ø  

first, 98.0% to all unitholders, pro rata, and 2.0% to our general partner, until each unitholder receives an amount equal to 115.0% of the reset minimum quarterly distribution for that quarter;

 

Ø  

second, 85.0% to all unitholders, pro rata, and 15.0% to our general partner, until each unitholder receives an amount per unit equal to 125.0% of the reset minimum quarterly distribution for the quarter;

 

Ø  

third, 75.0% to all unitholders, pro rata, and 25.0% to our general partner, until each unitholder receives an amount per unit equal to 150.0% of the reset minimum quarterly distribution for the quarter; and

 

Ø  

thereafter, 50.0% to all unitholders, pro rata, and 50.0% to our general partner.

The following table illustrates the percentage allocation of available cash from operating surplus between the unitholders and our general partner at various cash distribution levels (i) pursuant to the cash distribution provisions of our partnership agreement in effect at the closing of this offering, as well as (ii) following a hypothetical reset of the minimum quarterly distribution and target distribution levels based on the assumption that the average quarterly cash distribution amount per common unit during the two fiscal quarters immediately preceding the reset election was $        .

 

 

 

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