NEW YORK--(BUSINESS WIRE)--Fitch Ratings expects to assign a 'BBB-' rating to MPLX LP's (MPLX) proposed 10-year notes. The notes will rank pari passu with the partnership's existing and any future senior unsecured debt. Proceeds from the partnership's inaugural bond offering are to be used to reduce revolver borrowings and for general partnership purposes.
Fitch currently rates MLPX as follows:
--Issuer Default Rating (IDR) 'BBB-';
--Senior unsecured debt rating 'BBB-'.
The Rating Outlook is Stable.
KEY RATINGS DRIVERS
The 'BBB-' rating is supported by MPLX's sponsor, Marathon Petroleum Corporation (MPC; IDR 'BBB' with a Stable Outlook), which owns a 69.5% limited partnership interest and the 2% general partner interest. MPLX was created as a growth vehicle for MPC's midstream assets. Long-term fee-based contracts with MPC should provide MPLX with stable cash flows. Furthermore, its assets are integral for MPC and in 2013, MPC accounted for 89% of MPLX's revenues and historically MPC has accounted for over 85% of pipeline volumes. Future growth is to come from continued dropdown of midstream assets from MPC which has a significant inventory of assets while also developing new ones. In total, MPC estimates it has midstream assets that generate $1.6 billion of EBITDA available for future dropdowns. The partnership plans to operate with strong distribution coverage which was 1.2x in 2014 and is targeted at 1.1x for the long term.
Concerns include MPLX's strategy to grow at a fast pace. Plans are for the distribution growth rate to be in the mid-20's over the next five years, although Fitch believes that MPLX has the ability to reduce future growth should market conditions warrant a slower trajectory. Furthermore, MPLX does not have a history of accessing the debt capital markets, but it is not likely to face difficulties unless there was an overall unfavorable change in the capital markets. Other ratings concerns are MPLX's significant customer concentration with MPC, but MPC has a strong credit profile. MPLX's rating is restricted by its dependence on its sponsor meaning that MPLX would not be rated above MPC. MPLX has strong operational, financial and strategic ties with MPC. MPLX is notched down one from its sponsor based on MPLX's standalone credit profile which Fitch does not view as strong as MPC's.
EXPECTATIONS FOR GROWTH AND LEVERAGE
To grow EBITDA and distributable cash flows (DCF) particularly for a public MLP, Fitch expects to see significant spending for growth via dropdowns at MPLX. MPC's inventory for dropdowns is substantial. The manner in which the partnership funds growth going forward will be a significant driver of future credit quality. MPLX's current adjusted leverage (defined as debt to adjusted EBITDA) is 3.9x since it has largely financed growth with equity issuance, therefore, Fitch views the partnership as having the ability to fund growth with additional debt. Since the IPO in October 2012, management has grown MPLX at a measured pace and conservatively. Fitch forecasts adjusted leverage to increase to 4.5-4.75x given expectations for an increase in debt to fund spending and for dropdowns from MPC. Leverage may be above the forecast due to the timing of acquisitions. As EBITDA is realized from acquired assets the run rate for leverage is expected to be consistent with projections.
Liquidity at MPLX is sufficient. As of year-end 2014, the partnership had $27 million of cash on the balance sheet. In addition, it had $615 million available on its $1 billion senior unsecured revolver which extends until 2019. The revolver was extended and upsized from its original size of $500 million in November 2014. The bank agreement restricts leverage from exceeding 5.0x unless MPLX qualifies for being in an acquisition period. In that case, leverage cannot exceed 5.5x for two consecutive quarters. Like other MLP bank agreements, MPLX receives pro forma EBITDA adjustments for material projects and acquisitions for its leverage calculation. At the end of 2014, leverage as defined by the bank agreement was 2.8x.
MPLX remains somewhat small yet has increased in size since becoming public. Fitch views the $1 billion bank agreement as a reflection of the partnership's opportunities for growth. Currently, the only debt MPLX has is the revolver and a $250 million term loan. Both are senior unsecured and mature in November 2019. Fitch would expect MPLX to access the debt capital markets to term out revolver borrowings.
The partnership's liquidity position is further enhanced with its $50 million revolver from MPC which extends until March 2019. As of year-end there were no borrowings on this facility.
SIGNFICANT DROPDOWN INVENTORY
MPC's midstream assets available for future dropdown to MPLX includes additional pipelines, marine assets, terminals, railcars, midstream assets at refinery locations (such as storage, loading racks, docks and condensate splitter investments) and fuels distribution. Management has indicated it is seeking a private letter ruling for the fuels distribution assets to be classified as MLP qualifying income and expects it should receive it during 2015.
The most recent dropdown of midstream assets from MPC was the December 2014 acquisition of a 30.5% stake in MPLX Pipe Line Holdings LP (Pipe Line Holdings) that increased MPLX's stake in the asset to 99.5%. The additional interest was acquired for approximately $800 million. To fund the acquisition, MPLX issued MPC $200 million of common units and publicly issued common units for net proceeds of $221 million. The balance of funding came from revolver borrowings.
RECENT FINANCIAL PERFORMANCE
During 2014, MPLX's adjusted EBITDA was $166 million, up from $111 million in the prior year. EBITDA in 2014 was adjusted to reflect the $69 million of EBITDA which is attributed to MPC's retained interest in Pipe Line Holdings. The prior year adjustment was $86 million. Leverage (defined as debt to adjusted EBITDA) was 3.9x at the end of 2014, up from 1.7x at the end of the third quarter of 2014. The year-end increase in leverage reflects MPLX's higher borrowings for its acquisition.
Growth capex was $65 million and maintenance capex was $28 million in 2014. For 2015, MPLX expects growth capex to be $220 million and maintenance spending to be $40 million.
Fitch's key assumptions within our rating case for the issuer include:
--Average annual revenue growth between 35% and 60% over the next few years;
--Growth derived from midstream dropdowns from MPC;
--EBITDA margins average approximately 40%;
--Spending for acquired MPC dropdowns and growth capex to be funded with a combination of debt and equity.
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
--Increase of size and scope of operations with EBITDA above $500 million;
--Reduced leveraged (as defined by Fitch) below 4.0x over a sustained period of time;
--Favorable rating action at MPC.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
--Significantly reduced volume commitments from MPC which could occur as contracts come up for renewal;
--Increases in capital spending or dropdowns beyond Fitch's expectations that have negative consequences for the credit profile (e.g., if not funded with a balance of debt and equity);
--Increased adjusted leverage (as defined by Fitch) beyond 5.0x for a sustained period of time (although allowing for temporary increases as a result of acquisitions);
--Negative rating action at MPC.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research
--'2015 Outlook: Crude Oil and Refined Product Pipelines' (December 2014);
--'Pipelines, Midstream and MLP Stats Quarterly - Third Quarter 2014' (December 2014);
--'MLP End Game (Common Goals - Divergent Strategies) (November 2014);
--'Bakken Shale Report (Prolific Production Prompts New Pipelines) (October 2014);
--'What Investors Want to Know: Pipelines, Midstream and MLPs' (October 2014);
--'Midstream Spending Significantly Rising for MLPs and C-Corps' (August 2014);
--'Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage' (May 2014)';
--'Rating Pipelines, Midstream and MLPs - Sector Credit Factors' (January 2014).
Applicable Criteria and Related Research:
MLP End Game (Common Goals -- Divergent Strategies)
Bakken Shale Report (Prolific Oil Production Prompts New Pipelines)
2015 Outlook: Crude Oil and Refined Products Pipelines (Positioned to Withstand Lower Commodity Prices)
Pipelines, Midstream and MLP Stats Quarterly -- Third-Quarter 2014 (Third-Quarter Review)
What Investors Want to Know: Pipelines, Midstream and MLPs
Midstream Spending Significantly Rising for MLPs and C-Corps
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
Rating Pipelines, Midstream and MLPs -- Sector Credit Factors