Welcome to the MPC update on strategic actions to enhance shareholder value. My name is Christine, and I will be your operator for today's call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. Please note that this conference is being recorded. I will now turn the call over to Lisa Wilson, Director of Investor Relations. You may begin.
Thank you, Christine, and good morning, and welcome to Marathon Petroleum Corporation's update on our strategic actions to enhance shareholder value. The synchronized slides that accompany this call can be found on our website at marathonpetroleum.com under the Investor Center tab and on mplx.com under the Investors tab. On the call today are Gary Heminger, Chairman, President, and CEO, Tim Griffith, Senior Vice President and Chief Financial Officer, Don Templin, MPLX President, and Pam Beall, Executive Vice President and Chief Financial Officer of MPLX. We invite you to read the safe harbor statements on slide two. It is a reminder that we will be making forward-looking statements during the call and during the question and answer session. Actual results may differ materially from what we expect today. Factors that could cause actual results to differ are included there, as well as in our filings with the SEC.
Now, I will turn the call over to Gary Heminger.
Thanks, Lisa. Good morning and Happy New Year to all. We appreciate you joining this call to start off the new year. Let me begin by saying that we are a management team with a long track record of taking aggressive actions to create value. These bold actions started with our separation from Marathon Oil Corporation in 2011. Since that time, we have successfully created MPLX, diversified our portfolio, and tripled stable cash flows related to midstream and retail. We generated total shareholder return of 179% since 2011, in excess of our peers and far in excess of the S&P 500, driven in part by our return of over $10 billion to shareholders through dividends and share repurchases. Driving long-term value for our shareholders has always been and remains our top priority, and we outlined several significant value-enhancing initiatives recently, which continue that track record.
We have been working diligently over the last several months on each of them. This work has positioned us to announce a significant update to our plan. Building on those previous initiatives, the actions we are announcing today are shown on slide three. First, we are significantly accelerating our planned drop-downs of approximately $1.4 billion of EBITDA to MPLX from three years, as discussed in late October, to as soon as practicable and expected in 2017. This acceleration is subject to obtaining requisite approvals and regulatory clearances, including tax. Second, we have completed the initial evaluation of strategic alternatives for our MPLX general partner interest to highlight and capture the GP's value. Based on our evaluation, we expect to pursue an exchange of MPC's economic interest in the GP, which includes our 2% GP interest and IDRs for MPLX LP units.
This is expected to occur in conjunction with the completion of the drop-downs I just mentioned. Details of the transaction are expected to be announced following the receipt of requisite approvals and regulatory clearances, including tax. Importantly, MPC would continue to retain control of the GP following this exchange. Third, a special committee of the MPC board will conduct a full and thorough review of Speedway with the assistance of an independent financial advisor to ensure that optimum value is being delivered to MPC shareholders over the long term. The review will include a tax-free separation of Speedway and other strategic and financial alternatives, and we plan to provide an update on the review in mid-2017.
Fourth, given the accelerated drop-down schedule we are announcing today, we have concluded that there is no need to revise our segment reporting since the related earnings will likely already be reflected in the midstream segment by the end of 2017. Over the past several weeks, we have had the opportunity to talk about our value enhancing plan with many shareholders and have appreciated the feedback, which has been positive. We are pleased that Elliott Management has expressed its support for our plan and look forward to continuing our constructive engagement with all of our shareholders. Slide four provides additional detail on our accelerated drop-down plan. A proposed transaction representing approximately $250 million in annual EBITDA has already been presented and referred to the Conflicts Committee of the MPLX board. It is expected to be completed in the first quarter of 2017, pending requisite approvals.
The remaining MLP eligible assets totaling approximately $1.15 billion in annual EBITDA, including the approximately $600 million associated with fuels distribution, is expected to be dropped to MPLX in 2017, subject to requisite approvals and regulatory clearances, including tax. Given the uncertainty of timing on the tax clearances for fuels distribution, if we do not receive the necessary clearance in 2017, we would expect to drop approximately $200 million of MLP qualifying EBITDA no later than the first quarter of 2018, with approximately $600 million of EBITDA associated with fuels distribution dropped following the receipt of tax clearance. We expect these drop-downs to be valued consistent with recent industry precedents at valuation multiples ranging between seven to nine times EBITDA, subject to the MPLX Conflicts Committee review process and customary fairness opinions.
We also expect the partnership to finance the drop-down of transactions through approximately equal proportions of debt and equity, with the equity financing to be funded through MPLX LP units issued to MPC. This allows the execution of our drop-down strategy to not be reliant on public equity markets. As I will detail in a few minutes, we expect that the drop-down strategy will significantly enhance shareholder value by providing significant cash proceeds and increasing MPLX's LP and GP distributions to MPC. Importantly, all of these transactions are subject to market and other conditions and requisite approvals, including regulatory and tax, as well as approval of the Conflicts Committee of the MPLX Board of Directors. On slide five, we provided an illustrative timeline of the drop-downs. As I just outlined, these drop-downs would occur in several transactions over the course of the year.
Slide six provides an update on the review of the strategic alternatives for MPC's economic interest in the GP, including the IDRs. With the assistance of our independent financial advisors, we have completed the initial evaluation of alternatives to highlight and capture the value of our general partner economic interest in MPLX while optimizing the partnership's cost of capital. Based on this evaluation, we expect to exchange MPC's economic interest in the GP for newly issued MPLX LP units. The benefit of this approach is that it provides a tangible valuation marker for MPC's GP interests via publicly traded MPLX LP units. We believe this has been underappreciated in our evaluation. Effectively, GP IDR cash flows would be exchanged into LP unit distributions. Following execution of the exchange, MPC would continue to own and control the general partner and own a majority of the outstanding LP units.
MPC intends to continue to own, operate, and to grow its midstream segment through MPLX. This strategy is expected to reduce MPLX's cost of capital while enhancing MPLX distribution growth over the long term. We would execute this action in conjunction with the completion of drop-downs. We will provide additional details following receipt of requisite approvals and regulatory clearances, including tax, which as I indicated, we expect later in 2017. Now turning to the use of proceeds and ongoing distributions MPC will receive from MPLX on slide seven. The drop-downs are expected to produce approximately $4.5 billion of after-tax cash proceeds. Following the exchange of GP interests, MPC expects to receive approximately $1.2 billion-$1.4 billion in initial annual distributions. This will grow with the expected growth in LP distributions.
We expect the use of the cash proceeds from drop-downs and ongoing LP distributions to fund substantial ongoing return of capital to MPC shareholders in a manner that is consistent with maintaining an investment-grade credit profile at both MPC and MPLX, and we will manage the capital structure of both entities accordingly. Notably, the drop-down and IDR exchange transactions are achievable with pro forma MPLX net debt to EBITDA leverage of less than or equal to 4x. On slide eight, we provide additional detail on the significant value MPLX unit holders will gain from these actions. The removal of the IDR burden on the partnership will enhance long-term distribution growth. It is also expected to permanently lower MPLX's cost of capital, enabling the partnership to better pursue organic growth and M&A opportunities to expand distributable cash flow even further.
Collectively, these actions are projected to provide distributable cash flow accretion and allow MPLX to achieve its double-digit distribution growth targets with near-term distributable cash flow coverage expected to be above 1.1 times. Going forward, MPLX will have the ability to further increase distributions if market conditions support such actions. These actions will also benefit investors by simplifying MPLX's structure and fully aligning incentives with MPC. MPC will own the non-economic general partner and a majority of MPLX LP units, completely aligning interests towards continuing MPLX distribution growth and managing MPLX to be competitive and attractively valued. Finally, the addition of the approximately $1.4 billion of EBITDA drop down from MPC adds substantial stable cash flow to MPLX and provides greater visibility to distribution growth with an improved mix of stable cash flow earnings within the partnership.
On slide nine, we illustrate the substantial total midstream value to MPC following completion of our strategic actions. Starting first with MPC's LP interest, the approximately 87 million MPLX LP units MPC currently owns represents approximately $3 billion in market value or gross value of approximately $6 per share. Next, the combination of the after-tax cash proceeds and the equity taken back for the drop-downs is expected to produce approximately $9 billion-$11 billion in value to MPC, or a gross value of approximately $17-$21 per MPC share. This assumes valuation multiples ranging between seven to nine times EBITDA, and that MPC takes back LP units for the equity portion of the transactions.
Finally, exchanging the GP interest at 15-20 times pro forma GP cash flows generates an additional $9 billion-$12 billion in value to MPC, or a gross value of approximately $17-$23 per share. Collectively, after dropping assets and converting the GP interest to LP units, MPC anticipates approximately $21 billion-$26 billion of total midstream value held either in cash or publicly traded MPLX LP units, representing approximately $40-$50 in gross value per share. Moving to slide 10, in keeping with MPC's practices of long-term shareholder value creation, an MPC board special committee will conduct a full and thorough review of Speedway. This review, led by the special committee with the assistance of an independent financial advisor, will include a tax-free separation of Speedway to MPC shareholders and other strategic and financial alternatives.
As I noted, we plan to provide an update on the review in mid-2017. Turning to slide 11, in conclusion, the entire management team and board of directors are committed to continuously evaluating opportunities to enhance shareholder value. We've taken a thoughtful approach to developing this plan, just as we have always done in the past. We have a long and successful track record of enhancing long-term value and are confident that the plan we announced today will position us to deliver further value to both MPC and MPLX. It is clear that both companies' interests are aligned, and we believe both companies will continue their strong performance and delivery of long-term value to shareholders and unit holders in the years to come. As you can tell, we are very enthusiastic about the value these steps will deliver.
A significant amount of work has gone into accelerating our plan, and we are continuing to work aggressively on its implementation. Our track record demonstrates our ability to execute on major projects. Delivering shareholder value is our number one priority, and it's a job that our board of directors and this management team takes very seriously. With that, let me turn the call back over to Lisa.
Thanks, Gary. As we open the call for your questions, as a courtesy to all participants, we ask that you limit yourself to one question and a follow-up. If time permits, we will re-prompt for additional questions. With that, we will now open the call to questions.
Thank you. Ladies and gentlemen, if you have a question, please press star then one on your touch-tone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you are using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star one on your phone now. Our first question is from Edward Westlake of Credit Suisse. Please go ahead.
Good morning. Happy New Year, everyone. Congratulations on the acceleration. I have two quick questions. First one, really around the Refining business. Refining and Marketing business, I should say. That's going to have a higher fixed charge as a result of these drop-downs, and obviously 2016 was not a great year. Partly that was maintenance, partly margins. In 3Q, there was a disappointment versus consensus. Maybe just give us some color as to why you think the Refining and Marketing business can support this higher fixed charge. Thank you.
Well, Ed, as we've discussed in the past, let's go back and look at 2016. This same period of 2016, you had overburden of way too much inventory across the entire industry, which really hurt the first quarter and a good part of the second quarter. You are correct, in the third quarter, we had a significant amount of refinery maintenance that we got completed. I look going forward at how we're set up in refining and how our integration and refining is teed up, that we'll still be a even with these drop-downs and some of the R&M assets going into MPLX, that we'll still have the top tier refining margins going forward.
Secondly, on Speedway, in the past, you've said there was quite a high value of integration of that asset. Obviously, still a strategic review underway. What do you think at this point, having done the work over the last year or so, you think the disintegration cost would be of spinning out Speedway? Thank you.
Well, Ed, as we've talked before, we're embarking on a new study. We've done a lot of work on integration in the past, we're going to do a full and thorough review, as I said in the announcement. By mid-year, as we complete this review, we'll be able to share with the investor community what we believe that value is.
Okay, thanks very much.
Thank you. Our next question is from Chi Chow of Tudor, Pickering, Holt. Please go ahead.
Great, thanks. Happy New Year.
Good morning, Chi.
Gary. Yeah, thanks. Despite these announcements on the accelerated drops and distribution growth guidance, it doesn't seem like the market has really responded with any sort of valuation uplift. On MPLX units, really since the first strategic announcement. Why do you think that's the case, and what more do you think you need to do to lower the yield on MPLX?
Well, I think the first thing is to really get an understanding. That's why this was a dual approach. First to talk about the acceleration, the overhang has been, where do we go with the IDR burden that has been facing the LP investor. I think clearly, we've been studying what is the best way to improve our capital structure going forward. We've been studying this for quite some time. We talked about this at our October release. I believe the announcement that we're making today is certainly going to take any distraction out of the market, and the market's going to understand the direction that we are now going to go. The simplification strategy, we expect really to be a very strong catalyst in understanding that value going forward.
Is there a target cost of capital improvement you're looking for on MPLX's yields? If the market doesn't give it to you, does that alter the strategy at all on either the organic or M&A related growth?
Yeah. Chi, this is Don. I'm not sure there's necessarily a target cost of capital. What we would like to do is to make sure that we are achieving the most efficient combination of growth and yield. We believe that having visibility into the distribution growth profile that's offered up by the increased drop-downs, I think helps with the yield. Taking away the IDR burden helps with the yield. We think we'll be very well positioned 2017, 2018 and beyond to be able to not only support our organic growth projects and platform, but to participate in M&A activity and to be a consolidator in the market.
Okay, great. Thanks, Don. Then, I guess second question here. There's a lot of speculation on the EPA moving the point of obligation on RINs. Would dropping the fuels distribution business to MPLX or separating Speedway change anything on where the RIN obligation point would reside within MPC's or your businesses?
No, Chi, we do not believe so. In fact, I've always said, and our team, in different calls have said that we believe the RIN obligation and the RIN cost is already reflected in the crack spread. Whether it changes or not, I don't think it changes the overall gross margin that a refiner will receive.
Okay. Does the obligation, would that move with the fuels distribution business or to Speedway, or does it stay in refining?
No. I'm sorry, Chi. No. That obligation would stay within refining. The whole thesis of moving the obligation out to a retailer, is that the retailer at the end of the day, the final blender at the end of the day would be the one that would be obligated. First of all, that would be an administrative nightmare to try to be able to control that. It's not going to change it. Everything is still going to, we believe, be valued at the refining segment.
Okay, great. Thanks, Gary. Appreciate it.
Thank you. Our next question is from Neil Mehta of Goldman Sachs. Please go ahead.
Good morning, and congratulations. Gary, can you talk a little bit about where we stand in terms of the PLR for the $600 million of fuels distribution? Any sense of what the gating factor is to ultimately get the IRS approval that's outstanding?
Yeah, Neil, it's Tim. There's probably sort of a two-phase process here that will take a little bit of time. The first is to have Treasury issue its QI regs, and that's something that's been pending for a period of time here. We're certainly hoping for it in the very near term, but I don't think we've got any absolute clarity on when that happens. Even once that gets received, given the differences in the fuels distribution model that we've got, we probably will also seek a PLR. Again, we've got a little bit of concern that there may be a little bit of a backlog, and that could take some time. Again, all of this we are expecting in 2017. I don't think we've got any prescient guidance as to exactly when that occurs. There really are two pieces to it.
One, getting the Treasury to issue the QI regs, and then the PLR itself. Again, we would hope that happens in 2017. As you can see from the materials, there's at least an outside chance that some of that moves into 2018. We would expect it and hope it in 2017, and do everything in our power to continue to sort of put pressure to keep that process moving along.
I appreciate that, Tim. The $4.5 billion in after-tax cash proceeds, it's a lot of money. Can you talk a little bit about how you weigh dividend growth versus buybacks versus raising capital spending levels at either MPC or MPLX?
Sure. I think the first place we'd start, that we hopefully made that clear in the release, that we're going to keep a very close eye on the capital structures of both MPC and MPLX and make sure that we are sustaining an investment grade credit profile at both entities. The first thing we'll do is take a look at any tweaks or adjustments we'll need to make to capital structure. From that point forward, I think the predominance of those cash flows are going to be directed toward return of capital to shareholders. Again, I think we'll look pretty carefully at balancing those between Repurchase of shares as has been our custom in maintaining a strong growing underlying dividend. I don't think we've got any plans for these proceeds to make further investment in the business.
That investment will come out of operating cash flows. For most of the cash flows we've got intended here, some return of capital, again, we'll figure out the most efficient and hopefully the most impactful way to get that cash back to shareholders.
Neil, as we've spoken in the past, as far as refining, other than completing the STAR project, which we really have now over a five-year period of time, we don't have any other major capital plans for the refining sector other than regulatory capital. Of course, Tier 3 gasoline is starting up as we speak. I certainly echo what Tim said, Don and I look forward to being at your conference this week.
We look forward to it as well.
Thank you. Our next question is from Kristina Kazarian of Deutsche Bank. Please go ahead.
Morning, guys.
Morning, Kristina.
Starting off with a debt question today. If I'm thinking about the $1.4 billion of drops and then MPLX's calendar year 2017 capital needs, rounding numbers, but it looks like you probably need to issue $6 billion-$7 billion of debt, and MPLX only has about $4.5 billion-ish right now. Maybe can you guys just touch on how you get comfortable here from a capital market standpoint, feedback from the rating agencies, and what happens as MPLX becomes a bigger part of the overall picture?
Sure. This has been sort of an important part of the consideration, Christine, in terms of how we've approached it. Obviously, the substantial increase in earnings into the partnership is going to build into some leverage capacity that we will utilize immediately upon the drops. Again, for the portion that we're not taking units back, all of that will be debt financed. Our market checks thus far have indicated that the capacity exists. Obviously, we'll be careful and mindful about how that gets done and exactly when we access the markets. I think we feel very good at this point about MPLX's capacity to issue debt and to fund those transactions for at least the debt finance portion of it.
Yeah. Christine, it's Pam Beall, and I'll just add, remember at the end of the 3rd quarter, we announced that we had $200 million of cash on the balance sheet. We had $2.7 billion of total liquidity. As we enter 2017, the partnership is really in a very good financial position.
Perfect. My follow-up is, Gary, I know I've asked you this before, when this is all complete and you get through the new MPLX units that need to be issued with these transactions, what's the longer-term strategy for MPLX? Is it 1.1 coverage, double-digit distribution rate? That's a little different than the other large cap areas. What is this company going to look like?
First of all, Christine, you're right at the. I think that your first question at the end of the third quarter earnings were what's MPLX going to look like in 3 to 5 years? What we have outlined here today puts us in a great position to be a consolidator in the market. As Don just outlined, to get our cost of capital down, to get improvement in the yield, it's going to give us a very competitive position to be a consolidator. I believe over 2017, 2018, as you get a rebound in commodity prices that we expect, that you're going to see a lot of opportunities. I'll let Tim and Pam speak to the coverage here that they see.
Christine, we have really since the IPO of MPLX indicated that 1.1 times was sort of a good long-term target. I think we'll continue to evaluate that. Certainly, the mix of earnings into the partnership post all these drop-downs is going to be much more balanced. It will have roughly equal proportions of G&P and L&S as we go forward. I think we will evaluate over time whether even 1.1 is necessary in that scenario.
Perfect. Thank you, guys.
Bye.
Thank you. Our next question is from Brad Heffern of RBC Capital Markets. Please go ahead.
Morning, everyone.
Morning, Brad.
Gary, in the past, I think that you've talked about Speedway as being critical to stabilizing the refining margins. I'm curious if you think that that decision has any impact on this accelerated drop plan, and I'm thinking about from the standpoint of, do you think that the refining business without Speedway is able to write a $1.4 billion annual check to MPLX every year without that sort of stabilizing influence?
Yeah, Brad, those are all very good questions, and that's going to be a very big part of the detailed, the full and thorough review that I said that we're going to do under the direction of a special committee of the board to really document further work that we've done prior, but go into it again and make absolutely sure that we make the right decisions. Over the period of now to mid-year, we will finalize all that analysis again, and we'll report back through an update to the investors in due course. Those are the exact right questions, and that's the work that we're going to do.
Okay. I'll stay tuned on that. Then a follow-up to an earlier question for Tim, talking about the potential private letter ruling. You mentioned that the fuels distribution model is different than some of the precedent transactions that have been cited. Can you go into what the differences are and why you think that means that you potentially need a PLR?
Sure. I can provide a little bit of color. A lot of the transactions that you have seen in the marketplace have really been done sort of on a rack to retail basis. What we've got contemplated is really the totality of the wholesale fuels distribution piece, really from refinery to rack. There really has not been anything done like that thus far. There's no precedent we can stand on or get comfortable with. Again, it really is a much more robust model that incorporates really all elements from scheduling to exactly how the terminals are being managed to the elements of pricing. There's a number of pieces that just have not been done in the form that we have contemplated.
The precedents that you've seen really have been sort of that rack to retail, Brad, I think, the questions that we've gotten from folks are sort of asking around why we're pursuing it. I guess the point is, it's a very different part of the value chain. It's a much more robust model, it has not been done to date.
Okay, thanks.
Thank you. Our next question is from Paul Cheng of Barclays. Please go ahead.
Hey, guys. Good morning.
Hi, Paul.
Happy New Year. The first question is actually for Tim. Tim, on the wholesale margin, can I just clarify that the $600 million you intend is that you're sort of like a fee base and it's not going to fluctuate according to the market condition?
That's right, Paul. That's an important feature to the model that we've got contemplated so that there is not inventory risk, there's not pricing risk. This is effectively a services model where MPC would pay MPLX to basically perform all of those services. We've eliminated almost all elements of volatility to it. We feel very good that that $600 million, once dropped into the partnership, is going to be very ratable and very stable with regard to the earnings profile.
All the volatility will be, from that standpoint, sheltered by the C Corp. It's coming out from the refining, not from the Speedway, I presume.
That's right. I mean, the volatility that exists within the refining business today would remain in the R&M segment. The fuels distribution, again, will just be services that MPLX will be providing to MPC for all of that sort of wholesale movement of fuels through our system.
Okay. The second one, Gary, just curious that, you will own probably more like in the 60%-70% of the MPLX LP unit after everything is said and done. Is it the intention for the company that to maintain that ownership or that you will have maybe a regular liquidation program that every quarter they may sell 1%-2%, that to use that for other corporate use in the C Corp? How should we look at that ownership?
Paul, very easy. We plan on maintaining this ownership. We do not plan on doing any liquidation or having any structured liquidation. We plan on maintaining this ownership in the business. As I said earlier, we clearly will retain control of the GP.
I see. Can I just add on a real quick one? Do you have any LP distribution guidance for the next two years?
Paul, this is Don. We've not changed our distribution guidance. For 2017, we expect 12%-15% increase, for 2018, we expect double-digit increase in distribution.
Thank you.
Thank you. Our next question is from Doug Leggate of Bank of America Merrill Lynch. Please go ahead.
Thank you. Good morning. Happy New Year, everybody.
Hey, good morning, Doug.
Gary, I know this question was asked earlier, I'm going to ask it a different way about the pace of MPLX distribution growth post the GP exchange. Would you expect a period of an elevated coverage ratio to preserve that MPLX yield, or would you anticipate a more aggressive growth in distributions? I've got a follow-up, please.
Yeah. Doug, this is Don. I guess, we will evaluate that at that sort of that time in the market. I mean, the market has been fairly volatile over the last 18 months. Our goal is to have a, as I said earlier, to have sort of the most efficient combination of yield and growth. We will monitor that and evaluate that as time goes on.
Okay. We'll wait for guidance. I guess my follow-up is on the fuels distribution. Gary, you've said often, obviously, it's a tremendous brand. It's an important part of you securing outlets for your products. How does that change if you no longer control Speedway?
Well, the fuels distribution really doesn't have anything to do with controlling Speedway or not. As I've said before, I think when we were on the road, we talked a lot with you and investors about this. Speedway has 400,000 barrels a day that go through the entire integrated system of MPC. That's the work that we're going to brush up and finalize by mid-year that I've been speaking to absolutely be able to show to the market how we see the value of Speedway, inside the company or not. That's the work we will do. 400,000 barrels a day, that touches refining, that touches pipelines, that touches
All the terminals, the barges. It touches a number of businesses that are already in the MLP today, and there will be some of that throughput that'll go through MPLX in the future. We will do all of that study, Doug, and make sure that we're very transparent with the market once we've completed that thorough review.
Gary, maybe just a point of clarification on that. Is it an IRS implication on the length of supply agreement that you could secure with Speedway as a standalone entity? Maybe just give some color, two-year supply agreement, a 15-year supply agreement, any implications there? I'll leave it at that. Thank you.
Right. I'm going to turn it over to my tax expert here.
Doug, I think, again, we're going to look at all potential options, let's not pre-conclude any particular path. Certainly if there were a tax-f ree spin to be pursued, all of the agreements that would exist between MPC and Speedway would need to be at an arm's length. There certainly would be implications as to how those agreements got structured, over what period of time the agreements get put in place. Again, will certainly be part of the overall evaluation around all of the alternatives that exist for Speedway. There certainly are implications around what form of supply agreement and probably what length it could have if that's the alternative that we were to go down.
I appreciate the answers, guys. Thank you.
Thank you. Our next question is from Shneur Gershuni of UBS. Please go ahead.
Hi, good morning, guys, and happy New Year.
Thanks, Shneur.
Thanks.
Just a couple of quick questions here. I guess first off, I kind of wanted to talk about the IDR conversion. You sort of have a value out there of $9 billion-$12 billion. It also says in the footnote that you're looking at about a $600 million IDR conversion. I guess really where I'm trying to triangulate here is, you haven't updated your distribution growth rate. Do you plan on dropping the assets and having coverage accelerate significantly over the next 2 years, and then converting the IDRs prior to fully raising the distribution growth rate? Just trying to understand how you plan to go through the process so that we can understand what's the appropriate premium that you're placing on the IDRs.
Yep. This is Don. Consistent with our prior guidance, we've not changed our distribution growth guidance. We are still with the 12%-15% growth guidance for 2017, and double digit for 2018. I think if you do that calculation. It is possible that near term that our coverage ratio will go above 1.1 times. That could happen. It may be needed to support the unit price, and people may want the visibility in terms of ability to deliver distribution growth. If you use the distribution growth guidance that we've given, the combination of GP distributions and IDRs gets you into a number that's not dissimilar to the $600 million. That gets you the ranges that we showed there. We're using a 15 multiple and a 20 multiple.
The reason I ask the question is that if I was to run through an acceleration of these assets being dropped, I was trying to maintain, let's say, a coverage ratio, I would end up with an IDR cash flow far higher than $600 million. That's why I was wondering if you plan on converting before you completely push through all the distribution growth. Said differently, you're leaving some of the distribution growth to flow through from the drop-downs post the conversion.
I think what's going to happen is because these transactions are going to happen so quickly, I believe that there is a reasonable chance that the coverage will go above 1.1 times for some period of time.
Okay. In the past, I think it was on the third quarter conference calls, you talked about an expectation of the conversion of the IDRs to be accretive to the MPLX unit holders as well as improving cost of capital. As you sort of see this flowing through, have you guys concluded that this will be accretive to MPLX as well as being accretive to MPC?
Yeah. I think you can't assume that the special committee or the Conflicts Committee would approve a transaction that isn't good long-term for the MPLX unit holders. In our modeling and in our assumptions, we believe that it will be good for both MPC and MPLX. As one of the callers noted earlier, I think it was Paul Cheng, we're going to own a large majority of the LP units. MPC needs MPLX to be successful, so those LP units hold their value.
Okay. No, that makes perfect sense. That's why I just wanted to clarify that because of those numbers. One final question, if I may. When we sort of think about 2018, 2019, and so forth, can you give us a sense of how much EBITDA you see being able to be constructed from an organic perspective that will allow MPLX to grow in 2018, 2019, and 2020? You're going to be sitting with a much higher EBITDA number. The large numbers start to catch up a little bit. Was wondering kind of what you would expect the growth rate to be, or how you see it being, if it's something that you can give us over a three or a five-year period. I think that would be helpful.
We haven't given specific guidance around that. At the time of the transaction, we believed that there was a billion and a half or so of organic growth, kind of on average, of organic growth per year, to be invested from sort of the legacy MarkWest or the G&P part of the business. I don't think anything has changed in our view around that. We'll continue to give guidance, on a quarterly basis, on an annual basis in the future.
Great. Thank you very much, guys.
Thank you. Our next question is from Phil Gresh of JP Morgan. Please go ahead.
Hey, good morning. First question's probably for Tim. You talked about the target leverage at MPLX, and the desire to maintain an investment-grade rating at the MPC level. I know there are many metrics besides just a net debt to EBITDA, but it'd be helpful if maybe you could provide what kind of leverage metrics would be important, both at the parent level and the consolidated level, and whether some of these proceeds, the $4.5 billion, might actually be used to pay down consolidated debt.
Sure, Phil. I thought I made that comment, but we'll reiterate that. Ultimately, maintaining an investment-grade credit profile at both entities is going to be critically important, and I think any actions we take are going to be done with that as a context, just to make sure that we are comfortable with where we're at. The couple points I'll make, one is that, I think we highlighted this on the third quarter, increasingly, looking at consolidated leverage metrics for the total entity become a lot less useful as we go forward. I mean, the partnership obviously is going to continue to grow. We're talking about a substantial amount of leverage that MPLX would take on as part of these transactions. We think it's increasingly useful to look at the sort of bifurcated capital structures of MPLX and MPC without including MPLX.
Now, we'll always consolidate because we're always going to be the GP, we will always report in that manner. We think that looking at the capital structures on a bifurcated basis becomes importantly useful. Nonetheless, we will always look at consolidated metrics as we go and certainly be mindful of what the total consolidated picture will look like. This is a discussion we've had with fixed income investors and with the rating agencies as we've gone forward, that we're going to be looking carefully at what things look like. As you suggest, there is the potential for some debt paydown to occur at MPC, where we think it's necessary and appropriate to manage that investment-grade structure.
Okay. Is there a parent level of leverage that you think is appropriate to kind of post all these drop-downs out of refining and the increased volatility that would potentially come with that for the refining earnings?
Well, again, if we look at things on sort of a net MPC basis, that is excluding the leverage and the earnings from MPLX that are part of the consolidated picture. I think if we get around two times on a levered basis, that's probably in the zone where we'd really start carefully looking at exactly how we would look on a going-forward basis. Important also is to look at what the earnings profile is going to be that is coming out of the Refining & Marketing business. I mean, we certainly saw a softer 2016. If we were to see another period of soft refining earnings, I think we'll manage things carefully so that we don't put ourselves at risk if there is some additional softness or softness that we are not expecting. We're going to continue to manage it.
Again, as I indicated, we will take action to support that investment-grade credit profile, again, maybe importantly, really start to look at these capital structures on a bifurcated basis and make sure that we're managing both accordingly. We'll see. This is obviously going to produce a tremendous amount of proceeds, we'll have all of the levers available to us if we need to take action or if we need to do some de-levering to be able to do so, certainly focus the bulk and the remainder of the proceeds on return to shareholders.
Got it. Okay, Gary, I guess without presupposing a conclusion of the Speedway analysis, I guess the fact that you've agreed to move forward with the review of a potential tax-free spin and relative to the comments you made in the past about the many benefits of the integrated model, I mean, is moving forward with the analysis a partial acknowledgment that maybe those benefits aren't as important now, or should we not be concluding that?
I wouldn't conclude either way. This announcement is just what it says. We're going to do a full and thorough review, a very robust review. That doesn't mean the reviews we've done in the past were not robust, but we're going to do a very wholesome review, and we'll report out when we have completed it.
Okay, thanks.
Thank you. Our next question is from Roger Read of Wells Fargo. Please go ahead.
Yeah, good morning.
Hi, Roger.
Hi, Gary. A lot of good questions obviously been asked. I just wanted to kind of follow up. If you think about the integrated model here and the opportunity for post all these drop-downs to more aggressively grow, I think you used the term consolidation earlier. Is it possible for you to do this aggressive drop-down strategy and all the focus that's going to take as well as the potential disposition of Speedway and still focus on growth? I mean, is it a compartmentalized story, or do we need to think about 2017, 2018 or one kind of focus and 2018, 2019, 2020, or maybe another level of focus with the company?
Well, Roger, I think what we do best is we can multitask and juggle a lot of things at the same time, and that is our plan.
Not gonna give me any more than that, huh?
I mean, we're going to look at everything that's available. I said that we don't have any plans for any major refining capital expenditures. I've already said that. We want to be a consolidator in the Logistics & Storage as well as the Gathering & Processing business. I believe that we've been very successful, if you look at the last two to three years, in our strategy of more than tripling our cash flow from the stable businesses. We expect to continue doing that. I'm not going to overshadow what our announcement says. We're going to do a full and thorough review of Speedway, then we'll report to the market on what our observations are.
Okay. I appreciate that. Then just my last question for you, the comment earlier about top-tier refining margins, does that refer to your ability to achieve margins given your refining complex? Do we need to think about that in terms of reported margins? I think that's probably the bigger issue here. It's not that you can't achieve a top margin, it's that once we deal with drop-downs and stripping away certain stable businesses, the reported margin may be different. Is that a fair summary?
No, I think it's really your first point there, Roger, that we believe where our complexes are where they're situated. We have an outstanding position in the Gulf Coast that can take advantage of what we think is going to be an even growing competitive arena for exports. A lot of Galveston Bay and Garyville, we're in a great space there. Then our PADD 2 refineries are in a great position for our supply up and down the river, our supply in the Midwest. As you know, there's an open season to be able to start moving some barrels east of Pittsburgh, we think that's going to further be able to balance refining margins across PADD 2.
Okay. Thank you.
You bet, Roger.
Thank you. Our next question is from Corey Goldman of Jefferies. Please go ahead.
Hey, guys. Happy New Year's. Just real quickly, the first question on the GP IDR role. 15 to 20 times, that's a pretty wide range. I'm just wondering, what gets you to the higher or the lower end of that range? Is it purely based on how MPLX is trading, or are there other things involved there?
Yeah, Corey, it's Tim. I think what we really wanted to do is provide an illustration of where that value could potentially range. There really is a full process in front of us here where the proposed transaction, once we get the tax clearance to drop fuels distribution, everything here is predicated on the drops being complete. Then we'll need to go through the process of identifying the transaction that's proposed. It'll be presented to the MPLX board that will be deferred to the Conflicts Committee. I mean, there really is a process around it here that ultimately needs to play out, we really did not want to front-run or get in front of that process in a way that could be disruptive.
All we intended to do today was just to provide a range of where we think that value could come in, and that process will play out over its natural order as the drops are complete and that transaction is proposed.
Okay. That's helpful. Then maybe just the second question for the drop-downs for the assets itself, so not the IDR role. Seven to nine times, can we expect to see some of the drop-downs perhaps come below or above those range levels? The seven to nine times is kind of a weighted average total. Again, I understand that the Conflicts Committee still needs to be involved here, but just given that the drop-downs are going to be done in piecemeal fashion, it kind of matters whether or not they're all going to fall in that seven to nine times range, or if they're going to come below or above that.
Well, again, I think I'll give you a little bit of the same answer that I just gave you on the IDR buy-in, that ultimately these are subject to a process and a review by an independent Conflicts Committee of the board that we'll go through. We think at this point that seven to nine is an appropriate range for all those assets. That's not to say something couldn't be done above or below, but we think that seven to nine is the appropriate range. We'll have the specific discussions on each of the drops as we go through the process to identify what the appropriate valuation is and making sure, obviously, that it's fair to the partnership and provides an appropriate value equation for the partnership as those transactions are conducted.
Got you. Okay, just one last one, if I can, just for Don. You talked about being a consolidator at MPLX kind of when all of a sudden done with the drops and the IDR role, and this was echoed from what you said on the 3Q earnings call. Can you just discuss some of the businesses or assets MPLX would seek to acquire? Can you talk about maybe perhaps geographies that are beyond what MPLX is already operating in, or is it kind of just bolt on from what we've already seen?
Yeah, I would say that generally our ability to get a transaction, if there's an attractive transaction, it is probably because it's also connected to or in a geography or in a profile that's very consistent with what we're doing now, and we're able to get synergies and to be able to operate those in a way that brings more value than other bidders would be able to put forth. I don't see us stepping out dramatically. I think we really like the Utica Marcellus. We really like the Southwest. To us, those are probably areas where we'd be very focused, at least on the G&P side of the business.
Got you. Thanks, guys.
Thank you. Our next question is from Faisel Khan of Citigroup. Please go ahead.
Thanks. Good morning, Gary.
Hi, Michael.
Hey. Is there going to be a vote at the MPLX level for the exchange of the IDRs?
Faisel, we're not expecting a vote. We expect this is a matter that will be taken up by the Conflicts Committee of the MPLX board and ultimately decided on by the MPLX board.
Okay. Gotcha. On the tax-free separation of Speedway, if your special committee comes back and says that that's the right thing to do, is that sort of a final decision or is there other sort of negotiations or discussions that have to take place after that?
Well, let's wait till we get the study done, and then we'll make that transparent.
Okay. Got it. That's all I had. Thanks.
Thank you. Our next question is from John Edwards of Credit Suisse. Please go ahead.
Yeah, thanks for taking my question. I just wonder if you could clarify, Gary, on the GP exchange, the IDR GP exchange, what you expect the timing on that to be.
Yeah, John, it's Tim. As we've made clear, I think, in the release, our expectation is that that will be done in conjunction with the completion of the drop. It is unfortunately also a little bit time-dependent on when we get the tax clearances. We would hope and expect that that would be in 2017, but I don't think we can give an absolute assurance that that'll be the case. It will be at the tail end of the drops, which from where we sit today, we would expect to happen sometime in 2017.
Okay, great. Thanks for that clarification. That's it for me. Thanks.
Thanks, John.
Thank you. Our next question is from Jeremy Tonet of JP Morgan. Please go ahead.
Good morning.
Hi, Jeremy.
Just wanted to follow up on the distribution growth a bit more on the trajectory there. If you think about the drop-downs in isolation, obviously they're highly accretive. If you think about the GP fold in isolation, it's going to be dilutive. Combined altogether, it should still be nicely accretive. Just wondering if we're thinking about that distribution growth, is that going to continue to be ratable quarter-over-quarter, or should we expect any step changes within there? Going back to the question of being a very large entity at the end with $3 billion of EBITDA, when all is said and done, is this an MLP that can grow kind of mid-single digits or upper single digits? Any thoughts that you can share with us there?
Yeah, Jeremy, I guess I would first say that with respect to growth, I think that we're more likely to be doing it on a ratable basis than something that would be erratic or have significant fluctuations. With respect to long-term growth, one of our objectives, as we've articulated, is to continue to drive our cost of capital down so that we can be able to deliver a strong distribution growth profile. As you well know from all your modeling experience, the ability to deliver distribution growth is very much impacted by, or one of the key assumptions is, your assumption around yield. We will continue to do the things that we think are important to driving our yield down so that we have the lowest cost of capital that we possibly can have, and then that will inform our view around our distribution growth going forward.
That makes sense. Just one last one from me. Given that MPLX is going to be such a large midstream entity and there's been some departures in the midstream management side, just wondering if you guys had any thoughts on bulking up on midstream management going forward.
That's something I look at every day, Jeremy, is what our proper succession plans are. We'll keep working on it. I've got a very good management team, as we said.
Great. Thank you very much.
Thank you.
Thank you. I will now turn the call back over to Lisa Wilson for final remarks.
Thank you for joining us today, and thank you for your interest in Marathon Petroleum Corporation and MPLX. Should you have additional questions or would like clarification on topics we discussed this morning, Denise Myers, Doug Wendt, and I will be available to take your calls. Thank you.
Thank you. Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.