Welcome to the MPLX and MarkWest Energy Partners strategic combination conference call. Your lines have been placed on listen only until question and answer portion of today's call. This call is being recorded. If you have any objections, please disconnect at this time. I would now turn the call over to Mr. Josh Hallenbeck, Vice President of Finance and Treasurer of MarkWest. Thank you. You may begin.
Thank you, Lucille, and good morning. On today's call, we will be discussing the transaction MPLX and MarkWest announced this morning. The synchronized slides that accompany this call can be found on our website at both markwest.com and mplx.com under the Investor Center tab. The agreement in plan of merger was filed with the SEC this morning. On the call today are Gary Heminger, Chairman of the Board and Chief Executive Officer of MPLX, Frank Semple, Chairman of the Board, President, and Chief Executive Officer of MarkWest, and other members of the respective management teams. We invite you to read the safe harbor statements on slides two and three. It's a reminder that we will be making forward-looking statements during the presentation 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. Additional business combination disclosures appear on slide three. Investors and security holders are encouraged to carefully read the registration statement and joint proxy statement that MPLX and MarkWest will be filing in the future, and other documents which will be filed with the SEC, because they will contain important information about the proposed merger. I will turn the call over to Gary Heminger for an overview of the combination.
Thanks, Josh, good morning to everyone, thank you for joining our call. Let's start our discussion on slide four. We are very pleased to announce that MarkWest has agreed to join MPLX to pursue our collective growth ambitions through a strategic combination. The proposed transaction would create the fourth largest MLP by market cap with a compelling growth story over an extended period of time. As part of the combination, we are affirming MPLX's distribution growth of 29% this year and expect a 25% compound annual distribution growth rate for the combined entity through 2017, and a peer-leading growth profile thereafter. This transaction creates a tremendous platform for the combined partnership to continue to grow distributable cash flows for its unit holders. We have been business partners with MarkWest for many years.
As our teams continued to work more closely on a wide variety of projects in the Utica and Marcellus, it became evident that our companies have a strong confluence of desires and capabilities and some very natural synergies. MarkWest has a significant capital investment plan and incremental opportunities beyond its current capacity. MPLX has a low cost of capital and an investment-grade profile, in addition to a strong sponsor. MPC's financial strength provides the pro forma partnership the ability to incubate growth projects at MPC and can cure some of the timing challenges of the standalone partnership and builds further the portfolio of potential future drop-downs. We are pleased to be joining forces with the MarkWest team, which has built a sterling reputation for the timely development and execution of organic growth projects to support producers' requirements.
The MarkWest team is respected for its deep producer relationships, operational excellence, and commercial expertise, resulting in one of the premier MLPs in the market today. If you'll turn to slide five, the merger is a unit per unit transaction plus a one-time cash payment to MarkWest unit holders that implies a total enterprise value for MarkWest of approximately $20 billion, including approximately $4.2 billion of assumed debt using closing prices as of last Friday, July 10th. Under the terms of the merger agreement, which was unanimously approved by both boards, the common unit holders of MarkWest would receive 1.09 MPLX common units and a one-time cash payment of approximately $3.37 per unit, for a total consideration of $78.64 per MarkWest common unit, based on wholly diluted units currently outstanding. MPLX's sponsor, MPC, would contribute $675 million of cash to MPLX to fund the one-time cash payment.
In addition to the attractive premium of 32%, MarkWest unit holders would participate in the combined partnership's peer-leading distribution growth for an extended period of time. The transaction, which is subject to approval by MarkWest unit holders and customary conditions and regulatory approvals, is expected to close in the fourth quarter of 2015. After the closing, I look forward to working with Frank on both the MPC and MPLX boards. In addition, MarkWest will nominate another representative to the MPLX board. Before I turn things over to Frank, I want to recognize him and his fantastic organization. They have built an extraordinary partnership. The success of this transaction going forward centers on sustainable growth, MarkWest employees and management remain a fundamental part of that value proposition. Let me turn it over to Frank.
Thank you, Gary, to everyone on the call this morning. As you can hear, I've got the touch of laryngitis, bear with me. I guess I did too much talking over the last couple of weeks.
I want to reinforce the enthusiasm both teams have for this strategic combination. The cash flow growth engine of the combined partnership will be tremendous. On slide six, you can see that organizationally, MarkWest becomes a wholly owned subsidiary of MPLX. The MarkWest leadership team will become executives at MPLX and would remain in Denver, where the combined partnership expects to maintain a significant presence. Slide seven provides an overview of our leading midstream position. Today, we're the second largest processor and fourth largest fractionator in the U.S. Over the last six years, we have worked closely with our producer customers to develop critical infrastructure and have built the industry's most extensive footprint in the Marcellus and Utica shales. With long-term fee-based contracts, nearly 8 million acres dedicated, and minimum volume commitments, our growth program in these two resource plays is exceptional.
Given the scope and scale of our operations in the Marcellus and Utica shale, combining with MPLX will allow us to further expand our franchise and ensure that future projects will rapidly enhance the productivity of the basin and serve our customers' evolving needs. Turning to slide eight, you'll see some of our key producer customers from the roster of over 160 we support. The diversity of these customers is unrivaled in the midstream industry, as is our award-winning service to these partners. An important benefit to our combination with MPLX will be the ability to enhance and expand the capabilities for our valued partners. The success of our business has always been to anticipate and execute for our customers, this combination substantially strengthens that objective.
Slide nine provides a snapshot of the combined partnership and highlights why we believe the pro forma MPLX is truly a unique MLP among large cap peers. With about $1.3 billion in projected EBITDA and $21 billion of market capitalization, we're guiding to a 25% compound annual growth rate through 2017. That best-in-class growth is nearly double our closest peer and more than three times the peer group average. This distribution guidance is driven by MarkWest's strong organic project portfolio and MPC's substantial drop-down inventory, providing a clear line of sight for that growth. Let me turn it back over to Gary.
Thanks, Frank. Adding to your earlier comments, I believe this combination creates a best-in-class partnership. Together, we combine two attractive platforms with multiple avenues to grow distributable cash flow. The map on slide 10 shows the notable geographic overlap of our combined businesses, which provide natural advantages as logistics and processing capabilities continue to be built out in this area of the country. MarkWest's leading position in the prolific Marcellus and Utica shale plays complement MPC's and MPLX's logistics and refining footprint in the same region. Examples include the newly completed condensate splitters in MPC's Canton, Ohio, and Catlettsburg, Kentucky refineries, and MPLX's planned Cornerstone Pipeline, which will become a critical industry solution in the movement of condensate and NGLs in the region. Slide 11 highlights some of the significant growth opportunities available to the combined partnership.
The integration potential is notable as the two companies' operations span across the Natural Gas Liquids, crude, condensate, and refined products value chain. The volume of NGL production in the Utica Marcellus is expected to increase significantly over the next decade, creating an opportunity to convert NGLs into higher valued blending components. This is more easily done by leveraging the expertise and assets of MarkWest, MPLX, and its sponsor, MPC. We are developing solutions to move increasing amounts of NGLs and refined products to the East Coast for fuels blending and export. MPC's financial strength and the ability to incubate projects could further accelerate MarkWest's expected $1.5 billion of average annual capital investment program over the next five years. Additionally, incremental capital investment opportunities available to the partnership, either directly or through MPC, could double the organic growth currently planned.
We expect the combination of these upside projects and MPC's existing eligible drop-down inventory of at least $1.6 billion in EBITDA will support this strong distribution growth profile well into the partnership's future. The combined company will also be well-positioned as first mover in other emerging shale plays and will have the enhanced ability through scale to pursue additional strategic opportunities. Slide 12 provides an illustration of the operational synergies. Projects like Cornerstone Pipeline and Utica build-out are more obvious, but there are opportunities throughout the Natural Gas Liquids value chain, including multiple projects for long-haul pipelines and downstream process development. The MarkWest and MPLX combination will provide significant vertical integration opportunities for many years to come. Slide 13 highlights the robust inventory of MLP-eligible EBITDA at MPC.
The significant growth outlook resulting from the combination of MarkWest and MPLX eliminates the immediate need for the proposed MPLX acquisition of MPC's marine transportation assets in 2015. As a result, that transaction has been deferred indefinitely and returns to the backlog. With that, let me have Frank make some closing comments.
Thanks, Gary. Slide 14 highlights the substantial benefits this combination provides. Since our IPO in 2002, MarkWest has grown from a small gatherer and processor to one of the leading MLPs in the nation. Our mission has been to create a culture focused on relentless execution and superior customer service. By developing creative solutions on behalf of our producer customers, we have delivered exceptional total returns for our unitholders. With this transaction serving as a milestone, this combination allows us to move in the next phase of our growth. Joining with MPLX is an unparalleled opportunity as it combines our industry-leading organic growth profile with their significant drop-down structure and tremendous financial flexibility. The combined projects that we can develop are compelling, and the combination opens up this pool of investment opportunities. The transaction provides MarkWest unitholders with a very attractive premium of 32% based on last Friday's close.
The combined entity would have substantial scale and a peer-leading distribution growth profile over an extended period of time. The partnership would benefit from the support of a Fortune 25 company with an investment-grade credit profile, strong cash flow generation, and the ability to incubate capital projects as needed. A lower cost of capital of the combined partnership further enhances the value proposition. We believe this combination represents a fantastic fit that will drive substantial unitholder value over the long term.
Frank, I couldn't agree more with you. For MPLX, the existing opportunity set is substantially enhanced by the merger. The combination significantly increases our size, scale, and opportunity to grow over a very long period of time. Frank and I are truly excited about the opportunities this combination provides. The projects available to the combined entity are compelling, and we look forward to joining forces and continuing our focus on distributable cash flow growth for the combined unitholders. Combining MarkWest's industry-leading gathering and processing business with the increased financial strength and enhanced opportunity set provided by Marathon creates an MLP with exceptional growth profile, notable scale, and the potential to grow distributable cash flow and create superior value for our unitholders over an extended period of time. Josh, I'll now turn it back to you for questions.
Thanks, Gary. As we open the call for your questions, we ask that you limit yourself to one question plus a follow-up. You may re-prompt for additional questions as time permits. With that, we will now open the call to questions.
Thank you. To ask the question, please press *1 on your touchtone phone, unmute your phone, record your name when prompted. To withdraw the question, please press *2. Our first question comes from the line of Manav Gupta. Your line is now open.
Hi, good morning, guys. Congratulations on all the hard work of putting this together. A couple of quick questions here. I guess first, I was wondering if you can talk about the commercial opportunities that come about as a result of this transaction. I think you'd made a comment in your press release about potentially doubling the organic growth rate. You also had mentioned the one and a half billion for the next five years per year that you were thinking about is where MarkWest can grow. I was wondering if you can sort of give us a framework as to how to think about the investment capital that can be put to work as a result of the combination. Is it something in the $5 billion-$7 billion range? I was just wondering if you can sort of give us some color on that.
Noor, let me start, and then I'll turn it back over to Gary, before my voice fails completely. Absolutely. We're tremendously excited about the opportunities on the commercial side. The point we want to make going forward, and we're going to have lots of opportunities to talk about the strength and power of this combination. The organic growth that MarkWest has today is focused primarily in the Northeast shales, where we are clearly industry-leading from a gathering, processing, fractionation standpoint. We're creating, helping our producers create the NGLs. That is creating a lot of value in the marketplace. What this combination does, as Gary has talked about earlier, is it creates a lot of synergies between the two companies. We have been working together over the last year or so with Marathon and MPLX to identify those opportunities where we can provide the services and support the Marathon business.
NGLs are a key part of that equation. You'll hear more in the future about individual in-basin projects as well as additional access to international markets out of the Northeast. In terms of numbers, obviously, we are right now just evaluating what the impact of capital will be going forward. That doubling of capital is certainly achievable, and we've identified specific project opportunities and are well down the road on a number of those projects that will be developed and come online over the next several years. Gary, you want to talk more about that?
Yeah, one of the things that we were impressed as we looked at the backlog of projects, not only near term. The long-term strategy of MarkWest, and then we couple that with our own plans within our pipeline logistics terminals marine group. We saw many synergies to overlap, but we saw many projects that we really believe we can probably put together to even make them stronger for the long term. With Marathon's, or I should say Speedway's, acquisition of a very large retail component on the East Coast, this gives us the ability to even batch some refined products, possibly along with NGLs, and eventually move to the East Coast. We have, I think, a great set of assets and projects to look at over the long term.
Cool. As a follow-up question, I was wondering maybe you can talk about drop-downs going forward. You delayed the marine drop-down today. When I think about the accretion of the combination of MarkWest with MPLX, given the growth that MarkWest has as well too, you kind of have accretion plus growth there. Does this result in you pushing out the need to actually do drop-downs to hit your growth targets? Secondly, does the combination potentially result, especially when you're talking about the CapEx before, of an expansion of assets at MPC that you could actually grow the drop-down inventory as well too? I was wondering if you can address that.
Well, I think you caught up on all the key points. Yes, it does give us the opportunity and the luxury to always have a very large inventory to ensure that we keep very solid growth targets out into, as I said, an extended period of time in my comments. We believe that luxury, the $1.6 billion that we have in place today, and if you learn or listen on MPLX calls from the past, I've always talked about, we always wanted to be able to replace anything we drop down with new assets, organic or acquisitions. All we did here was defer the marine assets because we don't need to drop that in this period of time. It gives us that ability to maintain that great inventory of drop-downs.
Yes, things that we're looking at inside MPC and the ability to incubate projects at MPC now and possibly even make them at a bigger scale, is really what Frank was talking about. As we look forward in combining these companies, what is the best foot forward in determining the growth profile? Always remember, we're going to have a very, very solid and growing backlog of drop-down inventory.
Great. Thank you very much, guys. Once again, congratulations.
Thank you.
Our next question comes from the line of Michael Blum. Your line is now open.
Hi. Good morning, everybody. Frank, I hate to ask you to talk. I hope you feel better. Just wanted to get your perspective. You've always chose to remain independent and voice that as something you wanted to do. Can you talk about what changed and just, to the extent you can, just the background in terms of if this was a negotiation or an auction?
Michael, obviously, this was a very difficult decision for our board. We have built our value on that independent structure, which has allowed us to move quickly in the marketplace and to deliver world-class customer service. It was very difficult for us to even consider this sort of a transaction. As we said earlier, as we started to work with Marathon, we started to realize the power of this combination. It will allow us to have more flexibility from a capital standpoint, from a balance sheet standpoint. It will allow us to capture a number of projects across our operations, particularly up in the Northeast. By virtue of having a partner like Marathon and MPLX, simply stated, we have a lot of opportunities, as you know, Michael, to continue to expand our footprint and expand our service set.
It was extremely important for us strategically to align ourselves with a company that provides that financial support and flexibility, but also provides the commercial and operational capabilities. At the end of the day, it really came down to, are we better moving forward as an independent company, or to align ourselves with a company like MPC and MPLX? The answer is obvious that we feel that we can deliver much stronger unit holder returns over the long term through this combination.
Great. Thanks for that. Second question is just, you've talked a lot about commercial synergies. Are there any cost synergies that you can identify associated with this merger?
Michael, when we looked at this transaction, let me be clear here, I'm extremely impressed by this management team and the entire organization of MarkWest. As we started talking, and we've been, as Frank said, working over a year on a number of different projects and opportunities. It was clear that the MarkWest culture and the MPLX, MPC culture was very much alike. We need the entire management team. We need this organization. This is not a transaction built off of cost synergies. This is a transaction built off of commercial synergies and combining these two great companies going forward. Yes, there will be some over time, there will be some, I think, good synergies on how we take some feedstocks maybe into some of our refineries. This is not driven off of cost synergies.
Thank you.
Our next question comes from the line of John Edwards. Your line is now open.
Yeah. Good morning, everybody, and congrats. Yeah, my sympathies also to you, Frank. I hope you feel better here. I'm just curious how long this is in the process, why now? If you could confirm, and we're seeing press releases that there is a breakup fee, but I just didn't see it in the actual release, if you could confirm that as well. We're seeing $625 million, I think. Just want to confirm on that. Yeah, so how long the process, why now, and the breakup.
Well, John, this is Gary. I've been trying for a long time to get you to cover us, so now I guess I've succeeded.
Yeah. You're forcing us.
The breakup fee is correct, that you have. I think we were pretty clear, both Frank and I, that we have been working as partners for over a year on a number of different projects. It just evolved over, again, the great culture, the great relationship, and the commercial combination here made sense. We've been working for at least a year on projects, then it just evolved into these discussions early in the spring.
Yeah, John. Just to add to that, I mentioned earlier to Michael that it was very important for us to look at this opportunity from the standpoint of one of our unitholders, excuse me, as well as the producer customers. Huge opportunities across our footprint for continuing to grow. If you think about the Northeast in particular, the ability to drive these downstream projects, these in-basin projects, NGL projects, it's crucial. As we started working with Marathon, to Gary's point, it became pretty obvious that together we could create and drive a lot of new demand in the Northeast. Frankly, across our system. You look at Marathon's footprint. We're excited about the opportunity to evaluate and assess our opportunities also in the Gulf Coast. At the end of the day, it's all about. You ask why now?
It's all about being able to act quickly and decisively and to be able to continue to work with our producer customers and create more opportunities, more demand for their products, their commodities, so that we can together create more value. I started getting excited about this a year ago, basically, when we started to think about the alignment, the opportunities, and the synergies. You're going to hear more, John. We're going to talk a lot at the next quarter call. We'll be out talking to investors and analysts and producer customers about the power of this combination. At the end of the day, it's all about what together we can do, and is that more powerful, more valuable than our standalone independent business plan.
Okay. That's helpful. Just who are the other advisors on the deal, and then when do you expect this to close?
The advisors for MPLX were UBS, Jefferies for MarkWest, we expect to close in the fourth quarter.
Okay, great. Thank you very much.
Our next question comes from the line of Gabe Morin. Your line is now open.
Hi. Good morning, everyone. Congrats on the transaction. Gary, with the December drop-down transaction, I think you had given guidance for a mid-20s growth rate on the distribution at MPLX. I guess I just wanted to ask about that guidance in the context of today's transaction. I mean, we're certainly getting a lot of questions as to what top tier means beyond 2017. Maybe you could speak to that top tier within the context of the prior guidance given in December.
Well, when we gave the guidance back in December, of course, that was just for MPLX, and we said a mid-20%, going forward. Now as we enter into the large cap space, in fact, going out three years is a real luxury for you because most people only give it for one year. 29% reaffirmed for this year, then a CAGR of 25% for the next couple of years. We're very positive then. As I say, we still have $1.6 billion of backlog in inventory, and that's going to grow already within MPC. Then we have the ability to incubate several of these projects that Frank has been talking about, and I know Randy and John have been talking about at prior conference calls of MarkWest.
We're going to have tremendous opportunity to incubate those projects down into or at MPC, then virtually, or as to say, in the future, down into MPLX. Basically, what you have here is a virtual cycle that as we continue to invest at MPC in projects, as we continue to invest at MPLX in projects, we're going to have the ability to have what we call a top tier. I don't think it's out of bounds to say, only to give a three-year guide to this period of time for a large cap MLP. It's quite evident that we have a very strong portfolio and a very strong profile going forward, and it allows us to defer drops to a very extended line of sight.
Thanks, Gary. Maybe as a follow-up, if I could ask. You've seen one or two precedent transactions where, I guess, a refinery-oriented MLP has gone and bought gathering and processing assets and gained scale there. Just in terms of talking about some of those commercial synergies in future projects, the line to Philly or to the East Coast, a PDH facility, how much is it or was it complicated, or is it going to be contemplated that MPC is going to be commercially backstopping some of those transactions in terms of, I guess, taking capacity on some of those projects?
Well, that potential certainly is there. Whether we commercially backstop some of those with a T&D or whether we just invest on those from a commercial standpoint remains to be seen. It certainly provides, for those project ideas as well as others, it certainly gives us, I think, a first-mover advantage in several different markets, in several different respects. In that, yes, we move a lot of feedstocks especially NGL feedstocks. We're only talking about the East here. Let's talk about the Gulf Coast for a second. We're one of the largest refiners in the Gulf Coast, and we do not manage any of our own NGLs to speak of in the Gulf Coast. This gives us tremendous flexibility to move forward, all kinds of tools for growth on the partnership over time.
We're not only going to be focused on an East Coast movement, we're going to be focused across our entire depth and breadth of MPC, MPLX, and MarkWest platform today.
Got it. Thank you.
Our next question comes from the line of Kristina Kazarian. Your line is now open.
Hey, guys. Gary and Frank, congrats on the transaction today. Just following up on the growth opportunities. When I'm looking at page 12, it pivots the pipeline to the coast, PDH, Canadian diluent, or the Gulf Coast things you were just mentioning. Can you guys talk a little bit about timeframe around these? Would these all now be funded on at MPC level? What about the combined entity gives you conviction that they move forward?
Sure, Kristina, good to hear from you. If you look through these, the condensate splitters at Canton and Catlettsburg already been built, operating, and are already meeting design criteria. Those will be when the potential arises. Those will be set for drop-down candidates into this MLP. I guess some of the projects that we're talking about, alkylation and gasoline blending, those are in the front stage of us looking at, and those are some of the projects that we've been working on with MarkWest over the last year or so as different ideas and how to really improve the value of those molecules that are being produced in the Marcellus and Utica. Kristina, we're on the very front edge of looking at those projects. I'm very pleased and excited about what I see to date. As you know, it takes some time.
From a conceptual standpoint, the projects have been vetted, they make sense, and we're further into the conceptual engineering to ensure that this is the right thing to do. Let me turn it to Frank to talk about some of the other projects.
Kristina, I'll save my throat and let Randy comment on this. I would like to just give you a lead-in and remind you of our conversation at our analyst conference a month or so ago. Randy and I talked a lot about these in-basin projects. Gary has provided that overview of the opportunities. The slide kind of reinforces the synergies between MarkWest and Marathon Petroleum Corporation relative to those in-basin projects. Stay tuned for a lot more conversation about this. Since you asked the question, let Randy just expand a little bit on the vision and the projects that we started talking about during that June analyst meeting. Randy, if you would.
I can do that. I'd just perhaps start out sort of just reiterating the things that Gary talked about with Cornerstone Pipeline and the splitters and our stabilizer. That's really where a lot of this started. When MPLX announced the Cornerstone Pipeline project back then from a perspective of MarkWest, we said, "Wow, what a great project." We have Marathon Petroleum Corporation building this pipeline over to our stabilizer, eventually over to our fractionator, and we said to ourselves, "Wow, what a great opportunity for MarkWest to be able to take our products, access all of the Midwest region refineries with our NGLs, and perhaps even through pipe access, now the entire change of the Canadian diluent markets. We said, "Wow, what a great opportunity for MarkWest." That immediately led into thinking about our stabilizers and MPLX's splitters.
Another phenomenal combination, where the perfect feedstock for Marathon splitters is our stabilizer, and the perfect market for our stabilizer is their splitters. Another way that MarkWest looked at it and said, "Wow, does this combination ever really make sense?" It really provides the strengths of both. That's sort of where it really started driving even a year ago. We talked about some other projects that we're at the beginning phases of, like Alky, like the NGL pipeline, where we really have an opportunity to combine, I think Marathon's Midwest. They're a producer and consumer of these products. We have a tremendous feedstock at our fractionators for these projects. It's an enormous opportunity for our producer customers, really that's what's driven MarkWest forever, is really what can we do to add value to our producer customers?
Look at, of course, the Marathon retail footprint in the Northeast and the East Coast. The opportunities just in the Northeast are just enormous. As Gary talked about, we think we have the same sorts of opportunities in the Gulf Coast. We have been working for almost a year on this project, long before there were discussions about the strategic combination. There were lots of discussions about, wow, from a Southeast perspective, this is a great relationship for MarkWest. From our perspective, that's what really drove this into it. The deeper we got, the more opportunities we saw. After a year of looking at those opportunities, we are where we are now. Again, from a MarkWest perspective, from our producer customer's perspective, this is really a fantastic opportunity for us.
Great. Just a quick follow-up. On slide 11, you guys mentioned enhanced ability to pursue bolt-ons or large-scale acquisitions. Can maybe, Gary, you just balance that against the growth opportunity set you guys all just talked about and potential to do both?
Well, Kristina, we've met many different times, let's get this one put together first before I talk about the next one.
Sounds good. Thanks.
Our next question comes from the line of Faisel Khan. Your line is now open.
Thanks. Good morning, Frank. Good morning, Gary.
Hey, Faisel. How are you today?
Hanging in there. Thank you. Just a couple questions. I just want to make sure I understand how the cash flows are flowing here. MarkWest unitholders were going to get roughly $370 a unit this year in distributions. MPLX looks like close to $170. With this transaction, as the MarkWest unitholders get an MPLX distribution, the balance of the cash flows, do those all go to the general partnership? Or is some of that cash flow being held back for the growth in 2016 and 2017?
Let me ask Tim Griffith to take that.
Faisel, obviously, the transaction is not yet closed. Until that happens, both partnerships will operate under the distribution plans in place. Beyond that, once the combined partnership takes into effect, this will enhance the GP cash flows that will come back to MPC. As Gary highlighted earlier, I think an important point here is that those cash flows, as they come back to MPC, become available for even further incubation. Gary referenced the sort of virtual capital cycle, and I think that's the right way to think about it, that all that cash and capital becomes fungible at the C corp. As incubation or balance sheet is needed to be borrowed for a project to develop it over time, the partnership's got the enhanced ability to do that as we go.
Frank. I'm looking at the 25% combined distribution growth in 2016 and 2017. Is that a function of drop-downs, or is that a function of something different?
No. We state later in my presentation that we still have $1.6 billion of backlog inventory identified today. That does not anticipate using any drop-downs over those early periods. That's the beauty of this from the question that I answered earlier on the growth, is that we'll still have a significant backlog of inventory on top of what we think is a great project set of organic growth.
Got you. The $1.6 billion in backlog will remain all the way through 2017.
Correct.
Got it. Thank you. Thank you, guys. Appreciate the time.
Yep.
Our next question comes from the line of Jeremy Tonet. Your line is now open.
Good morning, congratulations there.
Thank you.
Thank you.
Just wanted to touch base on the credit side as far as your conversations with the rating agencies on this particular transaction structure and what the response was so far.
Yeah, Jeremy. Nancy and I did have a chance to go and visit with the agencies on Friday and give them a quick look on the transaction. Obviously, they will need to do their work. We think that the management of the pro forma partnership at about a 4x leverage is the appropriate point. Maybe more to the point, our intent will be to manage the pro forma partnership as an investment-grade credit profile, and that will continue to be our intent. It has been at the MPLX level from its inception, and it will be going forward as well. We think the credit features of this partnership are really tremendous. It is primarily fee-based.
There's a strong sponsor. We're going to limit leverage to about 4x. Again, just the amount of financial flexibility that is afforded the sponsor here gives us great confidence that we can manage that investment-grade profile for the long term.
Got you. That's helpful. Then one just quick follow-up, if I could. I think you might hold off on this, but just wanted to take a stab. As far as operational, commercial, all the synergies that you guys saw, is there any kind of baseline number that even though you know we're early in the process, you feel comfortable that this level is achievable and something higher down the road could be possible?
No. As I said, this is not driven by cost synergies. We're just getting in to determine not just one project. It's just not lined to the East Coast. It's many different things. This transaction stands very tall on the merits that we've already outlined, and we believe that there's going to be substantial value as we get in and can define these other commercial synergies long term.
Okay, great. Thank you.
The next question comes from the line of Helen Brielle. Your line is now open.
Thank you. Good morning, and congratulations. Just a quick question on the Utica JV, the third-party stake that exists today. What's your thoughts on potentially buying those stakes in, and if so, would it be done at the MPC level for future drop-down?
Let me ask. Frank and his team really have been managing these JVs, which appear to me to be exceptional partners. Let me ask Frank to take that.
I'll try. Helen, the JVs, all of our JVs, which are now focused in the Utica with EMG and Summit, are a critical part of our relationship and a part of our growth strategy. Those are long-term agreements in place. They will continue. Those partnerships have been crucial, and as Gary alluded to, we will continue to drive the MarkWest model, which includes those partnerships, which, as you've heard in the past, provide not only financial flexibility, but also provide a lot of commercial and even operational capabilities and optionality in the Utica. Those will continue. We have no plans at this time to buy them out. Obviously, at some point in time, we can talk about that. For the time being, all those agreements and the relationships remain intact.
All right, great. Then just another question on the proxy that you guys will be filing soon. Just wondering when that would come out, and to the extent that there has been other parties interested in combining with MarkWest, would that be made public in the proxy?
Let Nancy take this.
Sure, Helen. As you can imagine, there's been a lot of work getting up to this point. We'll all be working very hard towards proxy filings and other legal documents that need to be handled around this transaction. We anticipate filing within the next three to four weeks. Again, that's subject to an awful lot of work with a lot of people. We are all focused on getting that done quickly to move to the unitholder vote, and then subsequently to closing.
Okay. If there has been other sort of interest from other buyers, would that be made public in the proxy at all?
Yes. Any information on that front will be contained in the proxy.
All right. Great. Thank you very much.
Thank you. Our next question comes from the line of Jaron Holder. Your line is now open.
Good morning. Thanks for taking my question. Just wanted to focus on cost of capital here. Can you talk about the trade-off between, I guess, going from a higher-yielding currency to a lower-yielding one, but going from having no GP IDRs to now being at one in the 50% splits?
Well, Jeremy, this is Tim Griffith. I think as we've evaluated the combination, it's certainly two different scenarios that come together. MarkWest did in the past buy its GP out. The GP exists within MPLX, and again, as we talked about, we think that provides great benefit to the partnership on a long-term basis. As any cash flow coming to the GP become available to incubate projects. Again, I guess at risk of saying it twice, this is really the virtual capital cycle that this partnership provides for the combined enterprise.
Jaron, in addition to Tim's comments, the impact on cost of capital, the sheer math of the impact of the IDRs was evaluated as a part of this transaction. I would totally agree that it is a trade-off, but the value of that support by the parent, along all the lines that we've already talked about, was absolutely critical. On a going-forward basis, this structure that we're going to have going forward because of the support, the drop-downs, the ability to develop projects at the MPC level, and the associated growth that drives the lower cost of capital from a yield standpoint
was obviously considered heavily. Clearly, we are very, very comfortable with the end result through the combination.
I would add to that, the cash upfront from the sponsor MPC is very important and critical to the make whole, if you will, on the dilution to the MarkWest Energy unit holders. In addition to that, it really provides a vehicle for long-term growth of the distribution, and we view that as so critical. That cost of capital differential will help us continue to grow and really work with the unit holders on the distribution growth as well.
That's great. Thank you.
Our next question comes from the line of Tim Schneider. Your line is now open.
Hey, good morning, guys. My question is more of a longer-term strategic question. I don't want to put the cart in front of the horse, but I'm going to. If I look at page 10, obviously, very pretty map of the combined infrastructure footprint. If I look at some of the options in terms of exporting NGLs out of the Northeast, the two main ones had always been, well, you can go to the east and access the international markets or down to the Gulf Coast. What really hasn't been talked about a ton is getting some of these volumes west, more inland into the Mid-Continent, obviously, it looks like you guys have a tremendous set of pipeline assets that could potentially do this.
Could we envision on your NGL system or on your pipeline system, some of these barrels actually moving into the Mid-Continent and backing out barrels that are right now coming up from Mont Belvieu in the winter months specifically?
One of the projects we've already identified is the Cornerstone Pipeline that will initiate down around Cadiz and bring NGLs up to our refinery in Canton. We also have a 250,000-barrel-a-day refinery in Catlettsburg. We have both river access and pipeline access to be able to, with Cornerstone, as we build out Cornerstone, our ability is to be able to go west, to be able to develop a Delaware market all the way to Canada, to be able to take NGLs into Robinson, and other Midwest refineries in the Wood River, Toledo, Lima area as well. There are many avenues in which we can move products. At the same time, we're building a brand new butane cavern over at our Robinson Refinery, to be able to house butanes in the non-blending season.
Of course, if we can get all the way to our Robinson Refinery, then we have the ability to move all the way up into the Chicago plants, too. This just gives us a tremendous platform, and I think back to my earlier point, a tremendous platform for commercial synergies.
Good. Thank you.
Our next question comes from the line of Ed Westlake. Your line is now open.
Yes. Good morning, Gary, and congratulations. Congratulations to Frank as well on the MWE side. A couple of questions on maybe the MPC overall. What additional CapEx do you think you'll be able to do to accelerate the awesome sort of enlarge footprint of projects that MWE has?
Well, thanks, Ed, for your comments. We have not identified yet, and obviously, this will become a centerpiece of our analyst meeting in December. By then, we will have this transaction, expect to have it closed and be in very good position to talk about it in detail. We have many options. In the slide that I illustrated, we have an Alky project that we're looking at, other NGL pipeline access going back to the east. Ira outlined on the Gulf Coast some of our ideas, as well as this gives us the avenue, I think, to be able to expand in the Southwest, where MarkWest has a nice footprint today, and where we access a lot of condensate and other products also. This will give us a nice footprint there.
I do not have a, or I'm not ready to release a capital number yet. Several big projects like those I just spoke about, we think make sense.
On the Southwest, I noticed that MarkWest has been looking at the STACK with Newfield and the Delaware with Cimarex and Chevron. Those are obviously potentially large infrastructure opportunities with significant NGLs and gas handling, as well as the dominant position that you guys have up in the Marcellus and Utica. I'm wondering, does this change the ability for the combined company in terms of reallocating capital, in terms of their growth priorities? Or is it an all of the above strategy relative to what MarkWest were already developing?
Ed, it's clearly all of the above. The Southwest is building a huge platform in the shales, we see this strength of the balance sheet being a critical part about our ability to expand even more rapidly in Oklahoma and Texas. We're excited about the relationships in the Delaware and the STACK, I've been on the phone with customers earlier today and tremendously excited about our ability to be even more aggressive in those areas. It's an all of the above platform. It's an all of the above value proposition for our producer customers.
That really just sets up expanded opportunities across the entire enterprise. Beyond that, some of the other big plays, the Rogersville, New Albany plays, with MarkWest footprint already down in the Utica and Marcellus, the entire tri-state area of shale plays. I think MarkWest is in really a first-mover advantage and an outstanding position for when those play. If you go over to Southern Illinois Basin, the New Albany Shale, the history of Marathon was the entire Illinois Basin. That's why we have the Robinson Refinery. We have tremendous assets and footprint there. I think with this combination, we'll just have tremendous expansion opportunities for a long period of time.
I guess, to echo a question earlier on about the cost of capital, at what point do you think you then list the GP as potentially another financing vehicle?
Well, that's a real high-grade problem, a high-grade question, and we'll think about that down the road, Ed.
Okay. Thanks very much.
Okay.
Thank you. Our next question comes from the line of Paul Chang. Your line is now open.
Thank you. Good morning, guys. Gary, with the pro forma on the combined entity become much bigger, should we assume that it will be the intention for management going forward, the bulk of the logistic CapEx will be under MPLX and not under the C corp? If that's not the intention, what kind of criteria we should assume that for the CapEx to be under the C corp?
Okay, you're asking about the CapEx will be at MPLX or MPC?
Right. In a going-forward basis, when you're looking at an organic project which is logistics, whether that is a fractionator that you could potentially be dropped down, should we assume that you're going to still be in the C corp or that given the much enhanced financial capability of the combined company on the MPLX, that the bulk of the CapEx going forward will be under that entity, will be self-funded?
Well, that's the beauty of this combination, is we can do it either way. First, we would expect to have the capital budget inside MPLX. It's all going to depend on the cash flows and staying within the cash flows so we can meet the distributions that we expect, also the flexibility and the luxury of having MPC and MPC's balance sheet. I've said that at our analyst meeting the year before, when we rolled out our acceleration of MPLX last year, that one of our strengths and one of our goals is to grow the midstream side of our business. It is our intent here with all these projects to continue to incubate projects inside MPC and drop them down over time, as well as having a very substantial growth within MPLX. That's the combination.
That's what Frank talked about, that with their tremendous backlog of projects, it gives us the ability to develop those.
Great. Gary, sounds like based on your early comment, that we're not going to see much of a drop down from now until 2017 at a minimum. Do you have some preliminary data, what kind of CapEx and organic EBITDA growth that you may be looking for the combined entity for the next two or three years?
Let me turn this over to Tim.
Paul. Thanks. I think obviously with the combination, we're going to take a pretty careful look. I think it's probably early to start providing CapEx guidance out on what the combined partnership will look like. I think the important part, as both Frank and Gary said, is that the opportunity set is tremendous. Obviously, the preference will be to do things at the partnership where we can. Where that's not possible or we're constrained by capacity, we can do it at the C corp. Frankly, we can cherry-pick the projects that make the most sense and have the best strategic value for the partnership going forward. I don't think we're sitting here today announcing the transaction prepared to put out CapEx guidance for either entity on a going-forward basis. Again, those will get developed over time.
I think what we'd like to leave with you today is that the opportunity set is tremendous.
One of the biggest positives is that we can just draw this inventory of drop-downs out and always have it available to maintain the high growth rates that we're illustrating on the front end here. That is really the beauty of replacing those drop-downs that we had looked at in MPLX with organic projects and maintaining that depth and breadth of the business. As we all know, to have a successful MLP, you have to be able to grow and feed that MLP every year. This just gives us a line of sight that I don't think many in this business have this line of sight.
All right. Thank you.
Yep. Thanks, Paul.
Our next question comes from the line of Roger Reed. Your line is now open.
Good morning. Congratulations on the transaction.
Thanks, Roger.
Hey, kind of following up with some of the similar questions. I recognize some of this you will hit more intensively at the Analyst Day. As we try to think about the actual sort of cash portion in here, which the $675 and the $298, roughly $1 billion in, then increased GP payments and the comments about the virtual capital cycle. Free cash flow-wise, how does this look over the next couple of years to MPC, Gary, or how do you think about that structurally?
Let me ask Tim to take this.
Again, Roger, certainly the organic growth within the MarkWest partnership now provides for a substantial amount of cash flow growth that is allowing for this deferral of the drops for what looks like at least into 2018. The cash flow profile of the business as we see it looks strong. Again, I don't think we're going to guide to it. We were as of the last distribution in the high splits at the MPLX level, so, as you know, under the agreement, that's 48% of incremental cash flows will accrue to the GP. I think, Roger, if you want to sort of build into it, I might suggest just take a look at what we've guided on LP distributions, and you can sort of back solve into what GP distributions could look like.
I got you on that. I guess I was just more trying to think about longer term, the redirection of cash flows, the comment about potentially using GP cash flows, whether that was going to be an obligation or an option or whether that would stay with the parent company.
That will be an option as we go.
Okay.
Roger, I think another way to look at that is, it's an option as we go, if you really think about how that works, that brings cash flows back in to MPC. That is going to be able to give MPC the ability to invest in those projects for this incubation that we've been talking about a lot this morning. We call it a virtual cycle, and we will weigh that against other investment opportunities we have, we are committed to growing this midstream part of our business for the long term.
Okay. Kind of the last question along those lines, does this have any impact, I understand there may be time here until the transaction closes, impact on MPC being able to repurchase shares?
Roger, again, I guess we view the capital allocation at the C corp as one where those funds are sort of fungible across the system. We'll continue to evaluate investment opportunities where they make sense, including what could be incubated capital here against the cash flows of the business. I think we expect that a capital return protocol will be an important part of how we operate on a going-forward basis. We'll evaluate. I think the nice part here is that, again, with this expanded opportunity set, there's sort of more things that we can evaluate from a capital allocation perspective in driving value for the long term. We do expect capital return and the capital return protocol to be an important part of our sort of strategic intent going forward.
Okay, great. Thank you.
Thank you. I would now turn the call over to Mr. Joshua Hallenbeck for closing remarks.
Thank you for joining us today, and thank you for your interest in MarkWest and MPLX. Should you have additional questions or would like clarification on topics discussed this morning, Geri Ewing and Teresa Homan at MPLX, as well as Kevin Hawkins and myself at MarkWest, will be available to take your call. Thank you.