MPLX LP — Q2 2018 Form 10-Q
Business context and reporting period
Quarter ended June 30, 2018; six-month comparisons are against the six months ended June 30, 2017. MPLX operates Logistics and Storage (L&S) and Gathering and Processing (G&P) businesses. Comparability is affected by acquisitions, including the February 2018 dropdown of MPC refining logistics and fuels distribution assets, and by the adoption of ASC 606; prior periods were not restated.
Financial and operating performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue and other income | $1.578B | $916M | $2.998B | $1.802B |
| Operating income | $608M | $280M | $1.165B | $545M |
| Net income | $456M | $191M | $879M | $378M |
| Net income attributable to MPLX LP | $453M | $190M | $874M | $340M |
| Common limited-partner income per unit | $0.55 | $0.26 | $1.15 | $0.46 |
| Adjusted EBITDA attributable to MPLX LP (non-GAAP) | $867M | $474M | $1.627B | $897M |
| DCF attributable to GP and LP unitholders (non-GAAP) | $675M | $370M | $1.278B | $708M |
Second-quarter L&S adjusted EBITDA was $526M, up $342M year over year; G&P was $341M, up $51M. Management attributed L&S growth principally to the refining logistics and fuels distribution acquisition, acquired joint-venture interests, MarEn Bakken, and higher transportation volumes. G&P benefited from higher commodity prices and volumes; processing volumes rose about 9%, fractionation about 13%, and gathering about 29% versus Q2 2017.
For the six months, operating cash flow was $1.290B, investing cash outflow $954M, and financing cash outflow $336M. Additions to property, plant and equipment were $862M; net capital expenditures were $959M. Cash and restricted cash totaled $9M at period-end, including $3M cash and cash equivalents. Cash alone provides little liquidity; reported total liquidity was $3.138B, including $3.135B of available borrowing capacity.
Total debt principal was $12.357B at June 30, 2018, versus $7.362B at December 31, 2017; balance-sheet long-term debt, net of discounts and issuance costs, was $11.874B. The increase principally reflects $5.5B of senior notes issued in February to finance the dropdown and refinance borrowings. MPLX reported a 3.66-to-1.0 debt-to-covenant-EBITDA ratio and compliance with its credit covenants. The common-unit distribution was $0.6275 for Q2, versus $0.5625 a year earlier; the Q2 distribution was declared after quarter-end and scheduled for payment August 14, 2018.
Material changes and unusual items
- On February 1, MPC transferred refining logistics and fuels distribution assets for $4.1B cash and equity valued at approximately $4.3B, for total consideration of about $8.4B. The acquired businesses contributed $364M of revenue and $232M of operating income in Q2, and $629M and $413M, respectively, from the acquisition date through June 30.
- MPC exchanged its IDRs and economic general-partner interest for 275M newly issued common units; the GP became non-economic. Management said the exchange was expected to be accretive to common-unit DCF in Q3 and for full-year 2018.
- ASC 606 increased reported Q2 revenue and costs through gross presentation of reimbursements and other changes. The filing estimates a $4M Q2 and $2M six-month increase in net income versus the prior revenue standard. Accordingly, reported revenue growth is not wholly organic or directly comparable.
Outlook, risks and contingencies
- MPLX stated a 2018 growth-capital plan of $2.2B, excluding the February dropdown and its related subsequent capital spending. It reported $901M of net growth capital expenditures for the first six months. Plans include gas-processing and fractionation capacity additions and L&S projects; project timing and spending may change.
- Management said it expects to fund a greater portion of future growth internally and intends to maintain distribution growth. It intends to pay at least the $0.2625 quarterly minimum, but does not have a legal obligation to pay a particular amount. Future distributions depend on cash generation, liquidity, capital markets, commodity conditions, execution, and other risks.
- MPC accounted for 48% of Q2 revenue and other income, and held 64% of common units at June 30. Commercial arrangements, acquisitions, and financing links to MPC are material related-party exposures.
- Commodity-price exposure is managed partly through derivatives, which are not designated as accounting hedges. A natural-gas purchase embedded derivative was a $66M liability. MPLX had no interest-rate derivatives; fixed-rate debt fair value is sensitive to rate changes.
- Environmental remediation accruals were $16M. Westcon construction litigation includes claims exceeding $40M against MPLX parties and claims exceeding $10M by them; MPLX said a reasonably possible loss range could not be estimated. An Illinois environmental matter also remains unresolved, although MPC agreed to indemnify MPLX for covered losses. The filing states that certain contingencies could be material, despite management’s view that resolution of the cited matters is not expected to materially affect the consolidated results, financial position, or cash flows.
- The company expects adoption of the lease standard to materially affect its balance sheet through recognition of lease assets and obligations. Management said the covenant calculation excludes the new standard’s effects.
Investor verification priorities
- Assess how much of reported growth reflects the acquisition, ASC 606 presentation changes, commodity prices, and organic volume growth.
- Review the dropdown’s financing, increased debt burden, refinancing profile, covenant headroom, and distribution coverage using both GAAP cash flow and MPLX’s non-GAAP DCF definitions.
- Verify the execution, spending, and expected returns of the $2.2B growth-capital plan and the timing of projects and capacity additions.
- Examine dependence on MPC, related-party contract terms, MPC’s distribution and throughput commitments, and the implications of MPC’s proposed transaction with Andeavor referenced in the filing.
- Monitor legal and environmental matters, commodity exposure, lease-standard implementation, and any changes to distribution or credit outlook.