MPLX LP — Q2 2017 Form 10-Q
Business and period. This unaudited quarterly report covers the three and six months ended June 30, 2017. MPLX operates Logistics and Storage (L&S) and Gathering and Processing (G&P) businesses, principally serving sponsor Marathon Petroleum Corporation (MPC). Comparisons with 2016 were retrospectively adjusted for businesses acquired from MPC; 2017 results also include acquisitions and growth activity, so reported growth is not wholly organic.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue and other income | $916 million | $698 million | $1.802 billion | $1.343 billion |
| Income from operations | $280 million | $128 million | $545 million | $178 million |
| Net income attributable to MPLX LP | $190 million | $19 million | $340 million | $(41) million |
| Common limited-partner income per unit | $0.26 | $(0.11) | $0.46 | $(0.43) |
| Adjusted EBITDA attributable to MPLX LP (non-GAAP) | $474 million | $351 million | $897 million | $653 million |
| DCF attributable to GP and LP unitholders (non-GAAP) | $370 million | $276 million | $708 million | $512 million |
- Approximate GAAP operating margin was 30.6% in Q2 2017 versus 18.3% in Q2 2016, calculated as operating income divided by total revenue and other income.
- Q2 L&S segment operating income attributable to MPLX rose to $208 million from $123 million; G&P rose to $313 million from $271 million.
- Operating cash flow was $844 million for the first half, versus $670 million. Investing cash outflow was $1.404 billion, including $652 million of property, plant and equipment additions, $640 million invested in unconsolidated affiliates and $220 million of acquisitions, net of cash acquired. Financing provided $619 million. Cash increased by $59 million to $293 million.
- At June 30, total debt principal was $7.108 billion ($6.666 billion long-term debt carrying value). Cash was $293 million. Current assets were $843 million and current liabilities $790 million. Reported liquidity was $2.790 billion, including cash and available revolving and MPC loan capacity.
- Declared common-unit distributions were $0.5625 per unit for Q2, up 10% from Q2 2016; the July declaration was payable August 14. Preferred-unit distributions were $17 million for Q2.
Changes and significant transactions
- Revenue rose $218 million in Q2 and $459 million in the first half. Management cited higher product prices and volumes, growth in Marcellus and Southwest operations, the Ozark pipeline, and acquired assets. Q2 2016 included an $89 million equity-investment impairment; first-half 2016 included $130 million of impairment expense, including goodwill impairment.
- In March 2017, MPLX acquired HST, WHC and MPLX Terminals from MPC for approximately $1.5 billion cash and $503 million in equity. It also acquired the 433-mile Ozark crude pipeline for approximately $219 million. In February, it invested $500 million for an indirect interest in the Bakken Pipeline system.
- Debt increased from $4.858 billion at year-end 2016, principally following a February $2.25 billion senior-note offering. The notes include $1.25 billion of 4.125% notes due 2027 and $1.0 billion of 5.200% notes due 2047. Interest expense increased $22 million in Q2 year over year.
- After quarter-end, MPLX replaced its $2.0 billion revolving facility with a $2.25 billion facility maturing in July 2022, and prepaid its $250 million term loan with cash on July 19.
Outlook, risks and contingencies
- Management’s 2017 organic growth-capital plan was $1.8–$2.0 billion, excluding specified dropdowns and acquisitions. First-half net growth capital expenditures were $728 million. The Ozark expansion to approximately 345 mbpd was expected to be completed in Q2 2018.
- MPC planned further asset dropdowns: a second transaction was anticipated in Q3 2017, with assets projected to generate approximately $135 million of EBITDA; remaining assets estimated to contribute approximately $1.0 billion in annual EBITDA were expected to be ready for dropdown no later than Q1 2018. These are forward-looking expectations, not completed results. Planned funding was likely to include debt and equity; MPC also intended to offer an IDR exchange in connection with the dropdowns.
- Management stated it expected cash from operations and financing sources to fund operations, capital spending, debt obligations and distributions, and intended to maintain an investment-grade profile. The partnership reported covenant compliance at a 3.4-to-1 debt-to-Consolidated-EBITDA ratio against a 5.0-to-1 limit (with specified acquisition flexibility). Ratings were Baa3/BBB-/BBB-, all stable outlook.
- Exposure includes commodity prices, producer activity and counterparties, capital-market access, project execution and costs, regulation, weather and operational interruptions. Approximately 93% of first-half net operating margin was fee-based; commodity derivatives mitigated a portion of expected price risk through Q4 2018, but do not eliminate it. The $43 million fair-value liability for an embedded gas contract depends in part on estimated future prices and renewal probabilities.
- MPC represented 38% of Q2 revenue and other income, versus 47% a year earlier. Dependence on MPC and related-party agreements, including minimum-volume commitments, remains material. Deferred revenue related to MPC totaled $72 million, including $51 million of volume-deficiency credits.
- Environmental remediation accruals were $5 million. A civil environmental settlement proposal involved approximately $2.4 million in cash penalties and $3.6 million in environmental projects; MPLX disputed the proposed amount and negotiations continued. A separate Illinois environmental lawsuit remained unresolved; MPC agreed to indemnify MPLX for any losses attributable to MPL. Management said other environmental matters and lawsuits were not expected to have a material adverse effect, but certain outcomes and possible losses could not be estimated.
- Management expected adoption of the revenue-recognition standard in Q1 2018, with possible revenue gross-ups; it was still evaluating principal-versus-agent treatment for commodity sales. Management also expected the new lease standard to have a material balance-sheet impact from recognizing operating-lease assets and obligations.
Investor verification points
- Separate underlying growth from the impact of acquisitions, retrospective presentation changes, prior-period impairments and higher commodity prices; review segment trends and cash conversion.
- Assess distribution coverage using the filing’s non-GAAP DCF definition, preferred distributions, unit issuance and the higher declared distribution; DCF is not a GAAP cash-flow measure.
- Verify the funding, timing, terms and realized EBITDA of planned MPC dropdowns, the proposed IDR exchange, and the execution and returns of the growth-capital program.
- Monitor leverage, interest costs, covenant headroom, liquidity after the term-loan repayment, and the effect of debt and equity financing on unitholders.
- Review MPC-related revenue concentration and minimum-volume credits, commodity and embedded-derivative assumptions, environmental negotiations and litigation, and future accounting-standard impacts.