MPLX LP — 2017 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2017. This annual filing also reports unaudited fourth-quarter results. MPLX is a midstream partnership operating Logistics and Storage (L&S) and Gathering and Processing (G&P) businesses. Amounts below are U.S. dollars; financial figures are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | 2017 | 2016 |
|---|---|---|
| Total revenues and other income | $3,867 | $3,029 |
| Income from operations | $1,191 | $683 |
| Net income | $836 | $434 |
| Net income attributable to MPLX LP | $794 | $233 |
| Common-unit earnings per unit, basic | $1.07 | — |
| Operating cash flow | $1,907 | $1,491 |
| Capital expenditures, cash additions to PP&E | $1,411 | $1,313 |
| Adjusted EBITDA attributable to MPLX LP (non-GAAP) | $2,004 | $1,419 |
| DCF attributable to MPLX LP (non-GAAP) | $1,628 | $1,140 |
2017 segment operating income attributable to MPLX was $782 million for L&S and $1,335 million for G&P. The filing reports net operating margin of $3,458 million, a non-GAAP measure; it should not be treated as GAAP revenue or profit.
Fourth quarter: Unaudited revenue and other income was $1,085 million, operating income $335 million, net income $241 million, and net income attributable to MPLX $238 million. Comparable 2016 fourth-quarter figures were $848 million, $247 million, $182 million, and $133 million, respectively.
Cash, debt and liquidity: Cash was $5 million at year-end, down from $234 million. Long-term debt, including capital leases, was $6,945 million on the balance sheet; the filing cites total debt obligations of approximately $7.7 billion when other borrowings are included. Available revolving and MPC Investment borrowing capacity plus cash totaled approximately $1.861 billion. MPLX reported a 3.2-to-1 debt-to-EBITDA covenant ratio against a 5.0-to-1 limit and compliance with its covenants. Investing cash outflow was $2,307 million; financing cash inflow was $171 million.
Common-unit distributions declared totaled $2.2975 per unit for 2017, up from $2.05 in 2016. The fourth-quarter distribution of $0.6075 per unit was paid in February 2018. Preferred-unit distributions were $65 million in 2017. The filing’s non-GAAP DCF and EBITDA are management measures, not substitutes for GAAP cash flow or earnings.
Material changes versus 2016
- Revenue and other income rose 28%; operating income rose 74%; and net income attributable to MPLX increased to $794 million from $233 million. Results reflect acquisitions, higher volumes and product pricing, as well as the absence of 2016 impairment charges.
- L&S operating income attributable to MPLX increased $329 million, principally reflecting the March 2017 acquisition of HST, WHC and MPLX Terminals, the Ozark pipeline, and the timing of acquired operations.
- G&P operating income attributable to MPLX increased $203 million. Gathering volumes rose 10%, processed volumes 12%, and fractionated volumes 18% versus 2016; increased pricing and volumes were partly offset by higher costs.
- Operating cash flow increased $416 million. Investment spending also increased, including investments in joint ventures, acquisitions and growth projects. Capital expenditures and acquisition activity were funded through debt, equity issuance and operating cash flow.
- Comparability is affected by acquisitions and retrospective presentation of certain businesses acquired from MPC. 2016 included $130 million of goodwill impairment and an $89 million impairment related to an equity-method investment; no goodwill impairment was recorded in 2017.
Business developments, outlook and risks
- 2017 transactions: MPLX acquired HST, WHC and MPLX Terminals from MPC for $1.5 billion cash plus equity; acquired the Ozark crude pipeline for approximately $219 million; purchased a 9.1875% indirect interest in the Bakken Pipeline system for $500 million; and acquired MPC joint-venture interests for approximately $420 million cash plus equity. It also formed the Sherwood Midstream joint venture with Antero Midstream.
- Post-year-end strategic transactions: On February 1, 2018, MPLX acquired MPC’s refining logistics and fuels distribution businesses for $4.1 billion cash plus 111.6 million common units and 2.3 million general partner units. These assets and services were projected to generate approximately $1.0 billion of annual EBITDA. Immediately afterward, MPC exchanged its IDRs and economic general partner interest for 275 million newly issued common units. Management expected this exchange to be accretive to common-unitholder DCF in the third quarter and full year 2018. These are forward-looking projections, not 2017 results.
- 2018 outlook: Management guided to 10% distribution growth and approximately $2.2 billion of organic growth capital, excluding the February 2018 dropdown and associated spending. It expected to fund organic growth with internal cash flow and debt, without public equity issuance for organic growth. Fee-based contracts were expected to represent approximately 95% of 2018 net operating margin. Planned additions included processing and fractionation capacity and L&S pipeline, storage and marine projects.
- Funding update: In February 2018, MPLX issued $5.5 billion of senior notes and used proceeds to repay the $4.1 billion acquisition term loan, revolving-credit and MPC Investment borrowings, and for general purposes. Year-end 2017 liquidity therefore should not be read as the post-transaction capital structure.
- Customer and sponsor concentration: MPC represented approximately 36% of 2017 revenues and other income and 92% of L&S segment revenue and other income. Two customers each represented a significant share of G&P segment revenue. Long-term contracts and minimum-volume commitments support cash flows, but MPC may in specified circumstances suspend, reduce or terminate obligations; deficiency-payment credits may also defer cash receipts.
- Commodity and operating exposure: Management reported 92% of 2017 net operating margin as fee-based, with the remaining 8% classified as other arrangements, including commodity-linked contracts. Risks include producer drilling and throughput changes, commodity-price volatility, project delays or overruns, outages, severe weather, cyber incidents and access to capital.
- Debt and distribution risks: Substantial debt, variable-rate borrowings, acquisition financing, capital requirements and dependence on capital markets could constrain growth or distributions. The partnership agreement does not guarantee a particular distribution; preferred units rank senior to common units for distributions.
- Legal and environmental matters: Construction contractor Westcon sought more than $40 million plus unspecified punitive damages, while MPLX parties sought more than $10 million; the partnership could not reasonably estimate a loss range and said a material adverse effect was not expected. Other matters include Illinois environmental litigation, with MPC indemnification for MPL’s potential losses, and agreed-in-principle environmental penalties and projects. Environmental remediation accruals were $13 million at year-end; management expected approximately $13 million of environmental capital spending in 2018.
- Reporting and unusual items: Auditors issued an unqualified opinion and concluded internal control over financial reporting was effective. The partnership expected to adopt the new revenue-recognition standard in 2018; estimated presentation changes included gross-ups to certain service revenue and costs, without a material cumulative adjustment expected.
Most important facts for investors to verify
- Reconcile 2017 GAAP operating cash flow and cash distributions with non-GAAP DCF, including the effects of maintenance capital, preferred distributions and joint-venture cash distributions.
- Assess pro forma debt, interest expense, covenant headroom and liquidity after the February 2018 dropdown and $5.5 billion note issuance and repayment of acquisition financing.
- Verify the timing, delivered earnings and integration of the acquired assets, and whether projected dropdown EBITDA and 2018 project returns are achieved.
- Monitor MPC’s share of revenue, minimum-volume commitments, unused deficiency credits and the durability of third-party producer volumes and contracts.
- Track execution of the $2.2 billion 2018 growth-capital plan, construction schedules, costs and capacity utilization.
- Review litigation and environmental developments, especially the Westcon claims, remediation exposures and relevant regulatory changes.
- Confirm progress against distribution-growth guidance and the expected benefit of the GP/IDR exchange; these expectations are not guarantees.