MPLX LP — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2018. Amounts are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Business context and reporting period
MPLX is a master limited partnership sponsored by Marathon Petroleum Corporation (MPC). Its Logistics and Storage (L&S) segment transports, stores and distributes crude oil and refined products; its Gathering and Processing (G&P) segment gathers and processes natural gas and handles NGLs. Results are not directly comparable with 2017 because of acquisitions, the February 2018 refining logistics and fuels distribution dropdown, and adoption of the new revenue standard.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue and other income | $1,712 | $980 | $4,710 | $2,782 |
| Income from operations | $672 | $311 | $1,837 | $856 |
| Net income | $516 | $217 | $1,395 | $595 |
| Net income attributable to MPLX LP | $510 | $216 | $1,384 | $556 |
| Net income per common unit, diluted | $0.62 | $0.29 | $1.77 | $0.75 |
| Adjusted EBITDA attributable to MPLX LP (non-GAAP) | $937 | $538 | $2,564 | $1,435 |
| DCF attributable to GP and LP unitholders (non-GAAP) | $747 | $426 | $2,025 | $1,134 |
Reported operating margin (income from operations divided by revenue and other income) was approximately 39% in Q3 2018 versus 32% in Q3 2017; revenue gross-ups from the new accounting standard and acquisition effects affect comparison. Q3 segment adjusted EBITDA was $547 million for L&S and $390 million for G&P.
For the first nine months, operating cash flow was $2.027 billion, investing cash outflow was $2.027 billion, and financing provided $30 million. Capital expenditures were $1.480 billion, including $98 million maintenance and $1.382 billion growth spending; reported additions to property, plant and equipment were $1.383 billion. Cash and restricted cash totaled $39 million at September 30.
At September 30, total assets were $22.379 billion, long-term debt carrying value was $12.889 billion, and redeemable preferred units were $1.003 billion. Gross borrowings were $13.357 billion. Total liquidity was $2.284 billion, comprising $1.247 billion available under the revolving facility, $1.000 billion under the MPC loan agreement, and $37 million cash. The revolving-credit covenant debt-to-EBITDA ratio was 3.76x against a 5.0x limit; MPLX reported compliance.
Material changes versus the prior comparable period
- Q3 revenue increased $732 million and MPLX-attributable net income increased $294 million. Management cited the refining logistics and fuels distribution acquisition, higher G&P prices and volumes, transportation growth, and equity-investment contributions. Comparisons also include revenue-accounting changes and other acquisition effects.
- L&S adjusted EBITDA rose $329 million (151%) in Q3, including $250 million attributed to the dropdown and $26 million to the joint-interest acquisition. G&P adjusted EBITDA rose $70 million (22%); management cited volume and pricing growth. Compared with Q3 2017, processing volumes rose approximately 9%, fractionation 23%, and gathering 27%.
- On February 1, MPLX acquired MPC refining logistics and fuels distribution assets for $4.1 billion cash plus issued units, for total purchase price of $8.4 billion. The assets generated $365 million revenue and $230 million operating income in Q3, and $994 million revenue and $643 million operating income from acquisition through September 30.
- MPC exchanged its incentive distribution rights and economic general-partner interest for 275 million newly issued common units, converting the general partner interest to non-economic. The transaction materially increased common units outstanding and ended GP/IDR distributions.
- Debt increased substantially, principally reflecting $5.5 billion of senior notes issued in February and borrowings used for acquisitions and other purposes. Long-term debt carrying value rose from $6.945 billion at year-end 2017 to $12.889 billion.
Outlook, commentary, risks and unusual items
- Management’s 2018 growth-capital plan was $2.2 billion, excluding the MPC dropdown and its subsequent capital spending. The filing describes processing and fractionation expansions and other growth projects; it does not provide a formal earnings forecast.
- MPLX stated its intention to maintain distribution growth and internally fund a greater portion of future growth. The board declared a quarterly distribution of $0.6375 per common unit, payable November 14, 2018; this was a 2% increase over Q2 2018. Management emphasized that future distributions and growth objectives are subject to risks and are not guaranteed.
- The Mt. Airy Terminal was acquired for $451 million on September 26. It has 4 million barrels of leased storage capacity and a 120 mbpd dock, with potential for more storage and a second dock. MPLX also announced a jointly developed Permian-to-Texas Gulf Coast crude pipeline expected to enter service in mid-2020.
- ASC 606 adoption increased Q3 revenue and costs through gross presentation and other classification changes; the filing estimates a $2 million increase in Q3 net income and $4 million for the first nine months versus prior accounting. Revenue comparisons should therefore be interpreted with care.
- MPLX expects lease-accounting adoption on January 1, 2019 to have a material balance-sheet impact because virtually all leases are expected to be recognized as right-of-use assets and lease obligations. The credit agreement excludes the new standard’s effects from covenant calculations.
- Commodity and derivative exposures include an $82 million embedded-derivative liability; total derivative liabilities were $84 million. Q3 derivative losses totaled $22 million. The partnership reported no interest-rate derivatives and noted exposure to commodity prices and interest-rate changes.
- Environmental remediation accruals were $15 million. A construction-contract dispute involving Westcon includes claims exceeding $40 million against MPLX parties and claims exceeding $10 million by those parties; MPLX could not estimate a reasonably possible loss. An Illinois environmental case also remains unresolved, with MPC indemnification under the omnibus agreement if MPL is held responsible.
- MPC accounted for 46% of Q3 revenue and other income, and held 64% of common units at September 30. Continued reliance on MPC commercial agreements and related-party arrangements is a concentration risk.
Important facts for investors to verify
- How much reported growth reflects underlying throughput, pricing and operating performance versus acquisitions and ASC 606 presentation changes.
- Whether cash generation and distributable cash flow support the increased distribution and planned growth spending, considering debt service and capital requirements.
- Debt trajectory, refinancing needs, credit-agreement headroom and the effect of lease obligations once recognized.
- Progress, cost, returns and timing of the Mt. Airy expansion, announced pipeline and other capital projects.
- Continuity and terms of MPC contracts, minimum-volume commitments, related-party transactions and customer concentration.
- Developments in Westcon, environmental and other contingencies, including any change in estimated exposure or indemnification.