MPLX LP — Q3 2015 Form 10-Q
Business context and period: For the quarter and nine months ended September 30, 2015. MPLX is a fee-based midstream partnership operating crude oil and product pipelines, storage facilities and a butane cavern. MPC remained its controlling sponsor and principal customer.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue and other income | $148.6 million | $138.0 million | $433.7 million | $409.2 million |
| Operating income | $47.1 million | $44.2 million | $155.9 million | $144.8 million |
| Net income | $41.8 million | $43.1 million | $139.1 million | $141.7 million |
| Net income attributable to MPLX LP | $41.5 million | $29.1 million | $138.3 million | $92.1 million |
| Adjusted EBITDA attributable to MPLX LP | $64.6 million | $40.2 million | $199.5 million | $123.9 million |
| Distributable Cash Flow attributable to MPLX LP | $52.5 million | $32.9 million | $170.9 million | $106.4 million |
Limited partner common-unit earnings were $0.41 for Q3 and $1.42 for the nine months, versus $0.37 and $1.16, respectively, in 2014. Q3 operating margin was approximately 31.7%, compared with 32.0% a year earlier. The filing reports no separate guidance for future profit or revenue.
Cash flow, capital, debt and distributions
- Nine-month operating cash flow was $184.9 million, down from $190.3 million. Investing cash outflow was $119.1 million, versus $43.1 million, reflecting higher capital spending. Financing cash outflow was $2.7 million; cash increased $63.1 million to $90.4 million.
- Nine-month capital expenditures were $139.3 million, including $122.1 million for expansion and $17.2 million for maintenance. Net additions to property, plant and equipment were $121.1 million.
- At September 30, gross debt was $759.1 million; balance-sheet long-term debt after issuance costs, discount and current maturities was $752.5 million. Debt increased from $644.8 million gross at year-end 2014, principally following issuance of $500 million of 4.0% senior notes due 2025. The company had no borrowings under its $1.0 billion revolving facility and $1.05 billion total available credit capacity; including cash, total liquidity was $1.14 billion.
- The debt-to-Consolidated-EBITDA covenant ratio was 3.1x, against a 5.0x limit (up to 5.5x for qualifying periods after certain acquisitions). MPLX reported compliance with its covenants and investment-grade ratings with stable outlooks.
- Distributions declared were $0.47 per limited partner unit for Q3, versus $0.3575 in Q3 2014. The October declaration of $0.47 per unit was payable November 13, 2015, and represented a 7% increase over Q2 2015. Q3 distributable cash flow was about 1.13x declared distributions; nine-month coverage was about 1.37x.
Material changes and management commentary
- Revenue rose 7.7% in Q3 and 6.0% for the nine months. Pipeline throughput increased to 2.031 million barrels per day in Q3 from 1.887 million; higher throughput and average tariffs supported revenue. Nine-month operating cash flow nevertheless declined modestly.
- Net income was slightly lower in both comparison periods, while income attributable to MPLX LP increased substantially. This reflects, in part, MPLX’s increased ownership of Pipe Line Holdings and a lower MPC-retained interest allocation; the comparison is not solely an improvement in underlying consolidated net income.
- Interest and other financial costs rose to $5.2 million in Q3 and $16.7 million for the nine months, primarily due to the term loan and 2025 notes. Q3 G&A increased $5.8 million year over year, including services from MPC and $4.3 million of merger-related acquisition costs recorded through September.
- MPC did not meet minimum volume commitments on certain systems. It owed $32.6 million in deficiency payments for the first nine months, including $10.8 million paid in Q3. The associated deferred-revenue balance for volume deficiencies was $33.7 million at quarter-end. Such payments enter the company’s non-GAAP distributable cash flow calculation in the deficiency period, while revenue recognition follows specified credit-use or expiration conditions.
- Management revised its 2015 capital plan to $210 million from $260 million, citing procurement efficiencies and changed project timing. The plan included approximately $180 million of expansion spending and $30 million of maintenance spending. Management said cash from operations, credit facilities and future debt or equity issuance were expected to meet funding needs, including distributions and capital requirements.
Merger, risks and contingencies
- MPLX agreed to acquire MarkWest Energy Partners in a unit-for-unit transaction plus a $675 million cash payment to MarkWest unitholders. The filing estimated MarkWest’s enterprise value at approximately $13.7 billion, including about $4.6 billion of debt to be assumed. Closing was expected in Q4 2015, subject to unitholder approval, regulatory approvals and other conditions. If completed, MPLX intended to assume MarkWest senior notes and refinance any MarkWest revolver borrowings. Rating agencies affirmed prospective investment-grade ratings for the combined partnership, conditional on closing consistent with their expectations.
- Merger-related litigation sought to block the transaction or, if completed, obtain rescission or damages. MPLX said it considered the claims without merit; an adverse outcome could affect the partnership. A separate environmental cleanup lawsuit involving an Illinois site remained unresolved; MPC agreed to indemnify MPLX for any damages for which MPL was responsible under the omnibus agreement.
- Environmental remediation liabilities accrued were $1.1 million at September 30, compared with $0.6 million at year-end. The filing stated that the ultimate cost of all remediation and certain litigation could not be estimated and that some contingencies could be material.
- Revenue concentration and sponsor dependence are notable: MPC accounted for 87% of reported revenue and other income for the first nine months, or 92% including specified joint-tariff volumes. Risks cited include changes in MPC commitments, financing and capital-market conditions, project delays or cost overruns, regulation, and operating disruptions. MPLX reported minimal direct commodity-price exposure because it does not take ownership of transported commodities.
Important facts for investors to verify
- Whether the MarkWest merger closed on the expected terms, including assumed debt, financing, dilution, synergies and the outcome of merger litigation.
- Whether projected capital spending and growth projects were completed on budget and schedule, and whether the revised $210 million 2015 capital plan was achieved.
- Whether distributable cash flow continued to cover distributions after accounting for volume-deficiency credits and capital needs; this is a non-GAAP measure with limitations described in the filing.
- How MPC’s large share of revenue, minimum-volume commitments and related-party arrangements affect cash generation and distribution capacity.
- Debt covenant headroom, liquidity and the combined partnership’s credit ratings following the proposed acquisition.