Business context and reporting period
MPLX LP is a master limited partnership sponsored by Marathon Petroleum Corporation (MPC), operating in Logistics and Storage (L&S) and Gathering and Processing (G&P). This Form 10-Q covers the quarter and nine months ended September 30, 2017. Unless noted, financial amounts below are in millions of dollars. Prior-year results were retrospectively adjusted for businesses acquired from MPC, which affects comparability.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue and other income | $980 | $838 | $2,782 | $2,181 |
| Income from operations | $311 | $258 | $856 | $436 |
| Net income attributable to MPLX LP | $216 | $141 | $556 | $100 |
| Common limited partner earnings per unit | $0.29 | $0.22 | $0.75 | $(0.19) |
| Adjusted EBITDA attributable to MPLX LP (non-GAAP) | $538 | $375 | $1,435 | $1,028 |
| DCF attributable to GP and LP unitholders (non-GAAP) | $426 | $285 | $1,134 | $797 |
| Cash distributions per common unit | $0.5875 | $0.5150 | $1.6900 | $1.5300 |
For the nine months, operating cash flow was $1,338 (up from $975); investing cash outflow was $1,837 (versus $892); and financing cash inflow was $268 (versus $82). Cash declined to $3 at September 30, 2017, from $234 at year-end 2016.
At September 30, total assets were $19,238 and total liabilities were $8,152. Long-term debt carrying value was $6,848, versus $4,422 at year-end 2016; gross borrowings were $7,277. Total available liquidity was approximately $2,128, including $1,827 available under the revolving credit facility and $298 under the MPC loan agreement. The reported debt covenant ratio was 3.4x against a 5.0x limit (temporarily 5.5x after qualifying acquisitions). Senior debt ratings were investment grade with stable outlooks.
Material changes versus the prior comparable period
- Q3 revenue and other income increased $142, while net income attributable to MPLX rose $75. For the nine months, revenue increased $601 and attributable net income increased $456. Growth reflected higher product prices and volumes, new facilities, acquisitions, and equity-method income. Results also benefited from no repeat of the $130 impairment expense recorded in the first nine months of 2016.
- Q3 L&S segment operating income attributable to MPLX increased $89 to $213, substantially reflecting the inclusion of HST, WHC and MPLXT and the Ozark pipeline. G&P increased $56 to $349, supported by pricing and volume growth; processing, fractionation and gathering volumes rose approximately 11%, 14% and 13%, respectively.
- Interest expense rose $26 in Q3 and $59 for the nine months, primarily because of $2.25 billion of senior notes issued in February 2017. Debt also funded acquisitions and capital spending.
- Cash distributions rose: the Q3 common-unit distribution was $0.5875, 14% higher than Q3 2016. Unit issuance under the ATM program and acquisition consideration increased the unit count.
Outlook, commentary, risks and unusual items
- MPLX reported that its 2017 organic growth capital plan was unchanged and expected to finish the year near the lower end of its previously reported range; the filing text does not provide a clear numerical range in this discussion. Nine-month capital expenditures were $1,061, including $59 of maintenance and $1,002 of expansion spending; total growth capital net of partner contributions was $1,118.
- MPC offered MPLX the remaining refinery logistics and fuels distribution businesses, projected by management to contribute approximately $1.0 billion of annual EBITDA. The transaction was under conflicts-committee review and was expected to close by the end of Q1 2018. Management described the three planned dropdown transactions together as representing an estimated $1.4 billion of annual EBITDA; completion and projected contribution were not assured.
- Other growth activity included the Ozark pipeline acquisition, with capacity expansion to approximately 345 mbpd expected in Q2 2018, and investments in the Bakken Pipeline system and Antero-related joint ventures. Several processing plant projects remained under construction.
- Management said it believed available liquidity and expected cash sources would fund operations, capital needs, debt service and distributions. This is forward-looking; distribution growth depends on cash generation, capital-market access, acquisition execution and other factors. No guarantee of future distributions is provided.
- MPC represented 36% of Q3 revenue and other income, and provides significant commercial, administrative and employee services. The filing notes that suspension, reduction or termination of MPC commitments could adversely affect MPLX.
- Commodity prices, producer activity, project execution, competition, regulation, environmental compliance and financing conditions are key risks. Derivative fair-value accounting can add earnings volatility; at quarter-end derivatives were a net $57 liability, including a $52 liability for a long-term embedded commodity derivative.
- Environmental remediation accruals were $14 at September 30, compared with $3 at year-end. EPA and Pennsylvania civil-enforcement negotiations remained open; a revised proposal included a $1.24 cash penalty and about $1.6 of environmental projects. The filing says the ultimate outcome and liability are uncertain. Contractual commitments to acquire property and equipment totaled $520.
- Management expected ASC 606 adoption in 2018 to gross up annual revenue and cost of revenue by an estimated $300–$350, with no net-income impact. The company also expected the new lease standard to have a material balance-sheet and potentially process impact.
Important facts for investors to verify
- Whether the proposed MPC refinery logistics and fuels distribution dropdown receives conflicts-committee approval, closes on schedule, and delivers the projected EBITDA.
- How acquisition-driven growth, increased unit count and debt affect per-unit DCF, distribution coverage and future financing needs.
- Actual 2017 capital spending versus plan, project completion timing, and the Ozark expansion and processing-plant ramp-up.
- Continued compliance with debt covenants and investment-grade ratings, including the impact of planned transactions and higher interest costs.
- Developments in the EPA civil matter, remediation obligations and other contingencies, as well as changes in MPC-related revenues, commitments and balances.