MPLX LP — 2018 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018; filed February 28, 2019. The filing is an annual report, not a standalone fourth-quarter filing. Dollar amounts below are in millions unless stated otherwise.
Business context
MPLX is a master limited partnership operating midstream energy infrastructure and fuels distribution businesses in two segments: Logistics and Storage (L&S), and Gathering and Processing (G&P). Marathon Petroleum Corporation (MPC) is its sponsor, general partner owner, a major customer and, at year-end, owner of approximately 64% of MPLX common units.
Financial and operating performance
| Metric | 2018 | 2017 | Change / context |
|---|---|---|---|
| Total revenues and other income | $6,425 | $3,867 | Up $2,558, or about 66%; acquisitions and ASC 606 presentation changes contributed. |
| Income from operations | $2,503 | $1,191 | Up $1,312; operating margin was approximately 39% of reported revenue. |
| Net income | $1,834 | $836 | Up $998. |
| Net income attributable to MPLX LP | $1,818 | $794 | Up $1,024; common-unit basic and diluted earnings were $2.29 per unit versus $1.07 and $1.06. |
| Adjusted EBITDA attributable to MPLX LP | $3,475 | $2,004 | Up $1,471; non-GAAP measure. |
| DCF attributable to GP and LP unitholders | $2,706 | $1,563 | Up $1,143; non-GAAP measure, after preferred distributions. |
| Cash from operating activities | $2,826 | $1,907 | Up $919. |
| Capital expenditures, net of JV partner contributions | $2,144 | $1,626 | Growth and maintenance spending; reported PP&E additions were $1,919. |
| Long-term debt, carrying value | $13,392 | $6,945 | Principal outstanding was approximately $13.9 billion at year-end 2018. |
| Cash and cash equivalents | $68 | $5 | Including restricted cash, year-end cash was $76. |
Reported operating margin and changes in revenue are affected by the 2018 adoption of ASC 606. The company reported approximately $369 million of grossed-up third-party reimbursements in both service revenue and costs, among other classification and timing changes; management reported a net-income effect of approximately $2 million.
Segment results: L&S revenue and other income were $3,240 and Segment Adjusted EBITDA was $2,057, versus $1,562 and $775 in 2017. G&P revenue and other income were $3,185 and Segment Adjusted EBITDA was $1,418, versus $2,305 and $1,229. L&S EBITDA growth reflected the Refining Logistics and Fuels Distribution acquisition, equity-method investment distributions and higher transportation rates and volumes. G&P growth reflected higher volumes and utilization, prices and affiliate distributions, partly offset by higher operating and employee costs.
Fourth-quarter data: 2018 revenue and other income were $1,715, operating income $666, net income $439, and net income attributable to MPLX LP $434. Basic and diluted earnings were $0.52 per common unit. The declared distribution was $0.6475 per common unit.
Material changes and financing
- On February 1, 2018, MPLX acquired Refining Logistics and Fuels Distribution from MPC for $4.1 billion in cash and 111.6 million common units, plus general partner units. The acquired operations contributed $1,359 of revenue and other income and $874 of operating income from the acquisition date through year-end.
- In the related GP/IDR exchange, MPC’s incentive distribution rights and economic 2% general partner interest were eliminated in exchange for 275 million newly issued common units. This removed general partner cash distribution requirements but materially increased the common-unit count.
- MPLX acquired the Mt. Airy export terminal for $451 million. It has approximately 4 million barrels of storage capacity and a 120 mbpd dock, with stated expansion potential.
- MPLX issued $5.5 billion of senior notes in February and $2.25 billion in November. Proceeds refinanced acquisition and other borrowings and funded redemption of $750 million of 5.5% notes due 2023. The redemption resulted in a $14 million premium payment and recognition of $46 million of unamortized debt issuance costs.
- At year-end, MPLX reported $3.315 billion of total liquidity, including approximately $2.247 billion available under its $2.25 billion revolving facility, $1 billion available under the MPC loan agreement and $68 million cash. Its debt-to-EBITDA covenant ratio was 3.8x, below the 5.0x limit; the company reported compliance with its covenants.
Outlook, risks and contingencies
- Management planned $2.2 billion of organic growth capital for 2019, including pipeline, export, marine, gas-processing and fractionation projects. The 2019 environmental capital-spending estimate was approximately $11 million.
- MPLX expected fee-based contracts to represent approximately 95% of 2019 net operating margin. It stated guidance for quarterly distribution growth of $0.01 per unit during 2019. A $0.6475-per-unit distribution for fourth-quarter 2018 was paid in February 2019. The filing does not provide clear full-year 2019 earnings guidance.
- Key risks include dependence on MPC (46% of 2018 revenue and other income, and 92% of L&S segment revenue), producer volumes and commodity-linked G&P activity, substantial debt and interest costs, project execution and permitting, environmental and pipeline-safety regulation, and operational disruptions. The filing also discusses customer concentration, credit and counterparty exposure, cybersecurity and severe weather.
- FERC’s 2018 revised policy no longer permits MLPs to recover an income tax allowance in cost-of-service rates for interstate petroleum pipelines; future regulatory or court changes could affect rates. MPLX also identified potential future costs and delays from environmental, emissions and pipeline-safety requirements.
- Pending Westcon construction litigation includes MPLX-party claims exceeding $10 million and Westcon claims exceeding $40 million, plus unspecified punitive damages. MPLX said the outcome is uncertain and did not consider a material loss beyond accrued amounts reasonably possible. Environmental remediation liabilities accrued were $14 million at year-end. A separate consent decree required approximately $0.9 million in penalties and $3.3 million in monitoring and emission-reduction projects; the decree was approved in January 2019 and the penalty paid.
- Goodwill was $2.586 billion, and no impairment was recorded in the 2018 annual test. Management noted sensitivity to future cash-flow assumptions, including commodity prices and producer development plans. The embedded natural-gas derivative liability was $61 million; there were no open commodity derivative contracts at year-end.
- The financial statements received an unqualified audit opinion, and management and the auditor concluded internal control over financial reporting was effective as of December 31, 2018.
Important facts for investors to verify
- How much of reported growth reflects acquired assets, underlying volume and rate improvements, equity-method distributions, and ASC 606 gross-ups or reclassifications.
- Whether MPC’s minimum-volume commitments and commercial agreements continue to support cash flows, and how remaining deficiency-payment credits affect future receipts.
- Debt maturity, interest-cost and refinancing exposure, covenant headroom, and the sustainability of distributions relative to DCF and capital needs.
- Progress, costs, commitments and expected returns for the $2.2 billion 2019 growth plan and announced pipeline and processing projects.
- Developments in Westcon litigation, environmental matters, FERC policy and other permitting or safety requirements.
- How the GP/IDR exchange’s unit dilution and the preferred units’ distribution and conversion terms affect per-unit cash returns.