MPLX LP — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2016. MPLX is a midstream partnership spanning Logistics and Storage (L&S) and Gathering and Processing (G&P). The MarkWest merger closed in December 2015; its results are included in 2016 but not in the 2015 reported comparison, so year-over-year growth is substantially acquisition-driven. Prior periods were retrospectively adjusted for the common-control HSM acquisition.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue and other income | $703 million | $214 million | $1.876 billion | $628 million |
| Income from operations | $207 million | $68 million | $310 million | $224 million |
| Net income | $143 million | $63 million | $126 million | $207 million |
| Net income attributable to MPLX LP | $141 million | $41 million | $100 million | $138 million |
| Adjusted EBITDA attributable to MPLX LP | $375 million | $66 million | $1.028 billion | $200 million |
| DCF attributable to GP and LP unitholders | $285 million | $54 million | $797 million | $172 million |
| Common-unit income (loss) per unit, basic | $0.22 | $0.41 | $(0.19) | $1.42 |
Adjusted EBITDA and distributable cash flow (DCF) are non-GAAP measures; the filing cautions they are not substitutes for GAAP results. Nine-month net income attributable to MPLX fell partly due to a $130 million goodwill impairment and $89 million of Ohio Condensate impairments recorded through equity-method income. Q3 operating income and revenue growth primarily reflect MarkWest. Q3 L&S operating income attributable to MPLX was $124 million versus $81 million; G&P contributed $293 million, with no reported G&P segment in the prior-year period.
Cash flow and investment: Nine-month operating cash flow was $932 million, investing cash outflow $849 million, and financing cash inflow $82 million; cash rose to $208 million from $43 million at year-end 2015. Additions to property, plant and equipment were $874 million. Growth capital spending and investments were $825 million; maintenance capital expenditures were $48 million.
Debt and liquidity: Long-term debt carrying value was $4.411 billion, compared with $5.255 billion at December 31, 2015; principal borrowings totaled $4.858 billion before unamortized discounts and other adjustments. The $2.0 billion revolver had no borrowings and $3 million of letters of credit outstanding. Reported total liquidity, including cash and the $500 million MPC affiliate loan facility, was $2.705 billion. The debt-to-EBITDA covenant ratio was 3.5x against a 5.0x limit; MPLX reported compliance. Senior debt ratings were investment grade with stable outlooks.
Margins and operations: Management reported that 93% of Q3 net operating margin was fee-based overall (89% for G&P and 100% for L&S). Pro forma G&P segment operating income attributable to MPLX was $293 million versus $266 million in Q3 2015. Q3 G&P gathering throughput, gas processed and NGL fractionated volumes increased 8%, 15% and 27%, respectively, on a comparable pro forma basis.
Material changes and capital allocation
- The MarkWest merger expanded MPLX into natural gas gathering, processing and NGL services; acquired debt and depreciation also increased interest and depreciation expense.
- In May, MPLX issued about 30.8 million 6.5% Series A convertible preferred units, raising approximately $984 million net. Preferred distributions are senior to common-unit distributions.
- MPLX raised approximately $499 million net through its ATM common-unit program in the first nine months and had authorization for up to $1.2 billion of continuous common-unit offerings. Common units outstanding increased materially, including through the HSM contribution and unit issuances.
- The Class A reorganization completed in September simplified the ownership structure; MPC assumed $377 million of deferred tax liabilities.
- Common distributions were $0.515 per unit for Q3, versus $0.470 a year earlier. The partnership declared $0.515 per unit for Q3, payable November 14, 2016. Management stated intent to grow distributions, but noted there is no legal obligation to pay a particular amount.
Outlook, risks and unusual items
- 2016 gross organic growth capital guidance was $1.1–$1.2 billion, excluding the anticipated Bakken Pipeline investment. Preliminary 2017 guidance was $1.2–$1.6 billion of gross organic growth capital and about $100 million of maintenance capital.
- MPLX expected its $500 million investment for a 9.1875% indirect interest in the Bakken Pipeline system, through a joint venture, to close in Q4 2016, subject to conditions.
- On October 26, 2016, MPC announced plans to offer MPLX assets expected to contribute about $350 million of 2017 annual EBITDA, including an initial approximately $235 million by the end of Q1 2017, and further dropdowns targeted through 2019. Timing, asset value, approvals and financing remain uncertain; funding could include substantial equity issued to MPC.
- Commodity exposure remains, although management said most Q3 net operating margin was fee-based. Derivative positions mitigated some expected price exposure through Q4 2017; derivatives are not designated for hedge accounting, so fair-value changes can affect reported earnings. A Southern Appalachian embedded derivative was a $44 million liability.
- Goodwill impairment reflected weaker commodity-price and producer-growth assumptions and higher capital costs. The Marcellus reporting unit’s first-quarter fair value exceeded implied goodwill carrying value by only about $20 million; the filing warns that a 0.50 percentage-point higher discount rate would have caused more than $400 million of additional impairment in that analysis.
- Potential EPA and Pennsylvania enforcement related to MarkWest facilities could result in fines, defense costs, operational changes or restrictions; amounts cannot be reasonably estimated. The federal criminal investigation was closed without charges, but regulatory discussions continued. A West Virginia consent order resulted in a $95,000 penalty and estimated program costs of about $140,000.
- Environmental remediation liabilities were $7 million at quarter-end. The filing also describes a 2016 oil release at a West Virginia gas facility and a diesel release estimated at 1,150 barrels in Indiana; management did not expect material additional remediation costs for either incident.
- Contractual commitments to acquire property, plant and equipment were $202 million. Management said it did not expect construction-milestone penalties to be triggered, but project delays, cost overruns, commodity conditions, customer activity, environmental requirements and MPC-related risks could affect results and distributions.
Investor facts to verify
- Assess acquisition-adjusted trends: reported 2016 versus 2015 results are not directly comparable because MarkWest is included only in 2016.
- Track DCF relative to common, general partner and preferred distributions, including the effects of preferred-unit priority and common-unit dilution.
- Monitor growth-capital spending, project execution, liquidity and leverage against covenant limits, and the financing and terms of any MPC dropdowns or Bakken investment.
- Review goodwill and equity-method investment valuations, especially Marcellus assumptions and Ohio Condensate forecasts.
- Follow the unresolved environmental and regulatory matters, commodity-price exposure and MPC concentration; MPC accounted for 28% of Q3 revenue and other income and 31% for the first nine months, excluding specified joint-tariff revenue.