MPLX LP — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. MPLX operates crude oil and refined-products logistics and storage, and natural gas and NGL gathering and processing. Results are significantly affected by the December 2015 MarkWest merger; 2015 comparatives include HSM retrospectively but do not include MarkWest operations.
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue and other income | $564 million | $213 million | $1.173 billion | $414 million |
| Income from operations | $76 million | $82 million | $103 million | $156 million |
| Net income (loss) attributable to MPLX | $19 million | $51 million | ($41 million) | $97 million |
| Limited-partner income (loss) per common unit | ($0.11) | $0.50 | ($0.43) | $0.96 |
| Adjusted EBITDA attributable to MPLX (non-GAAP) | $351 million | $70 million | $653 million | $134 million |
| DCF attributable to GP and LP unitholders (non-GAAP) | $276 million | $62 million | $512 million | $118 million |
- Cash flow: Six-month operating cash flow was $593 million versus $173 million. Investing used $526 million, including $569 million of additions to property, plant and equipment. Financing used $75 million; cash declined $8 million to $35 million.
- Debt and liquidity: Long-term debt carrying value was $4.4 billion; outstanding borrowings totaled $4.859 billion before unamortized discounts and issuance costs. Debt declined from $5.736 billion at year-end 2015, mainly after repayment of revolving-credit borrowings. Total liquidity was $2.525 billion, including $1.992 billion available under the revolver and $500 million available under the MPC loan agreement. Debt-to-EBITDA covenant ratio was 3.6x against a 5.0x limit.
- Distribution: Q2 common-unit distribution was $0.5100, up from $0.4400 a year earlier and 1% above Q1 2016. The partnership declared a $0.5100 distribution after quarter-end. Management stated an intention to maintain distribution growth, while noting no legal obligation to pay a particular amount per unit.
- Margins and operations: No consolidated gross-margin figure is presented. Q2 L&S operating income attributable to MPLX was $123 million; G&P was $271 million. On pro forma comparison, G&P operating income increased to $271 million from $243 million in Q2, and to $528 million from $488 million in the first half. Pro forma volumes rose, but lower commodity prices partly offset the volume growth.
Material changes and unusual items
- The MarkWest merger drove most of the reported revenue and EBITDA increase and added substantial depreciation, interest expense and operating costs. On a pro forma basis, Q2 revenue and other income was lower year over year ($564 million versus $668 million), and first-half revenue was $1.173 billion versus $1.332 billion; the filing attributes pressure in part to lower commodity prices and related items.
- First-half results included a $130 million noncash goodwill impairment in two G&P reporting units, prompted by commodity-price deterioration, reduced customer spending and drilling expectations, and higher cost of capital.
- In Q2, updated Ohio Condensate forecasts led to $89 million of impairment charges at the investee level: MPLX recorded approximately $58 million for its share of fixed-asset impairment and an additional $31 million impairment of its investment basis. The consolidated income statement reports a net $83 million loss from equity-method investments for Q2.
- MPLX acquired MPC’s inland marine business, HSM, on March 31 for consideration stated at $600 million; units issued were recorded at $683 million fair value. HSM contributed 18 towboats and 205 barges. The transfer was between entities under common control, so prior periods were retrospectively adjusted.
- On May 13, MPLX issued approximately 30.8 million 6.5% Series A convertible preferred units for net proceeds of $984 million. Preferred distributions rank ahead of common-unit distributions and were $9 million for the period.
Outlook, risks and contingencies
- Management narrowed its 2016 growth-capital plan to $900 million–$1.2 billion and said financing needs were provided for through the remainder of 2016 and into 2017. First-half capital expenditures were $564 million, including $533 million for expansion.
- The filing gives no specific earnings or full-year cash-flow guidance. Management cited commodity prices, producer activity, customer credit, project execution, capital-market access and MPC’s contractual obligations as factors that could affect results, liquidity and distributions. Fee-based contracts accounted for approximately 93% of Q2 net operating margin, a non-GAAP measure.
- Environmental and operational matters include an ongoing federal investigation concerning Pennsylvania pipeline launcher/receiver permitting; potential penalties, defense costs or operating restrictions cannot be estimated. A West Virginia draft consent order proposed a $425,000 penalty. A pipeline release near Crawleyville, Indiana, was estimated at 1,150 barrels; MPLX recorded about $2 million in Q2 remediation expenses and does not anticipate material additional costs.
- Other incidents included a heat-transfer-oil release at the Mobley facility, with approximately $6 million of first-half remediation costs, and West Virginia pipeline slippage and facility flooding, each expected to require about $1 million to resolve. The filing notes that environmental liabilities and other contingencies may be material, though many outcomes or loss ranges cannot be determined.
- Commodity-price exposure remains relevant despite hedging; derivative fair values include a $41 million liability for an embedded gas-processing contract and depend on significant unobservable assumptions. The filing also notes sensitivity in Marcellus goodwill valuation to discount rates and forecast cash flows.
Key facts for investors to verify
- Separate acquisition-driven growth from underlying performance: compare pro forma G&P results, volumes and realized pricing with reported consolidated results.
- Assess whether DCF and operating cash flow support distributions, growth capital spending and debt service; these non-GAAP measures are not substitutes for GAAP cash flow.
- Track Ohio Condensate forecasts and any further impairment, as well as commodity-price and producer-activity assumptions affecting goodwill valuations.
- Monitor leverage, revolver availability, credit ratings and the effects of preferred-unit distributions and additional unit issuance on common unitholders.
- Follow the Pennsylvania permitting investigation, the Indiana release proceedings and other environmental matters for penalties, remediation costs or restrictions that could not yet be estimated.