MPLX LP — Q1 2016 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2016. MPLX operates midstream natural gas, NGL, crude oil and refined-products assets through Logistics and Storage (L&S) and Gathering and Processing (G&P). Results include MarkWest following its December 2015 merger; Q1 2015 did not include MarkWest. Prior-period results were retrospectively adjusted for the March 31, 2016 acquisition of MPC’s inland marine business, Hardin Street Marine LLC (HSM), a common-control transaction.
Key financial metrics
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue and other income | $609 million | $201 million |
| Income from operations | $27 million | $74 million |
| Net income (loss) | $(37) million | $68 million |
| Net income (loss) attributable to MPLX LP | $(60) million | $46 million |
| Common limited partner loss per unit | $(0.33) | Income of $0.46 |
| Adjusted EBITDA attributable to MPLX LP (non-GAAP) | $302 million | $64 million |
| DCF attributable to MPLX LP (non-GAAP) | $236 million | $57 million |
| Operating cash flow | $295 million | $72 million |
| Capital expenditures added to PP&E | $291 million | $35 million |
At March 31, cash was $4 million; total assets were $15.98 billion and total liabilities $6.32 billion. Long-term debt carrying value was $4.72 billion; debt principal totaled $5.19 billion. Quarterly cash distributions declared were $0.5050 per common unit, up from $0.4100 a year earlier. The filing reports a 4.1-to-1 debt-to-EBITDA covenant ratio, within the 5.0-to-1.0 limit, and total liquidity of approximately $1.73 billion, including available revolving-credit and MPC loan capacity.
Material changes versus the prior comparable period
- Revenue rose $408 million, primarily reflecting $398 million from MarkWest and higher L&S tariffs and volumes. Reported comparisons are substantially affected by the acquisition; management’s pro forma comparison showed G&P segment operating income attributable to MPLX of $257 million versus $245 million.
- Segment operating income attributable to MPLX increased $263 million: $257 million from G&P and $6 million from L&S. L&S pipeline throughput increased to 1.940 million barrels per day from 1.898 million.
- Despite higher revenue and non-GAAP cash-generation measures, GAAP operating income fell to $27 million, and MPLX-attributable net income turned to a $60 million loss. The quarter included $129 million of non-cash goodwill impairment, higher depreciation and amortization, and increased interest and other financial costs.
- Operating cash flow increased, while investment spending rose materially. Cash declined by $39 million during the quarter to $4 million, after investment outflows and distributions.
- MPLX issued 12.0 million common units through its ATM program for approximately $315 million net proceeds and issued equity consideration for HSM, valued at approximately $683 million. HSM consists of 18 towboats and 205 barges.
Outlook, management commentary, risks and unusual items
- Management expected 2016 growth capital spending of $800 million to $1.2 billion, said it did not anticipate increasing debt in 2016, and expected to reduce leverage through EBITDA growth. It described the ATM and subsequent preferred-unit financing as funding for needs into 2017.
- On April 27, 2016, after quarter-end, MPLX agreed to issue $1.0 billion of 6.5% Series A Convertible Preferred Units, with expected net proceeds of approximately $984 million, for capital expenditures, debt repayment and general purposes. Closing was expected in May. The units initially carry annual distributions of $2.1125 per unit and may convert into common units subject to stated terms.
- Management stated its intent to pay at least the minimum quarterly distribution and to maintain distribution growth, but cautioned that distributions depend on cash availability and are subject to risks. It declared a $0.5050 per-unit distribution for Q1, payable May 13, 2016.
- The $129 million goodwill impairment followed weaker near- and longer-term commodity price expectations, lower customer capital-spending and drilling forecasts, slower expected production growth, and higher cost of capital. The filing notes that a 0.50 percentage-point increase in the discount rate for the Marcellus reporting unit could have resulted in more than $400 million of additional impairment.
- Commodity prices, producer activity and customer creditworthiness remain risks. Fee-based contracts represented approximately 95% of total net operating margin in Q1, but some G&P activity remains commodity-sensitive. Derivatives mitigated part of expected commodity exposure through Q4 2016; their fair-value accounting can add earnings volatility.
- An EPA/Department of Justice investigation and related information requests concerning MarkWest Liberty Midstream facilities in Pennsylvania remain unresolved. Potential penalties, costs or operational restrictions cannot be reasonably estimated. The filing also reports a $6 million Q1 remediation expense following a heat-transfer-oil release at the Mobley facility; management expected no material incremental charges.
- Other contingencies include environmental matters, contractual construction commitments of $247 million, and litigation relating to the MarkWest merger; management did not expect the merger-litigation fee application to have a material adverse effect. The filing identifies a maritime-law risk: foreign ownership above applicable limits could prevent operation of inland vessels.
Important facts for investors to verify
- Whether MarkWest integration, commodity conditions and customer drilling activity support the assumptions underpinning G&P cash flows and goodwill valuations.
- How much of reported growth reflects acquisitions versus organic operating improvement; compare reported results with the filing’s pro forma disclosures and non-GAAP reconciliations.
- Distribution coverage and funding needs in light of $236 million of DCF, $200 million of distributions declared, growth capital spending, and very low quarter-end cash.
- Leverage and liquidity after the preferred-unit offering, planned capital spending, debt repayment and subsequent Class B unit conversion.
- Resolution and potential financial or operating consequences of the Pennsylvania environmental inquiry, Mobley remediation, and other disclosed contingencies.