MPLX LP annual report, FY2015

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MPLX LP — 2015 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2015. Unless noted otherwise, financial amounts are in millions of dollars. The filing was signed February 26, 2016.

Business context and reporting period

MPLX is a master limited partnership sponsored by Marathon Petroleum Corporation (MPC), operating in Logistics and Storage (L&S) and Gathering and Processing (G&P). On December 4, 2015, MPLX completed its merger with MarkWest, substantially expanding its natural-gas gathering, processing and NGL businesses. As a result, 2015 consolidated results include MarkWest only from the acquisition date; comparisons with 2014 are not on a like-for-like basis.

Financial and operating performance

  • Revenue and earnings: Revenue and other income was $703, up 28% from $548 in 2014. Operating income was $206, up 13%; net income was $157, down 12%; and net income attributable to MPLX was $156, up from $121. Common-unit basic earnings were $1.23 versus $1.55.
  • Margins: Operating margin, calculated as operating income divided by revenue and other income, was approximately 29% versus 33% in 2014. The comparison reflects the acquisition, increased depreciation and G&A, and higher financing costs.
  • Non-GAAP measures: Adjusted EBITDA attributable to MPLX was $486 versus $166; distributable cash flow (DCF) attributable to MPLX was $399 versus $137. These measures include specified adjustments, including MarkWest pre-merger results, and are not substitutes for GAAP results.
  • Cash flow and capital spending: Operating cash flow was $239, down from $247. Investing used $1,498, including $1,218 for acquisitions; financing provided $1,275. Capital expenditures were $290, including $259 of growth and $31 of maintenance spending.
  • Debt and liquidity: Year-end long-term debt, including capital leases and after unamortized discounts and issuance costs, was $5,255, versus $644 in 2014. Gross borrowings totaled $5,736. Cash was $43; available capacity under the revolving facility and MPC loan was $1,607, for total liquidity of $1,650. The debt covenant leverage ratio was 4.6x against a 5.0x limit (temporarily 5.5x after qualifying acquisitions); MPLX reported compliance.
  • Distributions: Declared common-unit distributions totaled $1.82 per unit for 2015 versus $1.41 in 2014. The fourth-quarter distribution was $0.50 per unit, paid February 12, 2016. Distributions declared for 2015 totaled $315.
  • Operating scale: At year-end, MPLX reported 7.067 bcf/d of gas-processing capacity; 5.355 bcf/d of gathering capacity; 262 mbpd of propane-and-heavier fractionation capacity; and 2,900 miles of L&S pipelines. Reported 2015 G&P operating volumes largely reflect activity after the merger.

Material changes versus prior period

  • The MarkWest merger added a major G&P business, with consideration valued at $8.606 billion, including $7.326 billion in MPLX units and $1.230 billion cash; MPC funded the cash consideration. MPLX recorded approximately $2.454 billion of goodwill.
  • The acquisition drove the increase in assets to $15.677 billion from $1.214 billion and increased debt sharply. MPLX issued 216.4 million common units; approximately 8.0 million Class B units are scheduled to convert in 2016 and 2017, with $6.20 per unit funded by MPC.
  • Interest expense and other financial costs rose to $47 from $5, reflecting merger-related borrowings and costs. Acquisition-related expenses were $36, including $30 in G&A and $6 in other financial costs.
  • For a more comparable G&P view, unaudited pro forma segment revenue declined 1% to $2.151 billion, while segment operating income attributable to MPLX increased 17% to $1.092 billion. Volumes rose, but average natural-gas and NGL prices fell 39% and 50%, respectively; the filing also cites contract-mix changes that reduced reported inventory sales and related costs.
  • MPC accounted for approximately 72% of 2015 revenue and other income, down from 86% in 2014; management expected MPC’s share to be significantly lower in 2016 following the merger.

Outlook, risks, contingencies and unusual items

  • Capital plan: In light of market conditions, MPLX expected 2016 growth capital spending of $800 million to $1.2 billion, down from an originally approved $1.7 billion plan. Projects include Marcellus/Utica and Southwest G&P infrastructure and the Cornerstone pipeline and Utica build-out. The company said project timing had been revised to align with expected customer utilization.
  • Business outlook: Management expected fee-based contracts to represent approximately 94% of 2016 net operating margin. It cited long-term, minimum-volume agreements and organic and acquisition opportunities, while noting MPC is not obligated to offer assets or pursue acquisitions with MPLX.
  • Commodity and customer risks: Lower oil, gas and NGL prices can reduce producer drilling, throughput and cash flow, and can raise financing costs through pressure on unit value. Customer, counterparty, market-access, construction and integration risks remain. Although 2015 total net operating margin was approximately 96% fee-based, the acquired G&P business still has commodity-linked exposure.
  • Goodwill and impairments: No goodwill impairment was recorded for 2015. Management warned that the sharp decline in MPLX’s unit price by February 2016, together with changes in assumptions, could require renewed impairment testing of the approximately $2.5 billion of merger-related goodwill.
  • Environmental and legal matters: An EPA/Department of Justice investigation following a July 2015 search and subpoena concerned pipeline maintenance facilities and potential Clean Air Act permitting issues. Possible penalties, costs or operating changes could not be reasonably estimated. A separate EPA consent order proposed a $285,078 penalty for alleged Sarsen facility violations. A West Virginia consent order was resolved for a $76,450 penalty. The MarkWest merger litigation claims were dismissed with prejudice as to named plaintiffs, but a request for plaintiffs’ counsel fees remained pending.
  • Other contingencies: Year-end accrued remediation liabilities were $1; the filing says ultimate environmental costs cannot all be estimated. Contractual cash obligations totaled $9.284 billion, including debt, leases, purchase commitments, transportation and terminalling commitments, and the SMR liability. The filing reports no off-balance-sheet financing arrangements.
  • Subsequent event: MPC offered to contribute its inland marine business in exchange for securities; the proposed transaction was expected to close in the second quarter of 2016, subject to approvals.

Most important facts for investors to verify

  • Whether post-merger operating results, G&P volumes and integration benefits meet expectations, and how much of pro forma performance is sustainable.
  • Debt reduction, covenant headroom, refinancing needs and the effect of interest rates and capital-market access on the distribution and growth plan.
  • Whether 2016 growth capital spending stays within the revised $800 million–$1.2 billion range and projects achieve expected timing, utilization and returns.
  • Whether the 2015 distribution level is supported by recurring cash generation; compare GAAP operating cash flow, DCF adjustments and distributions.
  • Goodwill valuation and any impairment indicators, particularly given the unit-price decline noted in the filing.
  • Developments in the EPA/DOJ investigation, permitting exposure, other environmental matters and the pending mootness-fee application.
  • The fourth-quarter financial data report $18 of net income attributable to MPLX but common-unit basic and diluted loss per unit of $0.14; verify the two-class allocation and per-unit calculation in the filing’s detailed schedules.