MPLX LP — Q2 2014 Form 10-Q
Business context and period. This unaudited quarterly filing covers the three and six months ended June 30, 2014, compared with the same 2013 periods. MPLX is a fee-based midstream partnership; its pipeline and storage operations are heavily tied to Marathon Petroleum Corporation (MPC). At quarter-end, MPLX held a 69% general partner interest in Pipe Line Holdings.
Financial and operating performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenues and other income | $133.9 million | $122.2 million | $271.2 million | $236.9 million |
| Income from operations | $44.3 million | $35.2 million | $100.6 million | $70.7 million |
| Net income | $42.9 million | $34.8 million | $98.6 million | $70.1 million |
| Net income attributable to MPLX LP | $28.8 million | $18.6 million | $63.0 million | $36.2 million |
| Adjusted EBITDA attributable to MPLX LP | $39.9 million | $26.7 million | $83.7 million | $51.8 million |
| Distributable Cash Flow attributable to MPLX LP | $36.2 million | $27.2 million | $73.9 million | $55.2 million |
Adjusted EBITDA and Distributable Cash Flow are non-GAAP measures as defined by the partnership. Operating margin, calculated as operating income divided by total revenues and other income, was approximately 33.1% in Q2 2014 versus 28.8% in Q2 2013, and 37.1% for the first half versus 29.8% a year earlier. Limited partners’ basic earnings per unit were $0.37 for Q2 and $0.79 for the first half. Declared common-unit distributions were $0.3425 for Q2 and $0.6700 for the first half.
- Cash flow and investment: First-half cash from operations was $128.4 million, compared with $108.6 million. Investing used $9.4 million, including $13.2 million of property, plant and equipment additions; total capital expenditures were $14.6 million. Financing used $129.9 million, including $48.7 million of distributions to unitholders and the general partner, $25.8 million to MPC’s retained noncontrolling interest, and $310.0 million related to the additional Pipe Line Holdings interest, partly funded by borrowing.
- Liquidity and debt: Cash was $43.2 million at June 30, down from $54.1 million at year-end. Total debt was $265.2 million, including $255.0 million outstanding on the revolving credit agreement. The revolver had $245.0 million of unused availability. MPLX reported a 1.8x debt-to-Consolidated-EBITDA covenant ratio and compliance with its covenants.
- Margins and cash distributions: First-half DCF was about 1.43x declared distributions of $51.5 million; Q2 DCF was about 1.37x declared distributions of $26.5 million. These are simple comparisons of reported DCF and distributions, not a company-presented coverage ratio.
Material changes versus prior periods
- Q2 total revenues and other income rose $11.7 million (about 9.6%); first-half revenue rose $34.3 million (about 14.5%). MPLX-attributable net income increased $10.2 million in Q2 and $26.8 million for the first half.
- Growth reflected higher average tariffs, increased revenue recognition from volume-deficiency credits, and higher fees for operating MPC pipelines. Higher G&A and interest costs partly offset these gains.
- Pipeline throughput declined: Q2 total throughput was 1.903 million barrels per day versus 2.034 million; first-half throughput was 1.852 million versus 2.014 million. Higher average tariffs helped offset lower volumes.
- Effective March 1, MPLX acquired an additional 13% interest in Pipe Line Holdings from MPC for $310.0 million, increasing its interest to 69%. The consideration was funded with $40.0 million of cash and $270.0 million of revolver borrowings. The acquisition was recorded at historical carrying value, with the excess paid recorded as a reduction to general partner equity.
- First-half capital expenditures fell to $14.6 million from $46.6 million, primarily reflecting lower expansion spending.
Outlook, risks, contingencies, and unusual items
- Management set a 2014 capital budget of $148 million, comprising $113 million for expansion and $35 million for maintenance, and expected higher spending in the second half. It stated that operating cash flow and financing sources were expected to meet funding needs, including distributions.
- MPLX stated its intent to maintain an attractive distribution-growth profile and declared a $0.3425 per-unit distribution payable August 14, 2014. This was a 4.6% increase from the first-quarter 2014 rate and 20.2% above Q2 2013. Future distributions and growth are not guaranteed.
- MPC did not meet minimum throughput commitments on certain systems. First-half deficiency payments due were $21.2 million; $10.1 million was paid in Q2. The June 30 deferred-revenue balance for volume deficiencies was $29.7 million, with credits scheduled to expire from September 2014 through June 2015. These payments support DCF when incurred but revenue is recognized later as credits are used, become unusable, or expire.
- Related-party exposure is significant: MPC accounted for 85.7% of first-half revenues and other income, excluding certain joint-tariff volumes treated as third-party revenues. MPC also provides services and is a major customer; MPLX disclosed that it considers agreement terms comparable to third-party terms.
- Environmental remediation accruals were $2.6 million, with up to $0.4 million of reasonably possible losses above accruals. A pending Illinois environmental contribution lawsuit has an unestimable potential loss; MPC agreed to indemnify MPL for any damages. Vehicle lease guarantees had maximum potential undiscounted payments of $1.6 million. Contractual commitments for property, plant and equipment were $18.5 million.
- Commodity-price exposure was described as minimal because MPLX does not own transported products or trade commodities. Variable-rate debt creates interest-rate exposure; the filing estimates a $0.9 million net-income effect for a hypothetical 100-basis-point rate change over the first half. No interest-rate hedges were in place.
Important facts for investors to verify
- Whether MPC’s throughput, minimum-volume commitments, and related-party commercial agreements remain stable; assess the concentration of revenue and deferred deficiency credits.
- Execution and funding of the $148 million 2014 capital program, expected second-half spending, and the return from the additional Pipe Line Holdings interest.
- Revolver balances, variable-rate interest costs, covenant headroom, and the ability to sustain distributions if cash generation or financing availability weakens.
- Actual pipeline volumes and tariff trends, and whether reported earnings and DCF growth persist as volume-deficiency credits are used or expire.
- Developments in environmental remediation and litigation, including matters for which the filing says potential losses cannot be estimated.