MPLX LP — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless noted. MPLX operates Logistics and Storage (L&S) and Gathering and Processing (G&P) businesses. Acquisition activity affects comparability, particularly because Refining Logistics and Fuels Distribution contributed for the full quarter in 2019 but only two months in 2018.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenues and other income | $1.646 billion | $1.420 billion | +$226 million |
| Income from operations | $678 million | $557 million | +$121 million |
| Net income | $509 million | $423 million | +$86 million |
| Net income attributable to MPLX LP | $503 million | $421 million | +$82 million |
| Basic and diluted net income per common unit | $0.61 | $0.61 | Unchanged |
| Adjusted EBITDA attributable to MPLX LP (non-GAAP) | $930 million | $760 million | +$170 million |
| DCF attributable to GP and LP unitholders (non-GAAP) | $737 million | $603 million | +$134 million |
Revenue growth reflected acquisitions, higher transportation and G&P volumes, and related equity-method investment income, partly offset by lower product pricing and some lower transportation rates. Net interest expense and other financial costs rose by $41 million, mainly due to financing costs associated with senior notes. Weighted-average common units increased to 794 million from 661 million, helping explain why per-unit earnings were unchanged despite higher net income.
Segment results: L&S Adjusted EBITDA increased 28% to $559 million, principally reflecting the acquired businesses, higher transportation volumes and rates, volume-deficiency revenue, additional storage and marine capacity, and the Mt. Airy terminal. G&P Adjusted EBITDA increased 15% to $371 million, supported by higher volumes and fees, partly offset by commodity-price effects. Management reported year-over-year increases of approximately 18% in processing, 17% in fractionation and 19% in gathering volumes.
Cash flow, capital spending and liquidity
- Operating cash flow was $618 million, up from $450 million. Investing cash outflow was $575 million, including $457 million of property, plant and equipment additions and $128 million invested in unconsolidated affiliates. Financing cash outflow was $26 million. Cash and cash equivalents ended the quarter at $93 million.
- Capital expenditures were $383 million: $19 million maintenance and $364 million growth. Including investments in unconsolidated affiliates, total capital expenditures and acquisitions were $584 million. The 2019 organic growth capital plan was $2.2 billion.
- Long-term debt was $13.832 billion on the balance sheet; total borrowings were $14.283 billion before unamortized debt costs and discount. The revolving credit facility had $425 million borrowed and $3 million of letters of credit outstanding.
- Reported total liquidity was approximately $2.915 billion, including $1.822 billion available under the revolving facility, $1.000 billion under the MPC loan agreement and $93 million cash. The MPC facility had no outstanding balance at quarter-end.
- Debt covenant leverage was 3.85x versus a maximum of 5.0x (up to 5.5x for limited periods following certain acquisitions); MPLX reported compliance. Senior unsecured ratings were investment grade: Moody’s Baa3 (stable), S&P BBB (stable) and Fitch BBB- (positive).
- Cash distributions declared for the quarter included $523 million to common unitholders and $20 million to preferred unitholders. On April 29, MPLX declared a $0.6575 per-unit distribution, payable May 15; this was 2% above the Q4 2018 rate and 6% above Q1 2018.
Material changes, outlook and risks
- Proposed ANDX merger: Announced May 8, 2019, after quarter-end. MPLX agreed to acquire Andeavor Logistics in a unit-for-unit transaction, with approximately $9 billion equity value and $14 billion enterprise value, including assumed debt and preferred units. Management projected the transaction would be immediately accretive to DCF and expected closing in the second half of 2019, subject to approvals and other conditions. These are forward-looking expectations, not guarantees.
- Capital projects: Management’s 2019 growth plan included approximately 825 MMcf/d of additional processing capacity and 100 mbpd of fractionation capacity, as well as L&S projects. Contractual commitments to acquire property, plant and equipment totaled $726 million at quarter-end.
- Related-party dependence: MPC held 64% of common units and accounted for 48% of Q1 revenue and other income. Commercial agreements include minimum-volume commitments and other fee-based services. MPC did not meet certain pipeline minimum volumes; MPLX recorded $10 million of deficiency payments in Q1 and recognized $16 million of revenue from prior credits. Remaining related-party deficiency credits were $38 million.
- Leases: Adoption of the new lease standard on January 1, 2019 added approximately $505 million of right-of-use assets and $502 million of lease liabilities. MPLX said adoption did not materially affect income, cash flow or equity.
- Contingencies: Environmental remediation accruals were $17 million. In construction litigation with Westcon, MPLX parties sought more than $10 million and Westcon sought more than $40 million, plus unspecified punitive damages; MPLX could not estimate a reasonably possible loss. MPLX’s maximum potential undiscounted contribution under the Bakken Pipeline contingent equity agreement was approximately $230 million. A West Virginia environmental penalty of $124,030 was expected to be paid in Q2 2019.
- Other risks: The filing identifies commodity and interest-rate exposure, project execution and cost risks, environmental and regulatory matters, litigation, access to capital, and the possibility that MPC’s obligations under commercial agreements could be reduced or terminated. MPLX reported no open commodity derivative contracts other than a $65 million liability for an embedded derivative in a gas-processing agreement.
Important facts for investors to verify
- Whether the ANDX merger closes on the proposed terms and timetable, and whether projected accretion and other benefits are realized.
- Distribution coverage and funding needs as growth capital spending proceeds; DCF is a non-GAAP measure and should be considered alongside operating cash flow and capital requirements.
- Debt levels, covenant headroom, ratings and continued access to revolving and MPC credit facilities.
- Volume, pricing and contract trends in both segments, including MPC’s minimum-volume performance and the concentration of related-party revenue.
- Project delivery, contractual capital commitments and potential outcomes of environmental matters and litigation.