MPLX LP annual report, FY2019

MPLX LP 2019 Form 10-K Summary

Business context and reporting period

MPLX is a U.S. midstream master limited partnership operating Logistics and Storage (L&S) and Gathering and Processing (G&P) businesses. Its assets include crude oil and refined-product pipelines, terminals, storage, marine transportation, natural-gas gathering and processing, and NGL fractionation.

This annual report covers the fiscal year ended December 31, 2019. MPLX completed its merger with Andeavor Logistics LP (ANDX) on July 30, 2019. Because MPC controlled both businesses, results are presented on a common-control basis, with ANDX results included retrospectively from October 1, 2018. Thus, period-to-period comparisons reflect different amounts of ANDX activity and are not purely organic comparisons.

Financial and operating metrics

Metric	2019	2018
Total revenues and other income	$9.041 billion	$7.005 billion
Income from operations	$2.377 billion	$2.728 billion
Net income	$1.462 billion	$2.006 billion
Net income attributable to MPLX LP	$1.033 billion	$1.818 billion
Net income attributable to MPLX LP per common unit, diluted	$1.00	$2.29
Operating cash flow	$4.082 billion	$3.071 billion
Cash capital expenditures for property, plant and equipment	$2.408 billion	$2.111 billion
Adjusted EBITDA attributable to MPLX LP, excluding Predecessor	$4.334 billion	$3.475 billion
DCF attributable to MPLX LP, excluding Predecessor	$3.489 billion	$2.781 billion
Common-unit distributions declared per unit	$2.6900	$2.5300

Income from operations was about 26% of revenue in 2019, versus about 39% in 2018; the comparison was materially affected by the 2019 impairment described below. Adjusted EBITDA and DCF are non-GAAP measures, and MPLX cautions that they are not substitutes for GAAP results or operating cash flow. After preferred-unit distributions, DCF attributable to general and limited partners was $3.367 billion; common-unit distributions declared were $2.635 billion.

Fourth quarter: Revenue and other income was $2.316 billion, but income from operations was a loss of $346 million and net income attributable to MPLX was a loss of $581 million. The principal unusual item was the goodwill impairment.
Segments: Segment Adjusted EBITDA was $2.748 billion for L&S, up $691 million, and $1.586 billion for G&P, up $168 million. L&S revenue was $5.352 billion and G&P revenue was $3.689 billion.
Cash and liquidity: Year-end cash and cash equivalents were $15 million. Reported total liquidity was $4.421 billion, including $3.5 billion available under the revolving credit facility and $906 million available under the MPC loan agreement.
Debt: Long-term debt, including finance leases, was $19.704 billion on the balance sheet; the filing also cites total debt of $20.7 billion in its risk discussion. Senior notes outstanding were approximately $19.1 billion. MPLX reported a 3.9-to-1 debt-to-Consolidated-EBITDA covenant ratio and compliance with its credit agreement at year-end.
Distribution: The common-unit distribution rose through the year to $0.6875 for the fourth quarter, up from $0.6475 in the fourth quarter of 2018. The board declared that fourth-quarter distribution in January 2020, payable in February.

Material changes versus the prior comparable period

Revenue increased $2.036 billion, reflecting the full-year inclusion of ANDX in 2019 versus only the final three months of 2018, as well as higher volumes and fees in several regions and acquired assets.
Net income attributable to MPLX LP fell $785 million. A $1.197 billion goodwill impairment in G&P, higher depreciation and amortization, and higher interest expense outweighed operating growth. Interest expense, net of amounts capitalized, increased to $851 million from $590 million.
Operating cash flow increased $1.011 billion, with the impairment being non-cash and an important factor in the difference between cash flow and reported earnings.
ANDX-related issuance added about 263 million MPLX common units. Common units outstanding reached approximately 1.058 billion at year-end, increasing aggregate distribution requirements.
Debt financing changed materially: MPLX assumed ANDX notes, issued $2.0 billion of floating-rate notes, drew a $1.0 billion term loan, and expanded its revolving facility to $3.5 billion, with maturity extended to July 2024.

Outlook, commentary, risks and unusual items

Management’s 2020 organic growth capital plan was $1.5 billion. Planned investments include L&S pipeline and terminal projects, approximately 580 MMcf/d of additional G&P processing capacity, and about 80 mbpd of additional fractionation capacity. The filing does not provide a numerical earnings or revenue forecast.
The Wink-to-Webster crude pipeline, with 1.5 million barrels per day of designed capacity, was scheduled for service in the first half of 2021; all contractible capacity was reported committed with minimum volume commitments. The Whistler natural-gas pipeline, designed for approximately 2 Bcf/d, was expected in service in 2021, with most available capacity committed.
The $1.197 billion goodwill impairment eliminated goodwill in the Western G&P reporting unit. Management attributed it primarily to slower drilling activity and lower producer-customer production-growth forecasts. Goodwill remained $9.536 billion at year-end; the Crude Gathering reporting unit’s fair value exceeded carrying value by only about 8%, making assumptions and future operating forecasts important to monitor.
MPC accounted for approximately 56% of 2019 operating revenue, excluding specified joint-tariff amounts treated as third-party revenue. L&S was particularly concentrated, with approximately 91% of its operating revenue generated from MPC. This relationship supports fee-based cash flows but creates material customer and sponsor concentration risk.
MPC’s board formed a special committee to review strategies for its Midstream business, of which MPLX is the primary component. The filing cautions that there is no assurance this review will result in a transaction; uncertainty could affect strategy, personnel, costs, ratings and unit price.
Other key risks include substantial debt and interest-rate exposure, commodity and producer-volume risk, dependence on third-party customers, project execution and permitting, environmental and pipeline-safety regulation, and potential impairment of goodwill or equity-method investments. Moody’s had a negative outlook on MPLX’s Baa2 rating; Fitch and S&P had stable outlooks on BBB ratings.
Westcon construction disputes were settled during 2019; MPLX stated the settlements were not expected to have a material adverse financial effect. Environmental remediation accruals were $19 million at year-end. A contingent equity contribution agreement for the Bakken Pipeline system had maximum potential undiscounted payments of approximately $230 million.
The filing states that no open commodity derivative contracts were outstanding at year-end, though a natural-gas purchase commitment embedded in a keep-whole agreement had a fair-value liability of $60 million.

Important facts for investors to verify

How much of revenue and cash-flow growth reflects acquired ANDX assets, and how much reflects organic volume, fee and operating improvements?
Whether producer activity, throughput forecasts and customer credit quality support G&P utilization and the remaining goodwill valuations, especially in Crude Gathering and Eastern G&P.
Debt maturity, floating-rate exposure, refinancing needs and covenant headroom, including the $1.0 billion term loan due in 2021 and floating-rate notes due in 2021 and 2022.
Whether project spending, committed capacity and in-service schedules for Wink-to-Webster, Whistler and other expansions remain on track and deliver expected returns.
How MPC’s strategic review affects commercial agreements, sponsor support, ownership, capital allocation and MPLX’s credit ratings.
Whether distributable cash flow continues to cover common and preferred distributions after maintenance capital needs, debt service and required growth investment.