MPLX LP — Form 10-Q Summary
Reporting period: Quarter ended March 31, 2017. MPLX is a master limited partnership sponsored by Marathon Petroleum Corporation (MPC), operating Logistics and Storage (L&S) and Gathering and Processing (G&P) businesses. Comparative financial statements were retrospectively adjusted for certain MPC asset transfers under common control; results include Ozark only from its March 1, 2017 acquisition date.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 | Change / context |
|---|---|---|---|
| Total revenues and other income | $886 million | $645 million | Up $241 million |
| Income from operations | $265 million | $50 million | Prior period included $129 million impairment expense |
| Net income (loss) | $187 million | ($14 million) | |
| Net income (loss) attributable to MPLX LP | $150 million | ($60 million) | |
| Common limited partner earnings per unit | $0.20 basic; $0.19 diluted | ($0.33) | |
| Operating cash flow | $377 million | $321 million | Up $56 million |
| Investing cash flow | ($953 million) | ($266 million) | Includes acquisitions and affiliate investments |
| Financing cash flow | $607 million | ($94 million) | |
| Cash and cash equivalents | $265 million | $234 million at Dec. 31, 2016 | |
| Debt | $7.108 billion gross borrowings | $4.858 billion | Increase primarily from $2.25 billion senior-note offering |
| Available liquidity | $2.762 billion | Includes cash and $2.497 billion available credit/loan capacity | |
| Quarterly common-unit distribution | $0.5400 per unit | $0.5050 per unit | Seven percent year-over-year increase |
Adjusted EBITDA attributable to MPLX LP, a non-GAAP measure, was $423 million versus $302 million. DCF was $354 million; DCF attributable to general and limited partner unitholders was $338 million, versus $236 million in Q1 2016. These non-GAAP measures should be considered alongside, not instead of, GAAP results.
Segment operating income attributable to MPLX LP was $156 million for L&S, up $68 million, and $309 million for G&P, up $52 million. Management cited acquisitions and Cornerstone Pipeline contribution in L&S, and higher product prices, volumes, plant expansions and fractionation capacity in G&P. G&P gathering volumes declined about 5%, while processing and fractionated volumes rose about 9% and 14%, respectively.
Material changes and transactions
- On March 1, MPLX acquired HST, WHC and MPLX Terminals from MPC for approximately $1.5 billion in cash and approximately $503 million in equity. The acquired businesses add crude and refined-product pipelines, NGL storage caverns and terminal capacity. Prior periods were retrospectively adjusted where required for common-control accounting.
- MPLX acquired the 433-mile Ozark crude oil pipeline for $220 million. It contributed $7 million of revenue and $2 million of operating income for March. An expansion to approximately 345,000 barrels per day is expected to be completed in Q2 2018.
- MPLX invested $500 million for an indirect interest in the Bakken Pipeline system through MarEn Bakken.
- MPLX and Antero Midstream formed Sherwood-related joint ventures to develop gas-processing and shared infrastructure. The arrangements include assets under construction and planned facility start-ups through late 2018.
- Q1 capital expenditures were $283 million; total capital expenditures net of joint-venture partner contributions were $370 million, including $358 million of growth capital. Operating cash flow did not cover reported investing outflows.
Outlook, risks and contingencies
- Management forecast 2017 organic growth capital of $1.8 billion to $2.0 billion, excluding anticipated MPC dropdowns and related subsequent spending. MPC had announced potential dropdown assets estimated to contribute $1.4 billion of annual EBITDA; transactions remain subject to market conditions, approvals and other conditions. Expected dropdown funding would likely use debt and equity in roughly equal proportions.
- MPLX stated it expects available liquidity sources and operating cash generation to meet funding needs, debt service, capital expenditures and distributions. It reported a 3.87-to-1.0 debt-to-Consolidated-EBITDA covenant ratio, below the 5.0-to-1.0 limit, and investment-grade ratings with stable outlooks. Management said it intends to maintain an investment-grade credit profile and distribution growth, but these are not guarantees.
- Commodity prices, producer activity, competition, project costs and timing, access to capital, MPC’s ongoing commercial commitments, regulation and environmental compliance may affect results, growth plans and distributions. MPC represented 38% of Q1 revenue and other income, underscoring sponsor and related-party concentration.
- The Partnership had $409 million of contractual commitments to acquire property, plant and equipment. Management did not believe construction milestone penalties were likely to be triggered. Environmental remediation accruals were $1 million; an EPA civil settlement proposal concerning Pennsylvania facilities remained under negotiation, with a proposed $2.4 million cash penalty and $3.6 million in environmental projects. The filing says the ultimate loss for certain litigation cannot be estimated; MPC indemnifies MPL for losses in one Illinois matter.
- A Level 3 embedded commodity derivative was a $44 million liability, valued using significant unobservable assumptions including future commodity-price curves and contract-renewal probabilities. Derivative accounting can add earnings volatility; management says commodity hedges mitigate some price exposure through Q4 2018.
- The Partnership was evaluating new accounting standards, including revenue recognition for planned adoption in Q1 2018. It expected certain revenue gross-ups; it had not finalized the impact for keep-whole and percent-of-liquids arrangements.
Key facts for investors to verify
- Reconcile acquisition-related growth and the retrospective comparative adjustments when assessing organic performance and segment trends.
- Review cash available for distributions, coverage and funding needs against the $1.8 billion–$2.0 billion organic growth capital plan and pending dropdown ambitions.
- Track debt, covenant headroom, refinancing needs and the cost of continued debt and equity financing.
- Assess the sustainability of MPC-related revenues, contractual minimum-volume commitments, and the effect of MPC’s planned asset transfers or any changes to sponsor support.
- Monitor Ozark expansion and Sherwood project execution, including costs, permitting and start-up timing.
- Follow commodity exposure, the Level 3 embedded derivative assumptions, and environmental and legal proceedings.