MPLX LP — 2016 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2016. This is an annual filing, not a standalone fourth-quarter report; quarterly figures below are unaudited. MPLX operates Logistics and Storage (L&S) and Gathering and Processing (G&P) businesses.
Financial performance and position
| Metric | 2016 | 2015 |
|---|---|---|
| Consolidated revenue and other income | $2.590 billion | $961 million |
| Income from operations | $507 million | $298 million |
| Net income | $258 million | $249 million |
| Net income attributable to MPLX | $233 million | $156 million |
| Operating cash flow | $1.288 billion | $340 million |
| Capital additions to property, plant and equipment | $1.206 billion | $288 million |
| Adjusted EBITDA attributable to MPLX (non-GAAP) | $1.419 billion | $498 million |
| DCF (non-GAAP) | $1.140 billion | $399 million |
| Cash and cash equivalents at year-end | $234 million | $43 million |
| Debt borrowings before unamortized discounts and issuance costs | $4.858 billion | $5.736 billion |
Consolidated operating margin, calculated as operating income divided by revenue and other income, was approximately 19.6% in 2016 versus 31.0% in 2015; net margin was approximately 10.0% versus 25.9%. These comparisons are affected by the MarkWest acquisition and the resulting change in revenue mix. Year-end long-term debt reported on the balance sheet was $4.422 billion, reflecting unamortized discounts and issuance costs. Total liquidity was $2.731 billion, including $2.497 billion available under credit facilities and $234 million of cash. The debt covenant leverage ratio was 3.26x against a maximum of 5.0x (temporarily 5.5x after certain acquisitions); MPLX reported compliance.
For fourth-quarter 2016, revenue and other income was $714 million, operating income $197 million, net income $132 million and net income attributable to MPLX $133 million. Fourth-quarter 2015 figures were $333 million, $74 million, $42 million and $18 million, respectively.
Material changes versus the prior comparable period
- The December 2015 MarkWest merger drove most of the increase in reported revenue and G&P results. MarkWest was included only from December 4 in 2015; therefore, the reported full-year comparison is not like-for-like. On a pro forma basis, G&P segment operating income attributable to MPLX increased to $1.132 billion from $1.011 billion.
- L&S segment operating income attributable to MPLX increased 41% to $453 million, reflecting the March 2016 acquisition of the inland marine business and higher average pipeline tariffs. G&P segment operating income attributable to MPLX was $1.132 billion, versus $76 million in 2015, largely reflecting the merger.
- Net income attributable to MPLX increased to $233 million from $156 million, while net income increased only modestly to $258 million from $249 million. Higher depreciation and amortization, interest and financial costs, and impairment charges weighed on reported earnings.
- Operating cash flow rose by $948 million, reflecting the enlarged business and favorable working-capital changes. Capital expenditures increased substantially; 2016 growth capital was $1.201 billion, net of estimated joint-venture partner contributions.
- Debt borrowings declined by $878 million during 2016. MPLX raised approximately $984 million net from preferred units and $776 million net from common units issued through its at-the-market program.
Outlook, commentary, risks and unusual items
- Management emphasized cash-flow stability, capital discipline, leverage improvement and growth. It expected approximately 95% of 2017 net operating margin to be fee-based. The 2017 organic growth capital plan was $1.4 billion to $1.7 billion, excluding anticipated dropdowns and acquisitions.
- MPLX announced 2017 distribution growth guidance of 12% to 15%. The fourth-quarter 2016 distribution was $0.5200 per common unit, up 4% from the fourth-quarter 2015 rate. The filing cautions that distributions depend on available cash and are not guaranteed at any particular level.
- MPC planned to offer MPLX assets estimated to generate $1.4 billion of annual EBITDA in 2017, subject to approvals, tax clearance and market conditions. The proposed financing was expected to use debt and equity in roughly equal proportions; MPC also expected to exchange its IDRs for MPLX units. These plans were not assured transactions.
- Subsequent to year-end, MPLX issued $2.25 billion of senior notes, entered an agreement to buy the 433-mile Ozark crude pipeline for about $220 million, and closed on a $500 million investment for an indirect interest in the Bakken Pipeline system. It also formed an Antero-related joint venture to develop processing and fractionation capacity.
- Unusual charges included $130 million of non-cash goodwill impairment and $89 million of impairment losses associated with an equity-method investment. A separate $54 million embedded derivative liability related to a producer gas-purchase and processing arrangement was subject to valuation uncertainty.
- Key exposures include producer drilling and throughput, commodity prices, customer concentration, project execution, capital-market access, regulation, environmental compliance and operational interruptions. MPC accounted for approximately 30% of consolidated revenue and other income in 2016 and 92% of L&S segment revenue and other income. Two G&P customers each represented 12% and 10% of consolidated revenue and other income.
- Environmental matters included an EPA proposal of approximately $2.4 million in penalties plus projects estimated at $3.6 million relating to pipeline-maintenance facilities; negotiations were ongoing. Other proposed resolutions included a roughly $0.9 million penalty and $3.3 million of projects across processing and fractionation sites. A 2016 pipeline release to the Wabash River was under investigation, with potential penalties; the filing did not provide a clear estimate of the ultimate exposure. Management said the pending matters were not expected to have a material adverse effect, while noting outcomes could not be predicted with certainty.
- Credit ratings were investment grade with stable outlooks as of January 31, 2017. The independent auditor issued an unqualified opinion and reported effective internal control over financial reporting as of year-end.
Important facts for investors to verify
- Assess underlying growth using pro forma results, given the MarkWest merger’s effect on reported year-over-year comparisons.
- Track whether the announced MPC dropdowns and IDR exchange close on the proposed terms, and the resulting purchase price, financing, dilution and distribution impact.
- Reconcile DCF and Adjusted EBITDA to GAAP cash flow and earnings; review the effect of maintenance capital, preferred distributions and future investment needs on cash available for common-unit distributions.
- Monitor leverage and liquidity after the February 2017 note issuance and subsequent acquisitions, including compliance with debt covenants and the cost of financing the growth program.
- Review customer concentration, producer activity, minimum-volume commitments and the status of environmental and pipeline-release proceedings.
- Check the assumptions underlying goodwill, equity-investment and embedded-derivative valuations, including commodity-price forecasts and customer renewal probabilities.