MPLX LP — Q1 2018 Form 10-Q
Business context and reporting period
For the three months ended March 31, 2018. MPLX is a midstream partnership with Logistics and Storage (L&S) and Gathering and Processing (G&P) segments. Results are not directly comparable with Q1 2017 because of acquisitions, including the February 2018 dropdown of MPC refining logistics and fuels distribution assets, and adoption of new revenue accounting rules.
Financial and operating performance
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue and other income | $1.420 billion | $886 million |
| Income from operations | $557 million | $265 million |
| Net income | $423 million | $187 million |
| Net income attributable to MPLX | $421 million | $150 million |
| Net income per common unit, basic | $0.61 | $0.20 |
| Operating cash flow | $450 million | $377 million |
| Adjusted EBITDA attributable to MPLX (non-GAAP) | $760 million | $423 million |
| DCF attributable to GP and LP unitholders (non-GAAP) | $603 million | $338 million |
Operating income margin was approximately 39% of reported revenue, versus approximately 30% a year earlier; revenue presentation changes and acquisitions affect this comparison. L&S segment operating income attributable to MPLX rose $268 million (172%), including contributions from acquired businesses. G&P segment operating income increased $41 million (13%); gathering throughput rose about 31%, processing volumes 8%, and fractionated volumes 15%.
Investing cash outflow was $490 million and financing cash inflow was $37 million. Additions to property, plant and equipment were $455 million; gross capital expenditures were $509 million. Cash and cash equivalents were $2 million at quarter-end. Long-term debt on the balance sheet was $11.861 billion, compared with $6.945 billion at year-end 2017. The revolving facility had $2.247 billion available; reported total liquidity, including the MPC loan facility and cash, was approximately $2.749 billion. Debt-to-EBITDA covenant ratio was 3.6x, within the 5.0x limit.
Material changes versus the prior comparable period
- The February 1 dropdown acquired MPC refining logistics and fuels distribution assets for $4.1 billion cash plus units valued at approximately $4.3 billion. The acquired businesses contributed $265 million revenue and $181 million operating income for the two months included in Q1.
- MPLX issued $5.5 billion of senior notes, with maturities from 2023 through 2058, to fund the dropdown cash payment and repay interim and other borrowings.
- MPC exchanged its IDRs and economic general partner interest for 275 million new common units, eliminating IDRs and converting the GP interest to non-economic. Management expected this exchange to be accretive to DCF attributable to common unitholders in Q3 and for full-year 2018.
- ASC 606 adoption increased reported revenue and costs through gross presentation, including approximately $117 million of gross-ups cited by management; the adoption reduced Q1 net income by $2 million versus the prior accounting standard. The filing did not restate the 2017 comparison.
- Revenue and other income increased $534 million year over year, reflecting acquired assets, volume and pricing increases, equity-method investment contributions, and accounting presentation changes. Interest and other financial costs increased $52 million.
Outlook, commentary, risks and unusual items
- MPLX planned $2.2 billion of 2018 growth capital spending, excluding the dropdown and related subsequent spending. Projects included added gas processing and fractionation capacity and expansions to the Ozark and Wood River-to-Patoka pipeline systems.
- Management stated it expects to internally fund a greater portion of future growth. It intends to maintain distribution growth over time and to pay at least the minimum quarterly distribution, but cautioned that future distributions are not guaranteed.
- The Q1 distribution declared was $0.6175 per common unit, up 2% from Q4 2017 and 14% from Q1 2017; the filing says it was payable May 15, 2018. MPC held approximately 64% of common units and accounted for 44% of Q1 revenue and other income.
- Approximately 95% of Q1 net operating margin was fee-based. Risks include reliance on MPC and producer customers, commodity-price and interest-rate exposure, construction costs and delays, regulation and environmental compliance, market access and financing conditions. MPLX reported investment-grade ratings with stable outlooks and no interest-rate hedges.
- Environmental remediation accruals were $15 million. A consent decree announced after quarter-end provided for a $0.6 million penalty and approximately $2.4 million of environmental projects. In Westcon construction litigation, Westcon sought more than $40 million plus unspecified punitive damages; MPLX said it could not estimate a reasonably possible loss. The filing also identifies $718 million of commitments to acquire property, plant and equipment.
- The partnership expected lease accounting adoption to materially increase recognized right-of-use assets and lease obligations. No full-year earnings guidance is provided in the supplied filing text.
Important facts for investors to verify
- How much of the earnings and cash-flow increase reflects acquired operations and organic growth versus ASC 606 gross presentation and other accounting effects.
- Whether post-dropdown operating cash flow and DCF support the larger distribution base, planned growth capital spending and debt service.
- The integration, performance and MPC-related contractual terms of the refining logistics and fuels distribution assets, given MPC’s ownership and revenue concentration.
- Debt leverage, refinancing needs, ratings and available liquidity after the $5.5 billion note issuance and subsequent financing activity.
- Construction-project execution and spending against the $2.2 billion growth plan and $718 million contractual equipment and construction commitments.
- Developments in environmental and construction litigation, including matters for which the partnership cannot estimate a loss range.