Welcome to the MPLX Second Quarter 2022 Earnings Call. My name is Sheila and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Kristina Kazarian. Kristina, you may begin.

Good morning, and welcome to the MPLX second quarter 2022 earnings conference call. The slides that accompany this call can be found on our website at mplx.com, under the Investor tab. Joining me on the call today are Mike Hennigan, Chairman and CEO; John Quaid, CFO; and other members of the executive team. We invite you to read the safe harbor statements and non-GAAP disclaimer on Slide 2. It's a reminder that we will be making forward-looking statements during the call and during the question-and-answer session that follows. Actual results may differ materially from what we expect today. Factors that could cause actual results to differ are included there as well as in our filings with the SEC. With that, I'll turn the call over to Mike.

Thanks, Kristina. Good morning, everyone. Thank you for joining our call. Earlier today, we reported second-quarter adjusted EBITDA of $1.5 billion. Our operating results this quarter represented a 6% increase from the second quarter of last year. This performance highlights the continued resiliency of our base business, tailwinds from higher NGL prices, as well as the growth coming from recent capital investments. In late June, we've renewed several pipeline contracts with MPC. These pipeline systems are fit for purpose and integral to MPC’s refining and marketing system. The renewal and extension of these contracts make economic and financial sense for both entities. Contracts now have extended terms to 2032 and have two automatic renewal provisions, which will allow for an additional 10 years of extensions, potentially taking them out to 2042. We continue to view the business as a return on as well as a return of capital business. This quarter, we advanced several organic growth projects. In the L&S segment, we continue to expand long-haul natural gas and crude gathering pipelines supporting the growing Permian and Bakken regions. Specifically in the Permian, working with our partners, we continue to progress our natural gas strategy with the expansion of the Whistler pipeline from 2 bcf per day to 2.5 bcf per day, along with laterals into the Midland basin and Corpus Christi markets. In the G&P segment, we remain focused on the Permian and Marcellus basins in response to producer demand. In the Permian, construction advanced on our Tornado 2 processing plant, which is expected to come online in the second half of 2022. We are also planning to build our sixth processing plant in the basin, Preakness II, which is expected to be online in the first half of 2024. This will bring our total Permian processing capacity up to 1.2 bcf per day. In the Marcellus, our Smithburg de-ethanizer is expected to come online to meet incremental in-basin demand in the third quarter of 2022. Additionally, we plan to add the Harmon Creek II processing plant, which we expect to come online in the first half of 2024. This will bring total processing capacity up to 6.5 bcf per day in the Marcellus. Our capital allocation framework remains unchanged. Year-to-date, we have returned slightly over $1.6 billion to our unitholders through distributions and unit repurchases. Today is part of our long-term commitment to capital return. We announced an incremental $1 billion unit repurchase authorization. With the strength and stability of the business, we will evaluate an increase to our base distribution later in the year. Shifting to Slide 4, this quarter, we continue to enhance our ESG commitments and disclosures with the recent publication of both our annual sustainability and perspectives on climate-related scenarios report. We continue to make progress on our 2030 targets to reduce methane emissions intensity by 75% from 2016 levels. Through last year, we've achieved a 46% reduction, further enhancing the lower carbon profile of our natural gas business. We've also added a biodiversity target to develop sustainable landscapes across 50% of our MPL-compatible right-of-ways, which is about 10,000 acres by the end of 2025. Through the end of last year, we've already achieved nearly 10% of this target. We're challenging ourselves to lead in sustainable energy by meeting today's needs while investing in a diverse energy future that creates shared value for all of our stakeholders. Now let me turn the call over to John to discuss our operational and financial results for the quarter.

Thanks, Mike. Slide 5 outlines the second quarter operational and financial performance highlights for our Logistics and Storage segment. The L&S segment adjusted EBITDA increased by $19 million compared to the second quarter of 2021, primarily due to higher throughputs. Pipeline volumes were up 6% and terminal volumes were up 4% year-over-year, driven largely by increased utilization at MPC’s refineries. Moving on to our gathering and processing segment on Slide 6. G&P segment adjusted EBITDA increased by $64 million compared to the second quarter of 2021, largely due to higher NGL prices. For the quarter, NGL prices averaged $1.18 per gallon, which is $0.43 per gallon higher than the average from the second quarter of 2021. Gathered volumes were up 11% due to increased production in the Utica and Southwest, offset slightly by a decrease in the Marcellus. Processing volumes were roughly flat compared to the second quarter of 2021. Moving to Slide 7. Our second quarter financial results demonstrate the earnings and cash flow resiliency and stability of our business. For the quarter, total adjusted EBITDA of $1.5 billion was up 6% from the prior year, while distributed cash flow of $1.2 billion was flat compared to 2021, primarily due to one-time benefits experienced last year. Free cash flow after distributions increased to $614 million in the second quarter. This number does include approximately $65 million in asset sales proceeds, primarily from the sale of several light product terminals and a $266 million working capital benefit, which we anticipate may largely reverse in the third quarter. Project-related expenses increased nearly $30 million in the quarter, and we anticipate an incremental $40 million increase from 2Q to 3Q in project-related expenses. Looking at other financial highlights for the quarter, MPLX declared a second quarter distribution of $0.750 per unit, resulting in a distribution coverage ratio of 1.69 times. We ended the quarter with total debt of about $20 billion and a leverage ratio of 3.5 times. Looking forward over the next 12 months, we have roughly $2 billion of senior note maturities, which, subject to market conditions, we would expect to refinance into long-term debt. After the quarter-end, we entered into a new $2 billion five-year credit facility to replace the previously existing facility. The new credit facility extends to July of 2027. In closing, given current business conditions, our commitment to strict capital discipline, and our continued adoption of a low-cost culture, we expect to continue generating strong cash flow, enhancing our financial flexibility to invest and grow the business while also supporting the return of capital to MPLX unitholders. Now, let me turn the call back over to Kristina.

Thanks, John. As we open the call for questions, we ask that you limit yourself to one question plus a follow-up. We may reprompt for additional questions as time permits. With that, the operator will open the call for questions.

Thank you. We will now begin the question-and-answer session. Our first question will come from John Mackay with Goldman Sachs. Your line is open.

Hey, good morning. Thanks for the time. Nice to hear from you, Mike. I wanted to start on just capital allocation; I got the new buyback authorization, but the buyback number during the second quarter was also a little bit lower than I think most of us expected. Can you just talk a little bit about how you're thinking about that going forward and balancing that against some of your comments on potentially increasing the distribution later in this year? Thanks.

Yes, John, thanks for your comment. I'm going to let John take that one.

Hey, good morning, John. Thanks for the question. First, I wouldn't read too much into our activity in the second quarter; nothing about it should be viewed as a deviation from our capital allocation philosophy. You'll remember in the first quarter, our free cash flow after distributions was less than $100 million. We were coming into a year forecasting higher capital spending and continuing to look at some growth opportunities. But looking forward, right, we ended this quarter with $300 million on the balance sheet and with our incremental $1 billion authorization, we now have a total authorization of $1.2 billion for the repurchase of units. So I think if you look forward in the second half, we'd expect to be perhaps more dynamic and opportunistic as we look at unit repurchases. Of course, all done in line with SEC regulations, which from time to time can limit our flexibility. Overall, I think we can continue to anticipate kind of an all-of-the-above approach, certainly subject to cash flow growth opportunities and market conditions. In addition to unit repurchases, right, we'll reassess our base distribution as we did last year, and any change there would be subject to board approval. We have a supplemental, which is perhaps a tax-efficient tool for capital return, but you might see us holding some level of cash as we look to evaluate growth opportunities and really opportunistically look to return capital. So I think that's the big picture, and I'll turn it back to Mike if he wants to add anything.

I think you covered it well.

No, that was great. Really thorough, appreciate the detail there. Maybe just follow up on kind of underlying fundamental stuff. Can we talk a little bit about what's going on in the Northeast? I think Marcellus processing was the lowest we've seen in a couple quarters, but you'd feel it kind of bounced back nicely. Wondering if you can kind of just unpack those two for us.

John, this is Greg; I'll speak to that question. We've seen a period of load growth to even flat sort of maintenance drilling in the Northeast over the last particularly post-COVID demand destruction era. Even a flat year-over-year number would represent quite a bit of drilling and new pads coming online to hold off that decline. We have continued to see that production come on, with probably more of the early ramp focused in the crude areas because the crude pricing level is what drove more of the rig activity in Permian and Bakken. But we are now starting to see that activity ramp-up. We expect to see more of a back half of 2022 volume load versus early in the year. Some producers have continued to maintain a little bit of growth, while some have continued to decline and not necessarily maintained. So that really is the primary explanation.

Okay. Appreciate that. Thanks for the time everyone.

Thanks, John.

Next, we will hear from Michael Blum with Wells Fargo. You may proceed.

Thanks. Good morning, everyone. I wanted to stand the Northeast a little bit from unless I'm wrong. This is the first new processing plant you've announced in quite a while. So just wanted to get your view on if you're seeing any like really change in the growth rate for volumes in the Northeast, and then kind of related to that if the Mountain Valley pipeline does get done, do you think that would influence your view of kind of basic growth overall and then specifically anything for MPLX?

Yes. Greg, again, as I had mentioned before, we do expect to see some ramp-up in growth in the Northeast beyond what we've seen over the last 18 months. In terms of the new plant, the processing plants are really sort of specific to the gathering area and the producers, even within an area like the Marcellus. So we have some plants that have run close to or are very near capacity over the last 18 months and some that aren't quite at that level overall. We're still at high utilization, but we do see the need over the next 12 to 18 months for more capacity in the specific area where we're building the Harmon Creek plant.

And Michael, this is Mike. I'll just add that what Greg has said; it's been a constrained area for a while. Our anticipation as MVP will get done, the shell plan is going to come up as you pointed out, and we're going to build another processing plan. I think we're finally going to start to see a little bit more growth in the area that's been somewhat constrained for a little bit, as Greg just mentioned.

Great. I appreciate that. My second question is really probably more strategic in nature. There's been recently a few sponsors that have chosen to buy in their MLPs. So I'm just curious to get your latest thoughts on the MPC-MPLX relationship and structure, and whether it still makes sense from your perspective to maintain a separate publicly traded MLP. Thanks.

Yes, Michael, we get that question often at the MPC call. Our quick answer is our situation is a lot different than many of the others that you've seen roll it up. So we're pretty comfortable in the structure that we have today. We still think it's good for the Marathon family. It works for both, as we just talked about in our prepared remarks; we just re-upped another 10 years of asset use between the two entities. So we're pretty comfortable with where we stand and we think it's a good structure for us.

Great. Thank you very much.

You're welcome.

Our next question will come from Brian Reynolds with UBS. Your line is open.

Hi, good morning, everyone. I was just curious if you could provide any incremental details on the L&S contract extension with MPC. Do any rates move up or down, or are there any other pipeline assets that were previously not included in the agreement that are now in the agreement? Thanks.

Yes, I'll take that one, Brian. This is Tim. I think you're familiar with the fact that these pipelines are really critical to both MPLX and stable earnings as well as to MPC’s operations. As a result, both MPLX and MPC agreed to renew and extend the contract for another 10 years. It's a pretty significant contract. But to your question, the contract terms were not changed other than extending the contract duration, which does certainly provide more certainty for an extended number of years on these very key systems. It's important to keep in mind that these specific logistics assets under contract with MPC are indeed fit for purpose and integral to the refining and marketing system. This renewal with MPC certainly made financial sense for both parties. I think the last thing I would touch on is that while we're talking about this specific contract with MPC, we continue to focus on maximizing the utilization of all of those systems, including those that serve third parties as well.

So hopefully that's helpful. And hey, Brian, it's John; I just might add on to Tim's comments. One of the things that really was part of our thinking around this as well, was maybe some questions from investors on the commitment of MPC to MPLX and we think this renewal certainly is evidence of that commitment. Just as a reminder, too, I think Tim might have mentioned as well, but these are all largely FERC index-based systems. So their rates have been moving every year in line with the indices.

Great, appreciate all that color. My one follow-up question is just around any initial thoughts on the potential pipeline reform bill and then potential impacts in the Northeast JMP business. I know you briefly touched on it a little bit earlier, but curious if there are any unique opportunities that MPLX would now consider that it previously hasn't, given it hasn't met its risk-adjusted profile because of the regulatory uncertainty. Thanks.

And Brian, are you speaking to the inflation reduction act or a different legislation? I thought I heard you refer to a different legislation. I just want to make sure…

Inflation reduction, effectively the side deal that mentioned.

So obviously, it's a pretty long bill; the details were just released, and we continue to evaluate it. I think a couple of key points for MPLX. One, you see some focus around methane emissions, and we've kind of talked about it on the call. Mike commented on some in his prepared remarks. We've been working very hard to reduce those emissions. We feel like right now with the current draft, we don't see a significant impact on our overall system, really a benefit of the work we've done to date to reduce those emissions. There may be some opportunities around renewables, but I think we're encouraged, but we need to see kind of how that all flows through the final legislation.

And maybe I would just, this is Tim. I would just add a couple of things from the logistics standpoint. There are some provisions in the current version of it that increase the 45Q tax credit, which could be supportive of CCS projects, which we have an interest in. There are also provisions for SAF and hydrogen production, which could drive some future logistics needs as well. But as John said, it's early, so we're going to continue to monitor it.

Nope. Great, that covered it. Appreciate all the color and have a great rest of your day.

Thank you, Brian.

Thank you. Our next question will come from Jeremy Tonet with JPMC. Your line is open.

This is Steve McGee for Jeremy. Really just one for me, wanted to see if there were any further updates to Matterhorn. Just how you're thinking about participating and any further details you can give us there.

Sure. This is Tim. I will take that one. As we've mentioned before, we do believe in the strong growth of the Permian and believe that beyond even the announced expansions of the existing pipes, such as Whistler, that a couple more pipes are going to be needed over the next five-plus years. Matterhorn is the first of those, which is why the partners made the final investment decision on the project in May. As for our equity ownership in Matterhorn, that's not been totally finalized yet, but it currently stands at 5%. From a monetary standpoint, that would represent about $30 million of investment, and that, of course, would reflect some level of project financing. So that's a relatively small stake here on Matterhorn. We put a lot of our commitments toward the Whistler side of the house and its expansion.

Got it; super helpful there. Actually, if I could just have one more, I just wanted to see with just cost increases if you're seeing any kind of cost pressures right now throughout the business. And then with that, how much of that do you think it's permanent versus how much do you think you can optimize again?

So this is Tim again, and you're basically referring to some of the inflation protection. I would assume that we have so. I'll tackle that question in that regard. I would say that like others, we are certainly seeing some inflationary cost pressures across most of our spend categories. These increases are largely in line with the public indicators for material, equipment, labor, and freight. We are seeing line pipe and energy costs that may be up a little more significantly. For example, our fuel and power is up about 15% year-on-year for our pipeline side of the house. The teams are certainly working hard to help offset these increases by completing more of the work in-house, maybe deferring some non-critical work, and realizing operating efficiencies through the ideas of our workforce. If you're talking more on the capital side, much of our 2022 capital spend was contracted previously, so early in the year we didn't see as much impact on our capital spend, but we do expect that with increased costs, you're going to see that later in the year. We still maintain our capital guidance of $700 million and intend to spend that and stay within budget. I would say that the increased costs for capital projects are probably going to show up more significantly in 2023, as we are starting to see a lot of rate sheet increases from contractors and other service providers. Hopefully, that gives you a little flair on what we're seeing.

Yep. That's perfect. Thanks, guys. I'll leave you there.

Okay. Thanks, Steve.

Thank you. Our next question will come from Theresa Chen with Barclays. Your line is open.

Good morning. Thanks for taking my questions. It's great to hear from you, Mike. So maybe beginning with the demand side of things across L&S, given the incremental concern following the recent economic data and just market worries about recession. Your second-quarter utilization of the parent and the volumes of the MLP would indicate that things are going well, but would love to hear your outlook across the demand regions, please?

Yeah, Theresa, it's Mike. Thank you for your comment first. The demand question is obviously one that we continue to monitor, and I guess at the end of the day, we're still pretty bullish of what we're seeing across the commodities. It was interesting to give you more detail than you probably wanted; the 4th of July weekend, which is typically a stronger weekend, was not that strong in our system. Subsequent to that, the rest of July really picked up again. I think the reason we're still constructive is that overall, we're still mostly at pre-pandemic levels across the system. So we think there's still room to run on the demand side. It's been choppy. Like I said, we went into the season with Memorial Day weekend and the 4th of July, the bigger weekends that typically show some robust numbers; we didn't really see those, but during the other times of the month, we've seen some strong recovery. So I think at the end of the day, we're still pretty constructive. Overall, we think demand has more to go once we get back to a normal post-pandemic environment. Inventories are still constructive, as you mentioned. Our whole thought process on the refining side in the second quarter was to run as reliably as we could in the margin environment and produce as much transportation fuel as possible. Really, we're going to continue to show the market that we're running a low-cost system. So low cost, strong reliability, and we'll take what the market offers as far as margins. Right now, it's hard not to still be constructive. Demand is looking good; inventories are low, so it's still a pretty constructive environment for us.

Thank you for that detailed response. Turning to the contractual nature of your assets or the contractual nature of your L&S assets, and following the inflation data that we've received thus far in the escalator tracking in that mid-teens range, can you remind us of the expected inflation tailwinds that you will have within L&S? To the extent you can share any color on capital colors around your gathering assets as well, that'd be great.

Yeah, I can – this is Tim. I can kick that off. I think your questions really address the inflation protection and so forth that some of our contracts may have. We do have some level of inflation protection in almost all of our L&S and G&P contracts. They range from some of the small fixed escalators up to the variable escalators that are based on either CPI, PPI, or the FERC indexes for those qualifying assets. For those regulated pipelines, we typically adjust our rates in line with guidance. Although we don't really expect to see an increase in revenue from those rate changes, we expect to see it at a material change to the EBITDA given that these rate escalators are meant to cover increases in cost. Just a reminder as well that less than about one-third of the L&S EBITDA is directly tied to the FERC escalator, which means that the majority of those are tied again to the fixed escalators or CPI or PPI. Hopefully, that's helpful.

Thank you.

You're welcome.

Thank you. Our next question will come from Danny for Neal Dingmann with Truist. Your line is open.

Hey guys, could you go back to the return to capital question? Can you speak to consideration of a supplemental distribution versus unit repurchases when creating value for unit holders?

Yeah. Good morning, Danny; thanks for the question. Overall, we're in maybe an envious position, given the cash we're generating covering our capital plan of $900 million in our base distribution of $3 billion, so that gets us to kind of this fork in the road. Again, I want to push you back that we continue to see an all-of-the-above approach, certainly being opportunistic about unit repurchases. I mean, the supplemental can be tax-efficient, but again, as I said, we might look to hold some cash to be a little more opportunistic with our return to capital as we continue to evaluate growth opportunities as well. So that's kind of the framework, maybe a little bit bigger picture than your question, but hopefully that's helpful. Mike, I don't know if you want to add something as well.

Yeah, I'm just going to add; we said this in the past, but I'll just remind everybody that it's interesting to us that different unit holders have different views on return of capital. Some feel very strongly that buying units back is the preferred way to go, while others feel just as strongly that they prefer to receive a check. Our situation, as we look at it, we try to optimize as John has said, taking an all-of-the-above approach. It wasn't too long ago that our yield was trading at 20% and in that environment, we were buying back units since it was compelling to do so. At other times, we're looking at it and saying that a supplemental makes sense. We also look at the permanent ones. So we've tried to differentiate a little bit between what we think is permanent growth in earnings as a result of our capital investments versus some of these cash flows that we're getting, which we think are transitory due to current market conditions. That's why we categorize those more in the supplemental. Our approach has been to look at market conditions, evaluate our ability to invest capital because we keep saying it's a return of and return on. We look at both of those. At the end of the day, we're trying to create as much value as we can in the earnings while also being efficient with the timing of our capital returns. Hopefully, that gives you a little more color.

No, that's very helpful. Thank you. That's it for me.

Thank you. Our last question will come from Harry Mateer with Barclays. Your line is open.

Hi. Thanks. Good morning. Your first question, your leverage is tracking well below the target of four times you've historically provided. Is that four times number still good to use? How should we think about your willingness to utilize that capacity for the incremental repurchase program and accelerated, or would that not be something you'd like to do?

Yeah, I'll let John comment, but one thing I do want to remind everybody is that we are very comfortable with that four times target. We've shown a lot of stability in these cash flows, but the reason we're at 3.5 times is basically because we've kept that flat and we've grown earnings. Our leverage is going to decrease as a result. One of the things that we will continue to monitor is as earnings grow, where is our leverage overall? We don't want to be under-levered, but what you've seen over the last couple of years is a change in that. We're going to manage the business such that we're going to generate free cash flow, invest capital in a disciplined way, such that we're not adding to debt. So we've been kind of flat on debt for a while, and that's why our leverage has been where it's been. John, do you want to add?

No. Mike, I think you said it well and just kind of refer back to some of my comments in the remarks as well. We've got some maturities coming our way, and we're looking to refinance those. It's another thing evident though in line with what Mike was just talking about.

Okay. Thanks. And then that's a good segue. John, my follow-up; you did comment about the senior maturities. One question I've been having is just given how fluid the rates market has been, how you're thinking about those preferreds, that reset to a floating rate early next year would seem to be pretty expensive capital considering where rates are heading. Have you guys thought about where those fit in the capital structure longer-term?

Without a doubt, and I definitely appreciate the question. That's certainly something that's been on our planning as well, as we're looking forward not just to these senior note maturities, but those Series Bs. You've kind of summarized it well; high cost and opportunity to look to manage those when they become callable in February of 2023.

Okay. Thanks very much.

All right, Sheila, if we don't have any other questions, thank you for joining us today and thanks for your interest in MPLX. If you have any questions that didn't get answered on the call today, our Investor Relations team is here to help any time. Thank you so much.

Thank you. That does conclude today's conference. Thank you for participating. You may disconnect at this time.