Fitch Ratings has affirmed MPLX LP's Long-Term (LT) Issuer Default Rating (IDR) and senior unsecured rating at 'BBB'.

The Series A preferred units have been affirmed at 'BB+'. The preferreds are notched down two from the IDR, which is typical for preferreds in the midstream sector. The Rating Outlook is Stable.

The 'BBB' rating reflects its operating and financial exposure to Marathon Petroleum Corporation (MPC; BBB/Stable), it's largest counterparty. It also reflects the partnership's scale, basin diversity, strong liquidity position and Fitch's expectations about its ability to generate FCF.

Key Rating Drivers

Counterparty Exposure: MPC is the largest independent refiner in the U.S, with 2.9 million bpd of refining capacity. It is the owner and sponsor of MPLX, as well as its largest counterparty. MPC contributed approximately 47% of MPLX's revenues in 2022, down from 55% in 2020. Fitch believes MPLX's midstream operations are strategically important to MPC's production and expects MPC to remain its largest counterparty, with contributions around 50% in the near term.

Stable Cash Flow: MPLX's revenues are supported by long-term, fee-based contracts generated under minimum volume commitments (MVC). The MVCs limit MPLX's exposure to direct commodity price risk and also provides stability and visibility into cash flows. For 2022, approximately 90% of revenues in its largest segment, Logistics and Storage (L&S), were generated by MPC under MVC contracts. Several transportation service agreements with MPC were renewed in 2022 with extended terms to 2032. The renewed transportation and storage contracts feature slightly lower MVCs. Inflation escalators are in place on a substantial majority of MPLX's long-term contracts.

Capital Allocation Policy: Fitch views MPLX's capital allocation policy of maintaining leverage below its 4.0x target while returning cash to unitholders primarily through dividend growth as supportive of credit. Leverage at the end of 2022 was 3.5x under management calculations, which differs from Fitch's calculations due to the treatment of the preferred units. Fitch anticipates that MPLX will continue to generate FCF while effectively managing the needs for capital expenditures and unitholder returns.

MPLX currently has around $846 million remaining in the $2 billion board authorized unit repurchase program. Units purchased are from the public, and not held by MPC, MPLX's sponsor. Fitch expects that MPLX will primarily utilize distributions to provide unitholder returns, while also pursuing opportunistic unit repurchases.

Leverage Reduction Trend: Fitch calculated MPLX's debt has been trending down toward below $21 billion in 2022. Adjusted EBITDA rose approximately 4% in 2022 versus the prior year, driven primarily by strong global demand for refinery products and the growth in Permian. The sustained growth in EBITDA has lowered the Fitch calculated leverage from 4.2x in 2019 to 3.7x in 2022. Fitch expects positive FCF to continue, debt level to stay flat, and leverage to remain at 3.6x through 2024.

Volume Risk in Gathering & Processing (G&P): The growth in G&P modestly outpaced L&S in both 2021 & 2022 with Marcellus and Permian regions being the main cash flow drivers for this segment. The Marcellus is MPLX's largest G&P region (approximately 65% of 2022's processing production) and was running at 87% processing capacity utilization. Fitch believes 2023 will see some growth as MPLX continues to add processing capacity in Marcellus and Permian to capitalize on the tailwinds from 2022.

Lower utilization and volume risk are key risks in this segment. E&P companies in North America in aggregate are pursuing a course of steady and slow volume growth, in line with the natural gas backwardation reflected in Fitch's price deck. Uncertainty in global economic conditions and lower commodity price could weigh on profitability in 2024 and 2025.

Sponsor Relationship: Fitch analyzed the parent-subsidiary relationship between MPLX and MPC, and has determined that their respective IDRs are the same based on the companies' standalone credit profiles. MPC owns approximately 65% of the limited partnership units and the non-economic general partner. The ratings reflect the favorable relationship and MPLX's significant counterparty exposure to MPC. In addition, MPC provides MPLX with a $1.5 billion uncommitted loan agreement, which is undrawn.

Derivation Summary

MPLX's 'BBB' rating reflects its significant size and diverse asset base. The partnership generates approximately $6 billion of adjusted EBITDA, and has shown good access to capital markets and liquidity. In 2022, MPLX received approximately 47% of its revenue from its sponsor. By year-end 2022, Fitch leverage was 3.7x, modestly higher than management's leverage due to Fitch's treatment of the preferred units.

Holly Energy Partners, L.P.'s (HEP) 'BB+' ratings reflect its small size and scope, with EBITDA under $500 million, and less diversification than MPLX. About 80% of revenues come from its sponsor, Holly Frontier Corp. (HFC; BBB-) in 2022. Fitch forecasts HEP's leverage approaching 3.0x range by 2026, lower than the 3.5x forecasted for MPLX in the same time frame. However, MPLX's larger scale and more geographic and customer diversification provide it with more favorable access to capital markets, even when capital market access has been difficult, accounting for the two-notch difference.

MPLX is rated one notch above Plains All America (PAA; BBB-/Positive). Despite its smaller size and less diverse operations, PAA has a strong focus in Permian, the top basin in North America. Its leverage was forecasted to be 4.7x for 2022 as compared with 3.7x for MPLX. However, the recent stronger than expected volume growth lowered its leverage to the range of 3.5x-3.9x through 2024, in line with MPLX. The Outlook for PAA is now Positive.

Key Assumptions

Fitch price deck, with WTI oil prices of $80/bbl in 2023, $70/bbl in 2024, $60/bbl in 2025, and $50/bbl in 2026 and natural gas prices at Henry Hub of $3.50/mcf in 2023, $4.00/mcf in 2024, $3.00/mcf in 2025, and $2.75/mcf in 2026;

Capex run rate at $1,000 million per annum barring any inflation impact or cost overrun;

Excess FCF dedicated to distributions and the unit repurchase program over the forecast years. Dividend growth trending toward low-mid single digit growth rate over time, in line with the long-term EBITDA growth.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

An upgrade is not likely to occur given its concentration in business activity and management's leverage target of below 4.0x.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Increased EBITDA leverage above 4.5x for a sustained period;

Significant EBITDA contraction from renegotiated gathering and processing contracts, or contracts renewed at much lower rates;

Financial distress and/or a multi-notch downgrade at its largest counterparty, MPC.

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Sufficient Liquidity: As of Dec. 30, 2022, MPLX had $238 million of cash on the balance sheet and $2 billion available on its $2 billion senior unsecured revolver due 2027. MPLX also has access to a $1.5 billion loan agreement from MP. As of Dec. 31, 2022, there was no outstanding borrowing under this loan agreement. The agreement extends until July 2024 and importantly, MPC can demand payment on any or all of the borrowings at any time before then. The MPLX bank agreement restricts bank-defined leverage from exceeding 5.0x at the end of any quarter.

Following an acquisition period wherein MPLX acquired $50 million or more of assets within the LTM, leverage cannot exceed 5.5x for two consecutive quarters. Under the bank definition, the leverage ratio was 3.5x at Dec. 31, 2022, well below the 5.0x ratio permitted financial covenant. Fitch believes that MPLX will have headroom on its covenants through the forecast period.

Issuer Profile

MPLX LP (MPLX) is a diversified midstream energy partnership that owns pipelines, natural gas processing and natural gas liquids fractionation and processing plants, in addition to crude gathering and natural gas gathering systems in key U.S. basins. It is the largest gathering and processor in the Marcellus and Utica basin.

Summary of Financial Adjustments

Fitch adjusts EBITDA to exclude equity earnings and adds distributions from unconsolidated affiliates. Fitch applies 50% equity credit to the $1 billion MPLX Series A convertible preferred.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

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