Fitch Ratings has assigned a 'BBB' rating to MPLX LP's (MPLX) proposed senior unsecured notes.

Proceeds from the offering will be used for the redemption of preferred units and to repay notes coming due in 2023.

The 'BBB' rating reflects its strategic and operating ties with Marathon Petroleum Corporation (MPC; BBB/Stable), its largest counterparty. Other key factors are the scope and scale of its operations, geographic diversity, largely stable cash flows and low leverage.

Key Rating Drivers

Significant Asset Integration: MPLX is one of the larger midstream issuers in Fitch's rated universe. It benefits from the strategic and operational ties with Marathon Petroleum Corp. (MPC), its owner and sponsor. MPC is the largest independent refiner in the U.S., with 2.9 million bpd of refining capacity. Approximately 50% of MPLX's 2022 revenues were from MPC, and the majority of that is derived from long-term contracts that have minimum volume commitments, providing cash flow stability.

Strong Execution and Financial Performance: Benefitting from higher throughput volumes and NGL pricing, leverage continued to trend down, slightly faster than expected under Fitch's forecast. For year-end (YE) 2022, Fitch estimated leverage was 3.5x, lower than Fitch's leverage of 3.9x at YE 2021. Management's leverage at YE 2022 of 3.5x was below its stated target of 4.0x. Fitch expects positive FCF to continue and leverage to remain between 3.4x-3.6x through 2023.

Capital Allocation Program: Fitch views MPLX's policy to unit repurchases, distributions and special distributions within FCF as supportive of credit quality. Management calculated leverage of 3.5x in 2022 and forecast $950 million in capital spending in 2023 to justify the repurchase program. In 2022, the partnership returned about $500 million in unit repurchases while remaining FCF positive.

About $850 million remains in the unit repurchase program, after the board authorized an incremental $1 billion unit repurchases in August 2022. Units purchased are from the public, and not held by MPC, MPLX's sponsor. Fitch believes the amount and pace of the capital returned to unitholders will revert to a normal rate in 2022 and remain funded within FCF.

Logistics & Storage (L&S): The L&S segment is the largest segment (66% of 2022 adjusted EBITDA) and primarily serves MPC. For 2022, MPC accounted for approximately 50% of MPLX's total revenues and approximately 90% of the L&S segment revenues. Adjusted EBITDA rose 4% in 2022 versus the prior year, on higher volumes as the industry saw strong global demand following Russia's invasion of Ukraine in February 2022. Fitch believes the downstream performance for U.S. refineries continues to improve, albeit with complications from the Russia-Ukraine conflict, supporting higher throughput for MPLX in 2023 compared with 2022.

Volume Risk in Gathering & Processing: The Marcellus and Permian regions remain the main cash flow drivers for this segment with assets in five other basins. The Marcellus is MPLX's largest G&P region and accounted for 65% of 2022's processing production. During 2022, processing capacity utilization was 88% in the region. None of MPLX's other regions had utilization close to this level. Lower utilization and volume risk are key risks in this segment. Fitch believes 2023 will continue growth, but uncertainty in global economic conditions and the Russia-Ukraine war may skew outcomes in 2023 and 2024.

MPC Contract Renewal: Fitch believes the renewal of a set of contracts between MPLX and MPC completed in June 2022 adds visibility into future cash flow. The new contracts are for ten years, expiring in 2032. The contracts are for pipeline assets tied to MPC's refineries, which MPC does not view as replaceable.

Sponsor Relationship: MPLX receives significant benefits from its general partner and sponsor, MPC. MPC owns approximately 65% of the limited partnership units and the non-economic general partner. MPLX's rating reflects its stand-alone credit profile. Because MPC is similarly rated 'BBB,' under Fitch's Parent Subsidiary Criteria, the ratings are not linked. However, ratings reflect the favorable relationship, and strategic and operating ties to MPC. In addition, MPC provides MPLX with a $1.5 billion uncommitted loan agreement.

Derivation Summary

MPLX's 'BBB' rating reflects its significant size and diverse asset base. The partnership generates approximately $5 billion of adjusted EBITDA, and has shown good access to capital markets and liquidity. In 2022, MPLX received approximately 50% of its revenue from its sponsor. By YE 2022, Fitch leverage was an estimated 3.5x.

Peer Holly Energy Partners, L.P.'s (HEP) 'BB+'/Stable rating reflects its small size and scope, with EBITDA under $500 million, and less diversification than MPLX. Over 80% of revenues come from its sponsor, HF Sinclair (HFS; BBB-/Stable). Fitch forecasts HFS's leverage below 4.0x by 2023, less favorable than the forecast for MPLX. However, MPLX's larger scale provides 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 five notches above PBF Logistics LP (PBFX; BB-/Stable), which is expected to have leverage below MPLX's. PBFX's lower rating is driving by its much smaller scale, with EBITDA under $300 million, and by its significant counterparty, PBF Holding Company LLC (PBF Holding; BB-/Stable). PBFX receives approximately 85% of revenues from its sponsor.

Key Assumptions

Fitch price deck, which reflects oil and natural gas backwardation;

Capex is about $950 million, with $800 million for growth projects;

Excess FCF dedicated to remaining stock buyback program and distribution over the forecast years. The distribution grows modestly.

RATING SENSITIVITIES

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

An upgrade is not likely to occur since MPLX's main counterparty, MPC, is rated 'BBB'. However, a favorable rating action at MPC would not directly result in a favorable rating action for MPLX, since a significant amount of MPLX's cash flows come from gathering and processing.

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

Increased leverage (total debt with equity credit to operating EBITDA) above 4.5x for a sustained period;

Growth of fee-based gathering and processing agreements, since it would increase the potential for cash flow volatility;

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

As MPC contracts come up for renewal, reduced volume commitments and/or lower contract rates from MPC, which significantly reduce cash flows and weaken the credit profile;

Reduced liquidity;

Unfavorable rating action 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. 31, 2022, MPLX had $238 million of cash on the balance sheet and full availability on its $2.0 billion senior unsecured revolver due 2027. MPLX also has access to a $1.5 billion loan agreement from MPC. As of Dec. 31, 2022, there were no outstanding borrowings 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. Note proceeds will refinance MPLX's Series B preferred units and MPLX and MarkWest's senior notes due July 2023.

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. Fitch believes that MPLX will have headroom on its covenants through the forecast period.

Issuer Profile

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.

Date of Relevant Committee

14 April 2022

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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