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. Press star one on your touchtone phone to enter the queue. 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'll 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 EBIT of $1.5 billion. Our operating results this quarter represent 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 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 extension, which could take them out to 2042.
We continue to view the business as a return on as well as a return of capital business, and 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 / d to 2.5 Bcf / d, 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 II processing plant, which is expected to come online in the second half of 2022.
We're also planning to build our 6th 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 / d. 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'll expect to come online in the first half of 2024. This will bring total processing capacity up to 6.5 Bcf/ d in the Marcellus. Our capital allocation framework remains unchanged. In year-to-date, we have returned slightly over $1.6 billion to our unit holders through distributions and unit repurchases.
Today, as 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 target to reduce methane emissions intensity 75% from 2016 levels. Through last year, we have 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 rights-of-way, or 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 the needs of today while investing in an energy-diverse 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 $19 million when compared to second quarter of 2021, due primarily 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 $64 million compared to second quarter of 2021, largely due to higher NGL prices. For the quarter, NGL prices averaged $1.18 per gallon, which is $0.43 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 as 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 distributable 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 $0.705 per unit, resulting in Distribution Coverage Ratio of 1.69 x. We ended the quarter with total debt of about $20 billion and a leverage ratio of 3.5 x.
Looking forward, over the next 12 months, we have $2 billion of senior note maturities, which, subject to market conditions, we would expect to refinance into long-term debt. After quarter end, we entered into a new $2 billion 5-year credit facility to replace the previously existing facility. The new credit facility extends to July 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 re-prompt for additional questions as time permits. With that, operator will open the call for questions.
Thank you. We will now begin the question and answer session. If you have a question, please press star then one on your touch tone phone. If you wish to be removed from the queue, please press star then two. If you are using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star then one on your touch tone phone. Our first question will come from John Mackay with Goldman Sachs. Your line is open.
Hey, good morning. Thanks for the time and nice to hear from you, Mike. I wanted to start on just capital allocation. Got the new buyback authorization, but the buyback number during the second quarter was also a little bit lower than I think, you know, most of us expected. Can you just talk a little bit about how you're thinking about, you know, thinking about that going forward and balance that against some of your comments on potentially increasing the distribution later in this year? Thanks.
Yeah. John, thanks for your comment. I'm gonna let John take that one.
Hey. Morning, John. Thanks for the question. You know, first, you know, I wouldn't read too much into, you know, our activity in the second quarter and nothing about it should be viewed as a deviation from our capital allocation philosophy. You know, you'll remember in the first quarter, you know, our free cash flow after distributions was less than $100 million. You know, we were coming into a year, you know, 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. With our incremental $1 billion authorization, we now have total authorization of $1.2 billion for the repurchase of units.
I think if you look forward in the second half, we'd expect to be, you know, perhaps more dynamic and opportunistic as we look at unit repurchases. Of course, you know, all done in line with SEC regs, which you know, from time to time can limit our flexibility. But overall, you know, I think we continue to anticipate kind of an all-of-the-above approach. You know, certainly subject to cash flow, growth opportunities and market conditions. In addition to unit repurchases, right, we'll reassess our base distribution, you know, as we did last year, and certainly any change there would be subject to board approval.
You know, we have a supplemental as perhaps a tax efficient tool for capital return, but you might see us, you know, maybe holding some level of cash, as we, you know, look to evaluate growth opportunities and really opportunistically look to return capital. 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, you know, kind of lowest we've seen in a couple quarters, but Utica kind of bounced back nicely. Wondering if you can kinda just unpack those two for us.
John, this is Greg. I'll speak to that question. You know, we've seen a period of low growth to even flat sort of maintenance drilling in the Northeast.
Over the last, particularly post-COVID demand destruction era. You know, 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. Probably more of the early ramp has been focused in the crude areas because the crude pricing level is what drove more of the rig activity, so Permian Bakken. We are now starting to see that activity ramp up, and we expect to see, you know, more of a back half of 2022 volume load versus early in the year.
You know, some producers have continued to maintain a little bit of growth and some have continued to decline and not necessarily maintain. That really is the primary explanation.
Okay. Appreciate that. Thanks for the time, everyone.
Thank you.
Thanks, John.
Next, we will hear from Michael Blum with Wells Fargo. You may proceed.
Thanks. Good morning, everyone. Yeah, I wanted to stay in the Northeast a little bit. Unless I'm wrong, this is the first new processing plant you've announced in quite a while. 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 Mountain Valley Pipeline does get done, do you think that would influence your view of kind of basin growth overall and specifically anything for MPLX?
Yes, Greg, again, as I, you know, 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, you know, the processing plants are really sort of specific to the gathering area and the producers, even within an area like the Marcellus. We have some plants that have run close or at or very near capacity over the last 18 months, and some that, you know, aren't quite at that level. Overall, we're still at high utilization, but we do see the need, you know, over the next 12 months- 18 months for more capacity in the specific area where we're building the Harmon Creek plant.
Michael, this is Mike. I'll just add that, you know, to what Greg has said. You know, it's been a constrained area for a while. Our anticipation is MVP will get done. The Shell plant's gonna come up. As you pointed out, we're gonna build another processing plant. I think we're finally gonna 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. You know, there's been recently a few you know, sponsors which have chosen to buy in their MLPs. Just curious if just 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.
Yeah, Michael, we get that question often at the MPC call. You know, our quick answer is our situation is a lot different than many of the others that you've seen, you know, roll it up. 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, you know, we just re-upped another 10 years of asset use between the two entities. 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. Was just curious if you could provide any incremental details on the L&S, you know, 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 but are now in the agreement? Thanks.
Yeah. I'll take that one, Brian. This is Tim. You know, I think you're familiar with the fact that these pipelines are really critical to both MPLX's stable earnings as well as to MPC's operations. As a result, both MPLX and MPC agreed to renew and actually extend the contract for another 10 years, and it's a pretty significant contract. 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. I guess it'd be important to keep in mind that these specific logistics assets under contract with MPC are indeed fit for purpose, and they're integral to the refining and marketing system.
Not only does it make, you know, operational sense, but the renewal with MPC certainly made financial sense for both parties. I think the last thing I would touch on is that, you know, while we're talking about this specific contract with MPC, we do have a lot of other systems and so forth. We continue to focus on maximizing the utilization of all of those systems, including those that serve third parties as well. Hopefully that's helpful.
Hey, Brian, it's John. I just might add on to Tim's comments. You know, one of the things that really, you know, was part of our thinking around this as well was maybe some questions from investors on the commitment of MPC to MPLX. We think this renewal certainly
Is evidence of that commitment. Just as a reminder too, I think Tim, you know, might have mentioned it 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, you know, potential pipeline reform bill, and then potential impacts on the Northeast G&P business. I know you briefly touched on it a little bit earlier, but curious if there's any, you know, unique opportunities that MPLX would now consider that it previously hasn't, you know, given, you know, it hasn't met its risk-adjusted profile, just given the regulatory uncertainty. Thanks.
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 wanna make sure.
Yeah, the Inflation Reduction Act and effectively the side deal that Manchin,
Yeah. Okay. Yeah. You know, obviously, a pretty long bill. You know, the details were just released, and we continue to evaluate it. I think a couple of key points for MPLX. You know, one, you see some focus around methane emission. And I would say, and we've kind of talked about it on the call, Mike, you know, commented on some of 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 to our overall system, really a benefit of the work we've done to date to reduce those emissions.
You know, there may be some opportunities around renewables, but you know, I think we, you know, we're encouraged, but we need to see kind of how that all flows through the final legislation.
This is Tim. I would just add maybe a couple things. From the logistics standpoint, there are some provisions in the current version of it that does increase the 45Q tax credit, and that could be supportive of CCS projects, which we have an interest in. There's also some provisions for SAF and hydrogen production, which could drive some future logistics needs as well if that was part of your question. But as John said, it's early, so we're gonna 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.
Hi, this is Stephen McGee on for Jeremy . Really just one for me. Wanted to see if there was any further updates to Matterhorn, just, you know, how you're thinking about participating and any further details you can give us there.
Sure. This is Tim. I'll take that one. You know, 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 gonna be needed over the next 5+ years. Matterhorn is the first of those, which is why the partners FIDed the project in May. As for our equity ownership in Matterhorn, that's not been totally finalized yet, but it does currently stand at 5%. From a monetary standpoint, that would represent about $30 million of investment, and then that, of course, would reflect some level of project financing.
That's, you know, relatively small stake here on Matterhorn, but that's 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 one more. Just wanted to see with, just cost increases, if you're seeing any kind of cost pressures right now throughout the business. With that, how much of that is permanent versus how much do you think you can optimize again?
This is Tim again. You're basically referring to, you know, just some of the inflation protection, I would assume that we have. I'll attack that question in that regard. I would say that like others, we are certainly seeing some inflationary cost pressures across, you know, most all of our spend categories, quite frankly. 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 are maybe up a little more significantly. For example, our fuel and power is up about 15% year-over-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, you know, maybe deferring some non-critical work, and realizing operating efficiencies through the ideas of our workforce. I think 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. We do expect that with increased costs, you're gonna 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 gonna 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 flavor to what we're seeing.
Yep. That's perfect. Thanks, guys. I'll leave it there.
Okay. Thanks, Stephen.
Thank you. Our next question will come from Theresa Chen with Barclays. Your line is open.
Good morning. Thanks for taking my questions and great to hear from you, Mike. Maybe beginning with the demand side of things across L&S, given the incremental concern following the recent economic data and just market, you know, worries about recession. Your second quarter utilization of the parent and the volumes at MLP would indicate that, you know, 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. You know, the demand question is, you know, obviously one that we continue to monitor. I guess at the end of the day, we're still pretty bullish of what we're seeing across the commodities. It was interesting, you know, give you more detail than you probably want. You know, Fourth of July weekend, which is typically a stronger weekend, was not that strong in our system. Then subsequent to that, you know, the rest of July really picked up again. I think the reason we're still constructive is overall, you know, we're still mostly at pre-pandemic levels, across the system. We think there's still room to run on the demand side. It's been choppy.
Like I said, you know, if we went into the season with Memorial Day weekend, Fourth of July, you know, the bigger weekends that typically show some robust numbers, we didn't really see those. The other times during the month, we've seen some strong, you know, recovery. I think at the end of the day, we're still pretty constructive, overall. You know, we think, you know, demand has more to go once we get, you know, to a, you know, back to a normal post-pandemic environment. Inventories are still constructive.
You know, as you mentioned, our whole thought process on the refining side of the house in the second quarter was, you know, run as reliably as we could in the margin environment, produce as much, you know, transportation fuel as possible, and really obviously continue to show the market that we're running a low-cost system. You know, 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. It's still a pretty constructive environment for us.
Thank you for that detailed response. Turning to the contractual side of your assets, or the contractual nature of your L&S assets, and following the, you know, inflation data that we've received thus far in the FERC, escalator tracking in that mid-teens range, can you remind us of the expected inflation tailwinds that you will have within L&S and to the extent you can share any color on caps and collars around your gathering assets as well? That'd be great.
Yeah, I can. This is Tim. I can kick that off. I think your question is really about 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 FERC guidance. Most of those pipelines saw updated rates go into effect on July 1.
We do expect to see an increase in revenue from those rate changes, but we don't expect to see a material change to the EBITDA, given that these rate escalators are really meant to cover our increases in cost. Then maybe just a reminder as well that less than about a 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. Once again, if you would like to ask a question at this time, you can press star one and record your name when prompted. Our next question will come from Danny for Neal Dingmann with Truist. Your line is open.
Hey, guys. Could you, going back to the return of capital question, can you speak to consideration of a supplemental distribution versus unit repurchases when creating value for unitholders?
Yeah. Morning, Danny. Thanks for the question. You know, again, overall, right, we're in maybe an enviable position given the cash we're generating covering our, you know, capital plan of $900 million and our base distribution of $3 billion. That gets us to, you know, kind of this fork in the road. Again, I think I wanna push you back that we continue to kind of see an all of the above approach, you know, certainly being opportunistic about unit repurchases. I mean, the supplemental can be tax efficient, but again, as I said, we might look to maybe hold some cash to be a little bit more opportunistic with our return of capital, as we continue to evaluate growth opportunities as well.
That's kind of the framework, you know, maybe a little bit bigger picture than your question, but hopefully that's helpful. Mike, I don't know if you wanna add something as well.
Yeah. I'm just gonna add, you know, we've said this in the past, but I'll just remind everybody that it's interesting to us that, you know, different unitholders have different views on return of capital. Some feel very, very strongly that buying units back is the preferred way to go, and others feel just as strongly that, you know, send me a check. Our situation as we look at it, we try and optimize, as John has said, and kind of have an all of the above approach, you know? It wasn't too long ago that our yield was trading at, you know, 20%. In that environment, you know, we're gonna buy back units. You know, it's just compelling to do that.
There's other times where we're gonna look at it and say, you know, the supplemental makes sense, and we're gonna also look at the permanent ones. We've tried to differentiate a little bit between you know, what we think is permanent growth, you know, in earnings as a result of our capital investments, et cetera, versus some of these cash flows that we're getting we think are transitory in nature due to some of the current market conditions, and that's why we put those more in the supplemental. I think John said it very well. Our approach is all of the above. I think that fits the full, you know, investor base that we have because there's a lot of different views from different people, and strong views too. I would say people are very convicted that.
Some tell us very, very strongly that unit buybacks is the way to go, and others tell us very, very strongly, you know, "Please send me a check, you know. That's the way I'd like to see return of capital." Our approach has been to, you know, look at market conditions, look at where we stand as far as our projections, evaluate our ability to invest capital 'cause we keep saying, you know, it's a return, you know, of and return on, so we look at both of those, and at the end of the day we're trying to create as much value as we can in the earnings, and then we're trying to be as efficient as we can in when we're returning it. Hopefully that gives you a little bit 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. You know, first question, your leverage is tracking well below the target of 4x you've historically provided. You know, is that 4x number still good to use, and how should we think about your willingness to use that capacity for, like, this incremental repurchase program and accelerate it, or would that not be something you'd look to do?
Yeah. I'll let John comment, but one thing I do wanna remind everybody is, you know, we are very comfortable at 4 x. We've shown a lot of stability in these cash flows. The reason we're at 3.5 x is basically 'cause we've kept debt flat, and we've grown earnings. As a result of that, we've said this for a while that, you know, our leverage is gonna, you know, decrease as a result. One of the things that, you know, we'll continue to monitor is, as earnings grow, you know, where is our leverage overall? We don't wanna be under-levered.
I think what you've seen over the last, you know, couple years is a change in that, you know, we're gonna manage the business such that we're gonna generate Free Cash Flow, invest capital in, you know, in a more disciplined way such that, you know, we're not adding to debt. We've been kind of flat debt for a while and, you know, that's why our leverage has been where it's been. John, do you wanna add?
No, Mike, I think you said it. Just to 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. I think just another kind of thing evident in line with what Mike was just talking about.
Okay. Thanks. That’s a good segue, John, to my follow-up. You did comment about the senior maturities. You know, one question I’ve been fielding is just given how fluid the rates market has been, curious how you’re thinking about those preferred that reset to a floating rate early next year. You know, would seem to be pretty expensive capital with where rates are heading. Have you guys thought about where those fit in the capital structure longer term?
Without a doubt, no, and I definitely appreciate the question. That's certainly something that's been on our planning as well is we're, you know, looking forward not just to these senior note maturities, but those Series B's, you know, you've kind of summarized it well. High cost, an opportunity to look to, you know, manage those, when they become callable, in February of 2023.
Okay. Thanks very much.
Thank you.
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 anytime. Thank you so much.
Thank you. That does conclude today's conference. Thank you for participating. You may disconnect at this time.