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Edited Transcript of MPLX earnings conference call or presentation 1-Aug-19 3:00pm GMT

Q2 2019 MPLX LP Earnings Call

Findlay Aug 22, 2019 (Thomson StreetEvents) -- Edited Transcript of MPLX LP earnings conference call or presentation Thursday, August 1, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gary R. Heminger

MPLX LP - Chairman of the Board & CEO of MPLX GP LLC

* Kristina Anna Kazarian

MPLX LP - VP of IR - MPLX GP LLC

* Michael J. Hennigan

MPLX GP LLC - President & Director

* Pamela K. M. Beall

MPLX LP - Executive VP, CFO & Director of MPLX GP LLC

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Conference Call Participants

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* Jeremy Bryan Tonet

JP Morgan Chase & Co, Research Division - Senior Analyst

* Michael Jacob Blum

Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst

* Shneur Z. Gershuni

UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst

* Spiro Michael Dounis

Crédit Suisse AG, Research Division - Director

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Presentation

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Operator [1]

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Welcome to the MPLX Second Quarter 2019 Earnings Call. My name is Ilan, and I will be your operator for today's call. (Operator Instructions) And please note that this conference is now being recorded.

And I would now like to turn the call over to Kristina Kazarian. Kristina, you may begin.

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Kristina Anna Kazarian, MPLX LP - VP of IR - MPLX GP LLC [2]

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Good morning, everyone, and welcome to the MPLX Second Quarter 2019 Earnings Webcast and Conference Call. The synchronized slides that accompany this call can be found on mplx.com under the Investor tab. On the call today are Gary Heminger, Chairman and CEO; Mike Hennigan, President; Pam Beall, Chief Financial Officer; and other members of the management 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 our filings with the SEC.

Now I will turn the call over to Gary Heminger for opening remarks.

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Gary R. Heminger, MPLX LP - Chairman of the Board & CEO of MPLX GP LLC [3]

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Thanks, Kristina. Good morning, and thank you for joining our call. I'm pleased to report that MPLX, once again, delivered solid results, with second quarter adjusted EBITDA of $920 million. Our distributable cash flow was $741 million for the quarter, and we continue to maintain a strong financial profile with adjusted distribution coverage of 1.36x and leverage of 3.9x. We successfully closed our acquisition of Andeavor Logistics. This acquisition simplifies MPC's midstream structure into one public company, allowing us to high-grade our commercial opportunities and creating a leading large-scale, diversified midstream company, anchored by fee-based cash flows.

We also progressed an impressive slate of high-return projects, which are expected to advance our strategy of creating integrated crude oil and natural gas logistics systems from the Permian to the U.S. Gulf Coast. Mike will provide more detail on these investments later on the call, but these projects demonstrate our ability to leverage our growing Permian gathering and processing operations into downstream projects to support MPC's Gulf Coast refineries as well as the growing export market.

Turning to Slide 4. I would like to take a moment to discuss our strategic initiatives for MPLX. First, we expect to streamline our capital expenditures focusing on the most attractive returns. Second, we are working with MPC on a portfolio optimization initiative, which could include potential asset divestitures. Third, we plan to use the proceeds from any divestitures for general purposes, such as investments and high return projects as well as debt reduction. We believe these initiatives will help MPLX continue to be one of the best positioned midstream platforms in the industry for long-term value creation.

With that, let me turn the call over to Mike.

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Michael J. Hennigan, MPLX GP LLC - President & Director [4]

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Thanks, Gary. Following up on Gary's comments, as we progress through integrating these 2 companies, there's 2 points I want to elaborate on. First, we plan to high-grade our capital spending program, MPLX stand-alone growth CapEx for 2020 was targeted at $2 billion, ANDX's stand-alone growth CapEx target for 2020 was approximately $600 million. As we look forward to 2020, we will be looking to spend less than the combined $2.6 million. Our focus will be on the highest return projects across the combined portfolio.

Additionally, we often get the question on our EBITDA outlook for 2020. Producer plans for 2020 will be better defined towards the end of the year. Given our decision to high-grade the growth program and engagement with MPC on portfolio optimization, which could include asset divestitures, we do not plan to provide an update at this time. We expect to continue our just-in-time gathering and processing build-out strategy as we work through the year and build conviction around our key producer customer growth plans for 2020.

In addition, we continue to move our capital investments towards the L&S side of the business. In 2018, 85% of our capital was directed to the G&P business. In 2019, we moved that ratio to approximately 50-50. And our expectation in 2020 is to spend the majority of our capital in the L&S business.

Moving to Slide 5. We highlight the progress on our strategy to create integrated crude oil and natural gas logistics system from the Permian to the Gulf Coast. During the second quarter, we announced that we reached a final investment decision to move forward the design and construction of the Whistler natural gas pipeline after having secured sufficient firm transportation agreements with shippers. This joint venture project is being designed to transport approximately 2 billion cubic feet per day of natural gas for approximately 475 miles of 42-inch pipeline from Waha, Texas to Agua Dulce area in South Texas. Supply for the Whistler Pipeline will be sourced from multiple upstream connections in the Permian Basin, including direct connections to plants in the Midland Basin through an approximate 50 mile, 30-inch pipeline lateral, as well as a direct connection to the 1.4 billion cubic feet per day Agua Blanca pipeline. The Agua Blanca pipeline crosses through the heart of the Delaware Basin, including portions of Culberson, Loving, Pecos, Reeves, Winkler and Ward Counties. We expect Whistler to be in service in the third quarter of 2021.

Also, during the quarter, we announced our participation in the Wink-to-Webster Permian crude oil project and recently signed definitive agreements. There are several other partners in the project that have chosen not to disclose their participation at this point, but we expect that disclosure to occur very shortly. The combination of all the partners has made this project highly committed with a very strong return. Wink to Webster Pipeline is a 36-inch diameter project with planned origination points in Wink and Midland, Texas. The pipeline will have a destination points in the Houston market, including MPC's Galveston Bay Refinery. Our equity ownership in the Wink-to-Webster project will be 15%, and the project is targeted to be in service in early 2021.

Finally, our NGL pipeline called BANGL, which stands for Belvieu Alternative for NGLs, continues to gain support. At the same time, we remain disciplined to only move forward when we see the project capable of achieving the return threshold that we set, and we hope to provide an update in the near future.

Slide 6 provides second quarter Logistics and Storage highlights. Total pipeline throughputs averaged 3.5 million barrels per day, a 3% increase over the same quarter last year. The year-over-year increase in throughput was primarily driven by higher volumes on the Ozark and Wood River to Patoka Pipeline Systems as well as higher product movements. This was partially offset by weather-related operational impacts in the Midwest. Terminal throughput was 1.5 million barrels per day for the quarter, an increase of 2% versus the second quarter of 2018.

Slide 7 provides second quarter Gathering and Processing highlights. Gathered volumes averaged 4.9 billion cubic feet per day, representing a 15% increase over the second quarter 2018. Quarterly processed volumes increased 15% versus the same quarter last year to 7.8 billion cubic feet per day, primarily driven by significant volume growth at our Sherwood and Harmon Creek complexes, which both had new plants placed in service in the fourth quarter of 2018. We plan to commission the Sherwood 12 and 13 plants in the fourth quarter of 2019. This will bring the total capacity of this complex to 2.6 billion cubic feet per day.

Fractionated volumes averaged 495,000 barrels per day in the second quarter, representing a 13% increase over the second quarter last year.

I'll now turn the call over to Pam to cover our financial highlights.

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Pamela K. M. Beall, MPLX LP - Executive VP, CFO & Director of MPLX GP LLC [5]

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Thanks, Mike. Turning to our financial highlights on Slide 8. We reported adjusted EBITDA of $920 million for the second quarter. Total Logistics and Storage segment adjusted EBITDA was $569 million while the Gathering and Processing segment contributed $351 million in adjusted EBITDA. For the quarter, we generated $741 million of distributable cash flow, and we will return for the quarter $529 million to our MPLX unitholders before taking into account distributions declared to converted ANDX unitholders post close of the transaction. This provided adjusted distribution coverage of 1.36x and resulted in $212 million of retained distributable cash flow to help fund our capital investment program. Likewise, distributable cash flow of nearly $1.5 billion for the first 6 months of 2019 resulted in $405 million of retained distributable cash flow.

The bridge on Slide 9 shows the change in adjusted EBITDA from the second quarter of 2018 to the second quarter of 2019. Since the prior year quarter, we increased adjusted EBITDA by $53 million. The $43 million increase in the Logistics and Storage segment was primarily driven by higher crude oil and product volumes, partially offset by a precautionary shutdown of our Ozark pipeline for about 5 days.

On a sequential basis, second quarter Logistics and Storage segment results were impacted by $10 million of higher refining logistics project-related expenses. Historically, project-related expenses in the second quarter are higher than the first quarter due to more work planned in the warmer months, particularly at MPC's Midwest refineries. A $10 million increase in Gathering and Processing segment adjusted EBITDA was primarily driven by strong growth in gathered, processed and fractionated volumes from new assets placed into service over the last year. These benefits were partially offset by an estimated $30 million impact due to lower weighted-average NGL prices year-over-year. We estimate that every $0.05 change in the weighted-average NGL prices would result in approximately $23 million annual impact. Our plan for the year was based on $0.76 per gallon, and the weighted-average price recently has been $0.40 to $0.45 a gallon. As you think about modeling for the rest of the year, please keep this earnings sensitivity in mind.

Sequentially, second quarter Gathering and Processing segment results were impacted by approximately $18 million for planned maintenance at the Javelina facility and $5 million associated with roughly 1 week of precautionary downtime on a Marcellus NGL pipeline.

Slide 10 provides a summary of key financial highlights and select balance sheet information. Adjusted distributable cash flow supported 1.36x coverage, which does not include distributable cash flow from ANDX or distributions paid to converted ANDX unitholders post close of the transaction. We ended the quarter with leverage of 3.9x and approximately $2.6 billion of liquidity, including $1.6 billion available on our bank revolver and $1 billion available on the intercompany facility with MPC.

In connection with the closing of the ANDX acquisition, we amended and restated our existing $2.25 billion revolving credit facility to increase the company's borrowing capacity up to $3.5 billion, and we extended the term to July 30 of 2024. The ANDX revolving credit facilities totaling $2.1 billion in borrowing capacity were terminated upon the closing and repaid with the borrowings under the MPLX revolving credit facility. Additionally, we upsized our existing $1 billion intercompany loan agreement with MPC to $1.5 billion.

Looking forward, as a result of our merger with ANDX, we anticipate approximately $8 million of additional transaction costs to be incurred during the third quarter. These costs are primarily related to fees for legal and advisory services associated with the deal. In addition, the new combined company will adopt the accounting policies of MPC and MPLX related to planned major maintenance and capitalization of projects. We expect this to result in approximately $25 million of additional expense per quarter for the remainder of 2019 with an offsetting reduction to maintenance capital.

Our strong cash flow underpinned by long-term fee-based service agreements allows us to provide cash returns to our unitholders, while investing in the business to enhance our long-term earnings profile.

Now let me turn the call back over to Kristina for questions.

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Kristina Anna Kazarian, MPLX LP - VP of IR - MPLX GP LLC [6]

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Thanks, Pam. (Operator Instructions) And with that, we will now open the call to questions. Operator?.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

Our first question today is from Jeremy Tonet from JPMorgan.

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Jeremy Bryan Tonet, JP Morgan Chase & Co, Research Division - Senior Analyst [2]

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Just want to start off with the Sherwood plant here, being -- it looks like they pushed back a little bit. Just curious how the agreements work with Antero here. If they have the ability to push back further? Or what's your confidence level, I guess, in this time line? And are there any financial guarantees for the delays? Or just how that contractually works?

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Michael J. Hennigan, MPLX GP LLC - President & Director [3]

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Jeremy, this is Mike. We're working cooperatively with Antero to start-up Sherwood 12 and 13 in the fourth quarter. It is delayed a little bit, but that's mainly because Sherwood 1 through 11 are running terrific rates, and we're able to handle all the gas. So cooperatively, we're delaying a little bit to reduce operating costs. But as soon as we are in a position to put those on, that's what we're anticipating doing. So it's more of an optimization than anything, but we are in sync with them to be starting up 12 and 13 towards the end of the year.

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Jeremy Bryan Tonet, JP Morgan Chase & Co, Research Division - Senior Analyst [4]

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That's helpful. And I might have missed it in the remarks or in the presentation. But just with regards to Swordfish and Apollo, if there's anything you can update us with on those projects?

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Michael J. Hennigan, MPLX GP LLC - President & Director [5]

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Yes. On the first one on Swordfish, we did not receive enough commitment for us to go forward FID. I mean, one of the things that we maintain is we're going to have capital discipline and not deploy capital unless we believe we're going to get a high return. So at this point, we've put Swordfish a little bit on the back burner. As far as Apollo, if you look at our materials, we've only shown the plants through 2020. Apollo has now moved into 2021. Preakness has kind of gone in front of it as far as our Permian growth. So Preakness will be starting up in the early part, first half of 2020. And Apollo has moved back a little bit. Still very bullish on the Permian growth as far as processing plants. But depending on the producer profiles, you can see those timings move around a little bit.

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Operator [6]

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And our next question is from Shneur Gershuni from UBS.

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Shneur Z. Gershuni, UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst [7]

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Maybe to start off a little bit here. I totally appreciate the fact that you literally just closed the merger and just going to get a chance to look at the books and so forth. And so obviously, there's no 2020 guidance that you're putting out there and you're waiting till later in the year. But do you have a sense of, like, kind of, like, what the floor would be for kind of the legacy MPLX earnings for 2020? Is there kind of some sort of a sensitivity that you can sort of share with us?

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Michael J. Hennigan, MPLX GP LLC - President & Director [8]

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Shneur, this is Mike. We don't have a floor that we're willing to share at this point. As I said in the prepared remarks, and you just highlighted, we just closed the deal. I'll tell you, our first focus is on looking at the capital program for 2020. I mentioned that we have about a $2 billion plan at the MPLX level, $600 million at the ANDX level. And our first focus is going to be high-grading that portfolio such that our goal is to spend less than the 2.6% and get ourselves in a even better return position with the combined portfolio. So -- but that's the first immediate thing that we're going to concentrate on. To your point on what 2020 looks like as far as volumes, et cetera. Many people have asked us this question about the Northeast volumes or volumes overall, and I continue to iterate that, look, we're very aware of the theme of producers going to live within cash flow. We know that, that's a real phenomenon in 2020 or coming into 2020. I keep saying that kind of fits our strategy, particularly in the Northeast, as we're looking to diversify the portfolio and deploy more capital, say, in the Permian or in other growth areas or in the L&S side of the business and some of these long-haul pipelines, investing a little less capital in the Northeast fits what we're trying to accomplish. We still feel really good about the position up there, the fact that producers will live within cash flow puts us in a position where the Northeast will be generating free cash flow and be a cash generator, so that we can deploy that capital in other high-return projects across our portfolio.

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Shneur Z. Gershuni, UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst [9]

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Okay. Appreciate the color, Mike. Maybe if we can sort of unpack the CapEx a little bit further. In your prepared remarks, I think you mentioned that you're operating multiple basis. If I do my math right, it looks like 8 basins, looking like you want to reduce your footprint potentially through asset sales? Are you able to discuss, I guess, the order of magnitude of the type of reduction in CapEx that you're thinking? And if not that, is there a way that you could rank the priorities in terms of spend outside of the Permian and outside of the Marcellus in terms of what other basins do you think that there's capital opportunities in?

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Michael J. Hennigan, MPLX GP LLC - President & Director [10]

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Yes, Shneur. Can't give you a lot of color there, because we really just don't know yet as to where we're going to put our emphasis. What we do believe is, we're currently, as you said, in 8 basins. Strategically, we want to concentrate some of the capital in some of those basins, and we've been very open about the Northeast and Permian being our concentration areas. Other than that, we're going to work with producers throughout the remainder of this year and look at what 2020 looks like. I would point out that this program is opportunistic. We have a good balance sheet. We're not doing force selling or anything like that. But we are going to evaluate the portfolio, because we have a large asset mix at this point. And we want to take a look at it and see what makes sense for us as far as an opportunity to divest some assets and take those proceeds and either use them to deploy into our other high-return projects or reduce debt or other ideas that we have on the financial side of the business. So that's kind of our first focus. I think you said it very well to start out though, we just closed. That's what we're going to get after. We're going to look at the capital, we're going to look at the asset base, we're going to try and optimize free up some cash if the market allows that and move forward on optimizing our portfolio.

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Shneur Z. Gershuni, UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst [11]

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That makes perfect sense. And if I can just sneak in a third question. In the optimization initiatives that you had mentioned, definitely with respect to asset sales, the proceeds you had mentioned towards debt reduction and general corporate purposes. Just curious if buybacks is part of the equation as well, too, because as I sort of think about it, if you saw an asset that's cash flowing, your coverage would effectively decline unless you were to take out a corresponding amount of units. So just wondering if that would be part of the thought process to try and keep things coverage-neutral.

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Michael J. Hennigan, MPLX GP LLC - President & Director [12]

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Yes, absolutely, Shneur. It's definitely part of the process. We will have a balanced approach as we look at it, and you hit it on the head, all those levers are open to us. I just didn't mention that as one, but you know the gamut of what we can look at. Redeploying capital is on the table, debt reduction is on the table, unit buyback is on the table, all the financial levers that we have will be available to us.

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Operator [13]

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Our next question is from Spiro Dounis from Crédit Suisse.

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Spiro Michael Dounis, Crédit Suisse AG, Research Division - Director [14]

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Maybe just starting off with BANGL, if we could. Sounds like that's progressing pretty well here, should hear something soon. But I also heard you say that you won't progress any projects here, unless you get the right return. So just maybe in that context, can you just provide a little color on, I guess, what's still being hammered out there with the potential customers on the system?

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Michael J. Hennigan, MPLX GP LLC - President & Director [15]

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Yes, Spiro. Let me back up for a second and just give you a little more color. We've been working on 4 long-haul pipeline projects that we've been talking about over the last couple of quarters, Wink-to-Webster, Capline and Whistler are all now signed deals executed at that level and moving on to the construction phase. Feel very strongly about all those projects going to give us really good returns. BANGL is the fourth that we are still very optimistic about. But like you said, we're maintaining discipline. And we're reevaluating what the market looks like as far as growth patterns. So we're still optimistic, we're going to get there, but we're continuing to work through some of the details, some of the cost estimates, working with the partners that we're dealing with. Still think the project makes a lot of sense. We believe the Sweeny Hub in any of that area, there is an alternative to Mount Belvieu, we will continue to build-out, and we're working with the partners in that area to define the project to a point that we could go forward.

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Spiro Michael Dounis, Crédit Suisse AG, Research Division - Director [16]

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Got it. And then just as far as the asset sale project work goes, it sounds like you're coordinating to some degree with MPC here. And so my question is really on 2 fronts. One, given that a lot of your assets are integrated with their assets. Should we assume that if there is a sale at the MPC level and any sort of midstream assets attached to that would sort of go with it, and that you'd be selling along in that process. And then sort of alternatively to that, obviously, MPC still has some midstream assets that it might look to unload. Should we consider those and maybe more near-term drop-down candidates now?

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Gary R. Heminger, MPLX LP - Chairman of the Board & CEO of MPLX GP LLC [17]

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Spiro, this is Gary. I think the best way to look at this and I don't want anybody to misinterpret the way we stated that, that we're working with MPC to optimize. You absolutely asked the right question. We have several assets now, Gray Oak where Capline has not -- has never been dropped. We have these new assets. And MPC is investing in some of these assets on the front end to ensure we have better coverage at the MPLX level before we drop these in and kind of drop them in, in a just-in-time basis. And then to your second point, you're absolutely right. Some of them have an overlap with MPC. So it's not the MPC, from a governance standpoint, is looking over MPLX's shoulder. It's we have to work together. Mike is working together with the people who run the segment assets within MPC to see what is the best way to optimize and the timing to bring those as you call them further drops, whether it's further drops or whether we invest upfront in some of these high-return projects. We're just looking at the way to optimize that.

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Spiro Michael Dounis, Crédit Suisse AG, Research Division - Director [18]

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Got it. That's. Sorry.

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Michael J. Hennigan, MPLX GP LLC - President & Director [19]

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Spiro, it's Mike. Let me just add one thing to Gary's comment, which gets underappreciated. MPLX gets tremendous value by being a sponsored MLP by working in coordination with MPC, as Gary just mentioned, I mean, each of the projects that I just mentioned, Wink-to-Webster, Capline and Whistler, really, really strong projects, but they're also part of the integrated model that MPC has. So MPLX is benefiting from the fact that we can work with MPC in developing those types of projects. I think that gets missed sometimes in the marketplace.

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Operator [20]

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Our next question is from Michael Blum from Wells Fargo.

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Michael Jacob Blum, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [21]

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First question is kind of related to BANGL. So should we assume that the sort of the downstream investments that you've identified, like the frac, some of the export plans that you have are effectively contingent on BANGL? So if BANGL goes (inaudible), if BANGL does not reach FID, those also don't? Just want to clarify that.

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Gary R. Heminger, MPLX LP - Chairman of the Board & CEO of MPLX GP LLC [22]

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Yes, Michael, there are actually 3 distinct pieces, but altogether integrated we've been calling it BANGL. But you have a very good point. They are separate pieces as well. So the pipeline gets you to the frac, the frac is a separate piece. And then ultimately, the export is a separate piece. In fact, our discussions today, we have different partners in different segments of that project. But I think it also explains to the question that was asked earlier, it's much more complex. Whistler is a natural gas line that goes from Waha to Agua Dulce pretty straightforward, one product natural gas. BANGL involves Y-grade NGLs. So there's ethane component to it, propane, butane, natural gasoline, et cetera. So there's a much more of a mix in the products as well as the point that you're making, which is, there's essentially 3 pieces to it. So think of them as separate. Our goal is to integrate the whole stream, so that we go from wellhead all the way to the export facility. But like I said, there are different partners and a little more complexity in each of the areas, which is just adding a little bit of the time to get that to closure.

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Michael Jacob Blum, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [23]

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Okay. Great. And then my second question is just kind of a general question on the L&S segment. And the question is, how do we think about just the underlying organic growth rate for that business? Meaning excluding any growth capital investments over the long term, should that business decline? Will it grow? Will it stay flat? Just any color you can provide there would be great.

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Michael J. Hennigan, MPLX GP LLC - President & Director [24]

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Yes. So 2 pieces there, Michael, I would tell you. Number one, one of our concentrations, in fact, Head of our BD Group knows his number one goal is getting more returns out of existing assets, and to your point about not deploying capital. So our high focus is take the assets that we have, where you don't have to deploy capital, and get better returns. Obviously, in that business, we also have some structural things that brings some value, tariff movements, et cetera, et cetera. And then the point that you weren't were alluding to, but I will say, we do look to divest -- to deploy capital, not divest, deploy capital in a way where we can bolt on to existing assets and create much more value. The expansion of Ozark, as an example, last year has been a terrific project for us, existing asset that we expanded that created a lot of value for us, not only through Ozark, through the rest of the crude system in that area. So higher utilization, using existing assets, looking for bolt-ons. That's all part of the L&S system. And then all the way to greenfield assets that we just talked about, the long-haul pipes, our L&S assets that are greenfield.

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Operator [25]

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(Operator Instructions)

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Kristina Anna Kazarian, MPLX LP - VP of IR - MPLX GP LLC [26]

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All right, operator. Are there any other questions in the queue?

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Operator [27]

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There are no further questions at this time.

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Kristina Anna Kazarian, MPLX LP - VP of IR - MPLX GP LLC [28]

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Perfect. Thank you for joining us today, and thank you for your interest in MPLX. Should you have additional questions or would like clarifications on any of the topics discussed this morning, our IR team will be available to take your calls. Have a great day.

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Operator [29]

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Thank you. And this does conclude today's conference. You may disconnect at this time.