Phillips 66 Partners LP
Q1 2017 Earnings Call Transcript

Published: 28 Apr 2017

[Operator:]

Welcome to the First Quarter 2017 Phillips 66 Partners Earnings Conference Call. My name is Kristen, and I'll 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 Jeff Dietert, Vice President, Investor Relations. Jeff, you may begin.

[Jeff Dietert:]

Good afternoon, and welcome to Phillips 66 Partners first quarter earnings conference call. Participants on today’s call will include Tim Taylor, President; Kevin Mitchell, Vice President and CFO; Bob Herman, Senior Vice President Operations; Tom Liberti, Vice President and Chief Operating Officer. The presentation materials we will be using during the call can be found on the Phillips 66 Partners website, along with supplemental financial and operating information. Slide 2 contains our Safe Harbor Statement. It is a reminder that we will be making forward-looking statements during this presentation and the question-and-answer session. Actual results may differ materially from what we present today. Factors that could cause actual results to differ are included here as well as in our filing with the SEC filings. With that, I'll turn it over to Tim Taylor for some opening remarks.

[Timothy Taylor:]

Thanks Jeff, and good afternoon, everyone. Phillips 66 Partners had solid first quarter results. Earnings were $97 million and adjusted EBITDA was $155 million. Our Board of Directors, recently approved a first quarter distribution of $58.06 per unit, a 5% increase over the fourth quarter. Distribution coverage this quarter remain strong at 1.31 times. Since our 2013 IPO, we've increased distributions for 14 consecutive quarters at a compound annual growth rate of 34%. We remain on track to achieve a 30% compound annual growth rate on distributions from the fourth quarter 2013 through 2018. Now turning to Slide 4. During the first quarter we continue to executed on our organic growth projects. For the year our capital budget is $437 million reflecting $381 million of growth capital and $56 million of maintenance capital. On the gross side development continues on the second leg of the Bayou Bridge Pipeline from Lake Charles to St. James, Louisiana. We expect construction to begin this quarter with commercial operations starting in the fourth quarter of 2017. Phillips 66 Partners owns a 40% interest in this joint venture project. The Sand Hills pipeline expansion continues to progress. The project will expand capacity from 280,000 barrels per day to 365,000 barrels per day with an expected in service date by the end of 2017. Phillips 66 Partners owns a one-third interest in this joint venture. The STACK joint venture into which we own a 50% interest has started an expansion project dilute the existing pipeline and extend further into the STACK play to access additional production. The project will increase capacity by 150,000 barrels per day and we expect it to be complete by the end of 2017. As announced today we're developing a 25,000 barrel per day isomerization unit to increase production of high octane gasoline blend components at the Phillips 66 Lake Charles Refinery. Total capital for the project is expected to be about $200 million. Final investment decision is expected in the first half of 2018. Just like our existing asset base we would expect the isomerization unit to generate consistent P based earnings. The partnership would enter into a long-term agreement with Phillips 66 for processing services including a minimum volume commitment. Development to this organic opportunity with further increase our growth portfolio beyond 2018. Now, I'll turn the call over to Kevin Mitchell to provide both operational and financial updates for the quarter.

[Kevin Mitchell:]

Thank you, Tim. Good afternoon, everyone. Looking at operations on Slide 5, volumes across the system were similar to the fourth quarter. Total pipeline throughput, excluding volumes from equity affiliates was 1.9 million barrels per day, up from 1.8 barrels per day in the fourth quarter. Total terminal throughput was 1.4 million barrels per day similar to the prior quarter. Crude oil terminal volumes decreased while refined product and NGL volumes increased. Volumes were higher compared to the prior quarter due to a full quarter's ownership of the assets that were acquired in mid-October 2016. This was largely offset by the impact of higher turnaround activity at Phillips 66 refineries connected to our logistics assets. Average pipeline revenue increased $0.04 per barrel in the first quarter to $0.63 due to volume mix. Average terminal revenue was slightly higher at $0.41 per barrel. Both of these rates exclude the equity affiliates. Slide 6 shows the change in adjusted EBITDA from the previous quarter. First quarter adjusted EBITDA was $155 million down $6 million from the fourth quarter. Turnaround activity at Phillips 66 refineries connected to the partnerships assets reduced the first quarter adjusted EBITDA by $6 million. The February 5, on our River Parish NGL System contributed to a $3 million decrease in EBITDA on that system. These items were partially offset by a make-whole payment from an equity affiliate and other smaller items. Slide 7 walks through the DCF calculation. During the quarter we had differed revenue impacts related to the Gold Line, Eagle Ford gathering and River Parish Systems which increased distributable cash flow by $4 million. Net interest expense was $24 million and maintenance capital expenditures were $11 million. Distributable cash flow for the quarter was $124 million. Total cash distribution was up $95 million will result in a distribution coverage ratio of 1.31 times. The recently approved first quarter cash distribution of $0.586 per limited partner unit will be payable on May 12. Slide 8 highlights the growth that we have achieved over the last year. Our first quarter distribution per unit represents a 22% increase over first quarter 2016. Adjusted EBITDA increased by 109% and distributable cash flow by 94% year-over-year. We continue to progress towards our goal of $1.1 billion of run rate EBITDA by the end of 2018. At the end of the first quarter, annualized run rate EBITDA for the partnership was approximately $625 million. Slide 9 shows our financial position at the end of the first quarter. We ended the quarter with $1 million of cash and $157 million of outstanding borrowings under our revolving credit facility. Our debt to EBITDA ratio was 3.8 times on a revolver covenant basis. Long-term, we expect leverage to be at a targeted level of 3.5 times. This concludes our prepared remarks. We'll now open the line for questions.

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Kristina Kazarian from Deutsche Bank. Your line is open.

[Kristina Kazarian:]

Good afternoon, guys

[Kevin Mitchell:]

Hi, Kristina.

[Kristina Kazarian:]

And congrats Jeff, excited to have you here. So I think you guys start off just get this one out of the way, you probably won't answer, but I'm going to try anyways. You guys reiterated guidance for PSX did in terms of EBITDA for PSXP and the longer term growth rate on it. Just can you provide me any updated thoughts on timing of the next offer just generally how you guys are thinking about capital markets, trends and activity right now?

[Tom Liberti:]

Kristina, we certainly give guidance about when we drop, but clearly to hit the $1.1 billion target, we need to acquire additional assets at PSXP. We have the support sponsor, so I think as we look at that that says that will continue to grow and that's the commitment that we've made both at PSXP and PSX sponsor. In terms of the capital markets might have Kevin talk a bit about that, but I think that still have an attractive cost of capital, the debt markets are very attractive with our credit rating. And so I think we always look at ways to optimize the cost of capital, but we think we've got the right propositions around our assets and the way we structured that to access those. Kevin?

[Kevin Mitchell:]

Yes. I would just supplement with – as we've done to date, we will fund our acquisitions over time. It will be a combination of debt and equity financing. Everything we've done. It has been as worked very well for us. We still think the markets are there and available on both on an equity standpoint as we look at – going into the equity markets. I mean we want to optimize our cost of capital and we're also mindful of how we cap those markets and what impact that has on our equity. So we will consider various options and alternatively as we get them. But all of that will be – as we get to the next transactions will develop specific line, but that make the most sense at that point in time.

[Kristina Kazarian:]

Perfect, a couple thematic ones, I think in terms of backlog of assets that might eventually sit into PSXP on the parent call this morning, I'm pretty sure they mentioned fracs with this on the end in debating locations. Can you just talk about updated thoughts there as well as – also mentioned the importance of export trends? So potentially in terms of developing crude export assets and where you guys might have to export dock capacity and where you guys might think about doing that if at all vocationally?

[Robert Herman:]

Yes, Kristina, it’s Bob. I think on the frac question, from the beginning of the Sweeny hub development in frac 1, we’ve always talked about that being with real conor frac one as we envision frac 2 and beyond as the NGL continue to grow and then in fact we invested an infrastructure, what the original assets down there to be able to kind of plug-and-play on the next set of fracs that would come there. Certainly we view in NGL particularly out of the Permian to be very strong over the coming years. We’re going to create a need for additional fractionation capacity in the U.S. Gulf Coast and we think we're well positioned Sweeny between the assets we've got there. The common storage terminal and then direct access to the water where we think particularly the propane has to eventually end up. It really positions us well to continue to build fracs there and I think it's reasonable to think that that those assets will be structured. So that we could do what we did the frac 1 at some point in time and our sponsor could move those down into PSXP. I think the same is true when you look at some of our other assets out there that are setting up for energy export, which is a growing theme in the country Belmont in particular sits very nicely. We've just finished two million barrels of crude expansion. You heard PSX announced this morning that we've taken FID and another two million barrels of crude storage there. We've got three docks with significant capacity available and we think that really sets that facility up long-term for as an export facility for us and for others. So again that that facility belongs to our sponsor and the eventual build out there is – but you can see that being the type of asset that our sponsor would probably want to see in PSXP at some point in time.

[Kristina Kazarian:]

Perfect and real last quick one for me, can you just give an update on this isomerization, maybe how it came to fruition and what kind of – we're waiting on it. We're not doing FID until first half of 2018?

[Timothy Taylor:]

Kristina, it’s Tim. We've just taken the AFD development piece of that to kind of really per develop the cost and that, but we have that stream is available. It's the wide stream on C5/C6 stream by isomerization, increases the octane level reliable like NAFTA. If you think up forwardly, if you believe like crudes continue to increase I think deals continue to see the need for octane to blend into that to make gasoline that at the White performance level. So that was really the thinking and the decision on FID is really dependent on wrapping up to define the costs and so that’s why we should at the first half of 2018, it just takes that long to fully develop the contract around that and how we look at the high ends of the refinery et cetera.

[Kevin Mitchell:]

I think one thing I’d add to that too is that over the last years, so you’ve heard us talk about pivoting towards more projects around our sponsors refining assets and whether those would be pipes to feed – be pipes to a take away or kind of growth projects like this that are beneficial both to that particular refinery, but give us an opportunity to really set in some nice fee-based income.

[Tom Liberti:]

Kristina, it’s Tom, I would just add too, this was kind of an example too. We’ve talked a long about as the MLP grows. It will be able to take on larger projects and larger timeframe projects and I think this is a pretty good example of that.

[Kristina Kazarian:]

Got it. Nice job.

[Operator:]

Your next question comes from the line of Jeremy Tonet with JPMorgan. Your line is now open.

[Jeremy Tonet:]

Good afternoon.

[Kevin Mitchell:]

Hi, Jeremy.

[Jeremy Tonet:]

Picking up on the topic of kind of a production getting lighter especially on the Delaware. Just wondering if this ISON project is maybe a person a step of other things that you guys might be able to capitalize on that via splitters or just other logistics assets in general just wondering if you could provide any thoughts there?

[Kevin Mitchell:]

Yes, I think you're absolutely right Jeremy as we see the production growth coming on it appears that it's going to be lighter and lighter as particularly as the Permian it kind of expands to the west and that creates a need for additional infrastructure and certainly part of our thinking around upgrading a very light NAFTA stream as we're doing here in the isomerization project is dealing with kind of a low value stream and upgrading it is directionally a good thing to do both for sponsor and for us. I think if we rewind a couple years we had talked about condensate splitters making sense. I think we're a long way from condensate splitters making sense today, but I think directionally that's where we're headed that those type of opportunities to deal with either additional really like barrels that need to get to the water to get exploited or need to be slightly modified and moved the lightest portion of that out and keep the heavier barrels maybe in a refining system probably makes sense at some point.

[Jeremy Tonet:]

Great thanks. And then just looking at the STACK JV just wondering is that an area where you guys could expand further seems like you have kind of a Bolton-on going deeper into the play there? Do you see runway for incremental opportunities?

[Tom Liberti:]

Hi, Jeremy, it’s Tom. We will get this loop down this will add another 150,000 barrels a day capacity. And then we'll just look at where producers are I mean that values is pretty hot right now and we would expect to increase in the future.

[Jeremy Tonet:]

Great thanks. And then maybe just one last one for Kevin if I could. As I wondered that that the make-whole payment that you described you listed there if you could provide any more detail on that or the other one that was 7 million and the income statement if you could provide a little bit more color on that?

[Kevin Mitchell:]

Yes, so the make-whole payment is actually I think this is the second time we've had this come through so it was about a year plus ago we had a similar related to the Sand Hills, Southern Hills equity ventures and the restructuring of DCP triggered attacks termination and back in effect trigger the make-whole payment.

[Jeremy Tonet:]

Great thank you.

[Kevin Mitchell:]

Thank you.

[Operator:]

Your next question comes from the line at Brian Zarahn with Mizuho. Your line is now open.

[Brian Zarahn:]

Good afternoon, everyone.

[Kevin Mitchell:]

Hi, Brian.

[Brian Zarahn:]

On the isomerization project, can you talk a little bit more about how to think about expected returns [indiscernible] doesn’t move forward and anything about the return profile and in-service date?

[Timothy Taylor:]

Yes, so I will start the last question first in-service date we see in the first half of 2020 and driven primarily by permitting and then kind of turnaround cycles with the Lake Charles refinery to fit in to their schedule. The second business we haven’t given EBITDA on that and we’re still that’s why we're still in development phase the nail down on the cost, but we would actually expect a good build multiple type return for this assets that competes very well with the other organic projects we've got in our back one.

[Brian Zarahn:]

And then along those lines anything you can share on other potentially some our projects you're looking at that could be done in the PSX level?

[Timothy Taylor:]

Yes, I think at our sponsor at PSX is certainly looking at other opportunities for yield improvement and upgrading low value streams like this one and whether we do at PSX or PSXP or there are always project dependent how big they are the time for this one for refining project is actually a fairly short timeframe and we're able to get going pretty quick on this one. So there's no doubt in my mind there's more projects out there to do and will decide it's time whether we do at our sponsor PSXP.

[Brian Zarahn:]

Just moving over to a project that is had to sponsor now for your Permian crude gathering system open season, any update on where that stands and then you could maybe elaborate a bit and how you view the opportunity set in the Permian could you look at potential JV somewhat what you've done and other sponsor pipeline investments in the crude area?

[Robert Herman:]

So the Rodeo Project which we announced in mid-March and went to open season March 24, we're still are open season, still in active discussions with lots of producers out there. As everybody knows that's the hot place to be, so there's a lot of competition for those barrels that are going to get produced next year and the year after and beyond. So we already operate out there, so we have a foothold and we think that helps give us an advantage over maybe a few to develop another gathering system, but we’ll have to see how that comes together. Those types of opportunities are really a scramble against other players and people who have an advantage or have a toehold already or have a connection point out it makes sense. As far as joint ventures, we have a lot of joint ventures today sometimes that's a way to get an asset lifted, economically is to bring a partner in who can bring volume with them. We're open to those and we always continue to talk about those sorts of things. So I would say stay tuned. There will be a lot of activity out in the Permian before this is older.

[Tom Liberti:]

Yes. We also not only just the crude side, but certainly in the NGL side with the Sand Hills expansion is a piece of that, so we talked condensate, we talked about crude oil, we talked about NGL. So I think Sand Hills we’ll be already have some exposure, we'd like to continue that. And so it's also as Bob said a very competitive area, but it is from an upstream standpoint, the most active development area in the North America.

[Brian Zarahn:]

Thank you.

[Operator:]

Your next question comes from the line of Richard Roberts with Scotia Howard Weil. Your line is now open.

[Richard Roberts:]

Hi. Good afternoon, folks. I guess one more back on the ISON muted, I'm just curious, maybe can you talk about what some of the considerations are that you look at when you're deciding whether to build an asset like that at the PSX or the PSXP level. Just thinking along the lines of more refining type assets, what are the put and takes on where that's more appropriate?

[Robert Herman:]

Well, I think first is a project that can be done at the size that PSXP can manage from a carrier or a cost standpoint and couple hundred million dollars on this period. That clears that from a financial sense, but fundamentally the projects going to make sense from an economic hold, so there has to be called at the general interest, but it has to be a project that has economic drivers both. When we think about those kinds of things, both the PSX and PSXP, then it’s a question of what's the best way to really capture value. And I think this is an example, we have a good general interest project and it's a great project for PSXP, so it works for both the sponsor as well as the partnership.

[Kevin Mitchell:]

And Richard I think from a fundamental standpoint too it's how we can structure, can we structure, so it can be a fee-based type of asset so that it fits in the PSXP portfolio.

[Robert Herman:]

We tend to look at this a little bit like we would have fractionator. It's the same concept that that kind of concept tends to work I think with the structure we have on the nature of our partnership.

[Richard Roberts:]

And certainly we think about this maybe as a – maybe a blueprint for similar type of investments going forward. I know you can blur the line between midstream and refined type investments?

[Kevin Mitchell:]

I think that that just depends on each one, but I think we're demonstrating that there is that opportunity there is a way to grow value for the Company in total.

[Richard Roberts:]

Okay, great. One more on the expansion of STACK JV, could you maybe give us a sense of what kind of commitment you have on the additional capacity there? Or maybe just how much of that capacity you think is going to taken by PSX pipeline system?

[Robert Herman:]

Yes. We haven't announced any of the contracts that are on the expansion going forward. I’m going to say like I said it expands the capacity by about 150,000 barrels a day. We have some commitments and we would expect more in the future.

[Richard Roberts:]

Great. Thank you.

[Operator:]

Your next question comes from the line of Christine Cho with Barclays Capital. Your line is now open.

[Christine Cho:]

Hi, everyone. I wanted to start with devoid of pipeline, what sort of drove the interest in wanting to build this line. Was it wanting to play in the Permian or was it driven by wanting to secure some additional supply for your refinery? And is this spending your manageable enough where if it were to move forward PSXP could do it at their level rather than apparent?

[Tom Liberti:]

I think the answer to the first question is we see the need for infrastructure investments in the Permian and that that drives us to want to participate out there. We think there's a lot of opportunity and Tim mentioned, we've got some synergies out there. We already exposed on the NGL side. We already have crude gathering systems in the [indiscernible] area and operate there today. So this is really kind of core to our strategy of expanding on our current footprint and reaching out and doing things that we already know how to do. I think the answer the second question always comes down to what is the eventual size of this project turn out to be? What's the timing of it? How long do we see development, is it an easy carry for PSXP or do we continue to do it at PSX, and it becomes eligible for one of those assets it moves to PSXP at some point in time. So that’s usually a decision, you've seen just kind of do everything right, so we had projects were like I saw more we just start out of the gate at PXSP. We've had projects like buying bridge, where we started PSX and we move them across that cost during the engineering or early construction phase and then we've got obviously projects that we construct at our sponsor PSX and dropdown at some point in time.

[Christine Cho:]

Okay and then thoughts on potentially extending one step further and building at bigger export pipeline out of the Permian. Is any potential to do this dependent on whether or not Rodeo moves forward or you guys don't think that they're related?

[Timothy Taylor:]

Well I think there’s been a lot of capacity announced coming out of the Permian. So that’s obviously a very competitive space in typical midstream you go to open season, you see what commitments you can get and we will be in the same kind of boat. But we think there's a need for this gathering system in these particular counties where we've laid out a plan with the producers and certainly there are multiple pipes that it can connect to get out of the Permian, either encouraging to Houston or to Corpus Christi.

[Christine Cho:]

Okay. And then moving over to NGL side, with the Sand Hills pipeline being expanded and it sounds like with the Permian going at the pace – there could be more extensions behind it. Is there any potential to contractually set up contracts or provide some pumping service with any of the future farcs that you guys are thinking about it?

[Timothy Taylor:]

Yes, I think that makes a natural extension were a large owner of Sand Hills pipe that goes right by Sweeny and it's an alternative to taking it all the way to Mont Belvieu and I think there could be a synergy there. Obviously there's a value chain there and there's different players and different parts of the value chain, but when we look at working together with the DCP partners, PSX level. We see opportunities across the value chain to work.

[Robert Herman:]

Yes, you just comment on the frac, I mean fundamentally we just see the increase supply. Ethane comes back out of rejection, the system, so we think this is still one areas as a patient develops that regards to your other supply options, but there is a need and will continue to be needed on the Gulf Coast for additional processing capacity for both export and petrochemical and feedstock.

[Christine Cho:]

Okay and one last question for me. The STACK pipeline you guys talk about extending that. What county are you extending that into?

[Timothy Taylor:]

I think you stop this. I’ll get back to you on that one.

[Christine Cho:]

Okay. Great, thank you.

[Operator:]

And your next question comes from the line of Jerren Holder with Goldman Sachs. Your line is now open.

[Jerren Holder:]

Hi, good afternoon. Given the potential for tax reform, does that change? How you guys think about the size and pace of dropdowns just given the – from $625 million run rate to $1.1 billion by the end of 2018?

[Timothy Taylor:]

Well, we certainly have visibility to 2018 on our side. I have a lot less visibility around what the tax policy would be. I think there has to be a lot more understood about that, but how that works and what it does, but I think that’s something that we'll watch. But we still look at that and say the NLP structures still has some advantages. And so I think that that's a story that still developing, but it's not clear to us all the ins and outs of what's covered. And Ken, if you want to add anything else on that?

[Kevin Mitchell:]

No, I think that's exactly right. There's a lot of uncertainty I mean we've seen high level statements are in tax proposals, but a lot of detail still waiting to fall on that. So clearly there's a lot of energy for some degree of tax reform, but we just have to stay on top of that as we get more details and work through it, but for now $1.1 billion target still intact.

[Jerren Holder:]

Okay. That’s it for me. Thank you. End of Q&A

[Operator:]

And we have no further questions at this time. I'll turn the call back over to Jeff.

[Jeff Dietert:]

Thank you, Krista and thank all of you for your interest in Phillips 66 Partners. If you have any questions, please call Rosy, CW or me. Thank you.

[Operator:]

Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect.