Phillips 66 Partners LP
Q2 2017 Earnings Call Transcript

Published: 1 Aug 2017

[Operator:]

Welcome to the Second Quarter 2017 Phillips 66 Partners Earnings Conference Call. My name is Julie, 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 second quarter earnings conference call. Participants on today's call will include Tim Taylor, President of Phillips 66 Partners; Kevin Mitchell, Vice President and CFO; Bob Herman, Senior Vice President Operations; and Tom Liberti, Vice President and Chief Operating Officer. The presentation materials we will be using during the call can be found on the events section of the Phillips 66 Partners web site, 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 the presentation and the Q&A 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 SEC filings. With that, I will turn it over to Tim Taylor for opening remarks.

[Tim Taylor:]

Thanks Jeff and good afternoon everyone. During the second quarter, earnings were $103 million and adjusted EBITDA was $170 million. This reflects strong operations and solid growth over the prior quarter. Our Board of Directors recently approved a second quarter distribution of $0.615 per unit, a 5% increase over the first quarter. Distribution coverage this quarter increase to 1.35 times. Since our 2013 IPO, we have increased distributions for 15 consecutive quarters at a compound annual growth rate of 33%. We are on track to achieve a 30% compound annual growth rate on distributions from the fourth quarter of 2013 through 2018. Let's move on to slide 4 and talk about execution on our organic growth portfolio. The ongoing Sand Hills pipeline capacity expansion from 280,000 to 365,000 barrels per day is expected to be completed by the end of 2017. In addition, during the second quarter, the operator, DCP Midstream, announced plans to further expand capacity to 450,000 barrels per day by the second half of 2018. This next phase of expansion is supported by volume growth coming from existing, long term plant and field dedications. Phillips 66 Partners owns a one-third interest in this joint venture. The STACK joint venture, in which we own a 50% interest, is investing in a project to loop the existing pipeline and extend the pipeline further into the STACK play. We expect the project to increase capacity by 150,000 barrels per day and to be complete by the end of 2017. Development continues on extension of the Bayou Bridge pipeline. Once complete, the second leg of the pipeline will deliver crude from Lake Charles, Louisiana, to St. James, Louisiana. We expect construction to begin this quarter, with commercial operations starting in the first quarter of 2018. Phillips 66 Partners owns a 40% interest in this joint venture project. As announced last quarter, engineering work is underway on a 25,000 barrel per day isomerization unit to increase production with higher octane gasoline blend components at the Phillips 66 Lake Charles Refinery. Total capital for the project is expected to be about $200 million. A final investment decision is expected in the first half of 2018. Now, I will 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 first quarter. Total pipeline throughput, excluding volumes from equity affiliates was 1.9 million barrels per day, up slightly from the first quarter. This increase was due in part to higher throughput on several systems connected to our sponsor's refineries, where utilization was higher than in the first quarter. The increase was partially offset by lower volumes on our pipelines connected to the Billings refinery, which had major turnaround in the second quarter. Total terminal throughput was 1.3 million barrels per day, down from 1.4 million barrels per day in the prior quarter. This decrease was primarily due to lower volumes on the Gold Line system. Average pipeline revenue decreased $0.02 per barrel in the second quarter to $0.61 due to volume mix. Average terminal revenue was slightly higher at $0.42 per barrel. Both of these rates exclude equity affiliates. Slide 6 shows the change in adjusted EBITDA from the previous quarter. Second quarter adjusted EBITDA was $170 million, up $15 million from the first quarter. Distributions from our equity affiliates increased adjusted EBITDA by $16 million over the prior quarter. The higher distributions were mostly attributable to the Sand Hills, Southern Hills and STACK pipelines. Variances on other assets increased adjusted EBITDA by $6 million. This included the positive impact of reduced turnaround activity at several Phillips 66 refineries, and higher earnings on the River Parish NGL system. These items were partially offset by the impact of the turnaround at the Billings refinery on Seminoe and Glacier pipeline volumes. These positive variances were partially offset by a $7 million make whole payment received in the first quarter. Slide 7 walks through the DCF calculation. During the quarter, we had deferred revenue impacts related to the Gold Line, Seminoe and Glacier systems, which increased distributable cash flow by $4 million. Net interest expense was $24 million and maintenance capital expenditures were $10 million. Distributable cash flow for the quarter was $140 million. Total cash distributions of $104 million will result in the distribution coverage ratio of 1.35 times. The recently approved second quarter cash distribution was $0.615 per limited partner units, will be payable on August 11. Slide 8 highlights the growth that we have achieved over the last year. Our second quarter distribution per unit represents a 22% increase over second quarter 2016. Adjusted EBITDA increased by 75% and distributable cash flow by 67% year-over-year. We continue to progress toward our goal of $1.1 billion of run rate EBITDA by the end of 2018. At the end of the second quarter, annualized run rate EBITDA for the partnership was $675 million. Slide 9 shows our financial position at the end of the second quarter. We ended the quarter with $1 million of cash and $50 million of outstanding borrowings under our $750 million revolving credit facility. During the quarter, we raised $131 million from equity issuances under our ATM program. We finished the quarter with a debt-to-EBITDA ratio of 3.5 times on a revolver covenant basis. Long term, we expect leverage to be around this level. This concludes our prepared remarks. We will now open the line for questions.

[Operator:]

[Operator Instructions]. Your first question comes from Jeremy Tonet with JPMorgan. Please go ahead. Your line is open.

[Jeremy Tonet:]

Good afternoon.

[Tim Taylor:]

Hey Jeremy.

[Kevin Mitchell:]

Hey Jeremy.

[Jeremy Tonet:]

Just wanted to touch base on the JV distributions in excess of equity earnings. That stepped up a bit this quarter and I was just wondering, if you could talk about some of the drivers there, and if you see this as kind of a steady state rate, or could this even increase as Sand Hills continues to ramp up? Thanks.

[Tom Liberti:]

Jeremy, this is Tom. So the increase from an earnings standpoint really came from Sand Hills and a little bit from Explore [ph]. From a cash standpoint, which obviously is a bit different, it will be more seasonality, and that cash increase came from Sand Hills, Southern Hills and the STACK JV that we have. So if you look going forward, if you add the two, if you add the equity earnings and the excess cash, the second quarter looks more like what we think the third quarter will look like, and is obviously higher than what the first quarter was. So if you going forward, you have to combine those two, from an earnings standpoint, from an excess cash, they kind of offset each other. But going forward, the third quarter looked more like the second quarter.

[Jeremy Tonet:]

That's helpful. Thanks. And notice that the ATM issuance had stepped up a bit over what it had been historically. And I was just wondering, if there was anything that kind of was different this quarter, or do you guys expect to kind of be able to maintain the higher access to quarterly ATM issuance than maybe what you have been able to achieve in the past?

[Kevin Mitchell:]

Yeah Jeremy, it's Kevin. I mean, obviously, we did issue more on the ATM this quarter. We had some opportunistic block rates through that and so -- that site there, and to the extent that those interest -- there's interest for that in future periods, then we certainly may do more of that. But it certainly reflects some kind of one time activity relative to previous run rate. But I'd also say, as we have talked about in the past, expect the ATM to be part of our ongoing sort of funding needs, a portion of that, when you look at the overall equity needs. The ATM will be a component there.

[Jeremy Tonet:]

Great. And then just one to turn quickly to the Rodeo project that have been discussed within the Phillips family, I was wondering if there is any update there that you could talk about, or other opportunities for organic growth in general, at PSXP, now that the entity is larger? Just want to think through, how that could look going forward?

[Bob Herman:]

Jeremy, it's Bob. I think PSX's Rodeo project, we continued to talk to the producers out in the Permian, where this would be a trunk line and gathering system kind of in the heart of the Permian out of there. Still a lot of interest in that line, and those competing projects. We feel really good about our project, and the ability to capture some of that growth that's occurring out there. So with the different oil prices, I would say, people were a little more cautious, with taking commitments. But we continue to work that one and feel good about growing our crude opportunities out there. I think, if you look around the system in organic, either PSX or PSXP, we have got a lot of opportunities around our existing assets. In particular, the Beaumont system, as we are calling it now, has really got quite a bit of opportunity. If you look at Dakota Access and ETCOP starting up in the last quarter, those volumes are showing up now in Beaumont. Beaumont, we have seen an uptick on PSXP's Bayou Bridge line over to the Lake Charles area. That whole system is coming together quite nicely for us and how we have envisioned it, and we continue to build out additional crude tank gauge at PSX's Beaumont, but that all becomes part of that big crude gathering system at Beaumont. We are well positioned over there, for both crude and product exports going forward. I think you will see that play a big part in the PSX/PSXP family of organic opportunities.

[Kevin Mitchell:]

Jeremy, two, when you asked the question about how much project organic work can we take on at PSXP, you have seen us increase that, and in fact, some of the earnings increase that you are seeing now, is a result of the growth in our organic investments in Sand Hills. And so I think that component continues to grow. There is a size limit, just based on the sized MLP. But clearly, we have been taking on more and more of that capital opportunity around the PSXP system where we can, let the sponsors Bob just talked about with PSX level, also continues to develop and there is a way that I think we can work that together. But we continue to really focus at PSXP about what we can do internally in the proper size. So over time, we would still expect that to grow in terms of our capability to execute bigger projects organically at PSXP.

[Bob Herman:]

I think you will see us, as we go forward, our first job out there is identifying commercialized opportunities, and then we look at the family and say, where does this project fit best? And you will see us, I think be as aggressive as we can about doing projects down at PSXP, it makes sense to do them down there. But the bigger projects that got two and three year carriers to get up and running, you probably will still continue to see those up top at PSX.

[Jeremy Tonet:]

Great. Thanks. And then maybe just one last one building off of that. As you move from the $675 million EBITDA run rate to the $1.1 billion EBITDA run rate by the end of next year, how do you envision kind of the mix shift there between these organic growth projects you are talking about and drop downs? Any thoughts on how that could shape up?

[Kevin Mitchell:]

Well, I think there will continue to be organic growth throughout the rest of this year and throughout 2018. So a piece of that remaining EBITDA does come from expansion of our existing assets at PSXP. The rest will have to come through other means with drop downs and other opportunities, that could be small bolt-ons that come up opportunistically. So we have got a clear path on how you get to the $1.1 billion by the end of next year, and we feel good about that. So we don't see any problems there, and there maybe opportunities that pop up along the way that help our plans.

[Tom Liberti:]

I think we have demonstrated organic investment, M&A or acquisitions of assets at PSXP, and then, looking at our sponsor, looking at attractive ways to add. So it's going to be the combination of all those things, as we look at PSXP as the way to ultimately grow, hit our targets and continue to grow.

[Jeremy Tonet:]

That's all helpful. Thank you.

[Operator:]

Your next question comes from Brian Zarahn with Mizuho Securities. Please go ahead. Your line is open.

[Brian Zarahn:]

Good afternoon.

[Tim Taylor:]

Hey Brian.

[Kevin Mitchell:]

Hi.

[Brian Zarahn:]

With Bayou Bridge being pushed back a quarter, any changes to your expected organic CapEx this year?

[Kevin Mitchell:]

It just had a little bit of effect. Obviously, the spending shifts a little bit from 2017 to 2018, as that project, just the natural course of spend on the project. I would think though, it isn't a material change to us and with the number of organic opportunities that are coming up, there is always a little bit of give and take between years on our capital budget.

[Tom Liberti:]

Yeah Brian, this is Tom. It actually -- it's kind of a nice offset with the expansion that DCP was talking about with Sand Hills, the initial spend that we are making on that phase, one expansion kind of offsets, what we were going to spend on Bayou Bridge. So we end up about equal this year so far.

[Brian Zarahn:]

Okay. So it's still about $380 million for organic --

[Tom Liberti:]

Of our changing CapEx, right.

[Brian Zarahn:]

Okay. And then can you remind us what average returns you are expecting on the capital budget?

[Kevin Mitchell:]

I think we always say, and we look at a typical midstream return around seven times EBITDA of these assets. That's the expectation that we have, and some projects are better. But that's kind of the expectation that we'd have on a capital allocation standpoint from growth.

[Brian Zarahn:]

And then, shifting from organic to acquisitions, on the PSX call it sounded like you still anticipate a drop down this year, with that on your plate and does that preclude any potential third party M&A and any high level thoughts on what you are seeing in the market right now for third party assets?

[Kevin Mitchell:]

I don't think our forward drop plans really affect our ability to go out and do a bolt on acquisition. It could have the effect of, if you did the acquisition, maybe if there are some assets that would get pushed out in our Q for dropping, and they just stay there in the pretty significant backlog of dropping the assets that we have. And we have been active in looking at the assets that have been out there. People were paying significant values for those, and when we compare those to the, kind of the organic backlog that we have gotten, things we can do with our own assets and around our own assets and around PSX assets, we decided to pass on most of those opportunities. It does not mean, that there won't be one that comes up, particularly ones that are extensions [indiscernible] current system or have a nice synergy, with either PSXP asset or a PSX refinery or something like that, you even might see us act on that. But we are always looking, but we have got just a rich backlog of things to go do.

[Tom Liberti:]

I think it's just safe to say, if there is a great opportunity out there, we will find a way to capture that.

[Brian Zarahn:]

Then the last one for me, it's not -- IDRs are not an issue yet, as distribution coverage and growth remain healthy. But as you hit your target for EBITDA distribution growth in 2018, how are you thinking about the IDR structure, and at what point do you think that they will potentially change?

[Tom Liberti:]

Let me just preface this by saying, today, we have a very competitive cost of capital. I don't think from an IDR perspective, it's not to the point, where if that is something that we need to address today. But I think there comes a point in the future, that what you say, if I can't make the projects accretive and the IDR drag is really the issue, then that's the time to address that. But I think, we are still ways from that, but it's certainly something that we are mindful of right now, in terms of a long term capital structure. So I think that just depends on the situation and kind of where the market is, we can make those calls. In the end, it has to be accretive to the LP.

[Brian Zarahn:]

Thank you.

[Operator:]

Your next question is from Tom Abrams with Morgan Stanley. Please go ahead. Your line is open.

[Tom Abrams:]

Thank you. Just wondering on the STACK joint venture, what could happen beyond that? Where could that take you?

[Tom Liberti:]

Tom, this is Tom. I think that there is possibilities, I mean, we could go deeper into the play a little bit. We could add to the looping that we are having, that we are currently constructing. We could probably add another 100,000 barrels a day with increased pump. So if the production was there, we would be able to add on to that line.

[Tom Abrams:]

Okay. All right thanks. I will have to check a map out. Lot of activity up there.

[Tom Liberti:]

There is.

[Kevin Mitchell:]

It's an active basin.

[Operator:]

Your next question is from Barrett Blaschke with Mitsubishi UFJ Securities. Please go ahead. Your line is open.

[Barrett Blaschke:]

Hi. Just a couple of quick ones. First, can you give us a little color on the Sand Hills newly announced expansion, just what percentage of that is already contracted? And then follow-up to that would be, shifting over the terminaling business, it looked like the volumes are still running a little weaker than fourth quarter and even last quarter on the refined product side, if you could give us a little color on that?

[Tim Taylor:]

Yeah. I think on the Sand Hills, as far as contracting goes, the backing for the Sand Hills expansion, and quite frankly, some of the base volumes are field dedications or plant dedications in the Permian and in the Eagle Ford along the route there, and that will be consistent going forward, where Sand Hills, the laterals all tie into a specific field or gas line out there, and we will catch those volumes. The expansions seen today, especially the first one, right, the fact that DCP has gone, stepped out and announced the second one after that. We are feeling pretty good about the volume growth that we see on the plants and the fields that are attached to the Sand Hills venture. So that will continue.

[Tom Liberti:]

Yeah Barrett, you have seen that volume on Sand Hills ramping up and thing. Through this expansion to 365 this year, you know, we think will -- as the capacity increases, the volume will follow it. And then into the announced expansion of another 85,000 barrels a day, we just think it will continue to increase. As far as the throughputs of the terminals go, most of that was in the Gold Line system, the volumes were down a little bit. Some of the is butane blending that goes off from the second quarter compared to the first quarter. Some of that is just a little bit of a -- some problems that have -- had the border refinery. But we would think that those throughput volumes would continue to come up and look more like they did in the third quarter last year.

[Barrett Blaschke:]

Okay. And all right, I think just on Sand Hills, so basically it's just a slow ramp, or should it be fairly lumpy, as you bring on additional capacity here?

[Tim Taylor:]

I think there is really two pieces out there. It's a little hard to say that you got existing gas line infrastructure out there that is ramping up with volumes that are coming on in the field. So that's kind of a slower ramp, and that's what you have really seen year-to-date out there, as volumes have grown. Some of the expansion work that we are spending now, is to put out new laterals to new gas lines. So you will see kind of lumps of volumes come on, when those assets are complete.

[Barrett Blaschke:]

Okay. All right. Thank you.

[Operator:]

Your next question is from Justin Jenkins with Raymond James. Please go ahead. Your line is open.

[Justin Jenkins:]

Great, thanks. Hello again everybody. I guess I think we have covered most of what I had on the PSX call in here. But you may be thinking about what we have seen from crude price differentials. I guess, Greg alluded to some crude slate changes on the PSX call. But am I right to think that, as the PSX crude slate does get a little bit lighter here that, that if anything that might be a slight benefit to PSXP? [Indiscernible] volumes on the system?

[Tim Taylor:]

I will go back to my previous discussion around Beaumont in particular. Beaumont is set up as a crude gathering terminal. You are seeing the DAPL volumes. We are the southern terminus for DAPL ETCOP. We are connected to seven other crude gathering lines. So as you see volumes from those lines come up, and there is volume, we have seen great interest in taking out tankage and storage requirements from third parties at the Beaumont terminal. We have got three docks there, capable of exports. So I think that's really our asset, where we would see some benefit coming from increased shale crudes in the U.S. And then, when you look up in the stack, that really feeds PSX's Ponca City Refinery, and they like those barrels. So some of what you have seen us do is, it's not only the STACK scoop and that expansion, but PSX/PSXP, at Cushing, developing additional storage there and the ability to tightline the barrels, basically from the wellhead through our own assets in the PSX's Ponca City Refinery. So you will see some opportunities like that pop up around the system.

[Tom Liberti:]

And Bayou Bridge is a beneficiary for Lake Charles. So I think you are right, as the crude slate continues to look more U.S. base, you create opportunity to move more volume or create new connections that are needed to get your crude slate optimized. So we look at this as a real opportunity from a total complex standpoint.

[Tim Taylor:]

And just to clarify, Beaumont is a PSX asset. But clearly, structured in a way that at some point, we could see it in the MLP.

[Justin Jenkins:]

Perfect. Thanks for that response guys. And I am guessing the answer is no here, but any potential impact on PSXP, if we were to see oil sanctions on Venezuela?

[Tom Liberti:]

No. I think that that would be fairly minimal on PSXP, Clifton Ridge or the Gulf Coast assets, where that's the likely market. And there would be other options on those assets to fill that, or you switch to inland. So we look at that from a PSXP standpoint, and just say, it's part of our optimization around our system. But we don't anticipate any big structural impact on our business.

[Tim Taylor:]

We have a number of optional crudes that come in over the dock to supply Lake Charles. But then too, since the Bayou Bridge now comes in to Clifton Ridge and goes through, it's kind of an offset, if we use similar domestic crudes on that one.

[Justin Jenkins:]

Perfect. Thanks guys.

[Tom Liberti:]

You bet.

[Operator:]

Your next question comes from Corey Goldman with Jefferies. Please go ahead. Your line is open.

[Corey Goldman:]

Hey guys. Since May, you raised your annualized run rate EBITDA by about $50 million. I think the STACK and the Sand Hills projects were already announced by May. So any color you can provide on what's driving this increase, just for the last few months?

[Tim Taylor:]

Well, those projects were announced, but we really have been ramping up the volumes. And so we have been a bit conservative in putting them in the run rate, until we actually see and get through. So some of that is organic. Some of the other increases just, assets running the way we had planned them to run, coming online. The Eagle dropped about a lot of assets, and some of those have increased also.

[Corey Goldman:]

Got you. But I guess, just to confirm, then baseline shouldn't be viewed as a floor rate, or can we view it as kind of one and the same?

[Tim Taylor:]

I think the run rate would be the anticipation that we would have. So I don't know whether you are looking at floor, just what we would anticipate.

[Tom Liberti:]

Let me maybe [indiscernible]. So I think that's our expected normal run rate and operational upsets can affect that. But at the same time, you got continued in Sand Hills. You have got Bayou Bridge, the expansion is coming. So there is organic opportunity to scoop STACK that will continue to build on those existing assets and add additional run rate. But there is always some type of operational impact. But it's fairly small in this kind of system.

[Corey Goldman:]

Got you. Okay. So just to confirm then, in the Sand Hills expansion, for yearend 2017, that has been built at that two times cash spend, that's included in the 170-ish a quarter, is that right?

[Kevin Mitchell:]

$170 million is what we did this quarter.

[Corey Goldman:]

Sorry, the $650 million per year.

[Kevin Mitchell:]

$675 million is kind of where we are at today, and we will continue to grow that number organically and through acquisition of assets throughout the year and throughout next year. So $675 million run rate is today. Kind of snapshot in time, second quarter.

[Corey Goldman:]

Got you. Okay. Thank you.

[Tom Liberti:]

I think our growth has been so rapid, that run rate is going to basically change almost every quarter with the growth profile that we have had and are going to have in the future.

[Corey Goldman:]

Perfect. Thanks guys.

[Operator:]

Your next question is from Craig Shere with Tuohy Brothers. Please go ahead. Your line is open.

[Craig Shere:]

Good afternoon. I am trying to think about funding for both drops and organic growth. If you are at $675 million run rate now and maybe the organic growth you have got in the pipeline, might be another $100 million to $105 million. That leaves maybe $320 million for drops to reach your target by year end 2018. But on the PSX call, the comment was made around potential for $1.5 billion and assume that with the drop-downs. So I am trying to understand, are two -- given your robust coverage, are we to assume that, you might be levering up the drop downs more than how you are funding the organic growth?

[Tim Taylor:]

I think we are still on our coverage target or under four times debt-to-EBITDA on that target range around 3.5. So I think it's just the management of the total capital structure. And so each drop can do that, but within that constraint to where we'd try to be, in terms of really solid investment grade rating and very consistent with the guidance we have always given around that. So it just creates an option. If you do a dropdown asset, if we purchase those to be a way to manage that at the total value level. Kevin?

[Kevin Mitchell:]

Yeah. That's exactly right. So the $1.5 billion that we talked about in the PSX call, that structure says, that we can drop it with assets. But that doesn't define necessarily, exactly how much debt financing we do at PSXP. We could do more or less than that, depending on the overall, what we drop, how we fund it, get [indiscernible] to which we do equity, whether it's public or take back, however we look at that. So that just gives us good optionality around it.

[Craig Shere:]

Fair enough. And as far as units taken back with drops, are you still trying to minimize that, to emphasize other debt assumption or the upstream cash?

[Tim Taylor:]

I think we think about take back, there is an angle there from the efficiency, that when we look at our sponsor's assets, sometimes, that's an attractive way for them to realize value in the transaction. So that's an important piece. And then of course, there is always the flexibility that we can have on our capital structure PSXP, that if our sponsor is willing to do that, then that can be an optimization of our capital structure between public equity, private equity or take back units.

[Craig Shere:]

Got it. And last question, coverage is still pretty robust, now that the industry is kind of more comfortable today with higher coverage than it was maybe a couple of years ago. As you envision achieving your $1.1 billion run rate at the end of next year, do you have any thoughts in mind about how your coverage may trend down, and how low it could go?

[Tom Liberti:]

I think we have always said, Tim just mentioned, on the debt side, we have always targeted 3.5 to EBITDA, we are kind of capped around 4. On the same lines, we have always said kind of a 1.1 coverage ratio which was our target. Quite frankly, we have had good organic growth in the assets own, that have really added to our coverage ratio. Maybe above our expectations as the year began, and so we don't feel bad about it, at a 1.35 coverage ratio, but we would target kind of a more normalized 1.1, and that leaves you room on either side of that for either really good operations or above normal volumes on some of our systems, or some of the operational downtime that comes as part of this business.

[Tim Taylor:]

Two, you think about the coverage ratio in today's market, and it creates additional options for how you structure purchases. And so I think right now, we can always go back to our target. There is also an element, that helps us to do more organic. And it just depends on the market conditions, whether I think as we adjust, it creates more options for us to use that cash effectively, either for distribution growth or for great ways to grow the partnership.

[Craig Shere:]

So if you do have continued, better than expected organic growth opportunities over a couple of years, could the trend down from 1.35 to 1.1 be elongated, so we aren't necessarily assuming that post year end 2018, we are at 1.1?

[Tim Taylor:]

Yeah, I think that's right Craig. You could definitely see it play out that way.

[Tom Liberti:]

Yeah. I think Craig, more happens with the distribution growth that we have had. As we get to the 30% CAGR, that's really what drives each quarter an over time, as we look at where that coverage ratio is. So we will still be in at the end of 2018, we will still be in a growth profile, and looking more at 1.1 or whatever the CAGR gives us.

[Craig Shere:]

Great. Appreciate all the color.

[Operator:]

We have no further questions at this time. I will now turn the call back over to Jeff.

[Jeff Dietert:]

All right. Thank you, Julie, and thank all of you for your interest in Phillips 66 Partners. If you have additional questions, please call Rosie, CW, or me. Thank you.

[Operator:]

Thank you ladies and gentlemen. This concludes today's conference. You may now disconnect.