Phillips 66 Partners LP
Q4 2017 Earnings Call Transcript

Published: 3 Feb 2018

[Operator:]

Welcome to the Fourth 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 fourth quarter earnings call. Participants on today's call will include Kevin Mitchell, Vice President and CFO and Tom Liberti, Vice President and Chief Operating Officer. The presentation materials we will be using during the call can be found on our events section of the Phillips 66 Partners Web site, along with supplemental financial and operating information. Slide two 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 the call over to Kevin Mitchell.

[Kevin Mitchell:]

Thank you, Jeff. Good afternoon everyone. The partnership operated very well during the quarter and we completed our largest transaction to-date with the acquisition of the Merey Sweeny coker and the 25% interest in the Bakken pipeline from Phillips 66. With this latest addition, we are near our $1.1 billion 2018 year-end run rate EBITDA target. And we remain on track to deliver our 30% five-year distribution CAGR. Our Board of Directors approved a fourth quarter distribution of $0.678 per common unit which is 5% higher than last quarter. Our distribution coverage was 1.33x this quarter. Since our 2013 IPO, we have increased distributions 17 consecutive quarters at a compound annual growth rate of 31%. Slide four highlights our financial growth. As you can see from the slide, we have achieved substantial growth in earnings, adjusted EBITDA and DCF each year since IPO. In 2017, we increased earnings and DCF by over 50% and adjusted EBITDA by 60% from 2016. Our run rate adjusted EBITDA has grown to approximately $950 million. Concurrent with the fourth quarter acquisition, we modified our disclosures to include joint ventures on a look through basis when reporting adjusted EBITDA. This change was made retrospectively and reports our actual results on a consistent basis with our $1.1 billion 2018 run rate target. Distributable cash flow is not impacted by this change. Moving on to Slide five, fourth quarter earnings were $162 million; adjusted EBITDA was $254 million and distributable cash flow was $172 million. Adjusted EBITDA increased $83 million from the third quarter primarily driven by the acquisition of Merey Sweeney and the 25 % interest in the Bakken pipeline, which had strong fourth quarter volumes. In addition, we had higher pipeline and terminal volumes during the quarter mainly due to improved operations after the hurricane and higher Phillips 66 refinery utilization Slide six shows our financial position at the end of the year. We ended 2017 with $185 million of cash and no outstanding borrowings under our $750 million revolving credit facility. Our debt-to-EBITDA ratio on a revolver covenant basis was 3.2x. Long-term we expect leverage to be around 3.5x. We continue to run our business from a strong financial position and we are confident in our ability to fund our 2018 growth plans without accessing the equity markets other than through selective use of our ATM program. With that I'll turn the call over to Tom Liberti for an update on our growth projects.

[Tom Liberti:]

Thanks Kevin and good afternoon everyone. As Kevin indicated with our strong balance sheet and a healthy distribution coverage ratio at 1.33x, we are well positioned to fund our 2018 growth opportunities. Our capital budget is $595 million, which includes $510 million for growth projects and $85 million for maintenance capital. During the fourth quarter, the Sand Hills pipeline exceeded 300,000 barrels per day of throughput and we expect to complete the capacity expansion to 365,000 barrels per day by the end of the quarter. Further expansion of the Sand Hills pipeline capacity to 450,000 barrels per day is anticipated in the second half of 2018. Phillips 66 Partners is a one-third owner of this joint venture with DCP Midstream. The $200 million isomerization project at the Phillips 66 Lake Charles Refinery has received final approval. This 25,000 barrel per day unit will increase production of higher octane gasoline blending components. When completed, we will enter into a long-term agreement with Phillips 66 for processing services including a minimum volume commitment. Startup is expected by the end of 2019. The step joint venture expansion to loop the existing pipeline and extend further into the STACK play was completed in the fourth quarter. The loop increased capacity by 150,000 barrels per day. And as a reminder, we own a 50% interest in this JV. All permits have been received and construction has begun on the Bayou Bridge pipeline expansion from Lake Charles to St. James, Louisiana. Commercial operations on the extension are expected to begin in the second half of 2018. Phillips 66 Partners owns a 40% interest in this joint venture. And remember the initial phase of this line from Nederland Texas to Lake Charles began operations last year. Our Sacagawea pipeline joint venture is constructing a 24 mile raw natural gas pipeline system linking North Dakota production in Montréal County to gathering and processing capacity in Mackenzie County. Project completion is expected in the second half of 2018 and we are 49.5% owner in this venture. This concludes our prepared remarks. We will now open the line for questions.

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Justin Jenkins from Raymond James, please go ahead. Your line is open.

[Justin Jenkins:]

Great. Thanks. Hi, again everybody. I guess I'd like to start maybe with a capital budget. Looks like PSXP is just over half of the gross capital in midstream for the whole PSX family. How should we think about that evolving over the next couple of years? Does that kind of mix stay near the half market? Does it grow to 3/4th or does it even become all of Philips midstream growth PSXP?

[Kevin Mitchell:]

Justin, it's Kevin. I think as you look at the PSXP capital spend, it's increased each year; year-over-year and the ability of the MLP to continue to increase its capital spend has really grown with the growth in the MLP. So I don't think it's unreasonable to assume that as the MLP continues to grow its ability to take on a larger share of the overall midstream capital to grow with that. And that was always as we look back, it was always our objective that over time the MLP will be directly funding the majority of the CapEx that we're conducting in the Midstream segment.

[Justin Jenkins:]

Right. Perfect. That's helpful Kevin. And then, maybe on the capital market side as a follow up. Is the reference to selective ATM issuance just conservatism in case another bolt-on project comes up or should we think of 3.5x debt-to-EBITDA, is maybe the limiting factor there?

[Kevin Mitchell:]

No. I think what we're saying is, so we have a lot of capacity today. Well, there is a couple of things, let me step back. We're not too far off our $1.1 billion run rate EBITDA target anyway. And then, you look at the organic projects that are underway and Tom just described most of those, a fair amount of organic EBITDA that will come on over the course of 2018. So to the extent that there are some capital needs that won't be funded by, if you look at coverage, we've got already -- we're sitting on reasonable healthy cash balance at the MLP. We've got that capacity 3.2x at the end of 2017 potential to increase that. So to the extent that we feel there's a little bit of equity needs, we can easily accommodate that within the ATM program and we've never done a lot of activity on the ATM. So I think in the 18 months, we've had the program I think we've done somewhere around about $200 million in total over that time period. So really just referencing the fact that we don't anticipate much equity needs at all and what we may need we would just do through the program.

[Justin Jenkins:]

Perfect. Appreciate that color Kevin. And last one I think it's quick and a modeling question thinking about the difference between cash distributions from JVs and the proportional EBITDA I think that the change in presentation is that $22 million reported for 4Q, is it run rate or was that particularly high in 4Q?

[Tom Liberti:]

That's probably just about typical Justin.

[Justin Jenkins:]

Perfect. Leave it there. Have a good weekend guys.

[Kevin Mitchell:]

Thanks.

[Tom Liberti:]

Thanks.

[Operator:]

[Indiscernible] from MUFJ Securities, please go ahead. Your line is open.

[Unidentified Analyst:]

Hey guys. Just kind of a quick question thinking a little more long-term here. As we watch you guys kind of rise quickly through the splits and operating under the assumption that all GPs and IDR searches eventually have a lifespan. Do you start to look at coverage now and say this is really the right level as a protective measure to -- if you ever didn't want to eliminate the GP and IDRs that you want to keep it a little higher just to soften the blow of a big block of units coming up?

[Kevin Mitchell:]

Yes. You certainly could do that. As we look at this structure. So we have a reasonable percent of distributions are coming back to the GP by way of IDR, so we see that. But at the same time, we have a yield that sitting right around 5%. So in overall terms, the cost of equity is still competitive and as we step back and look at that. However, as you say over time you get to a point where this needs to be addressed. And so we know we'll get there. I'm not sure we're quite there yet. I also think that relative to how we probably thought about this 3, 4 years ago, it probably come sooner than we would have previously anticipated, but we just need to be thoughtful about how we go about that? How we structure it? What works from the standpoint of the general partner and also the LP unit holders such that this doesn't become -- it doesn't end up in a way that's dilutive to the LPs, it's going to work in overall terms.

[Tom Liberti:]

And [indiscernible], I would just point out that we've always had a fairly high and strong coverage ratio. But we've also had a fairly young MLP. We've had a pretty aggressive organic growth program too in it and an overall growth program. So we've kept those -- we've kept the balance sheet pretty strong from the beginning and the plan would be to always keep that balance sheet strong.

[Unidentified Analyst:]

Right. I guess it comes down in my mind too. We seem to be an environment where investors are more willing to see a lower rate of distribution growth if you can have a healthier balance sheet and a healthier coverage and they just don't want to see anybody else pin themselves into a corner because of high distribution growth. And then, suddenly go, well, we need to do an elimination. And we were going to be very dilutive when we do it and you end up with a distribution cut in the mix. I guess that's always a concern. So just I'd like to know that people are thinking along those lines.

[Kevin Mitchell:]

Yes. No, we certainly understand that.

[Tom Liberti:]

I think along that life cycle that you are talking about, if we were going to do something and make some adjustment, we obviously would want to be on the front end rather than the back end of that.

[Kevin Mitchell:]

Right.

[Unidentified Analyst:]

Okay. Thanks guys.

[Operator:]

Brian Zarahn with Mizuho Securities, please go ahead. Your line is open.

[Brian Zarahn:]

Good afternoon.

[Kevin Mitchell:]

Good morning, Brian.

[Brian Zarahn:]

In the quarter, could you elaborate a bit on the $33 million increase in equity earnings, I assuming most of it's from the Bakken pipeline but maybe a little bit about the breakdown from Bakken and Sand Hills?

[Tom Liberti:]

Yes. Actually volumes Brian in the fourth quarter, the Bakken volumes were healthy even from our initial projection. Obviously just because there is the first quarter from that acquisition. And Sand Hills and Southern Hills NGL line both had increased volumes. The Sand Hills was -- as the capacity has increased, the volume has ramped to meet that capacity every quarter. And Southern Hills actually had increased volume also this quarter.

[Brian Zarahn:]

So the $33 million increase from the third quarter most of it was from the Bakken, Sand Hills and from Southern Hills, is that the right way to think about it?

[Tom Liberti:]

Yes. I mean most of it's the acquisition obviously in the Bakken.

[Brian Zarahn:]

Okay. On the parent's proposed Permian crude pipeline project, obviously is a great deal of competition, but it moves forward or some other form of participation moves forward how do you think about PSXP participating. Could it be a partner at the outset or this could be something longer term is a dropdown?

[Tom Liberti:]

We've said -- we settle along on any project that we'd be looking at. We always look at what the right kind of split. PSXP could participate with PSX. We could look at it in the future is a dropdown, would just be a situation that both PSX and PSXP were in at the time of the project.

[Brian Zarahn:]

And then, the last one for me on the isomerization unit. How does the project is expected returns given the contract compared with your historical dropdown?

[Tom Liberti:]

It's attractive. We talked about it being in the midstream typical midstream kind of returns. And I think from organic project it's going to be on the good end of those typical midstream returns.

[Brian Zarahn:]

Thanks Tom.

[Operator:]

Jeremy Tonet from JPMorgan, please go ahead. Your line is open.

[Jeremy Tonet:]

Good afternoon. Maybe just picking up on that last question there. There's been kind of concerns with regards to midstream entities being able to really hit the returns that they target on the organic growth side given how competition is turned out to be it appears. So if you kind of look across your portfolio suite here. I mean do you see the major project you have kind of hitting those mid teens rates of returns or are you seeing any pressure out there. Anything else you can share with us on kind of competitive landscape out there?

[Kevin Mitchell:]

Yes. Jeremy, it's Kevin. I think as we look across our projects we've done at PSXP. They're hitting the kind of return expectations that we had internally from the outset. And I know we've not given a whole lot of project level specifics as we've talked about those externally other than saying -- so typical midstream returns. But from the way we look at it, we're seeing the kind of returns that we would have wanted and expected as we laid out and went into those projects. And I don't see any reason why the isomerization unit will be any different. It's structured with -- it will be on a sort of fee-based with minimum volume commitments. So as long as the capital spend comes in line with where we expect it should deliver exactly as we expect it to.

[Tom Liberti:]

Yes. Jeremy, I think Kevin hit it. We've been pretty selective with the projects and the organic spend that we've had. And with that being fee-based and with those minimal [boarding] [ph] commitments, the projects have come in pretty nicely. And again, it's been a question of being selective I think with the projects. It hasn't been a question of growing for growth sake. We've kind of grown selectively and we've grown profitably.

[Jeremy Tonet:]

Thanks for that. And then, thinking about projects and turning to Gray Oak there and seeing how it's upstairs. But just wondering how you think about returns and risk in a project like that, you are seeing different shapes for those type of proposed projects, one competitor out there is looking for a project with just acreage dedications as opposed to a minimal income commitments and I was just wondering if you could help us think through how you guys look at risk out there and returns for those type of projects. How important [MBCs] [ph] would be or if acreage dedication could make that?

[Kevin Mitchell:]

Well, when we look at projects from a MLP standpoint and really that from a sponsor perspective that's all midstream projects because at that level we consider all the projects as ultimately being destined for the MLP. We're looking at that expectation around minimum commitments fee-based revenues such that you derisk the cash flow stream and make it very much a fit for the MLP portfolio. And so I know when you start talking about acreage dedication type that you start -- you kind of looking -- looks a little bit more like a G&P business at that point in terms of the way that structured which is a different model when you look at PSXP very much pipeline, terminals or some processing assets. But they're also fee-based with volume commitments -- minimum volume commitments. So we kind of err on the side of less risk not more as we look at these midstream projects.

[Jeremy Tonet:]

That's very good to hear. Thanks for that. And then just a housekeeping item here. With the leverage ratio is it at 3

[Kevin Mitchell:]

The covenant basis is basically for the agency. But on a run rate standpoint, it's just a little bit -- just a touch lower than the 3

[Jeremy Tonet:]

Okay. Thanks for that. That's all for me.

[Kevin Mitchell:]

Thanks Jeremy.

[Operator:]

Kristina Kazarian from Credit Suisse, please go ahead. Your line is open.

[Kristina Kazarian:]

Great. Hey guys. Can you talk a little bit more about the longer term organic growth opportunity set for PSXP and maybe talk about what you're thinking or some of the most attractive regions for projects and specifically it looks like the NGL strategy is really working, is that what you can get there as well?

[Tom Liberti:]

Yes. I'll start that and then Kevin can probably comment a little bit more. As we're looking right now Sand Hills pipeline, the expansion for 365 will be done by the end of this quarter completed. And we're in the process of moving that to 450,000 barrels a day that will be completed by the end of the year. Then we've talked about -- DCP has talked about possibly looking at further expansion for another 100,000 barrels a day to 550 with that. The Lake Charles project will be going on this year and into next year into 2019. So we've got the expansion there. We've got a number of smaller little projects on the current assets that we currently have but a lot of those will add up. Bayou Bridge will be done again in the second half of the year. So that's a rather large project. We're looking at a couple of things that are kind of more extensions of the current assets that we have and those things could come to fruition both in this year and through next year.

[Kevin Mitchell:]

Yes. And I would just supplement that with a sort of perspective from a sponsor level. You look at what's out there already, but not in the MLP. So you've got the Beaumont terminal which PSX is continuing to invest in. And of course integrates with the Bakken Pipeline and also the Bayou Bridge pipeline. You've got some additional transportation assets that still sit at the PSX level as well as some refinery logistics assets that potentially could be destined for the MLP at some point. Tom talked about the sort of NGL expansion which again from a sponsor standpoint could tie into future expansion than at the Sweeny hub both from a frac capacity standpoint. Beyond that I'd say you're looking at infrastructure opportunities in and around our existing assets that leverage those assets and provide the sort of double-whammy benefit to enhance the underlying say refining assets if that's where we're connected and also provide good midstream opportunities along with that.

[Kristina Kazarian:]

Great. And my follow-on for you guys is, one of your peers did a transaction in the market yesterday, I know we've talked about not needing to do a drop this year and only selected equity issuance but in the context of that maybe how does that impact your thought process?

[Kevin Mitchell:]

Well, I think it just reinforces the position that we've taken and where we sit. We are in very good stead for our 2018 targets. Some good organic projects underway that will come online in 2018 and we haven't said anything specific about whether we will or will not have a drop this year. But when you look at the investment that would be required to get to our $1.1 billion target, it's pretty nominal needs externally when you look at the ongoing cash generation, the cash balance on hand, the fact that we've got a really strong balance sheet. We're at the low end of the range on our debt metrics. And so to the extent we do need a little bit of equity we can easily take care of that on the ATM program. So you shouldn't see us coming out with anything like the transaction you're referring to.

[Tom Liberti:]

Yes. We said last quarter the financing that we did last quarter that transaction really put us in good shape for 2018 to see through all of our targets.

[Kristina Kazarian:]

Perfect. That's very good to hear. Thank you guys.

[Kevin Mitchell:]

Thanks.

[Tom Liberti:]

Thanks.

[Operator:]

Selman Akyol from Stifel, please go ahead. Your line is open.

[Unidentified Analyst:]

Hi, this is Tim on for Selman. Thanks for taking her question. Just one quick one, how will teardowns impact PSXP in 1Q?

[Tom Liberti:]

Well, we always talk about our refinery maintenance and that's really a PSXP issue. We don't issue anything, any direct numbers on that. But remember we have minimum volumes on all of our assets. And so those minimum volume commitments are really there to smooth out turnaround activity, maintenance activity from basically the refining system. So you don't really see a big effect when we have those.

[Unidentified Analyst:]

Got it. Thanks.

[Operator:]

Tom Abrams from Morgan Stanley, please go ahead. Your line is open.

[Tom Abrams:]

Thanks. I just wanted to follow up on a couple of things first on Jeremy's question regard to gathering and processing assets. If someday in the future -- distant future perhaps you're offered Eagle Ford, DJ, Permian and SCOOP/STACK gathering and processing. Would that kind of categorically not be of interest to you -- as if likely contract structure?

[Kevin Mitchell:]

So that would certainly be a significant deviation from the path that we've been down to-date with PSXP and all of our state of intentions. I never want -- you never want to say never on anything. But as we step back and again I'll kind of put my PSX hat on, as we look at this, we've got PSXP that is in that midstream infrastructure transportation pipelines, terminals all of those kind of assets. And then, you've got DCP with all the G&P business and so that's really how we think about it is in terms of G&P exposure is through DCP, and then, the more traditional midstream infrastructure transportation terminaling assets are at PSXP.

[Tom Abrams:]

Just wanted to confirm the other thing I wanted to ask about was the -- it seems like you're going to a year ahead guidance type model. So as we think about 19 and 20 and try to model it, it sounds like we could put on a little bit more debt. It sounds like your coverage is about where you want it. Are there any other parameters around corridors if you will that we should be thinking about triangulating your future?

[Tom Liberti:]

No. I don't think there's anything from a quarter standpoint. I mean I think it's safe to say that first preference would be where we have current assets where there's some synergy in the assets that we operate now. So I think we are short of that stepping out would have to be something very attractive for us to be someplace where we will or will not. But if that asset would be extremely attractive and accretive for the MLP, we would look at it obviously.

[Tom Abrams:]

Sorry, I misspoke. The absent acquisitions, what the financial parameters are or the coverage for instance 1.1 to 1.3 is kind of where you would like or be comfortable or balance sheet between 3.2 and 3.8 or where you'd be comfortable, those kinds of corridors parameters that you'd like to operate in over the future?

[Kevin Mitchell:]

Yes. Okay, okay. I mean so you've gone through a couple of them and we say that leverage around about 3.5 and acknowledge that it can be both above that and below that depending on the timing of acquisitions and how those transactions are funded. So 3.5x on a leverage basis coverage. We historically have said 1.1x is the market is kind of pushing that up the expectations are going higher and we would respond accordingly on that. And we haven't given any specific guidance on distribution growth beyond 2018 other than say we still have a strong growth pipeline. So we expect to be sort of top tier or top quartile on distribution growth.

[Tom Abrams:]

Thanks a lot.

[Operator:]

Corey Goldman from Jefferies, please go ahead. Your line is open.

[Corey Goldman:]

Just a follow-up on Justin's question earlier about the new EBITDA methodology. Sorry, if I miss heard it in the beginning of the prepared remarks that is apples to apples. And now you are considering the $1.1 billion target now?

[Kevin Mitchell:]

That's correct.

[Corey Goldman:]

Okay. Just purely out of curiosity what was the motivation for that change?

[Kevin Mitchell:]

So when we did the drop in the fourth quarter the Bakken pipeline and MSLP all the metrics that we showed with that we really needed to talk about that on a look through basis to make the overall transaction make sense in terms of the asset value, the transaction value, the EBITDA multiple. We needed to talk to that on a look through basis. And so we decided to -- the easiest thing to do, the most straightforward thing would be to carry that forward through with the way we report the MLP. It's also consistent with the way the parent company reports EBITDA at a total PSX level and by segment level. We look through in part because there are significant joint ventures as you probably know within the overall parent and so that is the methodology we're typically using internally when we're looking at EBITDA.

[Corey Goldman:]

Got you. Okay. And then, sorry just if you can remind us, how much off balance sheet that is there on PSXP, is it just apple or Bakken?

[Tom Liberti:]

Explore is, carbon explore has outside debt.

[Corey Goldman:]

Got you. Okay. All right. And so maybe again I apologize if you spoke to this, but if we just look at what you run rate now in 4Q. It is about a little over $1 billion or so and just given the growth projects we do have coming on stream in 2018. You don't necessarily need a dropdown this year, do you?

[Tom Liberti:]

We don't give guidance on anything that on any of the drops that we have. But obviously, when you look at the current run rate and you take on some of the organic projects we're getting closer and closer to our $1.1 billion EBITDA target.

[Corey Goldman:]

Okay. And like PSX's target for -- a bunch of the number I think, 18 for the full slate. Is it the year-end target also for PSXP or is that a full year we should think that $1.1 billion?

[Kevin Mitchell:]

It's a year-end run rate.

[Corey Goldman:]

Got you. Okay. Perfect. I appreciate the help guys. Thanks.

[Operator:]

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

[Jeff Dietert:]

Thank you, Julie. Appreciate your interest in Philips 66 Partners. Please call Rosy or me if you need any follow up. Thank you.

[Operator:]

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