Phillips 66 Partners LP
Q3 2016 Earnings Call Transcript

Published: 29 Oct 2016

[Operator:]

Welcome to the Third Quarter 2016 Phillips 66 Partners Earnings Conference Call. My name is Julie and I will be your operator for today’s call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Rosy Zuklic, General Manager, Investor Relations. Rosy, you may begin.

[Rosy Zuklic:]

Thank you, Julie. Good afternoon, and welcome to the Phillips 66 Partners’ third quarter earnings conference call. With me today are 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 question-and-answer session. Actual results may differ materially from what we present today and factors that could cause actual results to differ are included here as well as in our filings with the SEC. With that, I’ll turn the call over to Tim Taylor for some opening remarks. Tim?

[Tim Taylor:]

Thank you, Rosy, and good afternoon everyone. PSXP earned $83.1 million in the third quarter, up 23% from the second quarter. We continued to execute our organic growth projects and take advantage of third party acquisition opportunities. In addition, after the quarter closed we completed a $1.3 billion acquisition from Phillips 66, our largest to date. These activities support our strong distribution growth. Our board of directors recently approved a third quarter distribution of 53.1 cents per unit, a 5% increase over the second quarter. Distribution coverage this quarter was 1.24 times. Since our 2013 IPO, we have increased distributions in 12 consecutive quarters at a compound annual growth rate of 36%. We remain on track to achieve our goal of a 30% CAGR from fourth quarter 2013 through 2018. We have raised over $2 billion in the debt and equity capital markets this year in support of our growth activities. Turning to Slide 4. We continue to execute our growth plans through dropdowns, organic projects and third-party acquisitions. In August, we formed the STACK JV with Plains. The JV owns a pipeline in Oklahoma that transports crude from the STACK plate at Cushing, where it connects to our newly acquired [Cushpo] [ph] pipeline to supply crude to the Phillips 66 Ponca City refinery. As part of the JV formation, Plains contributed storage and pipeline assets while we contributed $50 million. Also in August, we acquired an additional 2.5% equity interest in explorer pipeline, increasing our ownership to approximately 22%. We are progressing due diligence on the announced acquisition of an NGL logistics system in Southeast Louisiana. We expect this transaction to close in the fourth quarter. Development continues on the second leg of the Bayou Bridge Pipeline from Lake Charles to St. James, Louisiana, with commercial operations for this segment expected to begin in the second half of 2017. We own a 40% interest in the project. In the Bakken, the Sacagawea Pipeline is mechanically complete. The project is waiting a final permit approval and is expect to be in service in November. Once in operation, the pipeline will feed the recently completed Palermo Rail Terminal, which is currently receiving crude by truck to load railcars. Earlier this month, we acquired crude, refined product and NGL logistics assets from Phillips 66 for $1.3 billion, reflecting an 8.7 times multiple of forecasted EBITDA. We have funded the transaction with $1.1 billion in cash, raised in a long-term senior notes offering and $196 million in take back units to Phillips 66. The transaction is expected to be accretive and increases the partnership's run rate EBITDA to approximately $580 million per year. 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. Total pipeline throughput for the quarter excluding volumes from equity affiliates was 876,000 barrels per day, down slightly from the second quarter. Crude volumes were lower on Clifton Ridge due to low utilization at Phillips 66's Lake Charles refinery. Refined product volumes were higher than the prior quarter primarily due to a full quarter's ownership of the Standish Pipeline and higher volumes through the Hartford Connector. This was partially offset by lower volumes on the Gold Line. Total terminal throughput was just under 1 million barrels per day, slightly lower than in the second quarter. The decrease was mostly due to lower volumes at Pasadena and Clifton Ridge, which was impacted by scheduled tank maintenance. Average pipeline revenue decreased $0.02 per barrel in the third quarter to $0.46, as a result of asset mix and a reduction in the pipeline tariff escalator. Average terminal revenue increased by $0.01 per barrel to $0.39. Both of these rates exclude equity affiliates. Slide 6 shows the change in adjusted EBITDA from the previous quarter. These amounts excluding predecessor results. Third quarter adjusted EBITDA was $110.9 million, up $13.6 million from the second quarter. The majority of the increase was attributable to the partnership owning 100% of the Sweeny Fractionator and Clemens Caverns for the full quarter. We also has increased cash distributions from the Sand Hills, Southern Hills and Bayou Bridge pipelines in the third quarter. Adjusted EBITDA from other assets decreased slightly this quarter with lower earnings on the Gold Line, Sweeney to Pasadena Pipeline and Clifton Ridge, due to low utilization at Phillips 66 refineries. This was partially offset by increased earnings at Hartford. We continue to deliver strong growth as we progress towards our goal of $1.1 billion of run rate EBITDA by 2018. Over the last year adjusted EBITDA has increased by over 50%. Slide 7 walks through the DCF calculation. Adjusted EBITDA for the third quarter was $110.9 million and distributable cash flow was $101.9 million. During the quarter we had deferred revenue impacts related to several assets, including the Eagle Ford crude gathering system and the expansion of the Clemens Storage Caverns which increased distributable cash flow by $4.3 million. Net interest expense was $9.9 million and maintenance capital expenditures were $3.4 million. In future quarters we expect our maintenance expense to increase to a more typical midstream percentage of EBITDA after the recent acquisition of mature pipeline and terminal assets from Phillips 66. Total cash distributions of $82.5 million will result in a distribution coverage ratio of 1.24 times. The recently approved third quarter cash distribution of 53.1 cents per limited partner unit will be payable on November 14. Slide 8 shows our financial position at the end of the third quarter. We ended the quarter with $19 million of cash and $50 million of outstanding borrowings under our revolving credit facility. After the close of the quarter, the capacity of our revolving credit facility was increased from $500 million to $750 million. Our debt to EBITDA ratio at the end of the quarter was 2.5 times on a revolve covenant basis. Recently we issued $1.1 billion in senior notes to fund our $1.3 billion acquisition from our sponsor. After this acquisition we estimate our debt to EBITDA ratio to be 3.9 times. Long term we expect leverage to be at our target level of 3.5 times. During the third quarter we issued 6 million common units in a public offering, generating net proceeds of approximately $300 million. The proceeds from this offering we used to pay off an outstanding sponsor loan, fund the purchase of interests in the STACK JV and Explorer Pipeline and fund organic projects. This concludes our prepared remarks. We will now open the line for questions.

[Operator:]

[Operator Instructions] Jeremy Tonet from JPMorgan is online with a question. Your line is open.

[Jeremy Tonet:]

There was some conversation in the MLP markets recently with concern over a recent IRS ruling and how that could impact dropdown storage. I am just wondering if this is something that you guys had seen kind of coming in advance. If this does have kind of any impact on how your plans are going forward or any other color you could provide there would be great.

[Kevin Mitchell:]

Hi, Jeremy. It's Kevin. So just to one part of that question, did not have much advance notice on this. We first heard about it probably a couple of weeks before it actually came out and there was a lot of uncertainty at that time. So not something we have had a lot of advance notice on. So we are continuing to kind of work our way through that but based on what we see to date, don’t really expect this to have a major impact on plans from a dropdown standpoint. I mean obviously talking really from a PSX position here because the impact on -- there is no impact on the MLP as such other than what it means to potential dropdown. Now what I would also do is just remind you that PSXP is and continues to more than just a dropdown story. So certainly there are legacy assets that we sponsor and that's some of what we have just done in the most recent transaction but we have got organic capital at the MLP. We have done some acquisitions related transactions at the MLP and we are also, as the sponsor level, investing in some pretty large new projects which, while that doesn’t eliminate tax exposure, it's significantly less so than when you have got the fully depreciated older assets.

[Tim Taylor:]

Jeremy, it's Tim. I just think I would wrap it up by saying, we are still committed to our distribution targets and our growth and I just feel part of that, it may have an impact on some of that but we don’t see it as something that changes our strategy about how we approach growth around the MLP and how we utilize the pool of assets we have, that the sponsor has, to perhaps grow that faster or keep up with that pace.

[Jeremy Tonet:]

Okay. Great. Thanks for that. And just wondering, you guys have had ample access to the capital markets his year. But it appears overall that the private capital market is much more robust in the public and we have seen some other MLPs take advantage of that in kind of some attractive financing. Just wondering about your appetite to explore some of those potential avenues given that there seems to be so much private capital on the sidelines here.

[Tim Taylor:]

Just, Jeremy, just high level and Kevin can follow up but, frankly, we just have to look at the relative cost to each of those and we always want to go with the best financing for the partnership and I think that’s where I would leave that. And so we have been happy with the access that we have had and the way we have gone to market.

[Kevin Mitchell:]

No, I would agree. I think that’s right. It's all about ultimately cost to capital and we have been very pleased with what we have been able to do date.

[Jeremy Tonet:]

Great. Thanks. And then just on expanding the platform going forward. You guys have gathering and a lot of different basins out there, crude oil gathering. The Permian is in a place where PSXP is too active these days. It seems like there is a lot of activity out there. Just wondering your appetite to kind of expand in that direction.

[Bob Herman:]

Yes. So, Jeremy, it's Bob. I think your statement is absolutely correct. Permian is kind of place to play and we have got kind of a limited set of assets out there now. So it is an area of interest to us. And as we pivot towards maybe smaller, quicker capital projects, both at the PSX and the PSXP level in the midstream, I think that’s an area of great interest for us to expand our footprint, expand our gathering systems. Those things are kind of in the wheelhouse for us of crude product storage, transport, NGLs, all of that. So, yes, it's lot of interest to us to play out in the Permian.

[Jeremy Tonet:]

Thanks so much. And then just one last one, if I could. With the Sacagawea Pipeline, and apologies if I mispronounce that. Just wondering if you could provide any additional color there as far as visibility you have in getting the permit. It seems like building pipelines is a much more difficult proposition these days, even work with the army core there. Just wondering what you are seeing there gives you comfort in just kind of building pipelines in general. Have you kind of changed your philosophy or process at all given the increasing difficulties of the regulatory and environmental concern.

[Tim Taylor:]

So maybe I will answer the first part of that first. On Sacagawea itself, and you got the pronunciation right, not many people do. So that pipeline in built, it's in the ground. So the permits have all been issued and the core of engineers permit that we got had several permit conditions as they always do for how you build it and hold points and all that. So we are actually working through the final administrative point around response plans and stuff for the pipeline operation, that we are helping our partner move through the core. And we actually would expect that final permit condition to be signed off in the very near future and we will start line fill. We have staged barrels now in Keene in tanks, us and other shippers, and we are ready to start putting oil in that pipe. So it's a very different situation than maybe Dakota Access and that sort of thing. But to just come back to you, the second half of that question. And I would say that what we have seen from the core of engineers and from FEMSA, is they are taking their time in being very diligent about pipeline reviews, pipeline permit condition reviews, like the one we are going through right now. And really doing themselves and us a favor by dotting every I and cross every T before the paper is issued. So it may take us a little bit longer upfront. It doesn’t really -- it's kind of airtight when the permit comes to us. And so we will be ready to go. Overall, yes, I think we and others would say that permitting pipelines, particularly interstate pipelines is going to take longer in the future because the permitting process is going to slowdown and I think you have to plan for more opposition to infrastructure projects, whether they be pipelines or power lines or anything else. Everything seems to gather a lot of attention today. Well, we don’t have any of those kind of big projects coming on the books right now. In the future there is no doubt we would end up building into the timeline a longer permitting period than maybe we have in the past. So I think it makes what we have in the ground more valuable as we go forward. Like anything else, supply and demand and as you dry up the ability to supply more infrastructure, you will see us pivot towards using what we have got to a greater degree.

[Operator:]

Kristina Kazarian from Deutsche Bank is online with a question. Your line is open

[Kristina Kazarian:]

So quick question. I don’t think this was in the release but I do think you alluded it to it in your prepared comments. Can you guys just talk about the recent acquisition CBX's South Louisiana NGL assets? It sounds like you said you are doing diligence on them now. So just an update in terms of what that means and if there is upside beyond original forecasted EBITDA and how you just generally think about that?

[Tim Taylor:]

So, Kristina, that's an NGL system that we are buying in South Louisiana. I would say we are entering -- we are nearing the end of the due diligence period on that with Chevron. We have worked our way through all the issues like you would have on any asset and we are nearing the point where we will be able to close. So really in the final phases of that. That's a system we look forward to owning. As you know, we have got a refinery over there that's attached to that system. It's a market we have been trading in for a long time and I think like any asset that you purchase, you usually are buying it for what you think you can do with it in the future versus what it will do today. So we think we have got upside to that system and we look forward to taking over operation here in the fourth quarter and starting to build out on those plans.

[Kristina Kazarian:]

Is there...

[Rosy Zuklic:]

I was going to say, Kristina from an EBITDA perspective, I think the estimate of 25 which was in the release is still a good estimate.

[Tim Taylor:]

Yes, we would agree with that.

[Kristina Kazarian:]

Okay, perfect. And then maybe can you talk a little bit about the STACK JV, Pipeline JV that you entered into with Plains back in August? Maybe what you guys are thinking you can do cash flow wise off of this synergy opportunities, maybe around your PSX's refinery. Just any color there would be great?

[Tim Taylor:]

Yes. I don't think we have actually given the expected EBITDA for that particular system. But if you look at -- we talked about the Permian in the last set of questions. Probably the next place we would like to play is the STACK-SCOOP. We see a lot of growth from the production side to come there with our Ponca City Refinery just sitting up the road from it, there is an obvious synergy there. As a crude buyer, we as a company like to be able to buy at the wellhead and ship that flavor of crude all the way into the refinery. We think there is great growth potential in the STACK SCOOP and I think you even saw us in the original release talk about expansion opportunities as soon as next year. And in fact that will play into our capital plans to be able to expand that part of the system between the fields and into Cushing where you've got great connectivity to not only our refinery but a lot of other people's.

[Bob Herman:]

And, Kristina, to add a little bit more color. We are building a truck ramp with Plains down there at Cashion and that'll connect in and then those barrels in Cushing flowed nicely into the [Cuspo] [ph] Pipeline that we recently purchased in this October, dropdown acquisition of PSXP. And that line goes from Cushing into Ponca City Refinery.

[Kristina Kazarian:]

Perfect and then last one for me. With this most recent larger drop, PSXP is really starting to get up there in terms of scale. How do I think in terms of timeframe to start in and move some of the larger scale organic growth projects down to the PSXP level and have them funded there more on a go-forward basis and moving it more of their organic growth story you guys were talking about earlier?

[Tim Taylor:]

Yes, Kristina, it's Tim. We're going to continue to progress that. This year the budget is roughly in that $300 million range or so with PSXP. We just want to see that continue to grow. I think as you get a longer period or carry period for construction that's still more difficult. But certainly you have seen our willingness to say, these projects that have slower cycle times and stuff, we'll do more and more of that. So over time we should, if we look out and think about our growth and what we have, we want to do more and more of that at the PSXP level.

[Tom Liberti:]

This is Tom. I was just going to say, if you add in the acquisitions too into what we would call CapEx budget and things, we will be closer to $0.5 billion this year.

[Operator:]

Justin Jenkins from Raymond James is online with a question. Your line is open.

[Justin Jenkins:]

I guess I will follow up to some of the earlier questions from a high level growth perspective. Clearly, the financial guidance figures haven't changed and PSXP is important to the overall Phillips 66 family and access to capital has definitely been there, but I am sure you are as frustrated as anybody with the unit price performance. Do you think that's just cyclical market appetite or could that lead to a modest shift in overall strategy if that continues?

[Tim Taylor:]

No. I think we just look at this and say the MLP between value creation between the LP, the GP, PSX, PSXP, is still a very strong performance. And so we still see today unlocking a lot of value and then we have the need behind that and the opportunity to grow, to expand the business. So all those things work to say, this is still a great vehicle that with our sponsor to support growth, there is a need there and I think that we still look at as very viable.

[Justin Jenkins:]

Yes, I agree with you there. And then I guess follow up with maybe more of an operational question. It looks like crude oil pipeline volumes are down quite a bit sequentially on the system and, Kevin, you had mentioned this in your remarks. But I am guessing that's mostly just refining, maintenance related, but is there anything else we maybe should be thinking about there from a sequential perspective?

[Tim Taylor:]

No. I think quarter-to-quarter you've got it right. And not even so much refinement, if you look at our sponsor's refining system, they ran flat out in the second quarter and ran really, really well in the third quarter. But utilization was about three points lower overall across the system and so a lot of that translates right into that crude oil number.

[Tom Liberti:]

Justin, that crude oil number, that is basically Clifton Ridge for the Lake Charles Refinery and the Eagle Ford gathering. So actually with the recent dropdown we will add more crude lines in so that number will be larger.

[Operator:]

Brian Zarahn from Mizuho is online with a question. Your line is open.

[Brian Zarahn:]

I guess following up on some of the prior questions. On the IRS ruling, you mentioned no major impact. How should we think about potential impacts to the dropdown inventories? Any changes on what you think could be included and also with the change of equity appetite for the parent on the financing side?

[Kevin Mitchell:]

Brian, it's Kevin. At a high level I don't think any of that changes. We have a large inventory between the assets that exist today and the projects we have under construction. We have a large inventory. There are a lot of options. Every time we do a transaction we are looking at optimizing around take back units, debt at the MLP and equity issuance at the MLP. So we are always kind of optimizing across all of that anyway. So I really don't think it changes the forward look on this.

[Brian Zarahn:]

And then on the LPG export facility. Any update on the contracted capacity, are those negotiations still ongoing?

[Tim Taylor:]

Yes. Well, first of all that's a PSX asset, so we will just maybe comment from a PSX perspective on that.

[Bob Herman:]

Yes, Thanks, Tim. So maybe I'll just back up a little bit from that. The LPG export facility really is mechanically complete and we are in the commissioning phase now and we expect to start loading some of the first boats here before the end of the year and to really kind of wrap up in the commercial operations in the first half of next year. So as we said today, we've got four cargoes a month contracted on a term basis. We've got the two cargoes at PSX commercial has always been committed to. So that's six to the eight. That really leaves us with two then to work on the spot market or maybe shorter term tender type market. And we are pretty comfortable going into next year at those levels, particularly in the current market environment with more narrow [arbs] [ph]. Signing up long-term commitments today isn't maybe something that we'd want to do. So we have seen good interest in spot cargo so far and people really are just waiting for us to get it started up and being able to pull up to our dock. So, as you know, we've got a global commercial organization. We trade LPGs, not only in the U.S. but we trade them out of London and Singapore. So we feel pretty good about where we sit today, Brian.

[Brian Zarahn:]

Appreciate the update. Last one for me. You still have been one of the few MLPs able to access the capital markets and the currency hasn’t probably gone the way you wanted this year. It's still accretive dropdowns. But as you get to your goal in 2018, are there initial thoughts around potentially changing the GP structure in relation to the LP's cost of equity capital?

[Bob Herman:]

Again, that's a PSX question. I would say from a -- we talked a bit about that on the PSX call. There is really nothing in the plans on that with what we see today.

[Operator:]

Selman Akyol from Stifel is online with a question. Your line is open.

[Selman Akyol:]

Just one question for me. Just thinking back in terms of ways to grow the partnership. I know you consider third party acquisitions, but can you remind me of your philosophy around that and how it relates to, should it always be contiguous to assets that you already have? Does it always have to be crude centric? Can you just kind of expand in and around on that?

[Tim Taylor:]

I think first of all, we like fee based assets, and right now in our fair way today, you look at PSXP, it's pipelines, it's terminals, docks, franctionation assets that lend themselves to that. So I think that's still the fair way that we like to think about, to the extent that it touches our system, we can build commercial value around the rest of our assets. At the PSX sponsor level that's a powerful combination of the relationships. But I think you saw with the potential, or the acquisition that we are working on in South Louisiana, that we are actually extending our reach to some new areas. So I think it's really just thinking about where do we have expertise, how do we keep that fee-based orientation and how could we expand that, either organically or through acquisitions, to give us that solid footprint. And there are things that we talk about that we could build out later and that's part of the growth potential and the value that we see. So we kind of look across the board when we look at that. But the final thing I would say is, in the middle of the country that's where it touches from the Canadian border down to the Gulf Coast, is strategically where kind of we are. Although there are some other interesting areas but that clearly fits given the extent of our infrastructure there.

[Kevin Mitchell:]

And just one other clarification. I think you mentioned crude pipelines and infrastructure and really we are across the crude oil refined products and NGLs. We've got infrastructure on all of those different product categories and we'd continue to grow across all areas potentially.

[Selman Akyol:]

Thank you on that. And then now as I think about the Permian and expanding there, would you see that as a place you would potentially be doing third party acquisitions or would you rather be growing that organically?

[Tim Taylor:]

I say we will take either/or. Right. If we can do a third party acquisition that brings us instant EBITDA and we can do it at an attractive price to the partnership, we will step out and do that. We have always said that we have really got a three legged stool on how we're going to grow and that is via dropdowns from our sponsor, third party acquisitions, via M&A and then the organic growth. And I think 2016 really demonstrates that we're going to use all three legs and use them often to stay on our pretty rapid growth trajectory.

[Operator:]

We have no further questions at this time. I'll now turn the call back over to Rosy Zuklic.

[Rosy Zuklic:]

Thank you, Julie, and thank you all for your interest in Phillips 66 Partners. If there are additional questions C.W. and I are available. Thank you.

[Operator:]

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