Phillips 66 Partners LP
Q4 2016 Earnings Call Transcript

Published: 4 Feb 2017

[Operator:]

Welcome to the Fourth Quarter 2016 Phillips 66 Partners Earnings Conference Call. My name is Sally 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 Rosy Zuklic, General Manager Investor Relation. Rosy, you may begin.

[Rosy Zuklic:]

Thank you, Sally. Good afternoon, and welcome to the Phillips 66 Partners fourth 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 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 if cause actual results to differ are included here as well as in our filing 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. Phillips 66 Partners had a strong fourth quarter. Adjusted earnings were $98 million up 18% from the third quarter and 53% from a year ago. Adjusted EBITDA was $161 million up 45% from the third quarter. This growth was fueled in large part by the October acquisition up logistics assets from Phillips 66. Our Board of Directors, recently approved a fourth quarter distribution a $55.08 per unit, a 5% increase over the third quarter. Distribution coverage this quarter was 1.48 times. Since our 2013 IPO, we've increased distributions for 13 consecutive quarters at a compound annual growth rate of 35%. We remain on track to achieve a 30% distribution compound annual growth rate from fourth quarter 2013 through 2018. Turning to Slide 4. 2016 was a very active year for us. We executed well on our organic growth projects and made three acquisitions from third parties. We also completed three acquisitions from Phillips 66 for combined $2.3 billion and raised over $2 billion in a debt and equity capital markets. During the fourth quarter, we acquired crude, refined products, and NGL logistics assets from Phillips 66 for $1.3 billion reflecting and 8.7 times multiple a forecasted 2017 EBITDA for these assets. We funded the transaction with $1.1 billion in cash raised from a debt offering and LP units issued to Phillips 66 valued at $196 million. The partnership acquired, the River Parish NGL System in November, River Parish includes a 300 mile bi-directional NGL pipeline system and storage cabins located in South East Louisiana. The system is connected to third party fractionators, a petrochemical plant and several refineries, including the Phillips 66 Alliance Refinery. 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 fourth quarter of 2017. We own a 40% interest in this joint venture project. In the Bakken, the joint venture Sacagawea Pipeline was placed into service in November. The pipeline connects Bakken crude production to our joint venture Palermo Rail Terminal. Phillips 66 Partners previously announced its 2017 organic capital budget a $437 million reflecting $381 million of growth capital and $56 million of maintenance capital. The growth capital will be directed towards completion of the Bayou Bridge project, expansion activities and the STACK JV continued expansion of the Sand Hills NGL pipeline and other organic opportunities. 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 significantly higher than the third quarter, mainly due to the October acquisition. Total pipeline throughput for the quarter, excluding volumes from equity affiliates was 1.8 million barrels per day up from 900,000 barrels per day in the third quarter. Total terminal throughput was 1.4 million barrels per day, up from 1 million barrels per day in the prior quarter. Most of the terminal volume increase was in the fine products. Average pipeline revenue increased $0.13 per barrel in the fourth quarter to $0.59. Average terminal revenue was slightly higher at $0.40 per barrel. Both of these rates exclude equity affiliates. The primary driver on the change in rates was the addition of assets acquired from Phillips 66 in October. Slide 6 shows the change in adjusted EBITDA from the previous quarter. Fourth quarter adjusted EBITDA was $161 million up $50 million from the third quarter. The majority of the increase was due to the assets acquired in the fourth quarter. Our existing asset base also performed well with increased EBITDA of approximately $6 million for the quarter. Slide 7 walks through the DCF calculation. Again, adjusted EBITDA for the fourth quarter was $161 million and distributable cash flow was $130 million. During the quarter we had differed revenue impacts related to several assets, including our Gold Line System, Eagle Ford crude gathering system and the Cross-Channel Connector. These impact increase distributable cash flow by $4 million. Net interest expense was $21 million and maintenance capital expenditures were $14 million. Total cash distributions of $88 million will result in a distribution coverage ratio of 1.48 times up from 1.24 times in the third quarter. The recently approved fourth quarter cash distribution of $55.08 per limited partner unit will be payable on February 13th. Slide 8 highlights the growth that we achieved in 2016. Our fourth quarter distribution represents a 22% increase over fourth quarter 2015. Adjusted EBITDA increased by 85% and distributable cash flow by 76% year-over-year. We continue to progress towards our goal of $1.1 billion of run-rate EBITDA by 2018. At year-end, run-rate EBITDA for the partnership was approximately $600 million. Slide 9 shows our financial position at the end of the fourth quarter. We ended the quarter with $2 million of cash and $210 million of outstanding borrowings under our revolving credit facility. Our debt to EBITDA ratio at the end of the quarter 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. [Operator Instructions] And your first question comes from the line of Kristina Kazarian with Deutsche Bank. Your line is open.

[Kristina Kazarian:]

Afternoon, guys.

[Tim Taylor:]

Hi, Kristina.

[Kevin Mitchell:]

Hi, Kris.

[Kristina Kazarian:]

So, on the PSX call, I think management quantified what the LPG export system could generate. And, just in the context of this being a potential PSXP asset, can you just help me, did I hear 230 million of potential EBITDA, is does that sound right and does that include the cavern, can you just help me understand the economics behind that and timeframe dash run rate?

[Bob Herman:]

Yes Kristina, this is Bob. I think you heard on the PSX call some quantification around those numbers and in the kind of the current market conditions we're kind of in the low end of those estimates and towards quite a bit of market, hopefully they'll recover between now and '18. When we look at that system down there and I think Greg alluded to this, right, we really look at it from the fractionator which is PSXP asset all the way through to the water through the LPG. And so, the caverns and the pipes and interconnecting a kind of all wrapped up and into that steady EBITDA that was kind of laid out earlier. So, I think for your purposes you can think we've given a fractionator EBITDA before the remainder kind of really goes with the assets that were just brought online.

[Kristina Kazarian:]

Perfect, that's helpful. And then it sounds like frac two might be bit more back on the formal consideration list for '17. Can you just help remind me, is this still planned to be done at the parent level, and each sounds it could be cheaper than frac one that it could be done at PSXP level and just thoughts around that?

[Tim Taylor:]

Again, this is from a PSX perspective. I'll shift gears in that. And so, it's a large, it could still be a large project, so I think you could conceivably do it either place, and so I think at the time we'd just have to decide what the capability but as we talked about the PSX call doing more organic projects at PSXP for mid-stream is where we'd like to go ultimately.

[Bob Herman:]

Yes. And certainly from PSXP standpoint, we stay on kind of our three legged stool right of organic growth, very attractive to the partnership. Sponsor dropped down projects and then third party M&A. Right, we'll continue to do kind of watch between all three of those to the greatest benefit for both us and our partnership.

[Kristina Kazarian:]

Alright, and then last one for me, it feels like we're seeing a simplification almost every other week or sometimes every week in the mid-stream space right now. Can you guys just give me your thoughts on PSXP level cost of capital and how you see the entrée evolving over the longer term?

[Tim Taylor:]

Yes. This is Tim, Kristina. I think specifically around equity, we'll talk about that, I think our debt is obviously very competitive and that has to be a component as we think longer term in the capital structure. In the equity side, we've a very attractive cost of capital day, even considering the IVR structure, so we're pretty early. And I think that as long as a very competitive we can do successfully compete for projects and develop accretive organic projects, it's good for the GP and the LP. I think we're going to continue down that path. So, it's something we can always address if we need to but the real key for us is making sure that we have the best cost of capital possible in the equity side.

[Kristina Kazarian:]

Perfect. Thanks for the update today, guys.

[Tim Taylor:]

Yes.

[Operator:]

Your next question comes from the line of Jeremy Tonet with JP Morgan. Your line is open.

[Jeremy Tonet:]

Good afternoon.

[Tim Taylor:]

Hi, Tonet.

[Bob Herman:]

Hi, Jeremy.

[Jeremy Tonet:]

I just want a follow-up on the quarter a little bit. And we'll talk the equity and earnings and affiliates, step down a bit quarter-over-quarter. I was wondering if you could provide a little bit more detail, I think you touched on a bit as far as what some of the drivers were there and where you expect that kind of trend in the coming year?

[Tom Liberti:]

Yes, Jeremy, it's Tom. Most of that reduction was in the Sand Hills and a little bit in Southern Hills and that was mostly December. I got to remember from an equity earning standpoint, we get all of the quarters of December gets included in the fourth quarter. It comes back a little bit on the EBITDA side because we get cash on a one month lag. So, we got cash from September, October, November, for those equity assets. But we got actually the earnings from October through December and December is typically a down month. We would expect still on the first quarter, we might be down a little bit from Sand Hills but we would expect that volume to ramp on the NGL side throughout the year.

[Jeremy Tonet:]

Got you. So, that explains the delta between the distributions and equity earnings there as far as that lag goes.

[Tom Liberti:]

That's correct.

[Jeremy Tonet:]

Great. And then when you're thinking about equity needs for the upcoming year, you've seen some of your drop down peers use other forms of equity such as differed equity issuance in common equity issuance in doing it in the size combined with kind of put them out of the equity markets for some time. I'm just wondering if you could provide any thought to us as far as how you approach getting the equity component for your funding needs this year.

[Kevin Mitchell:]

Yes Jeremy, this is Kevin. I mean, so we've still got a lot of growth ahead of us. The growth has to be funded. We got access to that and we'll be doing equity, in the former third party equity and to some extent take back equity. As we look at that we will look at different alternatives around potential ways of accessing the equity markets but to-date we've been able to adequately fund what we needed to fund just through the sort of conventional equity issuances, which doesn't mean to say that's exactly what we are going to do again going forward but we'll continue to look at the alternatives. So, not really any specific guidance on how we approach that. We certainly look at the different structures that are right there and give back consideration and evaluation as we look at the funding needs.

[Jeremy Tonet:]

That makes sense. And then, I was just wondering as far as the inventory of EBITDA upstairs, if you could just give us an update there where that sits in, what the buckets are as far as what's on stream now and kind of what our growth projects that will bring EBITDA in the future?

[Kevin Mitchell:]

Yes. I think if you looked at where we were on PSX's last update from the sponsors view right about a $1 billion of EBITDA out there between the two. We've now got, we'll we got about 600 million of that down below and then we got our growth projects beyond that are in flight. So, we've got as we talked about we have just finished the LPG terminal. We are very confident in that the DAPL Pipeline that cut pipeline system what we completed and up and running in the first part of this year. We've got Bayou Bridge at the PSXP level being extended and started up in the fourth quarter of this year. So, you got a pretty good chunk of EBITDA coming on in the not too just in future between PSX and PSXP. We just talked a minute ago about abiding another fractionator at some point in time. So, we got a fair amount in that kind of backlog bucket and then we've got our existing organic projects that we're spending those are usually done at a fairly attractive multiple debt or a capital to EBITDA multiple so the spend this year. So, we'll continue to grow that. We are always on the lookout for an accretive third party asset that fits into our system and either enhances our the liquid side of our business or the NGL part of our business. River Parish in the fourth quarter is probably a great example of the system that give us an anchor point now in Louisiana for NGLs and LPGs and so you'll continue to see as I think add to that that backlog if you want to look at it that way.

[Jeremy Tonet:]

And was that with that acquisition you just spoke of kind of one off or do you see more many more opportunities like that and how would you describe the bid ask spread in the market now. Do you think things are approaching areas where it makes it easier for you to transact?

[Kevin Mitchell:]

I think I'd probably characterize that. It's never easy on the bid ask, right, everybody is part of their assets but you're seeing more transactions getting done. So, I think that's a pretty healthy sign that the market is equilibrating around values that can get done by either Seacor's or NLPs. We'll obviously got a competitive cost of capital, so we're able to do that. You will see us continue to play in areas where we think we have a competitive advantage we already have strength. So, it's the M&A activity seems to be heating up if you just kind of look at the deal flow for the last couple of months out there and I think what the optimism with rig counts up and with the need to do more particularly in the Permian you will see people continuing to do transactions.

[Tim Taylor:]

Yes. I'd just like to add to that. I think in a macro level clearly the North American production environment is more encouraging that has been for couple of years, so I think opportunities is going to merge both organic as well as inorganic. And so, I think that's really where we want to focus is how do we find those new opportunities that build around our system that's been accomplished attrition for the LP and we think the opportunity sets is going to going to grow.

[Jeremy Tonet:]

That's all helpful. Thank you, very much.

[Operator:]

[Operator Instruction] You next question comes from the line of Brian Zarahn with Mizuho Securities. Your line is open.

[Brian Zarahn:]

Good afternoon.

[Kevin Mitchell:]

Hi, Brian.

[Bob Herman:]

Hi, Brian.

[Brian Zarahn:]

On the STACK, can you elaborate a bit on the growth opportunities you see from that joint venture?

[Tom Liberti:]

Yes Brian, it's Tom. We think there may be an opportunity as volume start to increase in that region to loop that line and that would be what we are looking at now we are doing some engineering work now. We will see where volumes keep going but we think there is going to be enough demand there that we loop that and then double the volume on that line.

[Brian Zarahn:]

And do you see any opportunities to diversify the product mix in the STACK as I'd accrue?

[Tom Liberti:]

Yes. If you look at that system is really kind of a dedicated system from truck station to well head by the in the Kuching and then allows our sponsors to pick that crude up in Kuching and take it to one of their refineries. So I think you will see that continue to be a dedicated crude gathering system.

[Bob Herman:]

Bit more broadly, I think that perhaps with the STACK there is opportunities in NGLs as well as that system that Tom said is that that deals develops but this particular joint venture is pre-purpose.

[Brian Zarahn:]

Understood. I was asking about NGL, the Chinese whether in inside or outside this joint venture.

[Bob Herman:]

Yes, okay.

[Brian Zarahn:]

And then on in the Bakken can you give us latest talks on your outlook for your assets for crude infrastructure and has anything changed over the past couple of months?

[Kevin Mitchell:]

Yes. I think if you step back and look at the Bakken in general, Tim just commented about the overall macro picture is looking better and I think that includes the Bakken also. We currently see production has been kind of flat in North Dakota over the last couple of months, differentials have started to widen out a little bit. Here that's nothing but good for our rail infrastructure and the ability to move crude East and West. There is probably some temporary disruptions in the market as we go into line fill period for DAPL here at some time in the first half of the year. But overall, I think we still see the drill bit turning again the Bakken production recovering over the period of 2017, 2018 and continuing to utilize our rail assets to go East and West.

[Tom Liberti:]

And Brian I would add in, I was just going to add in for the power mill terminal with Sacagawea Pipeline now finished, that makes economics a little bit better instead of trucking volume into power mill. You can use the pipe in so it helps the economics that way.

[Brian Zarahn:]

Okay. And then, just turning to your longer term outlook. You are getting closer to your end of 2018 guidance period. How do you think about the longer term growth outlook for PSXP, understanding it's getting larger entity, it will be 1.1 billion of EBITDA and easy make a way through the GP splits and how do you calibrate that looking at the opportunities for better back drop?

[Tom Liberti:]

I think clearly that $1.1 billion target is what we are focused and haven’t given guidance beyond that, I would say that we still see a lot of opportunity in midstream. So, you think about as PSXP now has factionary [indiscernible] in the future were doing smaller things that around the crude systems in the gathering in the various basin sites, I think [indiscernible] we are continue to develop those kinds opportunities and I think it’s still a growth there based on what we see happening in North America on the production side and then just looking at other opportunities that cut build around maybe our sponsors backbone to help improve the value of that system as well.

[Brian Zarahn:]

Thanks for the color.

[Tom Liberti:]

Welcome.

[Operator:]

Your next question comes from the line of Salman Akhel [ph] with Stifel. Your line is open.

[Unidentified Analyst:]

Thank you. Just one and just really kind of clarification for the PSX call. I think they reference industry wide turn around in the first quarter I was wondering how that might impact your volume? Should we see anything showing up there beyond just seasonality for you guys?

[Tom Liberti:]

Yes. Some of us come. I mean we have indicated a heavy turn around quarter in the first quarter and so that's going to have some effect. Now we are set some of that with minimum volume commitments that we have so kind of smooths out that a little bit but it will have some effect in the first quarter.

[Unidentified Analyst:]

Alright, thank you.

[Operator:]

Your next question comes from the line of Timm Schneider with Evercore ISI. Your line is open.

[Timm Schneider:]

Hey guys, thanks. Just I guess more in PSX territory but on the LPG side I know you guys I think its four cargo extra customers, four cargo is for yourself or for your marketing business. Are you utilizing those four for our own or for your marketing company fully at this point?

[Tom Liberti:]

Timm, just let me preface this. This is certainly a PSX question not a PSXP, so we will talk from the sponsor view point from that perspective.

[Tim Taylor:]

Yes. I would say that of the eight cargoes about six and half of those cargoes are now contracted out to third parties and about two and half are available for PSX to use this as part of their commercial LPG trading operations. So and that will move around kind of quarter-to-quarter a little bit because some of the contracted volumes are they are not exactly rate-able but we feel pretty good about where we are kind of the term basis with the cargoes down there.

[Timm Schneider:]

Okay got it and then as far as the end markets go I think the industry stuff has been the incremental demand driver was Asia but where also the cargoes going, do you have anything going to South America or Europe as well?

[Tim Taylor:]

Well I think we've always said our PSX is always said publicly to that -- we're interested in and actually have contracts in Europe, Mexico, Latin America and Asia. And so there's volumes flowing to all three. Some of that's a little seasonal depending but what the petchem use in Europe basically kind of the heating market in Latin America, Mexico and then mostly petchem in Asia. So, all three centers are showing demand.

[Timm Schneider:]

Okay, got it. That's it from me guys. Thank you.

[Kevin Mitchell:]

Thanks, Timm.

[Operator:]

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

[Rosy Zuklic:]

Thank you, Sally. And thank you for your interest in Phillips 66 Partners. If you have additional questions, please feel free to give CW or me a call.

[Operator:]

Thank you. This concludes today's conference call. You may now disconnect.