Phillips 66 Partners LP
Q3 2014 Earnings Call Transcript

Published: 29 Oct 2014

[Operator:]

Welcome to the Third Quarter 2014 Phillips 66 Earnings Conference Call. My name is Christine, 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 Kevin Mitchell, Vice President, Investor Relations. You may begin.

[Kevin Mitchell:]

Thank you, Christine. Good morning and welcome to Phillips 66 third quarter conference call. With me this morning are Chairman and CEO, Greg Garland, President, Tim Taylor EVP and Chief Financial Officer, Greg Maxwell; and EVP Clayton Reasor. The presentation material we’ll be using this morning can be found on the Investor Relations section of the Phillips 66 website, along with supplemental financial and operating information. Slide 2 contains our Safe Harbor Statement. It’s a reminder that we’ll be making forward-looking comments during the presentation and our question and answer session. Actual results may differ materially from today’s comments. Factors that could cause actual results to differ are included here on the second page as well as in our filings with the SEC. So that said, I’ll turn the call over to Greg Garland for some opening comments. Greg?

[Greg Garland:]

Thanks, Kevin. Good morning, everyone. Thanks for joining us today. Third quarter was a good quarter for us. Refining marketing we operated well, we are able to capitalize on the strong market environment. We executed on our scheduled turnarounds. We did those safely as you know that’s very important to us. Our Chemicals business despite downtime at the CPChem's Port Arthur facility, earnings were strong also reflecting favorable market conditions. We are delivering on our commitment to grow our Midstream business. On the picture in front of you, that’s the picture of the Sweeny Frac 1. It’s progressing nicely as its LPG export facility at Freeport. We look forward to giving you frequent updates on these important projects. We are also evaluating the opportunity for a second frac; we have a capacity of 110,000 barrels a day. We expect to reach a final investment decision mid-2015 it will be up and operational in mid-2017. We are continuing to build on our Midstream momentum. We have plans for 200,000 barrels a day crude and condensate line that will connect the Eagle Ford to our Sweeny refinery and our Freeport terminal. Pipeline will have the capability expand to over 400,000 barrels a day. We are also considering condensate processing options. Yesterday, we announced the formation of two joint ventures with Energy Transfer to develop the Dakota Access Pipeline and the Energy Transfer Crude Oil Pipeline or DAPL and ETCOP. We have a 25% interest in these JVs and our proportional share of the construction costs is approximately $1.2 billion. Possibly DAPL and ETCOP will have the capacity to move around 450,000 barrels a day of crude from North Dakota to market centers in the Midwest and the Gulf Coast. ETCOP will connect directly to our Beaumont Terminal that we recently acquired. We did closed on the Beaumont Terminal this quarter. We bought this asset for what it can be. It has a great footprint. It has a great location, great employees and in our view, tremendous value creation opportunity. So we are very excited about this asset. It currently has over 7 million barrels of storage capability. We see the opportunity to expand this to 12 million barrels. So I think you’ll see us move soon to storage expansion of this facility. Beaumont gives us deepwater access and the capability to export crude products of 600,000 barrels a day, that’s more than double our current capacity. We think this terminal integrates nicely with our Midstream growth plans. It provide our Louisiana refineries increased access to advantage crude. Last September, we said that by 2018, we expect to have assets capable of generating about $2.3 billion of EBITDA that can be dropped into our master limited partnership. This estimate did not includes EBITDA which we expect from the newly announced DAPL or ETCOP projects. We are confident that we continue to execute our Midstream strategy of growth, EBITDA of destine for master limited partnership PSXP will continue to expand as well. We will utilize Phillips 66 Partners as a source of funds to grow Midstream. Last week’s announced $340 million drop further demonstrates our commitment to PSXP and our desire to grow it. The rail-unloading facilities at our Bayway and Ferndale refineries and the cross channel connector pipeline are great assets. They tie into and they support our operations. Also with cross channel connector, PSXP will grow organically and we anticipate PSXP’s ability to continue to execute additional Midstream growth projects will increase. Integrating with our Midstream growth plans is our focus on enhancing Refining returns by accessing Advantage Crudes. We see crude by rail continuing delivering domestic crudes to the east and west coast. Our early 2015 will have 3700 rails cars dedicated to crude oil movement. We are constructing a rail-loading facility with up to 200,000 barrels a day of capacity in North Dakota. In August, our company began operations at its 75,000 barrels a day rail rack at the Bayway refinery and the 30,000 barrels a day rail rack and our Ferndale refinery is in the commissioning phase. This quarter, we improved our advantage crude capture to 95%. So we are working on a great portfolio of Midstream projects. Our Board recently approved the $1.2 billion additional capital for DAPL and ETCOP pipelines and we expect that this spin will occur over the next two years. This is in addition to our prior guidance around 2015 and we do not plan on slowing down our investments in NGL and LPG projects. We will provide you with an update of our 2015 capital program in December once we have reviewed it with our Board. As a management team, we remain focused on capital allocation; you should expect double-digit increases in dividends for the next couple of years. Our view is that our dividends are secure, they need to be growing and they need to be competitive. We have increased the dividend 28% this year. The $7 billion of share repurchases have been authorized by our Board; we’ve repurchased $4.4 billion. During the quarter, we repurchased 6 million shares and at quarter end, we had 554 million shares outstanding. We will continue to buy our shares as long as they trade below the intrinsic value. We believe doing so creates value for the shareholders of Phillips 66. And finally, I’d say we feel comfortable that we have the capacity to find an aggressive capital program and still maintain a strong approach to shareholder distributions. We are committed to sharing our success with the owners of our company. We have multiple sources of funds including cash from operations, our balance sheet, cash on hand, our master limited partnership. We are at the low end of our debt-to-cap ratio and that provided with other sources provides us with optionality and also the capacity to continue to grow and grow our distributions. So with that, I’ll turn it over to Greg to go through the quarter’s results.

[Greg Maxwell:]

Thanks, Greg. Good morning. Starting on Slide 4, adjusted earnings were $1.1 billion or $2.02 per share. We had two special items this quarter that impacted our Chemicals and our marketing and Specialties segments. In Chemicals, there were impairments of CPChem mainly related to the Specialties, Aromatics and Styrenics business and in Marketing we recognized a portion of the deferred gain from the sale of a power plant last year. Adjusting for these special items, the effective tax rate was 33% for the third quarter. Cash from operations excluding working capital for the quarter was $1.3 billion. We funded $1.5 billion in investments and we paid $771 million in shareholder distributions. Our net debt-to-capital ratio was 22% and after taking into consideration, our ending cash balance of $3.1 billion, our net debt-to-capital ratio was 12% at the end of the third quarter. And finally, our annualized adjusted year-to-date return on capital employed was 14%. Slide 5 compares third quarter adjusted earnings with the second quarter on a segment basis. Overall, third quarter adjusted earnings were up $277 million, mainly driven by higher results in Refining as well as in our marketing and Specialties segment. I’ll cover each of these segments in more detail as we move forward. Starting with Midstream. During the quarter we saw increased volumes across all of our business lines and in Transportation, we closed on the Beaumont Terminal acquisition. The annualized year-to-date return on capital employed for Midstream was 14% and this is based on an average capital employed of $4.1 billion. Slide 7 shows Midstream’s third quarter earnings of $115 million, up slightly from the $108 million last quarter. Transportation and DCP Midstream earnings were in line with the prior quarter. In transportation, higher volumes and throughput piece were more than offset by increased operating costs mainly due to higher maintenance activity. And at DCP the increased volume activity from the various projects that have come online was mostly offset by declining commodity prices. In our NGL business, we had gains on seasonal propane and butane storage as well as higher overall volumes on the Sand Hills and the Southern Hills pipelines. In Chemicals, CPChem’s Global Olefins and Polyolefins capacity utilization rate for the quarter was 83%. This reflects downtime at the Port Arthur facility resulting from the fire that impacted their ethylene furnaces early in the third quarter. SA&S had higher equity earnings this quarter coming off turnaround activity in the prior quarter. The annualized adjusted year-to-date return on capital employed for our Chemicals segment was 29% on an average employed of $4.4 billion. As shown on Slide 9, third quarter adjusted earnings for Chemicals were $299 million, down from last quarter’s record earnings of $324 million. In Olefins and Polyolefins, the decrease of $51 million is largely due to the CPChem’s Port Arthur ethylene cracker being down. Although Port Arthur represents approximately 11% of CPChem’s total O&P production capacity, the impacts from it being offline were lessened as CPChem was able to pull down inventory. In Specialties, Aromatics and Styrenics, the $25 million increase in earnings was primarily due to less turnaround activity during the third quarter. Moving on, Refining had a good quarter. We operated our refineries well and we safely work through several turnarounds. The annualized year-to-date return on capital employed for Refining was 12% on average capital employed of $13.5 billion. Moving on to the next slide. The Refining segment had earnings of $558 million; this is up over 40% from last quarter. Although market crack spreads were down in all regions except for Atlantic base and Europe region, we were able to benefit from higher realizations on clean products. We also benefited from our configuration as we produced more distillate than what is implied in the 321 market crack and distillate cracks improved this quarter. In addition, secondary product margins increased primarily due to the decline in crude prices. The Atlantic base in Europe and Central Corridor regions had the benefit of an improved feedstock advantage compared to last quarter. Whereas the Gulf Coast and the Western Pacific regions were impaired on feedstock advantage as well as by the build of inventory during the quarter. Refining and other was improved this quarter due to successfully capturing additional location arbitrage and product blending opportunities. This improvement also reflects gains associated with the timing of crude purchases. Let’s move to the next slide on market capture. Our worldwide realized margin was $10.89 per barrel compared to $9.66 per barrel last quarter with our market capture improving from 61% to 73%. Relative to the market crack of $14.85 per barrel, configuration which represents our clean product yield and also our secondary products were a negative impact on our realized margins partly offsetting this was the capture of crude advantage opportunities in feedstock as well as product differentials which represents the largest driver in the other bar. Compared to the second quarter, the largest movements were in the secondary products and the other categories as secondary product margins and product differentials improved. Moving next to Slide 13, this slide shows the comparison of advantage crude runs at our US refineries by quarter on the left and by year on the right. During the quarter, 95% of our US crude slate was advantaged and this compares with 93% last quarter. This represents a record quarter for us. The improvement was tied to increased crude runs at our alliance refinery after their second quarter turnaround and was also due to certain crudes becoming advantaged relative to Brent. Moving on to marketing and Specialties or M&S. M&S had a great quarter driven mainly by higher margins in marketing and in Specialties we closed on the spectrum acquisition and our lubricants business. The annualized adjusted year-to-date return on capital employed for M&S was 27% on an average capital employed of $2.8 billion. Capital employed in M&S increased this quarter mainly due to the Spectrum acquisition which was completed in July. Slide 15 provides some additional detail on our M&S segment. Earnings from M&S in the third quarter were $259 million representing a $97 million increase. The improvement in marketing’s earnings primarily reflects higher global marketing margins, due to the steady decrease in product costs during the quarter. We exported $129,000 barrels per day this quarter, down from last quarter’s exports of 181,000 barrels per day. This was primarily driven by domestic markets being more favorable for product placement. Specialties earnings were in line with the second quarter as increases in earnings from the Spectrum acquisition offset reductions in our Excel Paralubes JV business due to turnaround activity. Moving on to Corporate and Other, this segment includes net interest expense and includes corporate overhead cost, and it also includes technology and other costs and accruals that are not allocated to our operating segments. Corporate and Other after tax costs were $91 million for the third quarter and this compares with $121 million last quarter. The decrease was largely due to the effective tax rate as well as timing of contributions and lower environmental costs. And this brings us to the third quarter cash flow. Starting on the left, excluding working capital cash from operations was $1.3 billion. Working capital changes were a negative impact of $828 million largely due to builds in inventories. We expect this inventory build to reverse in the fourth quarter. We spent $700 million in capital for the Beaumont Terminal and the Spectrum acquisitions. We also funded $800 million of capital expenditures and investment mainly associated with NGL projects. And we made shareholder distributions of nearly $800 million this quarter in the form of dividends, and share repurchases. And we ended the quarter with a cash balance of $3.1 billion; this is down $1.9 billion from the beginning of the quarter. This concludes my discussion on the financial and operational results. Next I’ll cover a few outlook items. In Chemicals; CPChem continues to ramp up it’s 250,000 metric ton per year one hexene facility at Cedar Bayou which began operations in the second quarter. The global O&P utilization rate in the fourth quarter is expected to be in the low 80s as we anticipate CPChem’s Port Arthur facility to begin the process of restarting its Olefins units in November with some portions of the plant remaining down until year end. For the fourth quarter in refining, we expect the worldwide crude utilization rate to be in the mid-90s and pretax turnaround expense to be about $130 million. In Corporate and Other, we expect this segment’s after tax cost run about $110 million for the fourth quarter, and the overall effective income tax rate for the coming quarter is expected to be in the mid-30s. With that, we will now open the line for questions.

[Operator:]

Thank you. (Operator Instructions) And our first question is from Evan Calio of Morgan Stanley. Please go ahead.

[Evan Calio:]

Hey, good morning guys.

[Greg Garland:]

Good morning.

[Evan Calio:]

First question and maybe to a few questions around the same topic. I am trying to zeroing on the potential gains embedded in your organic Midstream program kind of built to drop. So, firstly on the drop down last week $340 million, what was the cost to build the rail terminals?

[Greg Maxwell:]

I don’t think we put out a number in terms of the rail terminals. I would say that, probably Midstream type multiples is kind of return we would expect out of those.

[Evan Calio:]

So, kind of a seven times to – building it seven and then you sold it around ten I thought.

[Greg Maxwell:]

Yes, sir.

[Evan Calio:]

And so, if I extend that thought into your $2.3 billion EBITDA that’s probably – as you’ve mentioned growing maybe 2.5 after the yesterday’s JV built to drop. I mean, is there, I mean, can you quantify – should we expect a similar relationship to that EBITDA or maybe more explicitly, how much of that infrastructure exists today versus what you are spending on to add, that makes sense?

[Greg Maxwell:]

Well, I think – it’s kind of 500 is what exists today in terms of the EBITDA. The balance is growth and I would say those are fairly typical type Midstream projects and returns are better than others than that. But, the other thing you need to be thinking about too is, we get the MLP at scale, it can co-invest and they can do some of these projects on and off. And so, I don’t know that I would necessarily think that our $2.3 billion of that ultimately would be built at PSX and initially drop into the MLPs. There will be some combination of that going forward in the future. But our challenge today is really to get the MLP to scale and have it a balance sheet so they can access the debt and equity markets.

[Evan Calio:]

Right, I just think it’s less appreciated if you did that one seven times at return difference of $5.4 billion recurring gain on that portfolio assuming it was all at the Phillips level. Let me switch gears if I could on a second question to Chemicals and trying to get some color on the margin compression on the ethylene side, Brent prices determined polyethylene price and maybe you could help determining the impact of the old move on your ethylene chain margins and longer term, if oil prices remain lower, do you think that risks investment for additional Gulf Coast ethylene capacity expansions in the US?

[Tim Taylor:]

Yes, Evan, this is Tim. So, roughly, I would say for every $10 movement in TI on just the cost basis versus ethylene today, you could think about $0.05 a pound compression on the margin on the cost side. Market factors impact that as well. But long-term, that’s kind of the structural difference. So it’s quite large today. We’ve anticipated that that would come in with ethane rising a bit more than crude. I think structurally we still feel that gas to crude ratio kind of stays in the ballpark. So, I think that, it has some compression, but I think we plan for some of that and we still fundamentally believe that crude will be relatively expensive to a gas-based feedstock.

[Evan Calio:]

Is there anything on the macro that you look for whether it be some stabilization that ethylene pound – cents per pound advantage before you would proceed to FID a second cracker? How do you think about the risk of the macro and making additional investments there?

[Tim Taylor:]

Yes, I mean, I think crude is got to fall substantially to takeaway that advantage. So you would look across that value chain, but today, where it is, there is still – I think incentive to do that. I probably – I think more about this in terms of availability of the feedstock, but we’ve always had a strategy at CPChem around ethane based cracking and that’s been a very good place to be. So we looked in the Middle East, looked in North America and I think fundamentally, we would say that crude would have to go quite a bit lower before we’d see that advantage dissipating and but that is a factor that we will think about in terms of additional investments wherever they are.

[Evan Calio:]

Great, I appreciate it guys. Thank you

[Operator:]

Thank you. Our next question is from Jeff A. Dietert of Simmons. Please go ahead.

[Jeff Dietert:]

Good morning.

[Greg Garland:]

Good morning, Jeff.

[Jeff Dietert:]

Following along on the Chemical sector and you provided some update on the Port Arthur partial restart in November full restart by the end of the year if I heard it correctly. I was wondering, if you could talk about the opportunity lost and facility being down in the third quarter, what would chemical earnings have looked like if it had been operating in the margin environment that was available?

[Greg Garland:]

Jeff, I think when we look at it, I like to think about it that we probably got about a five month outage when we think about Port Arthur. So that’s roughly in the range of say, 750, 800 million pounds of lost production and then you can put the margin on that. I think the third quarter was mitigated somewhat by coming out of inventories. So that will continue to be an impact over the next two quarters. But in macro, we just think about it in terms of the lost pounds and that’s kind of how I would think about that opportunity that you can put the margin assumption on there that you like, but that’s the best way to come up with that estimate.

[Jeff Dietert:]

Gotcha. And as far as 2014 capital budget, no changers to the $3.9 billion presented last quarter, I think the new projects are more 15 plus type investment, is that fair?

[Greg Garland:]

Yes, I think that’s fair. Our guidance is still around $3.9 billion for 2014.

[Jeff Dietert:]

All right. Thanks for your comments.

[Greg Garland:]

You bet. Appreciated.

[Operator:]

Thank you. Our next question is from Phil Gresh of JP Morgan. Please go ahead.

[Phil Gresh:]

Hey good morning.

[Greg Garland:]

Morning.

[Phil Gresh:]

First question, you talked about the working capital build in the quarter. I was wondering if you could talk about the impact that that had on the profit line particularly for Refining in the Gulf Coast, I think you called that out. Any quantification if you give there?

[Greg Maxwell:]

Phil, this is Greg Maxwell. I think as we look at it, we’ve got the large system. We trade around that and so we end up having both crude and product impact in our inventory builds that was the case in the third quarter. As far as regionally, we would expect that that to reverse it so, largely in the fourth quarter from an inventory working capital perspective. But other than that, we don’t have any real guidance down to the particular regions.

[Phil Gresh:]

Okay, then you would say as a particularly large drag on the Gulf Coast’s profits in the quarter?

[Greg Maxwell:]

That’s correct. We saw a negative or a positive in the second quarter and then a bit of a negative in the third quarter. So It’s sort of a double dip when you compare quarter versus quarter

[Phil Gresh:]

Got it, okay. With respect to balance sheet and the uses of cash, obviously, you have a lot of growth investments you are focused. You also talked about doing significant buybacks which I assume means continue along the current run rate if we can do in the third quarter. So, I guess, I was just wondering is if you put all those things together and we look ahead say two years from now, where do you want your leverage to be on the balance sheet?

[Greg Maxwell:]

Well, I think we’ve consistently said, we are going to target a 20% to 30% debt-to-cap and we are certainly wanting to float in there if necessary. I think we purposefully structured the company to be successful to continue its growth investments, to continue strong shareholder distributions in a volatile commodity environment and so, we don’t see any change to our strategy.

[Phil Gresh:]

Okay, last question just with respect to all the Midstream projects, obviously increased the target again in September and now you’ve layered in this other JV. Is there any realistically, is there any financial or operational cap in terms of how you are thinking about the opportunities ahead given what’s already in the pipeline right now.

[Greg Maxwell:]

No, I think that, I would say we are on track. Our strategy is a transformational change in to the Midstream of just this company with a great Refining assets and great chemical assets. I think we are on path we’ve laid out more than $2.3 billion worth of EBITDA growth between now and 2018 in our Midstream segment. I think we are – I would say, we are pleased with the project portfolio we have. We are executing well in terms of delivering on those commitments.

[Phil Gresh:]

Okay, all right, thanks.

[Operator:]

Thank you. Our next question is from Roger Read of Wells Fargo. Please go ahead.

[Roger Read:]

Hey good morning.

[Greg Garland:]

Good morning.

[Roger Read:]

Two things, I guess, first off, the Bakken pipeline announcements. Could you give us an idea of what sort of commitment on shipping those have I mean, is it a 100%, is it 80%, just kind of what backs up the volumes there?

[Greg Garland:]

Yes, we are in the middle of an extended open season on that and so – we will not disclose the commercial details, but I think the capacity we’ve talked about that 450,000 barrels a day.

[Roger Read:]

Okay, so, I will go with that for right now.

[Greg Garland:]

Yes, I think that you got to let that process work itself out and we would obviously – with the extended open season, I think the prospects are that, that they increase.

[Roger Read:]

Okay. Second question, kind of switching gears here to the Refining side, comments on the call and if I am looking at the numbers correctly, exports were 129,000 barrels I think and then, down from 181 if I wrote that correctly in Q2 and the comment was along the lines of better domestic demand. Could you give us an idea today as you look at the market and your thinking about sort of domestic pricing versus international product pricing that would drive the desire to export more and the changes we’ve certainly seen in between various crude differentials along the Gulf Coast and elsewhere, kind of where we stand on that export volume today?

[Greg Garland:]

Why don’t you take a stab start and then Tim can fill in the details?

[Greg Maxwell:]

First of all the export markets were there, they were available to us. We just made a decision to place them in a higher value market domestically. I think the barrels we did export were somewhere between $1 and $2 a barrel better. Then the alternative placement that we had available to us in the investment market. But in general you are going to see us flex up and flex down to follow the market opportunity. You want to add on that?

[Tim Taylor:]

Yes, I think structurally, pretty good demand if we look at gasoline demand and distillate demand in the US. So that was the opportunity, but longer term, we still know that exports have got to happen as we continue to run and centered to run and so, I think that we will continue to flex as Greg said, but you should continue to expect exports to be a significant part of the US Refining business.

[Roger Read:]

Okay, and one follow-up on that if I could. Any change into where your exported barrels have been going? Europe, Latin America, West Africa, any changes in sort of in your volumes?

[Greg Garland:]

I am sorry. On a US perspective, no and so, I think those are still markets that are there and those are logical markets to access from the US.

[Roger Read:]

Okay, thank you.

[Greg Garland:]

You bet.

[Operator:]

Thank you. Our next question is from Doug T. Terreson of ISI. Please go ahead.

[Doug Terreson:]

Good morning everybody.

[Greg Garland:]

Hi Doug.

[Doug Terreson:]

Greg, since the spin-off a two years ago, your team has been pretty focused on delivering growth, put in a capital discipline way and because your returns continue to be pretty strong and lead the peer group in many of the businesses, you’re obviously demonstrating proficiency on value creation. But, also on this transformational growth that you talked about a few minutes ago, some questions, but then we can get a progress report on the core components of the return enhancement plan an Refining specifically and then also any of that is strategic doubt that you might have on the West Coast and European parts of the Refining portfolio?

[Greg Garland:]

Sure, well, I think that, I would say, we are on track in terms of return enhancement plan that we laid out essentially two years ago and updated this year. As you know the biggest component of that is really accessing advantage crudes and we are driving to 95% of advantage crude capture. But that’s not the whole story as you know, once again advantage crude you look the next best advantage crude to displace that barrel too. And so, I think around the infrastructure that we are investing and it does have the ability to help us lever a higher returns around our integrated Refining assets. And so, we will continue down that path and we will get to a 100% advantage crude in the next year or so as we continue to move these projects forward around infrastructure. You think about the portfolio, I think we said, this year we will close on – and so we are on track to do that. White Gate, really a felt process, new interest in someone buying the White Gate refinery. So that asset is essentially off the market for now. We have an ongoing process at – and I think our expectation is certainly end of this year, first quarter next year, we will complete that process.

[Doug Terreson:]

Okay, great. Thanks a lot.

[Greg Garland:]

Thanks, Doug.

[Operator:]

Thank you. Our next question is from Ed Westlake of Credit Suisse. Please go ahead.

[Ed Westlake:]

Good morning. A simple one to start with. The condensate pipeline and the split is today in that $2.3 billion Midstream forecast.

[Greg Garland:]

Yes.

[Ed Westlake:]

Okay, okay and then $340 million drop, that’s great. I guess, you’ve got an EV of $45 billion and $2.3 billion of MLP investments is going to grow. I mean, obviously, just joking my team that I’d need to lift to a 100 to see the entire asset base to transfer down its PSXP. So, I guess, just the question is really, what are the constraints on you guys going faster and do obviously hope to lift to a 100?

[Greg Garland:]

Well, the first thing I would just say, we hope you do live to a 100. But you got to give us credit for the 740 we have done. So we have done $1.1 billion this year as you think about drop in the MLP and I would say, we consistently said, our view is that, we’ll probably keep our foot on the accelerator being the brake in terms of the natural partnership is. It’s a valuable part of our growth program in terms of funding this Midstream growth. And so, I think that currently we stated intentions that long-term we’ll be top quartile in terms of distribution growth. We are certainly 515, but narrowly years, we are going to be quite a bit above that.

[Ed Westlake:]

Right, I mean, you’ve seen obviously what’s going on in the space where people have used to consolidation to perhaps give – create a larger MLP obviously there is GP accretion from that and then potentially that that might be a base to then drop further assets in at perhaps a faster pace. I mean, is that something that would work in your vision?

[Tim Taylor:]

Ed, we’ve got a great backlog of projects as they come on. I think it increased that backlog of droppable EBITDA. So we are going to – to Greg’s point, you are going to grow your MLP and commensurate with that Midstream growth and it’s always a possibility that we could look at some type of opportunity to expand that. So, I think that’s just part of our strategic view that we see a lot of value creation in that segment and the MLP is just a really key piece to make that happen.

[Ed Westlake:]

And then two smaller questions. I appreciate your open season, but, any idea on what sort of tariff it would take Bakken barrels down to Beaumont?

[Tim Taylor:]

That has not been - the FERC tariffs have not been filed. So, once that’s complete that will be available, that we believe, I say it as, that this will be the most economic pipe solution from the Bakken to the Gulf Coast.

[Ed Westlake:]

Yes, re-converted gas pipe I think probably is definitely. And then on the – a throw away comment that you made on Refining in the Gulf, you said there was some feedstock restrictions. Can you walk us through what those might have been in the second quarter – sorry, third quarter?

[Tim Taylor:]

Yes, so, second versus third, we had – alliance came back on after turnaround so you had more exposure to light and medium grades with that and then there was less availability of crude and that was backfilled with more light, medium. So we had a mix effect that gave more exposure to light, medium versus heavy in the third quarter..

[Ed Westlake:]

Thank you.

[Operator:]

Thank you. Our next question is from Paul Sankey of Wolfe Research. Please go ahead.

[Paul Sankey:]

Hi, guys. To the extent you’ve been asked a lot of question around this, but obviously or arguably we’ve moved to a new price environment here. Firstly I was a bit surprised that your earnings weren’t boosted more you tried to break that out, but in the co-products area would we expect the lag to come through in Q4 and priced downturn? And could you try and strip out how much of that would be sustainable if at all possible if we stayed at this kind of price level? Secondly, from the current price level, would you expect that to be an inventory or accounting of inventory impact? And then I’ve got a follow-up which is a kind of a bigger question, Thanks.

[Greg Garland:]

Paul, on the secondary products I mean, clearly as the cost of the feedstock has come down, the margin on those products has gone up and so, that’s kind of the direct correlation versus some price movement maybe on those on the LPG and those kind of things. But it’s really around that feedstock value brings up the value of that secondary product. And so, I think that, that really depends on an absolute level of crude. Maybe in a broader statement, with crude prices coming down, you’ve got probably on the direct margin, the Chemicals business has probably – could have I should say the most exposure as that margin comes in versus net the cracking. But, generally, with the margin business there are just a lot of moving parts to what that really inputs into feedstocks and products.

[Paul Sankey:]

Yes, I guess what I am driving at, is that you had a negative in secondary products that you show on slide 12 and part of the question is that, I know that you’ve trying to improve that capture in general. But obviously the volatility of the market makes it difficult. But I would have thought that that number might be better because we saw a down move although the majority obviously came later. That’s a general idea I am pushing it.

[Greg Garland:]

I think it’s probably five bucks a barrel better quarter-over-quarter and I think, assuming that crude sales were that that probably carries forward into the fourth quarter. But we always seem to have better capture rate in the fourth quarter anyway historically. So we will just have to see where it goes, Paul.

[Greg Maxwell:]

And Paul on your crude inventory question, I think our spot is prices go down, you do see some float impact between accounts receivable and accounts payable. We haven’t publicly quantified that for anyone, but you will see some impact.

[Paul Sankey:]

Okay, I’ll follow-up on that. And then the bigger question I had was that you’ve obviously invested a lot and succeeded in getting a much more – what you call advantage crude slate. I was wondering how sticky that would be if we saw a situation where for example global crude prices were at or below US prices. I assume your infrastructure investment would leave, still wanting to use the domestic option, can you give us, I mean, if I am barking on the wrong tree there, but the idea is that you’re kind of incentivized by your infrastructure to use the domestic crudes almost to a much tighter price maybe than other people might think?

[Greg Garland:]

Paul, I think on the infrastructure, clearly, location of the Refining asset has a significant impact on the crude slate. So, clearly the mid-con some of the billings, pretty focused on the inland crudes, I think it really hinges on the optionality around say the Gulf Coast. Our infrastructure though – think, we think about it like this, that we have access to that and we will go to the best value on the Refining slate and then we’ve got opportunities with our logistics to move those crudes into whatever markets makes sense. So there is kind of a double-edged drive on the logistics has increased third-party capability as well as supplying our own system and I think that’s the balance that we are looking for.

[Paul Sankey:]

Yes, I guess, I am just trying to get a sense for example if we inverted Brent prices went under, let’s LLS, to the extent to which you would, how far that would have to go before you would want to move back to using imported crudes when you’ve done so much work to do the opposite?

[Greg Garland:]

Well, I think we keep that option on the table and my comment be that I would expect that minimum or - US prices would probably adjust to be competitive, but we work around that short-term optimization or system today. And so we will flex is that differential moves and we drive the best value in our Refining system.

[Paul Sankey:]

Yes, I guess, I am just thinking on that. The final question do you have any observations on distillate markets right now. I know you are relatively long distiller, anything that you could add? Thanks a lot.

[Greg Garland:]

The distillate market still looks strong. So, I think, kind of moving into the season, we are going to like that exposure on distillate side.

[Paul Sankey:]

Thank you, guys.

[Greg Garland:]

Thanks, Paul.

[Operator:]

Thank you. Our next question is from Blake Fernandez of Howard Weil. Please go ahead.

[Blake Fernandez:]

Hi guys, good morning. I was hoping to go back to the product exports. I know you said, you exported 129,000 barrels a day. You are progressively building out your capacity. I am trying to get an update of where you stand right now on capacity and also if you don’t mind, some commentary around some of the new global capacity coming online that’s export-oriented and just curious if you have any thoughts around how the US is going to be competitive with some of those new facilities in targeting, let’s just say the European market?

[Greg Garland:]

I think, we are close to 1 million barrels a day with Beaumont, plus the 420,000 that we have in the PSX Refining system and our view is that we will continue to expand that. I think that the US refiners – energy price advantage and some crude advantage are going to be well positioned to compete in export markets globally, but certainly and those that are most geographically close to us. Latin America, South America, West Africa, to a certain degree Europe. But there is no question you got some big refineries coming up in the Middle East that are targeting Europe and Asia and they are very, very competitive assets than I think they were.

[Blake Fernandez:]

Okay, just a quick one on Bayway. With the rail rack coming online, if I am not mistaken historically, you’ve done a bit of barging Gulf Coast crude over the East Coast. Does the rail rack basically displays that or would y you continue to do both?

[Greg Garland:]

We would continue to do both. We’ve actually run the – ship up around the Bayway off and so, I think you’ll see us continue to do both.

[Blake Fernandez:]

Okay, and then the final one from me. I know, you addressed Jeff’s CapEx question on 2014, any thoughts around, I mean there is a lot of moving pieces, so as we kind of progress into 2015, for the time being do you think it’s fair to think flattish type of CapEx into next year?

[Greg Maxwell:]

We have given guidance earlier this year on 2015 and so, we’ll go to our Board December and ask for approval on our 2015 budget. But certainly, I think that you should view that DAPL and ETCOP investments as incremental to what we’ve already said.

[Blake Fernandez:]

Right, okay. All right, thanks a lot.

[Greg Garland:]

You bet.

[Operator:]

Thank you. Our next question is from Paul Cheng of Barclays. Please go ahead.

[Paul Cheng:]

Hey guys, good morning.

[Greg Garland:]

Hey, good morning.

[Paul Cheng:]

A number of quick questions. Greg, earlier though on maybe Tim talking about some limitation on – do you know this is specifically Phillips 66 is actually hitting for the whole industry and can you quantify for us in some way that how big is that hit for you and have you seen that situation reverse?

[Greg Garland:]

You know, Paul, our view is that, it’s availability of production on the Latin American crude side that, and so, I can’t speak to others, but certainly we’ve seen that and so, in the interim, we are readjusting the supply chain, clearly Canadian crude, heavy crude to the Gulf Coast can be a piece of that, that’s starting to move with more rail infrastructure up there. So, I think new supply options are developing as that changes. But, that’s our view as that, it’s really been a reduced availability from that’s certainly we’ve seen.

[Paul Cheng:]

Tim, can you quantify helping us to quantify that, that negative hit on you in the third quarter?

[Tim Taylor:]

I have not done specifics around that. Sorry, I could get back to you on that with the sensitivity.

[Paul Cheng:]

Yes, okay, that will be great.

[Tim Taylor:]

We typically won’t go to our refinery level though.

[Greg Garland:]

Yes, yes.

[Tim Taylor:]

We might go to a regional level for you.

[Paul Cheng:]

Okay, that’s good enough. On the energy transfer, the total investment for the two JV is $4.8 billion to $5 billion, do we – is there – of that is that incremental or that this is including some of the money already been spent?

[Tim Taylor:]

So that’s the total value and so, we’ll have a share of that total capital commitment. And that it’s still – so you are in open season. You haven’t done a lot of engineering work those kinds of things. So you are very early in the formation of that project on that.

[Paul Cheng:]

Tim, if I want to understand that those two projects actually already have some existing pipes in the ground. So, is there a upfront payment you guys have to pay in this year r4elated to that project?

[Tim Taylor:]

So, it’s really around the contribution of the assets and everything and so that is the spending really occurs in 2015 and 2016 as – kind of split between those two years as we go forward, Paul.

[Paul Cheng:]

But, how about upfront investment? The upfront…that contribution.

[Tim Taylor:]

Fairly small spending this year, really the bulk of that spending on that total occurs in that 2015 2016 time period.

[Paul Cheng:]

And then – sorry.

[Tim Taylor:]

No, go ahead.

[Paul Cheng:]

All right. On the GP, can you tell us what your GP cash flow is? Annualized run rate right now?

[Greg Maxwell:]

Paul, it’s Greg. If you look at the percent of the distributable cash flow that’s received by the GP for this quarter’s announced distribution, it would be 8%.

[Paul Cheng:]

Great, it seems that either if you can have me since I don’t have the PSXP press release or the 10-Q. Do you have what is that in millions of dollar, that number?

[Greg Maxwell:]

I don’t have that right in front of me. I’ll get that for you.

[Paul Cheng:]

And also that – just, maybe a request, if possible in the future, I think it will be very helpful for your shareholder given we are talking about the logistics is going to be a big piece of the value creation for the company if you can activate this, what is your actual GP cash flow, so that we don’t have to focus different documents in order to find it.

[Greg Maxwell:]

That’s a great suggestion Paul and we are going to do that. We talked about that this morning. We will plan on putting that in a supplemental information, Paul.

[Paul Cheng:]

‘ Yes, that will be – I think that’s very helpful. And also along those line because we don’t know every quarter whether it’s going to – you have a change in your LP unit ownership so you can also lift how many LP units and what is the total LP unit. Those are available I am sure that in the PSXP, but you just help your – I don’t have to go through several different documents. A final question on along those lines, based on the partnership of the LP, what is the current maximum ability for them to do M&A whether you saw the internal job done or external M&A. How big is the balance sheet that they can do it. Is it a $1 billion, $2 billion a year, I mean, any kind of rough guidance that you can provide?

[Greg Maxwell:]

With regard to total acquisition a the PSXP level?

[Paul Cheng:]

That’s correct, I mean, that how much that they can – I mean, this year that you are doing $1.1 billion of the asset – is it the maximum in terms of the financial balance sheet capability or that you think that capability is actually bigger than that?

[Greg Garland:]

Paul, I guess, I look at there is equity debt component and we have targeted three times EBITDA on debt and I think you look at the MLP access on the equity side you start to see that $1 billion. So you are somewhere between $1 billion and $2 billion is kind or roughly in a range of what we think about could be managed from a purchase standpoint.

[Paul Cheng:]

So, without issuing equity into LP level will be about $1 billion, $1.2 billion from a debt standpoint?

[Greg Garland:]

No, I think you’ve got - as you go forward, with that, you got to have the equity offering or the debt to purchase the asset. So, I think equity offerings are a natural way to grow that capability. That doesn’t get into acquisition – share exchanges and like that, that’s a different issue. But just in terms of accessing the market and where the cash comes from it really has to be held back, distributions has to come from access to debt or equity.

[Paul Cheng:]

Right, okay. Perfect. Thank you.

[Greg Maxwell:]

Paul, I looked at – if you were wanting distributable cash flow for the third quarter?

[Paul Cheng:]

That’s correct.

[Greg Maxwell:]

$33.4 million

[Paul Cheng:]

$33.4 million, that is the total distributable and 8% is to the GP or that is the GP?

[Greg Maxwell:]

No, that’s total distributable and so the 8% would apply to that.

[Paul Cheng:]

I see, perfect. Thank you.

[Greg Maxwell:]

Thanks, Paul.

[Operator:]

Thank you. Our next question is from Doug Leggate of Bank of America. Please go ahead.

[Doug Leggate:]

Thank you. Good morning everybody.

[Greg Garland:]

Good morning.

[Doug Leggate:]

I guess, one of the things has come up periodically how we has been how we try and put a value around your Chemicals business and structural business and right now, and all we’ve been trying to look at I guess is the free cash flow. So, I am wondering if you could help us with, how do you see the self-funding Chemicals growth evolving to the free cash position and where you are in the decision process of the second cracker which obviously would defer at free cash move into the – I guess, that’s my first one. I have a follow-up please.

[Greg Garland:]

Basically, as we’ve looked at, we are in the middle of a major project right now. Our view has been that the project or it will be funded with the Chemicals business, there will be distributions for tax payments and next year is kind of a peak spending year. So I think a little bit there and I think going forward, it’s really a question about do they have the right return projects and the market fundamentals and to the extent that they can self-fund and grow, we’d really like to encourage that. So, I think our expectation is that, that will continue to grow, but the degree to which they do that really depends on the view of the returns and the project and how much, but we do expect that to be a self-funding venture with the payments back to the owners at minimum tax distribution and discretion beyond that.

[Doug Leggate:]

So as things – today, go ahead.

[Greg Garland:]

I think our current view would be that 15 CPChem and certainly self-funding and putting distributions back to Chevron and ourselves.

[Doug Leggate:]

Can you update us on where you are in the second project in terms of FID?

[Greg Garland:]

Well, I think, we are – at CPChem, they are certainly looking at all the options, looking specifically in the US at a couple of things. And so, it really is still very early looking more and I would say conceptual market feasibility of the returns that we expect and so, just taking a hard look at that, but not really engaged in a lot of engineering work at this point. So it’s really decision point that they’ve got to bring forward to the owners for some approval and discussion. So, it’s out there ways in terms when we would take any kind of investment decision or if we would go forward.

[Tim Taylor:]

I think just generically though as we consider the opportunity inversed in the Chemicals business, we still think that the US Gulf Coast is probably the best place to invest and I think that at least from our perspective, we wouldn’t hesitate to go forward with a second cracker. I think the real challenge is that, where you are going to put it and what you going to feed it. And that’s kind of what we are working through right now.

[Doug Leggate:]

Thank you. My follow-up if I may, take you all the way back to the MLP again. I guess, one of the things a lot of people talked about, drop downs and (inaudible) but there is no real discussion around obvious money, tax basis, or more importantly the impact on the Refining business. So I guess, what I am really trying to understand is what do you think is a reasonable pace that the MLP could actually handle by way of annual sort ratable acquisitions or growth if you like? And I guess, in the same kind of – do you ever think that the – I guess, about 10% of the 2.5% certainly enforce this deal, is refining- within the refinery, is it there a scenario where you envisage moving the refinery EBITDA into the MLP given the implications for the volatility of the Refining business and all EBITDA? Thanks.

[Greg Garland:]

I think – we think market capacity, given the sizes of this MLP is probably somewhere between $1 billion to $2 billion or what – where we could do annually and so, we just leave it that. We really haven’t given forecast of what our drops are going to be other than around just quantify top quartile type growth and distributions. I still look at the Refining business, the volatility in the Refining business and would say, we probably would not look that into an ML

[Doug Leggate:]

That should be helpful. It’s the answer I was looking forward because some of your competitors I guess, just a different view there. Thanks very much for the answers, guys. I appreciate it.

[Operator:]

Thank you. And our next question is from Bret Olson of Tudor Pickering. Please go ahead.

[Brad Olsen:]

Hey good morning guys.

[Greg Garland.:]

Hey Brad.

[Brad Olsen:]

I wanted to walk for a minute, if I could, through the Midstream EBITDA number, I know the $2.3 billion EBITDA, that's now in the presentation, it's certainly a robust number and assuming $2 billion of drops at a 10 times multiple, it gives you close to a decade of runway. Does that include the recent Bakken pipeline deal you announced, and if it doesn't, I'm just trying to think about the $700 million that was announced back in 2012, plus the $500 million or so from the Sweeny complex. And then trying to get from there, the additional $1 billion if I'm not using the Bakken pipelines. And I understand there's a lot of small stuff in there. But just one or two big chunky projects that -- especially in I believe the NGL segment, which will increase much greater than just the Sweeny frac complex alone?

[Greg Garland:]

Yes, as you think about, first answer, the Bakken pipe is not in those numbers. And so, that will be incremental to that and you should expect typical type Midstream returns out of the Bakken pipe. What are in the numbers, essentially the frac one, frac two the LPG export and we said, $700 million to $900 million of EBITDA in there. But, one of the things, that I think that the organization has done really well in the last year is to queue up a really strong portfolio of growth opportunities for us to invest in around our footprint, if you will and we are executing well in terms of getting these projects started, getting them up, getting them running. And so, I feel really comfortable with our portfolio, our capability to fund it and we like the opportunity set we see.

[Greg Maxwell:]

Beaumont is in there as well

[Greg Garland:]

Yes, Beaumont is in there as well.

[Brad Olsen:]

Yes, that's really helpful. And just to jump back to the Bakken invest or the Bakken pipelines, the crude pipeline investment, if I could. It looks like a really attractive deal. Obviously, you pointed out that they are your typical seven times Midstream returns, while also being kind of a long-term regulated cash flow stream. So when I think about that, you have obviously made it a point to say that strategically, Midstream is driving the bus on a go-forward basis and Refining is probably less of a focus in terms of growing the business and so, kind of piggybacking on Paul's question, when you think about which part of the equation is the dog and which part of the equation is the tail to use a clumsy analogy? On the Bakken deal, is this a deal that you would have done in the absence of your Gulf Coast refiners, refinery footprint? Or is it something that you view as adding significant value? Even if you hadn't participated in equity in the pipeline, would it have been something you had looked at from a Refining point of view? To what extent would this pipeline project maybe have played out differently if you were or were not looking for crude for those Gulf Coast refineries?

[Greg Garland:]

So, I think it’s not predicated on supply into our system. Surely it’s great option and that’s a value that we bring to our Refining system. We like the fact it’s a long-haul crude pipe from a basin that ties directly to our Beaumont terminal and so we got options across that Gulf Coast system; you got Midwest delivery. So we like that, it can tie into our supply and that’s a factor as we think about that, but it’s not the key driver was not supply, it is really around the Midstream opportunity. So, we think it’s a great asset because it’s going to continue to enhance our position in the Bakken, our position in the Gulf Coast, great linkage.

[Brad Olsen:]

Thanks for that color and when I think if supply is maybe not the main driver, but I assume that you guys are a significant shipper on the pipeline, and does it enhance your position? I guess you mentioned earlier in the call that this is the lowest cost option out of the Bakken. And as we see other pipelines facing delays out of the Bakken, that option probably gets more valuable over time. But as I think about how much volume you guys are going to be directly involved in marketing of this pipe, is there a good number? Or are you an anchor shipper? Or is this more of just an equity investment without a volumetric commitment?

[Greg Garland:]

Yes, we are in the middle of open season and we will take a commitment, but that’s all we are going to say on that.

[Brad Olsen:]

Okay, great and just one more housekeeping question. Greg, you talked about the hexene facility, it's still in ramp-up mode. As we think about where that facility or when that facility reaches full economic contribution, does the incident at Port Arthur prevent the hexene facility for any reason for being - from being able to sell full volumes or is the run rate unaffected by that? And if you wouldn't mind providing a little bit more specificity on the timing, and maybe just a rough EBITDA number on that facility as it does hit a 100% or close to 100% utilization?

[Greg Maxwell:]

Yes, so, I’d sit on things that Port Arthur is going to impact the run rate on hexene 1, it ramp up into 2015, Port Arthur is going to be back up and running. So, I don’t think Port Arthur is going to enter into an equation in terms of run rate. In terms of fully ramping the facility, I don’t know, Tim. It will probably ramp over 2015 and 2016 would be my guess.

[Tim Taylor:]

Yes, I mean, I think in response to demand, so we’ve been very happy with the start up. I’ve been very happy with the customer reception on the product side. So, it’s gone very well, but you do have just the normal ramp up in terms of demand and how that works.

[Brad Olsen:]

Got it. That's all for me. Thanks a lot, guys.

[Greg Garland:]

Take care. Thanks.

[Operator:]

Thank you. And we have reached the allotted time for questions. I will now turn the call back over to Kevin Mitchell.

[Kevin Mitchell:]

Thank you very much for participating on the call this morning. We do appreciate your interest in the company. You will be able to find a transcript of the call posted on our website shortly. And if you have any questions, please contact us. Thanks again.

[Operator:]

Thank you and thank you, ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may now disconnect.