Phillips 66 Partners LP
Q4 2014 Earnings Call Transcript

Published: 30 Jan 2015

[Operator:]

Welcome to the Fourth Quarter 2014 Phillips 66 Partners Earnings Conference Call. My name is Eric 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 record. I will now turn the call over to your host, Rosy Zuklic, Manager of Investor Relations.

[Rosy Zuklic:]

Thank you, Eric. 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; Greg Maxwell, Vice President and CFO; and Bob Herman, Senior Vice President, Operations; and Tom Liberti, Vice President and Chief Operating Officer. The presentation materials we'll be using this afternoon can be found on the events section of the Phillips 66 Partners website, along with supplemental financial and operating information. We'll have time for questions at the end of the presentation. 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 here today and factors that could cause actual results to differ are included here as well in our filings with the SEC. References in this presentation to operational and financial results for the fourth quarter of 2014 exclude amount from predecessors. These are non-GAAP financial measures and the reconciliation to their GAAP counterparts, which include predecessor results, are included in the supplemental information accompanying our earnings release and are posted on our website. With that, I'll turn the call over to Tim Taylor for some opening remarks. Tim?

[Timothy G. Taylor:]

Thank you, Rosy and good afternoon, everyone. The end of the fourth quarter marked our first full year as a partnership. In 2014, we completed over $1 billion in acquisitions from our sponsor, Phillips 66, with the goal of providing strong growth for our unitholders. With the recently advanced fourth quarter distribution of $0.34 per unit, we've increased our distribution to limited partners by 51% over the fourth quarter of 2013. Our focus will be to continue to provide top-tier distribution growth for our unitholders. Turning to Slide 4, I'll now discuss some key highlights from the fourth quarter. In December, we closed on our acquisition of the Bayway and Ferndale rail unloading facilities. The 75,000 barrel per day Bayway facility and 30,000 barrel per day Ferndale facility are expected to add about $30 million to $35 million of stable, fee-based annual EBITDA to PSXP. We operated well during the quarter with higher volumes leading to increased financial performance. Total pipeline throughput volumes were 727,000 barrels per day, up 6% over the third quarter. Total terminaling throughput volumes were 901,000 barrels per day representing an increase of 3% over the prior quarter. On Slide 5, I'd like to highlight several of our organic growth projects. These three projects, representing a total of over $230 million in capital investment net to PSXP, will provide us with increased fee-based cash flows for the partnership. The Cross-Channel Connector project will provide shippers of refined products with the connection from our Pasadena terminal to third-party systems with water access on the Houston Ship Channel. We expect this project to be complete early in the second quarter of this year. Our Eagle Ford gathering project will connect crude oil production to third-party pipelines at Helena and Tilden Texas. A small portion of the gathering system began operations in January and the entire project is anticipated to be completed in the third quarter of this year. This $50 million investment will be supported by long-term fee-based agreements with Phillips 66. Finally, our largest organic investments today are the Bakken joint ventures with Paradigm Energy Partners. The joint ventures will develop rail loading and central delivery facilities, as well as a takeaway pipeline in the Bakken region. PSXP will invest approximately $160 million in these projects that will provide rail and pipeline options for shippers in Palermo and Stanley, North Dakota. We anticipate these assets will commence operations in the fourth quarter of 2015. Now I'll turn the call over to Greg Maxwell to provide a more detailed update on the financial results for the quarter.

[Greg G. Maxwell:]

Thanks, Tim. Good afternoon, everyone. Beginning on Slide 6, Phillips 66 Partners had fourth quarter adjusted revenues of $62.7 million, up $9.3 million from the third quarter. This increase was primarily the result of higher pipeline throughput volumes on the Gold Line Products System and also revenues from the recently acquired rail racks. Total adjusted cost and expenses were $26.3 million, up $2.4 million from the prior quarter, mainly driven by costs associated with the fourth quarter acquisition, including interest expense on debt that was issued. The General Partners' Board recently declared our fourth quarter cash distribution of $0.34 per limited partner unit. This distribution is payable on February 13 to unitholders of record on February 4. This represents a 7% increase compared with our previous quarter's distribution of $0.3168 per unit. Turning to Slide 7, adjusted EBITDA for the fourth quarter was $42.6 million and distributable cash flow was $37.2 million. During the quarter, PSXP provided Phillips 66 a $2.4 million credit related to a portion of prior quarters' minimal volume commitment deficiency payments on the Gold Line Products System. We had maintenance capital expenditures of $2.8 million during the quarter and total cash distributions will $29.1 million resulting in a coverage ratio of 1.28. Slide 8 shows that we ended the quarter with $8 million of cash and cash equivalents. We currently have outstanding debt of $430 million in the form of a notes payable to Phillips 66 and borrowings under our revolving credit facility. During the quarter we increased the base capacity of our credit facility from $250 million to $500 million and it also has an accordion feature for an additional $250 million. This facility had $18 million of outstanding borrowings as of the end of the fourth quarter. As of December 31st, our debt-to-EBITDA ratio was approximately 2.5. Looking forward, we intend for PSXP to be positioned to achieve an investment-grade credit rating to enhance its financial flexibility and also facilitate low-cost financings that will efficiently fund our future growth plans. This concludes our prepared remarks. We will now open the line for questions.

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from Jeremy Tonet from JPMorgan. Your line is open.

[Jeremy Tonet:]

Good afternoon.

[Greg G. Maxwell:]

Hi, Jeremy.

[Timothy G. Taylor:]

Good afternoon.

[Jeremy Tonet:]

I was wondering if you could provide a little bit of color on the genesis of the Eagle Ford gathering project?

[Robert A. Herman:]

Sure, this is Bob Herman. That project is kind of a two-phase project out in the Eagle Ford for our ability to gather crude and transport it on third-party pipes into our Sweeny refinery. We'd expect the first phase that started up here just a couple weeks ago will ramp up to about 20,000 barrels a day. Later this year, we will add the second phase, which will add another 30,000 barrels a day for a total of 50,000 barrels a day of throughput on that system.

[Jeremy Tonet:]

Great. So was PSX looking to source barrels more or producers looking for Midstream service?

[Robert A. Herman:]

This allows us to source PSX barrels at the wellhead and get them into our Sweeny facility.

[Jeremy Tonet:]

Great. And I was just wondering if you see other organic growth opportunities either similar to this or anything else that could be percolating under the surface that could further expand the organic growth portfolio?

[Tom Liberti:]

Yes, I think we could – as we move forward PSXP, we will continue to find these type of growth opportunities, we’ve got the large PSX refining system to feed and there's no doubt in our minds that we'll continue to find a lot of opportunities to provide service to them.

[Jeremy B. Tonet:]

Great. And I was just wondering for Sand Hills and Southern Hills if you could provide any updates there as far as how that project is - that asset is ramping up and if it has hit a stage where it could be a good fit for the partnership.

[Tom Liberti:]

Yes, Jeremy its Tom. The volumes continue to ramp up and we still have about 3.5 years left on our on our ROFO. So I think all the partners are very pleased with how the volumes have been ramping.

[Jeremy B. Tonet:]

Great, thanks. And just one last one from me, it seems like you guys have great coverage coming in quite strong at 1.3 times this quarter. I was just wondering if you could share any updated thoughts with us on how you think about balancing the distribution coverage and distribution growth going forward.

[Tom Liberti:]

Well, our long-term target, I would still say we've talked about 1.1, but clearly as it grows and you've got the balancing and you've got now the capital requirements. So it's all part of how we think about how to manage the cash and still return as much as we can to the unitholders, but make sure that we can execute on these really good projects.

[Jeremy B. Tonet:]

Great, thank you. That's it for me.

[Operator:]

Your next question comes from the line of Elvira Scotto with RBC Capital Markets. Your line is open.

[Elvira Scotto:]

Hi, good afternoon. I was wondering if you could provide a little bit more color on the Bakken projects. Specifically how committed those projects are? Do they have minimum volume commitments and what types of returns can these projects generate?

[Tom Liberti:]

Yes, I think, on the Bakken projects, I will answer the last question first, we would expect to see a normal Midstream type return for those projects and all three pieces of that project are underwritten by volume commitments, primarily with our sponsor PSX that we would see keeping those facilities operational for quite some time to come.

[Elvira Scotto:]

Okay, great, thanks. And then in terms of dropdowns, and I don't know if you can answer this or not, but is last year's pace a good proxy going forward, about $1 billion annually?

[Tom Liberti:]

Well you know we said, we are committed to top quartile distribution growth and we're going to be aggressively pursuing the growth of the MLP. So I think that's the right way to frame that. Well it’s very value-accretive for both PSXP and PSX. Our sponsor appreciates that value as well. So it just fits strategically.

[Elvira Scotto:]

Okay, great. And then my last question is can you talk maybe a little bit about the M&A environment? PSXP obviously has good currency. Are you seeing more willing sellers? Also would you acquire something that maybe has a little more direct commodity price exposure?

[Timothy G. Taylor:]

So I think M&A is always something that you think about in terms of how does it value accrete day one and then how does it continue to help the plan to continue to grow. So we're always thinking about that and frankly, we'll see what happens from that perspective, but there's really – that's just a part of how we can grow the value of the MLP over the long run.

[Elvira Scotto:]

Okay, great. That's all I had. Thank you.

[Operator:]

Brain Zarahn from Barclays is on the line with the question. Your line is open.

[Brian J. Zarahn:]

Good afternoon.

[Timothy G. Taylor:]

Good afternoon.

[Brian J. Zarahn:]

Just going back to the organic projects, I think previously you mentioned the Cross-Channel Connector had a very low multiple. How do you think about the blended returns for the three projects?

[Tom Liberti:]

I think overall we would expect all of our projects to come in and average out at something around normal Midstream type returns or maybe a little better and quite frankly, that's why you'll see us do a combination of both dropdowns and organic projects to keep a good balance for our unitholders and for the value back to our sponsor from all those projects combined.

[Brian J. Zarahn:]

Okay. And then on the projects, is there a ramp-up period for the contracts or is it pretty steady cash flow stream once the project's under service?

[Greg G. Maxwell:]

Brian, it's pretty steady once they get into service. The projects themselves are ramping up a bit. So, for example, Eagle Ford, we've got a little bit of income in the first quarter, but it will ramp up throughout the year until it finally hits its peak and then it will flatten off. Of course, with different volumes coming from the field, it will change a little bit from time-to-time. Same thing as we don't expect any ramp-up initially unless we have volume increases for the projects in the Bakken. And the same thing for the Cross-Channel we've got some committed volumes and we fully expect walk-up volume in the Cross-Channel, too. So it will increase that way as volumes increase, but not necessarily from a ramp-up from an asset standpoint.

[Brian J. Zarahn:]

Given the identified projects, what's your expectation for expansion CapEx in 2015?

[Greg G. Maxwell:]

In 2015, we should be a little bit over $200 million. Some of these projects, the three projects we talked about, we had CapEx spend in the fourth quarter. And so for 2015 on these projects, we're looking at about $200 million.

[Brian J. Zarahn:]

And then on I guess the theme of low commodity prices, how do low crude and NGL prices impact your estimate for your dropdown inventory?

[Greg G. Maxwell:]

When I think about low crude and commodity exposure, we don't have a lot of that in PSXP. As we think, if you're looking at our sponsor and their plans, PSX around Midstream, most of the incremental growth in that EBITDA in the Midstream investments are with things that would be fee-based. So I think we still want to stick primarily to fee-based type of assets in PSXP, either organically through purchases from our sponsor or other activities. And that's really a key theme for us going forward is to keep this a largely fee-based MLP.

[Brian J. Zarahn:]

So the $2.3 billion EBITDA potential dropdown inventory has not changed?

[Greg G. Maxwell:]

So there is another, yes I’d say that $2.3 billion at PSX, when putting on the PSX hat, when we've looked at that, we said it depends a little bit as we go out in the future. Some of this is with projects that are clearly in-flight like the LPG terminal, like the frac, our joint venture with Energy Transfer on the long haul crude. Those projects are in-flight, fee-based underpinned by contracts. So those go forward. That's going to be over $1 billion a year of additional incremental EBITDA at the PSX level. Beyond that, there probably could be some slippage or deferral in terms of decisions for continued expansion of some of the things we had thought about until we get better clarity around how the liquids volumes are going to develop in North America. So we are still watching that. At the same time, we're seeing other opportunities crop up. So I think that's still a great backdrop that we have at the PSX level and opportunity perhaps for PS, P 66 Partners.

[Brian J. Zarahn:]

And then conversely, do you see any upside potential from low prices on your refined products pipeline assets at PSXP with likely higher demand and market demand?

[Greg G. Maxwell:]

Yes, these systems are pretty much connected to our refining operations on the product side. I just think it's going to continue to make sure that the run rates look pretty high and so I think it underpins the strength and the volume throughput and some of the long haul pipes like the Gold Line you would hope that that continues to underpin that. So I think it just provides a nice solid base for that and we'll see if other volumes grow, but I think it really gives a lot of support on the demand side of our business.

[Brian J. Zarahn:]

Last one from me, the Gold Line Medford Spheres dropdown is approaching its one-year anniversary. How have the assets been performing relative to your expectations?

[Tom Liberti:]

Really right on the expectations that we had. We had some refinery downtime last quarter and you saw the volumes go down a bit, but then came right back in the fourth quarter and actually have been a little bit higher even at the terminals as our marketing emphasis at those terminals and in that region gets stronger and stronger. So, yes, it's performed exactly like we had planned on it and Medford has been month in and month out since it's basically a show capacity agreement.

[Brian J. Zarahn:]

Thank you.

[Operator:]

John Edwards from Credit Suisse is on the line with a question. Mr. Edwards your line is open.

[John Edwards:]

Yes, thanks. Just following up Brian's question, so if I understood your answer right, so in terms of the dropdown inventory, you're saying there's the $2.3 billion does not change, but just from organic things up at the parent, there could be another $1 billion on top of that, so a total of $3.3 billion? Is that correct?

[Tim G. Taylor:]

I didn't segment that well enough. The $2.3 billion was inclusive of the $1 billion. And I said $1 billion is really stuff that's in-flight today. Our view would be that it very well may be that that stretches out a bit depending on the need for infrastructure in the Midstream based on the developments on the E&P side in North America. So the over $1 billion increment plus what we've had at the Midstream is how we've framed that at PSX. And then the $2.3 billion was just a total. And so I think that time horizon may stretch out and there can still be other opportunities though that come in between. So we feel very good about the growth of the Midstream at PSX, looking at it strictly from a PSX standpoint.

[John Edwards:]

Okay, so basically it's a $2.3 billion inventory. You're just saying there's this $1 billion piece, there could be a bit of a timing issue there.

[Tim G. Taylor:]

No, the $1 billion is actually stuff that's in-flight that completes in 2016, 2015 and then there could be some deferral and decisions about future things that would add growth to that. That $2.3 billion has some flex I think because of timing of what's happening in E&P. Bob?

[Robert A. Herman:]

Yes, and I would just say that with the projects that are in-flight right now, if you look at the short term - short term being the next four or five years – we've got significant inventory between things that are already existing at PSX and then the fractionator project, the LPG export facilities, some of the long haul pipes we're now involved in. So the short-term horizon for MLP-able assets is very solid.

[John Edwards:]

Okay. All right, well, just to make sure I understand, but you're still saying the total EBITDA that you could drop is around $2.3 billion?

[Tom Liberti:]

Correct.

[Timothy G. Taylor:]

Yes.

[John Edwards:]

Okay, all right. And then I guess the other question along those lines is a follow-on from Elvira's question. So you're basically saying in terms of the trajectory of dropdowns, your goal is to be in the top quartile. So if there was say faster growth within the MLP sector, you could be accelerating a bit if that was required to be in the top quartile or if things slow down, you would slow it down a bit? I'm just trying to get a better feel for that trajectory over the longer term that you're thinking about.

[Timothy G. Taylor:]

Well we’ve had a aggressive growth so far on the distributions and I think we've said we want to aggressively expand the value of PSXP and I think that's probably the best place and so as the world changes, we're going to still maintain the position that we have, really our plan is around how do we create the value with an aggressive plan.

[Tom Liberti:]

Yes, I think that’s right and I think if you just look at the projects that was going today they create a very, very strong backlog as they get completed that could be dropped at some point and I think that differentiates us from many.

[Timothy G. Taylor:]

And John, as we look at the landscape, we certainly don't see anybody - we don't see competitors slowing down with things, we wouldn’t anticipate that there would be a slowdown, but don’t know that it would affect all of our plans at least in the near-term.

[John Edwards:]

Okay. And then in terms of perhaps building up that $2.3 billion droppable, so in terms of investment at your parent, are you anticipating additional EBITDA to that figure and in terms of magnitude what do you think that would be?

[Tom Liberti:]

That’s number is really a midstream number, so terminal, pipelines, NGL, fracs, export docks and that was based on a timeframe when we saw liquids developing quite rapidly. So again I’ll say that’s probably still there, we just think it may take more time to get some of that but there is lot of that that’s coming right on the front-end with the projects and why that happened. And beyond that there are other kinds of income as PSX that could, but that’s really not what we’ve been talking about. So it’s just a pool that we continue to think about what the right way to create the best value for both PSX and PSXP.

[John Edwards:]

Okay, thanks for the clarity. That really helps. Thank you very much. End of Q&A

[Operator:]

We have no further questions at this time. I’ll turn the call back over to Mrs. Zuklic.

[Rosy Zuklic:]

Thank you very much for joining us this afternoon and if you any further questions, please feel free to reach out to William or me. Thank you, bye.

[Operator:]

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