Phillips 66 Partners LP
Q2 2015 Earnings Call Transcript

Published: 31 Jul 2015

[Operator:]

Welcome to the Second Quarter 2015 Phillips 66 Partners Earnings Conference Call. My name is Leanne, 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 Kevin Mitchell, Vice President, Investor Relations. Kevin, you may begin.

[Kevin Mitchell:]

Thank you, Leanne. Good afternoon. And welcome to the Phillips 66 Partners second 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 during the call 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 two 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. Factors that could cause actual results to differ are included here, as well as in our filings with the SEC. With that, I’ll turn the call over to Tim Taylor for some opening remarks.

[Tim Taylor:]

Thanks Kevin, and good afternoon, everyone. As you can see from the graph on slide three, Phillips 66 Partners continues to deliver on our objective to achieve a 30% compound annual growth rate on distributions from fourth quarter 2013 through 2018. We have increased our limited partner distribution every quarter since the IPO and maintained a sound coverage ratio. We plan to continue to grow our distributions supported by dropdown acquisitions from our parent Phillips 66, organic projects constructed at Phillips 66 Partners and strategic acquisitions that benefit both the LP unitholders and the GP owner. In the second quarter, earnings benefited from three months of contributions from our ownership interest in the Sand Hills and Southern Hills and Explorer pipelines, which were acquired in March of this year. This acquisition help support the recently declared second quarter distribution of $0.40 per unit, which is 8% higher than the first quarter of 2015 and a 33% increase over the second quarter of 2014. Since the IPO, we have increased distributions at a compound annual growth rate of 44%. Turning to operations, total pipeline throughput volumes for the quarter, excluding the volumes from equity affiliates were 728,000 barrels per day, down 2% from the last quarter. Total terminaling throughput volumes were 942,000 barrels per day, 5% lower than in the first quarter. These decreases were primarily due to lower volumes in the Sweeny to Pasadena Products System and the Clifton Ridge Crude System, resulting some maintenance activities at the connecting Phillips 66 owned refineries. Similar to the first quarter, downtime at the Borger refinery continued to limit volumes shipped on the gold line products pipeline. NGL volumes on our Sand Hills and Southern Hills JV pipelines increased from the first quarter, reflecting higher throughput and a fourth quarter of PSXP ownership. Sand Hills volumes should continue to ramp up as several new facilities begin to deliver NGLs into the system and pipeline expansions underway increased capacity. Average pipeline revenue per barrel remained unchanged from the first quarter at $0.44, while average terminal revenue increased $0.01 per barrel to $0.39, both of these rates excludes equity affiliates. Now I’ll turn the call over to Bob Herman.

[Bob Herman:]

Thanks Tim. Turning to slide four, we are making good progress on our organic growth projects. The second phase of the Eagle Ford crude gathering system remains on track for scheduled completion in the third quarter of 2015 and the cross-channel connector product system should finish shortly after, early in the fourth quarter of this year. In April, a refined products pipeline to Hartford Terminal dock experienced a diesel fuel release. Our response teams mobilized quickly and work to ensure safe, timely and effective cleanup of the incident. The Hartford Terminal is back to normal operations and we're utilizing third-party dock facilities and other logistics options to meet our customer needs. As a result of the incident, we are planning to install a new 8-inch and 14-inch pipeline connections at the facility. And we are negotiating new contracts with minimum volume commitment that will support this investment. We expect the project to be completed during the fourth quarter, cost about $3 million and yield typical midstream returns. The Palermo Rail Terminal is also progressing well and is on schedule to begin taking truck deliveries and loading railcars by year end. Permitting delays have affected the work on Chicago [via] [ph] pipeline, which will push completion into 2016. Through the second quarter, we have had capital expenditures of $97 million, $94 million of which is growth capital. Going forward, as PSXP executes its growth plans, we expect the partnership take on more and larger organic projects to supplement acquisitions from Phillips 66. Now I will turn the call over to Greg Maxwell to write a more detailed update on the financial results for the quarter.

[Greg Maxwell:]

Thanks Bob. Good afternoon, everyone. Beginning on slide five, second quarter revenues and other income were $83.8 million, up $13.7 million from the first quarter. The increase primarily reflects three months of equity earnings from the ownership interests acquired in the Sand Hills and Southern Hills NGL pipelines as well as the Explorer product’s pipeline. Total cost and expenses were $41.9 million, up $7.4 million from the prior quarter, mainly driven by additional interest expense associated with the additional $1.1 billion of debt that was issued in February. We also had higher operating costs due largely to the Hartford Terminal block incident as well as higher property taxes. G&A expenses were lower compared to last quarter. The general partners board recently declared the second quarter cash distribution of $0.40 per limited partner unit, which will be payable on August 12th. This represents an 8% increase over the $0.37 per unit distribution last quarter. This next slide shows our adjusted EBITDA and distributable cash flow growth since the second quarter of last year. We continue to execute our aggressive growth plan, which has resulted in an adjusted EBITDA increase of 52% year-on-year. Over the same time period, distributable cash flow is up almost 40%. We’re continuing to deliver on our plans for a five-year, 30% compound annual growth rate for our unitholders. Turning to slide seven. Adjusted EBITDA for the second quarter was $57 million and distributable cash flow was $47.8 million. During the quarter, PSXP received minimum volume deficiency payments of $2.2 million from Phillips 66. These payments were primarily triggered at the gold line product system due to downtime associated with turnaround activities at the Borger refinery. We had maintenance capital expenditures of $1.5 million during the quarter and total cash distributions will be $41.5 million, resulting in a coverage ratio of 1.15. Slide eight shows our current financial position. We ended the quarter with $104 million of cash and no outstanding borrowings under our $500 million revolving credit facility. On a revolver covenant basis, our debt to EBITDA ratio at the end of the quarter was 4.2 times. Long-term, we expect this ratio to decrease to our targeted level of 3.5 times as organic growth projects come on line. This concludes our prepared remarks. We'll now open the line for questions.

[Operator:]

Thank you. [Operator Instructions] And our first question comes from Elvira Scotto from RBC Capital Markets. Your line is now open.

[Elvira Scotto:]

HI. Good afternoon. I want to start with a macro question and I know PSX addresses earlier today but maybe you can expand a little bit here. So given the recent large M&A announcements, can you talk about third-party M&A, specifically how PSX and PSXP think about it? And I ask because given PSXP’s cost to capital, PSXP could probably acquire anything and make it accretive. So maybe just walk through how PSX and PSXP evaluate third-party M&A and what types of assets would you consider?

[Tim Taylor:]

Yeah. Elvira, it is Tim. I think it's -- I would like to frame this by saying with the $20 billion plus backlog of organic projects at PSX, there is a great backlog of organic growth to really drive a lot of value. And this is an MLP that we positioned to be a high growth MLPs. So, we’ve got organic growth. We’ve got a lot of options across refining and marketing at PSX. We got gathering and processing tie-ins, our chemicals business. So, a nice integrated downstream business where logistics play a very, very important part. So, there's a lot of options there to play. Now that said, I think when we think about M&A, we want something that is a, if we did that it would have to be fee-based, it would have to be complementary and create additional options to continue that growth and drive that growth story for PSXP. And it has to be good for PSXP unitholders, as well as benefit PSX.

[Elvira Scotto:]

Great. That’s very helpful. And then my next question is on natural gas liquids. Now, given the weakness in NGL prices, can you talk about the impact of any that these weak prices are having on Sand Hills, Southern Hills pipelines? It sounds like volumes are good and they are still moving forward with expansion plans. But just any color there would be helpful?

[Bob Herman:]

Elvira, this is Bob. I think we’ve continue to see NGL volumes come to the market and appear to be growing a bit. We see continued interest from the producers to price NGLs. The prices are kind of a tag along from gas drilling and other drilling kind of in the corners of Eagle Ford and Permian, some of those areas. NGL volume continues to be increasing out there and we’ve seen volume, particularly on Sand Hills, continue to grow quarter-on-quarter. So, we are feeling very good about NGL supply to our NGL business.

[Tom Liberti:]

Elvira, it’s Tom. I would add just a little bit more color. We’ve actually increased capacity on the Sand Hills line from 200 to about 240 going to 250 right now. We still have plans to put little bit more capital into pumping capacity in connections to increase that capacity even further.

[Elvira Scotto:]

Okay. Great. Thanks a lot.

[Operator:]

Jeremy Tonet from JPMorgan is online with the questions.

[Jeremy Tonet:]

Good afternoon.

[Tim Taylor:]

Hi, Jeremy.

[Jeremy Tonet:]

I was wondering as far as Bayou Bridge is concerned, congratulations there. It seems like there could be an expansion at St. James. You have that open season going there. But I am wondering about moving in the other direction, is there potential to expand that pipeline further into Texas, possibly tap into condensate or other light production from the Eagle Ford?

[Tim Taylor:]

Yes. Jeremy, it’s Tim. I am going to address Bayou Bridge. Today, the plan is that pipe will go from Beaumont to St. James. There is a supplementary open season, expansion open season to see the size of the pipe that we go from Lakes Charles on over to St. James. So it really is a long pipe from the Beaumont, Nederland terminals that we have into the St. James. So I think that that’s a key point. So that’s going to happen. There is other options to perhaps extend that system further as we assess additional shipper interest. So I want to make sure that we’re clear on that. I think Bob you want to talk about the west part of that.

[Bob Herman:]

Yes. I think if you kind of look at the crude and condensate system, we have been looking at and talking about for Texas and Louisiana this fits in real nice, kind of gives us the eastern leg of that. One of the projects we’ve got underdevelopment is the crude condensate pipeline and splitter system that would reach into the Eagle Ford and certainly come to Sweeny. And then if you look at it, it is not much of a jump to get from Sweeny over to our Beaumont Terminal and then all of a sudden, you take an Eagle Ford condensate and you put into St. James or Louisiana. So that continues to be a focus area for us and we think that’s a good development opportunity for PSX.

[Jeremy Tonet:]

Great. Thanks for that. It seems like you guys have gotten a pretty good partnership with Energy Transfer family going with some of the joint ventures you have announced so far. Do you see more opportunities for kind of joint development with them?

[Bob Herman:]

I just think the asset overlay that we’ve had has really fit that. So I think they are good partner and we will continue to look where we have overlap and the ability to drive value project. We will look at partnering with them and of course with other people. And then, we’ve got our own set of organic opportunities as well.

[Jeremy Tonet:]

Great. Thanks. And then just one last one. If you could refresh us on the size of the EBITDA dropdown pool upstairs and how do you see the current environment impacting that? Is it getting smaller or larger, or what are your thoughts there?

[Bob Herman:]

I start today with looking at midstream, we start with kind of -- and including refinery logistics, which start with the $1 billion of EBITDA at PSX. So it’s a PSX perspective. Under construction, we have about $7 billion of capital projects with the Sweeny Frac, the LPG terminal that they joint ventures within Energy Transfers, with Sunoco, Beaumont Terminal, etcetera. And that adds -- if you have a seven times multiple, it would add about a $1 billion of EBITDA, so you are at 2. And then we are still in the early engineering phase and additional $2 billion to $3 billion of capital in that 2018-2019 timeframe. That would add again another $300 million to $400 million of EBITDA. So I think we still see the 2.3 pool at PSX developing at a run rate basis at the end of ‘18 and we can see expansion beyond that as we continue to develop new projects.

[Jeremy Tonet:]

Great. Thanks for that. That’s it for me.

[Operator:]

Kristina Kazarian from Deutsche Bank is on the line with the question.

[Kristina Kazarian:]

Hey, guys. Greg, well the other Greg mentioned on the PSX call this morning about $2 billion of midstream CapEx at the PSX level and the potential for that over the next couple years. Can you guys talk a little bit about some of the projects that would potentially drive this magnitude of CapEx? And what it takes to move these projects, maybe like Sweeny Frac 2, condensate splitters, pipes, LPG expansion from the backlog into the current project queue?

[Bob Herman:]

Sure. This is Bob. I can take a shot at that. So when we look at spending $2 billion to $2.5 billion, I think, of capital and midstream over the next few years. We still have work to do, obviously next year to finish the LPG export terminal that will be done second half of next year and start exporting LPGs. We’ve got really the next year and a half is kind of the heavy lift for Dakota Access and ETCOP, Bayou bridge. We just announced that last night we’re already out working the way the first leg of that pipe. So next year is a good look lift for that. Beaumont expansion, we've identified several projects over there that really takes out over the next four or five years of incremental expansion opportunities in income stream. And then we look at back to or the Sweeny complex, a crude condensate line out of Eagle Ford over to Sweeny and probably a natural fit them with a condensate splitter at Sweeny. Those are projects we are actively working today. And Tim just said, in their early stages of engineering and I think we would see those coming for final investment decision, sometime next year and getting right into that queue. So I would say that those are active projects right now for us.

[Kristina Kazarian:]

Great. And then follow-up on that. Now that PSXP has the IG-rated balance sheet, how do I think about which projects running at a PSX level versus the PSXP level over the next couple of years? And what the right run rate on PSXP CapEx should be?

[Tom Liberti:]

Yeah. Kristina, this is Tom. We look at each project individually. And one is going to be the timing of the project when the EBITDA actually comes online, the size that we have, the situation wherein as we get into a growth mode of how much capital we can handle, still keeping into our debt covenants. But you saw this year we’ll be in the $160 million to $200 million kind of number of things depending on how much of the paradigm pipeline shifts over to 2016. And again, those same kind of rates now going into next year. We haven’t given a capital outlook at. But those kinds of things you can kind of count on. And again, we look each time each individual project and see whether it fits into PSXP for organic growth or not.

[Kristina Kazarian:]

And then last one on my side is I know Greg talked on the call this morning about how the vision for PSXP is to remain a fee-based entity with high growth rates. So can you guys provide a little more color on what like fee-based actually means in your mind?

[Greg Maxwell:]

So, I think when you think about fee-based for us, it’s really the throughput deficiency underpinning the commercial side. So there is both a component say, a tariff or fee and then there is a volume piece because you got to work both piece of that. So we’re still looking for contracts and commercial arrangements that really underpin these investments with those I call it throughput and efficiency types of agreements. That give a great deal of assurance around the cash flow, around the asset as you build that.

[Kristina Kazarian:]

But does that mean if there was an asset that we might not traditionally think of this fee-based but PSX could do something to offset or take off the risk and structure those contracts that way that could potentially be a PSXP qualifiable asset or a sit for the MLP?

[Greg Maxwell:]

From an MLP perspective, from PSX perspective -- from PSXP perspective, it used to be qualified income but as long as I met that definition, yes, you could structure something that fits that definition to then be the part of an MLP-able pool.

[Bob Herman:]

If you’re asking Kristina, if there is an asset that has both fee-based and commodity risk to it, could we split that between parent and PSXP, yes, we could obviously do that.

[Kristina Kazarian:]

Perfect. Thanks, guys. Nice job.

[Tim Taylor:]

Thank you.

[Operator:]

Michael Blum from Wells Fargo is online with the question.

[Michael Blum:]

Thanks. My questions were addressed.

[Operator:]

Brian Zarahn from Barclays is online with the question.

[Brian Zarahn:]

Good afternoon, everybody.

[Tim Taylor:]

Hi, Brian.

[Brian Zarahn:]

Just following up on Bayou Bridge, I think on the parent call you gave a cost estimate and return expectations. On the return expectations, are those based on contracted capacity or just expected utilization or mix of contracts and spot volumes?

[Tim Taylor:]

It’s really based on what we see is contracted committed at this point. I think there can be some upside depending on the success of the open season and of course the spot business has a component that we’ve not built into our thinking about the base driver.

[Brian Zarahn:]

In terms of the shippers, I’m assuming PSX was one of the anchored shippers?

[Tim Taylor:]

We don’t disclose the shippers or the shipping terms at this point.

[Brian Zarahn:]

Okay. Then in terms of the project cost, does that include any potential storage expansions, do we need any additional package of Lake Charles?

[Tim Taylor:]

No, we don’t need any additional at Lake Charles because this pipeline will run in right into the Lake Charles crude system now. At Clifton Ridge we have storage to supply the refinery and it will originate barrels out of our Beaumont Terminal from our standpoint and we are already currently building additional crude storage there.

[Brian Zarahn:]

So on the lake farm, Lake Charles or St. James, there is the discussions previously was the potential shippers on that lake. I mean, it sounds like you feel fairly confident that that section of the project will move forward. I guess any commentary on new body at least you are seeing from shippers.

[Tim Taylor:]

Yes. I think we are absolutely confident that the lake from Lake Charles to St. James is moving the expanded open season that we announced yesterday they are really set to the size of the pipe. We think there is enough interest now that we might want upsize that pipe from the base project.

[Bob Herman:]

So base is 44-inch and we are looking at can we go possibly 30-inch pipe because of demand side on that.

[Brian Zarahn:]

Okay. So the cost somebody you gave around the $100 million, is that included or excluded the eastern lake?

[Bob Herman:]

It includes the Eastern Lake, we gave the range I think $700 million or $800 million and the range really is the difference between 24-inch and 30-inch pipe.

[Brian Zarahn:]

Okay. And the couple I guess small item in the second quarter, the taxes, is that more increase there to about $3 million? Is that property taxes or is that more of a one-time item or is that a good run rate?

[Greg Maxwell:]

Yes. This is Greg. It was more or less one-time item. Basically it’s a catch-up accrual for about six months for the property taxes. So then the normal monthly accruals occur as we go forward.

[Brian Zarahn:]

Okay. And last one for me. Any updated view on maintenance CapEx for the remainder of the year?

[Greg Maxwell:]

Yes. Maintenance CapEx will be up a little bit in the second half of the year. It’s basically because we are down a little bit from forecast from the first half. So we should end the year right around $9 million from the $3 million to $3.5 million that we’re at today. So I think it’s more likely $5.5 million, $6 million in the second half of the year.

[Brian Zarahn:]

Thank you.

[Operator:]

And we have no further questions at this time. I’ll now turn the call back over to Kevin Mitchell for closing remarks.

[Kevin Mitchell:]

Thank you very much for participating in the call today. We do appreciate your interest in Phillips 66 Partners. You’ll be able to find the transcript of the call posted on our website shortly. And if you have any additional questions, please feel free to contact me or CW. Thanks again.

[Operator:]

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