Phillips 66 Partners LP
Q3 2015 Earnings Call Transcript

Published: 30 Oct 2015

[Operator:]

Welcome to the Third Quarter 2015 Phillips 66 Earnings Conference Call. My name is Mike, 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. Kevin, you may begin.

[Kevin Mitchell:]

Thank you, Mike. Good afternoon. And welcome to the Phillips 66 Partners’ third quarter earnings call. With me today are Tim Taylor, President of Phillips 66 Partners; Greg Maxwell, Vice President and CFO; 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 2, contains our Safe Harbor statement. It is a reminder that we will be making forward-looking statements during the presentation and the question-and-answer session. Actual results may differ materially from what we present today. 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 G. Taylor:]

Thank you, Kevin, and good afternoon, everyone. As you can see from the graph on Slide 3, Phillips 66 Partners continues to deliver strong quarter-over-quarter distribution growth while maintaining a sound coverage ratio. We are committed to achieving at 38% compound annual growth rate on distributions from fourth quarter 2013 through 2018. Growth in our distributions will be supported by drop down acquisitions from our parent Phillips 66, organic projects constructed at Phillips 66 Partners and strategic acquisitions that benefit both the LP unit holders and the general partner. We had a strong third quarter, which highlights the consistent earnings of our fee based portfolio. Distributable cash flow was higher, driven by increased pipeline and terminal volumes and higher distributions from Explorer pipeline and Sand Hills pipeline. This supported the recently declared third quarter distribution of $42.8 per unit. That 7% higher than the second quarter and represents a 35% increase over the third quarter of 2014. Since our IPO, we've increased distributions at a compound annual growth rate of 42%. Turning to operations total pipeline throughput volumes from the quarter excluding volumes from equity affiliates were 744,000 barrels per day up 2% from the last quarter. Total terminal throughput volumes were 977,000 barrels per day 4% higher than in the second quarter. These increases were primarily driven by higher volumes in the Sweeny to Pasadena Products System, the Clifton Ridge Crude System, and the Eagle Ford Gathering System slightly offset by lower volumes on the Gold Line Product System. Average pipeline revenue per barrel increased to $0.45 in the third quarter up from $ 0.44 last quarter. Average terminal revenue remain flat at $0.39, both of these rates exclude equity affiliates. This morning, we announce PSXPs capital budget for 2016 will be $314 million. This includes $300 million for growth capital. We also announced that Phillips 66 Partners has agreed to acquire Phillips 66’s 40% interest in the Bayou Bridge pipeline joint venture at Phillips 66’s investment cost, which is approximately $70 million. This project is a great fit for partners as it will provide fee based earnings and the written by committed volumes from strong counter parties. Now I'll turn the call over the call over to Bob Herman to discuss our organic growth projects.

[Robert A. Herman:]

Thanks, Tim. Turning to Slide 4, we continue to make good progress on our organic growth projects. As Tim just mentioned we will acquire Phillips 66’s interest in the Bayou bridge project, which will delivered crude oil from the Phillips 66 and Sunoco Logistics Partners terminals in Nederland, Texas to Lake Charles, Louisiana and then on to Something. James Louisiana. Construction is underway on the 30-inch Nederland to Lake Charles segment of the pipeline, which is expected to begin commercial operations towards the end of the first quarter of 2016. The second leg from Lake Charles to St. James is an open season to determine the diameter of the pipe for that segment, which is schedule the commence service in the second half of 2017. The pipeline project is part of the joint venture with energy transfer partners and operators Sunoco Logistics Partners with each owning 30%. The second phase of the Eagle Ford Gathering System was completed in September and should add additional EBITDA in the fourth quarter. The Cross-Channel Connector Products System is currently operational is on track to finish the final third-party connection in the fourth quarter of this year. The Palermo Rail Terminal in the Bakken remains on budget and on schedule. We have begun taking truck deliveries and will load the first railcars by yearend. Once the Sakakawea Pipeline is complete the terminal will also take deliveries via pipeline. The Sakakawea Pipeline should be in operation in 2016 with completion timing dependent on permitting and weather. Going forward as PSXP executes its growth plans, we expect the partnership to continue to take on more and larger organic projects to supplement acquisitions from Phillips 66. Highlight of our 2016 capital budget include completing the Sakakawea Pipeline increasing capacity on the Sand Hills pipeline and continued funding of the Bayou Bridge crude pipeline project. Now, I will turn the call over to Greg Maxwell to provide a more detailed update on the financial results for the quarter.

[Greg G. Maxwell:]

Thanks Bob. Good afternoon, everyone. Beginning on Slide 5, third quarter revenues and other income was $91.4 million; this is up $7.6 million from the second quarter. This has driven primarily by increased equity earnings from Explorer pipeline and higher pipeline in terminal volumes. Total cost and expenses were $39 million down $2.9 million from the prior quarter, mainly driven by lower cost Hartford and lower maintenance expense. The General Partners Board recently declared a third quarter cash distribution of $0.428 per limited partner unit, which will be payable on November 12. This represents a 7% increase over the $0.40 per unit distribution last quarter and the 35% increase over the third quarter of 2014 distribution. This next slide shows our adjusted EBITDA and distributable cash flow growth since the third quarter of last year. We continue to execute our growth plan, which has resulted in an adjusted EBITDA increase of 104% year-over-year. Over the same time period, distributable cash flow is up over 90% and we are continuing to deliver on our plans for our five-year, 30% distribution CAGR for our unit holders. Turning to Slide 7. Adjusted EBITDA for the third quarter was $73.4 million and distributable cash flow was $64.5 million. During the quarter, PSXP received net minimum volume deficiency payments of $2.4 million from Phillips 66. These payments were primarily triggered at the gold line product system. We had maintenance capital expenditures of $2.2 million during the quarter and total cash distributions will be $46.2 million, resulting in a coverage ratio of 1.4 times. Slide 8 shows our current financial position. We ended the quarter with $73 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 under four times. And long-term, we expect this rate ratio to decrease to our targeted level of 3.5 times as organic growth projects come on line. This concludes our prepared remarks. We will now open the line for questions.

[Operator:]

Thank you [Operator Instructions] Your first question is from Kristina Kazarian with Deutsche Bank.

[Kristina Kazarian:]

Hey, guys. First Greg congratulations again, I really appreciate all your work over the past few years and Kevin very exciting for you as well.

[Greg G. Maxwell:]

Thank you.

[Kevin Mitchell:]

Thank you.

[Kristina Kazarian:]

So great announcement on Bayou Bridges today. Can you guys talked a bit about the rationale behind PSX stocking it at cost, and parent taking back units?

[Tim G. Taylor:]

Kristina. Its Tim. So I think we are always want to continue to develop organic projects at PSXP, it’s the right kind of project, we actually have that coming into service in the first half of 2016 and then with additional spend and organic build and then EBITDA hitting later when we complete the pipe to St. James. So for us it’s a really good fit with PSXP. As far as cost is not in operation and both take back units and cash at $70 million are relatively small, but I think it shows how we see the relationship between the sponsor and the partnership to try and maximize the value. So I think it’s a win-win for both the sponsors as well as the partnership.

[Kristina Kazarian:]

And I know the open season is still pending on the extension, but have you given even just a guide on the EBITDA generation or the potential of the pipes.

[J.T Liberti:]

Yes, we talked about typical midstream EBITDA Kristina. This is Tom. And we've got a base load of EBITDA on the project as it is and so anything that we would add in the open season would be incremental to that.

[Kristina Kazarian:]

Sounds good and then last one for me. I know PSX has put out its 2016 CapEx budget and it looks like about $2 billion of that is going to be spent on midstream. Could you maybe talk about what this means for the PSX opportunity that from a dropdown perspective and frame it relative to that $20 billion midstream potential growth projects at PSX that they talk about?

[Robert A. Herman:]

Yes Kristina its Bob. I think the $2 billion you see for PSX in the midstream for 2016 is really a completion of the LPG export terminal. It’s our spending on DAPL and ETKOP lines. It’s the completion of some of the smaller projects we’ve got going. We continue to build out Beaumont Terminal and adding tankage there. And really all of those projects we finish next year, for the most that becomes MPL type EBITDA, fee-based assets for the most part. And then we will also spend some money anticipated next year on kind of the next tranche of projects that we would see coming on in 2019, 2020, belt more work around Frac 2 and additional infrastructure projects around our existing refining base that give us more access to advantage crude or allow us better access for export of products. So we will continue to work on those projects as part that $2 billion next year.

[Kristina Kazarian:]

Alright. That’s it from me. Great job again today guys.

[Robert A. Herman:]

Thank you.

[Greg G. Maxwell:]

Thank you.

[Operator:]

Your next question comes from Jeremy Tonet with JP Morgan.

[Andrew Burd:]

Hi good afternoon. It’s actually Andy stepping in. In terms of the higher distribution from the joint venture pipelines, can you give an incremental color in terms of the compensation of the beat between either Explorer or Sand Hills?

[J.T Liberti:]

Yes this is Tom, Andy. Explorer had some record volumes in the third quarter. And so their contribution was much higher, so with Sand Hills, and the thing that’s remember to is Sand and Southern is in the second quarter we received two months of the quarter’s earnings because of working capital adjustments that we had. So were really reflected in the third quarter a full quarter instead two-thirds of the quarter.

[Andrew Burd:]

Okay, and then so fair to say that the operational performance of Sand and Southern Hills is likely sustainable given that it’s to ramp us whereas Explorer has more to do with refined products demand being up than anything else and this might not necessarily repeat in the future?

[J.T Liberti:]

Explorer will still be in its typical historical kind of volume levels, but there were some refinery upsets in the Midwest that added to their volumes in the third quarter.

[Andrew Burd:]

Okay, great. And then I guess final question from us is on the M&A environment. I guess specifically focused on crude assets closer to the well head similar to maybe the Bakken assets or Eagle Ford that you are developing and whether or not the bid ask spread has come in there may be more so than other assets and any general update on that environment could be helpful?

[Tim G. Taylor:]

Yes this is Tim. I would just say that we continue to look at everything that’s out there, gathering systems, other types of logistics assets. First and foremost it’s really nice and it ties to our systems where we can support that on an incremental basis or provide some additional growth platform. So I think that’s always something of interest, we still like the organic projects that we have, they really add a lot of value, but I do sense that perhaps things are starting to become more available in the midstream space overtime. So we will keep an eye on that but always like to emphasize that needs to be a strategic fit with the scale and scope of our operations, so that we get the maximum value for the partnership with that.

[Andrew Burd:]

Great. Thanks very much.

[Operator:]

Your next question comes from Brian Zarahn with Barclays.

[Brian J. Zarahn:]

Afternoon everybody.

[Greg G. Maxwell:]

Hey Brian, good afternoon.

[Tim G. Taylor:]

Afternoon.

[Brian J. Zarahn:]

Just want to echo the prior comments to both on Greg and Kevin. On the 300 million of growth CapEx for next year, is Bayou Bridge the largest portion of the budget?

[J.T Liberti:]

Yes Brian it’s Tom. It is the biggest portion in 2016. Sand Hills has a pretty spend in there also. Then we've got a number of smaller projects around the assets also.

[Brian J. Zarahn:]

Okay. And then staying on Bayou Bridge, how should we - in understanding it’s coming in, in phases and typically there is a ramp period high now. How should we think about the contribution to PSXP next year and then going forward?

[J.T Liberti:]

Yes next year, somewhere towards the end of the first quarter, we should begin to be getting some EBITDA from the Nederland to Lake Charles portion, but it will be small. So that will ramp up overtime, because we’ll still have costs associated with the rest of the spend. So full income should be coming in towards the end of 2017.

[Brian J. Zarahn:]

And then looking at the competitive environment, any impact from a proposed expansion into the St. James on your project?

[Robert A. Herman:]

Yes I think that's why we went out to open season. Zarahn This is Bob. We had the base pipe underwritten and then there seems to be more and more interest for Texas crude to find its way to Louisiana. So that's why we've gone back out to open season before we size that second leg.

[Brian J. Zarahn:]

And then moving up stream from how you bridge, any change in the cost or in the service date for DAPL ETKOP?

[J.T Liberti:]

No I think we see that project that continues to be on time on budget and right away acquisition in permitting efforts particularly for the DAPL leg of that project kind of continue on pace. We've got some time to go yet to complete all of that but we feel the end of 2016 early 2017 sort of DAPL ETKOP is still to schedule.

[Brian J. Zarahn:]

And then last one for me.

[Greg G. Maxwell:]

And Brian I would add remember this. I was just going to add that’s volume underwritten by some real good counterparties also.

[Brian J. Zarahn:]

Understood. Last one for me. Looking at financing and the market changes, everyday it's got a little better over the past few days, but if we are in a choppy equity market environment next year does that impact your dropdown plans and your financing plans for PSXP?

[Tim G. Taylor:]

Yes, Brain. I think we look at it and certainly we would like to have a stable market with really high pipe pressures, but I think if you look at it, very competitive source of cost of capital for us, it does not change our plan to access both debt and equity markets to continue to grow the partnership.

[Greg G. Maxwell:]

And Brain this is Greg. The only other thing I would add to that is, we've had discussions with the bankers and other thing, we think that be in a strong sponsored MLP them that we would still have the ability to do the financing.

[Brian J. Zarahn:]

Thanks for the color everybody.

[Operator:]

Your next question comes from Bhavesh Lodhia with Credit Suisse.

[Bhavesh Lodhia:]

Hi. Good afternoon guys. Glad to see the organic projects move to PSXP so as if look ahead into the next couple of years, would you say the smaller more development in the projects will move over to PSXP or would PSXP rather take like some level of interest in the larger projects that PSXP is doing?

[Greg G. Maxwell:]

Yes I think what you'll see us do overtime, as PSXP continues to grow, it to take on more and more organic projects and we’ll continue to look at every project individually and balance kind of the capital carry load that PSXP could handle versus the timing of that project. As Tim alluded to earlier, this one that we just do to Bayou Bridge fits perfectly, because we did some incremental EBITDA coming in very quickly on this project, helps support the capital spending and going forward. So I think all options around the table going forward whether we continue to develop projects up top and drop them as appropriate or co-invest with the sponsor on some of the bigger projects, but it will be really just a function of scale of the project and the size of PSXP.

[Bhavesh Lodhia:]

And just on bio Bayou Bridge, is the cost still $700 million to $900 million overall?

[J.T Liberti:]

This is Tom Bhavesh. The total cost of the entire project is in $700 million to $800 million range and we are off course 40% of that.

[Bhavesh Lodhia:]

And most of that would be in the 1Q, 2016 regions right.

[J.T Liberti:]

No. Actually the spend next year the remaining spend are remaining spend of about $220 million and that kind of range will be split over 2016 to 2017.

[Bhavesh Lodhia:]

Okay, that helps. Thank you so much.

[Operator:]

Your next question comes from Michael Sheen with Evercore ISI.

[Timm A. Schneider:]

Hey guys this is actually Timm Schneider. I had a macro question for you on the LPG exports actually. First of all, can you remind us how much of your facility is going to be contract versus spot?

[Tim G. Taylor:]

Yes, this is Tim, Timm. And so this is really a PSX question on our midstream. So we've said, to essentially to think about it as 150,000 barrels day, eight cargos, I think our objective would be to have six of those say with outside third-parties and then the two of those would then be a P66 commitment or opportunity to market those. And we are not that spot or term, our preference certainly is term, although spot can certainly serve a role as well. So are really trying to structure toward term agreements, but there are certainly opportunities in the spot market too, but we want this to be underwritten with those term agreements.

[Timm A. Schneider:]

Okay, got it. And then the follow-up I had I guess, the counter parties that you are signing up on term. Are there actual end users or do you just trading - just kind of move to volumes around where they see the biggest opportunity.

[Robert A. Herman:]

No. Tim this is Bob. Today the counter parties have loose signed up to take cargos they are all end users and for most part for petrochem type users in either in the far east and some domestic use in Mexico, Latin America and I would say that the interest by other parties for the remaining cargos that we are going to contract are in the same vein.

[Timm A. Schneider:]

Okay, got it. And I appreciate you guys answering these, because I know it’s more PSX focused, but one last follow-up and I guess this is an opinion question. Do you think there is ever a scenario where even if a counter-party has term contracts that those cargos actually won’t get lifted, because naphtha prices in Asia for example render is not economic to import U.S. LPG. I know it doesn’t really matter for you guys, because this stuff is contracted, just more of a kind of U.S. NGL balance?

[Tim G. Taylor:]

I think when we look at the counter-parties we have to-date, the fact that they wanted petrochem processing and they are talking about PDH unit. So you can’t feed naphtha to PDH and particularly PDH and that are integrated with polypropylene derivative units, those make sense in most scenarios. So we would think that those will continue lift. The Mexico, Latin America type barrels that are going into domestic demand isn’t likely to be traded off in naphtha market either. So I think we would see most of those cargos getting lifted.

[Timm A. Schneider:]

Okay. Thank you guys.

[Greg G. Maxwell:]

Timm just one comment on that. I guess I would think about it in terms of what is the sub cost and the variable cost versus the alternative and that’s kind of what would have to take place. You want to make sure that you have covered that incrementally versus your commitment. And that would be kind of where I would – it have to be discounted to be able to cover that extra cost that they consider.

[Timm A. Schneider:]

I don’t remember if you have put it out or not, the terminal fee for the LPG terminal?

[Greg G. Maxwell:]

No, we have not published that, but it’s very competitive.

[Timm A. Schneider:]

Okay, got it. Thank you.

[Greg G. Maxwell:]

Yes.

[Operator:]

There are no further questions at this time. I will turn the call back over to the presenters.

[Kevin Mitchell:]

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

[Operator:]

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