Shell Midstream Partners, L.P.
Q1 2018 Earnings Call Transcript

Published: 3 May 2018

[Operator:]

Good morning. My name is Victor and I will be your conference operator for today. At this time I would like to welcome everyone to the First Quarter 2018 Shell Midstream Partners’ Earnings Call. All participants are in a listen-only mode. Latter we will conduct a question-and-answer session, and instructions will be given at that time. [Operator Instructions] I will now like to turn the call over to Ms. Courtney Selinidis, Investor Relations Officer. You may begin your conference.

[Courtney Selinidis:]

Thank you. Welcome to the first quarter Earnings Conference Call for Shell Midstream Partners. With me today are Kevin Nichols, CEO; and Shawn Carsten, CFO. Slide 2 contains our Safe Harbor statement. We will be making forward-looking statements related to future events and expectations during the presentation and Q&A session. Actual results may differ materially from such statements and factors that could cause actual results to be different are included here as well as in this morning's press release and under risk factors in our filings with the SEC. Today's call also contains certain non-GAAP financial measures. Please refer to the earnings press release at Appendix 1 of this presentation for important disclosures regarding such measures including reconciliations to the most comparable GAAP financial measures. We will take questions at the end of the presentation. With that, I'll turn the call over to Kevin Nichols.

[Kevin Nichols:]

Thank you, Courtney. Good morning. And thank you for joining the Shell Midstream Partners quarter one 2018 earning webcast. The business generated $64 million of net income and $96 million of adjusted EBITDA in the quarter. We achieved a significant milestone with the successful completion of the Zydeco integrity test on schedule and within quarter one guidance. This was a proactive step to ensure the long-term reliability of the Zydeco pipeline for our customers, and communities in which we operate. Excluding the impact of the Zydeco integrity test, as well as certain onetime positive offsetting items, Shell Midstream Partners would have generated approximately $100 million in net income and about $130 million of adjusted EBITDA, up 15% and 10% respectively from the prior quarter. And I’m proud to say this was achieved against the backdrop of a difficult market. As I’m sure you are all aware the FERC issued a revised policy statement in mid-March addressing changes to the tax allowances for MLPs. Shortly after FERC’s announcement, we issued a press release confirming that the policy revision would not have a material impact on Shell Midstream Partners. However, as I visited with the investors over the last month, it’s clear that there continues to be some questions on this topic. So let me take a bit of time discussing the announcement what it means to Shell Midstream Partners and why we do not expect a material impact to the business. As a starting point it’s important to keep in mind the diversified nature of our portfolio, in terms of geography, product type, asset class, customer base. This diversity is also seen in the regulatory environment. In fact, approximately two thirds of our run rate cash available for distribution is either not regulated by the FERC, or already owned directly by Seacorp. Looking at the FERC policy announcement, they really made two statements. First, they issued a policy revision eliminating the income tax allowance for MLPs in the cost of service model. We do not have any pipelines in a cost of service model. The second statement is related to FERC’s indexation methodology. At this time it’s very difficult to determine what the index bases may look like out in 2020. But what is important to note is that contracts on pipelines can create protection from impact of a change to the indexation. An example of this is our Zydeco pipeline. The contracts on Zydeco explicitly state that the tariffs will not go negative in the case of negative indexation. In addition, Zydeco has not taken all of the allowable increases under indexation, creating headroom for our tariffs in the future. So to summarize, two thirds of our portfolio is not regulated by the FERC or is already owned directly by a Seacorp. The remaining third of our portfolio, that is FERC regulated, is not expected to see a material impact from this policy revision. And looking at our portfolio going forward, we expect further diversification as the majority of our remaining runway is not FERC regulated. So let me now transition to the operating results for the quarter. In our onshore portfolio, results were largely driven by the integrity project completed on the Zydeco mainline. As planned, the line was taken out of service on February 1. Following the successful completion of the integrity test, the pipeline was restored to normal operations. The activity was completed within the expected timeline and the quarter one guidance previously communicated. The remaining pipelines and terminals in our onshore portfolio continue to deliver steady results in line with the fourth quarter of 2017. In the offshore, total volumes were slightly higher than the prior quarter largely due to increased volumes on the eastern corridor. Looking forward, volumes on the Auger Pipeline and the eastern corridor are expected to continue to increase. Now before I turn the call over to Shawn to walk you through the financial results for the quarter, I wanted to bring your attention to the recent announcement made by our sponsor Shell. Last week, Shell took final investment decision for Vito, a deepwater development in the Gulf of Mexico. This project is expected to have a forward-looking breakeven price estimated to be less than $35 a barrel. This will be Shell’s 11th deepwater host in the Gulf of Mexico and is currently scheduled to begin production in 2021. Peak production is expected to reach approximately 100,000 barrels per day which will flow into our Mars pipeline. Over the first five years of production, Vito is expected to increase the Mars pipeline cash available for distribution by some 18%. This is a great example of our offshore corridor strategy in action. Organic growth with no capital required by our company. With that I’ll now hand the call over to Shawn to discuss the financial results for the quarter. Shawn?

[Shawn Carsten:]

Thanks Kevin. Now looking at how this activity translates into financial performance for the quarter, our revenue was $99.6 million, down about $27 million from the prior quarter, which was primarily due to the 49-day outage at Zydeco during the integrity test. Income from equity investments was $40.2 million, lower than the prior quarter, largely driven by storage revenue at Mars. In addition, beginning this quarter, certain income from equity investments will be recorded as other income which does not impact to our results, but will show some variance in the individual lines in the P&L. Our dividend income was $24.9 million up about $15 million from the fourth quarter. This increase was largely driven by a onetime increase dividend following corporate tax reform. So in total, adjusted EBITDA attributable to the partnership was approximately $96 million, down about $23 million from the prior quarter. The Zydeco integrity test had a total impact of about $55 million to adjusted EBITDA in the first quarter. This impact was partially offset by higher dividend income a full quarter results on our December drop and in insurance recovery. After interest expense, maintenance capital and other adjustments total cash available for distribution was $80.1 million. Our partnership declared a distribution of $34.8 per LP unit representing a 4.5% increase over the fourth quarter and a 20% increase over the first quarter of 2017. The resulting coverage ratio for the quarter was 0.8x, now removing the one time impact of the Zydeco integrity test, as well the positive impact from the onetime dividend and insurance recovery, the underlying coverage ratio would have been around 1.1x. As in previous years we are expecting higher than average routine maintenance to occur within the second quarter, the most significant of which is an upstream plant producer turnaround at Mars that we expect to have about a $7 million impact to our net income and cash available for distribution. In addition, several routine maintenance programs were delayed given ongoing project work, which will now be completed in the second quarter. So finally, let me quote the partnership’s balance sheet and liquidity. As of March 31, the partnership had total cash and cash equivalents of $185 million and total debt outstanding of about $879. As previously guided, we intend to acquire between $1 billion to $1.4 billion of assets from Shell in 2018. We plan to use our cash on hand and capacity under our debt facilities at the time of any future acquisition. So let me reiterate that we do not intend to raise additional equity in 2018. So with all that will now take your questions. Operator?

[Operator:]

[Operator Instructions] And our first question comes from the line of Jeremy Tonet from JP Morgan. You may begin. Your line may be on mute.

[Unidentified Analyst:]

Good morning this is Bill on for Jeremy. Just curious on your later day growth plans as you know will be going pass 2018-2019? Thanks.

[Kevin Nichols:]

Sorry Bill could you repeat the question, you cut at the very end there? This is Kevin.

[Unidentified Analyst:]

Sorry about that. Just curious on latter dated grow plans as we go past 2018 and 2019, how you think about that?

[Kevin Nichols:]

Yes thank you. We've given guidance through 2019 we're not at this time giving guidance beyond. We'll always take a look at the marketplace, we’ll take a look at the peers and then we’ll look to refresh that guidance at a later date. But for right now the guidance is 20% for 2018 and we’ll continue to reiterate our guidance in 2019 at mid teens.

[Unidentified Analyst:]

Okay great thanks. And then – nice project with Vito just curious for the rest of the year how the Gulf of Mexico outlook is progressing? Thanks.

[Kevin Nichols:]

Yes thanks Bill again. We've always been bullish on the Gulf of Mexico. We have continued to see activity in the Gulf of Mexico and there are projects that are slated to come on both in 2018 and 2019. 2018 is estimated to reach a new peak in the Gulf of Mexico. And we have projects that are maturing like Stampede which is connected late last year into Amberjack and flows into Mars. And we have additional fields and projects that we’ll be connecting to the eastern corridor later this year like Crown & Anchor and some additional volume coming in from Coulomb. So we continue to see new prospects and new business coming to the Gulf of Mexico 2018, 2019 and beyond.

[Unidentified Analyst:]

Great thank you for taking my questions.

[Operator:]

And our next question comes from the line of Theresa Chen from Barclays. You may begin.

[Theresa Chen:]

Good morning. Kevin to follow-up on your comments related to FERC, can you talk about the proportion of indexation contracts you have in some of your onshore pipelines? I understand that explorer is hundred percent market based, but any additional color on Colonial Bengal and low cap?

[Kevin Nichols:]

Yes good morning Theresa. Thank you very much. We don't have all of that information that we give out to the public. Some of those lines are not operated by Shell. And I would defer you to those companies and what they're answering related to this, the Colonial being one of them. So it is true that these lines and most of the lines have a combination of market based rates, as well as index rates, but not all of that is out in the public domain.

[Theresa Chen:]

Got it. I guess maybe on Zydeco specifically, any update on the re-contracting work you’ve been doing for the two contracts that are rolling off this year representing 30% of your consolidated revenue?

[Shawn Carsten:]

Yes, thanks Theresa. So the team is busy out negotiating with existing customers and talking to new customers. The team has done an excellent job over the last several years of creating the most flexible system in its area connecting Permian, connecting Bakken, connecting offshore as many sources of crude, as many destinations of crude that allows our customers and our customer demands to be met in any scenario that unfolds. So it's a little early in the process to have specific information with regards to terms, conditions, volumes. We’ll update that when we’re a little further of the process.

[Theresa Chen:]

Okay. In terms of quantifying the moving pieces a little bit more precisely with your press release for the Auger insurance proceeds remaining the $3.5 million, when do you expect to receive that during the year?

[Shawn Carsten:]

So Theresa right now we hope to receive it in Q2. But of course that’s a negotiation we’ll have with these gestures and go through the process. And so that’s the best guidance we can provide at this point.

[Theresa Chen:]

Got it. And for the $14.8 million bump in Colonial dividend, how much exactly was that due to the tax reform reimbursement? What's the current – a good current run rate?

[Shawn Carsten:]

Approximately $15 million was the incremental portion from the tax reform, above and beyond the normal distribution.

[Theresa Chen:]

Okay thank you. And lastly, just on the topic of IDR restructuring, any updates on your thoughts and timeline around that?

[Kevin Nichols:]

Yes, thanks Theresa. I’m not surprised by the question I knew it would come out. We get that question as we talk to investors. We recognize the impact of the IDRs, the deals that we have done to date have been accretive. We're going to be thoughtful and prudent on how we approach the market on this subject. But at this time we’ll take action when it's appropriate, but at this time we have no additional guidance.

[Theresa Chen:]

Okay, But on your comment about the deals they've done to date that are accretive, when you – I guess when you look at the announcements of many of your MLP peers where the transaction has been dilutive day one to the LP, is that an acceptable outcome to you?

[Kevin Nichols:]

I'm not going to talk about our forward looking deals. I think you can judge us based on the deals that we've done to date and the history that we've been in since we IPOed. And again we watch what's going on in the marketplace, we look and consider what our peers and others are doing, and we'll be thoughtful and prudent on how we approach the market.

[Theresa Chen:]

Thank you very much.

[Operator:]

Thank you. And our next question comes from the line of Brian Zarahn from Mizuho. You may begin.

[Brian Zarahn:]

Good morning.

[Kevin Nichols:]

Good morning Brian.

[Brian Zarahn:]

On Vito could you reiterate the impact that is the positive contribution you expect on Mars that you’re seeing 18%.

[Kevin Nichols:]

We think over the first five years you'll see an incremental cash available for distribution from the Mars pipeline system of about 18%.

[Brian Zarahn:]

Thanks. That’s helpful. And then on Appomattox, understanding that the volumes will flow on Mattox pipeline, but from Mattox to onshore how should we think about the contribution from that project on your asset base?

[Kevin Nichols:]

Well as you know Brian thanks. We recently, maybe it's not recent anymore, but we acquired an interest in the Proteus and Endymion system. So I think as you think about the molecules coming from the Appomattox platform, there will be an impact from the Mattox pipeline as that contract and that pipeline system is commissioned. Those volumes will then flow into that Proteus and Endymion corridor. So there'll be a tariff and some cash that's available from there. And then as it hits onshore, depending on where the customers and shippers want to take that product, you could see some additional benefits to some of the existing assets on the onshore footprint, as well.

[Brian Zarahn:]

That's helpful. And then shifting to dropdowns, your financing is completed. Guess what’s the thought process on why wait much longer to complete the drop down?

[Kevin Nichols:]

Yes that’s a good question. And I know that investors have been waiting for when is that drop down and what is that drop down going to be. We reiterate our guidance of the 2.5 to 2.9, we're very comfortable that will achieve the acquisition this year that will land us firmly in that range. With regards to the specific asset and the timing, we're just not giving guidance at this time. The team is busy working on the asset, getting it prepared, it's a separate process and we'll bring it out of the market when they're ready.

[Brian Zarahn:]

And then just following-up on a prior question on distribution growth, given the change in the market since you’ve issued 2019 distribution growth guidance, is there any consideration to potentially moderating 2019 distribution growth to retain more cash flow?

[Kevin Nichols:]

Yes, thank you Brian. No I know that's on the minds of a lot of our investors and we get that question. First and foremost, we have been all about delivering on what we say we're going to do from the very start of the IPO and the launch of this business. And so we'll continue to stick with that guidance. I think we were very – we did not give a specific number for 2019. We said it was in the mid teens. I think that gives us a little bit of a range to play with, with regards to sense of the market and where we want to go. But we will play within that range.

[Brian Zarahn:]

And the final question for me on your revolvers, can you just update us on your current interest rate given the change in LIBOR.

[Shawn Carsten:]

Yes Brian this is Shawn. So thanks for the question. So we’re still running in the range around 3%. So if you remember with the February equity offering we're down actually to a better position because our new revolver that we just picked up in December had a slightly lower base price than the prior one. So we're still in relatively good shape.

[Brian Zarahn:]

Thank you Shawn.

[Operator:]

Thank you. [Operator Instructions] Our next question comes lines of Gabe Moreen from Deutsche Bank. You may begin.

[Gabe Moreen:]

Just a couple quick questions from me. With the partnership getting larger and larger is any thought to actually seeking a credit rating and potentially issuing some longer term debt in conjunction with maybe further drops or financings?

[Shawn Carsten:]

Hi Gabe this is Shawn. So we’re always looking at that – our sponsor has always been clear that if it is supportive to the market, they're willing to have that conversation. But honestly right now our facilities with our sponsor we have a better interest rate than what we can get in the market. And so until such a time that is not advantageous to our unit holders, we won’t go for a public credit rating. And further I think on the covenants at those facilities it’s just simply easier for us to do business with our sponsors than with public market.

[Gabe Moreen:]

Got it. And then in terms of the difficult MLP capital markets out there in the portion of equity that was raised with your sponsor, should we read into that in terms of I guess appetite at the sponsor level to participate in future equity issuance. I’m just wondering how that conversation went and what the appetite might be for any future financings to place equity with the sponsor?

[Shawn Carsten:]

So Gabe I think it's always kind of where the markets are at the time. And we are pleased to be able to do this with our sponsor. And they are also pleased to buy at the price they would, that they bought it out. And we’re a long-term investment and our sponsor doesn’t look at this for the one time or quick hit [ph] where they're looking for the long-term. I’ll also remind everybody that the sponsor has not sold the unit in the market of what they own. And so the sponsor is fully committed to our MLP and that’s we now think about this.

[Gabe Moreen:]

Thanks. And then last one for me is just in terms of thinking about future dropdowns and I hear the organic growth coming out of the Gulf without really spending much in the way of additional capital. But any thoughts in terms of the next assets you might acquire having a bigger, I guess CapEx spend organic growth profile to them?

[Shawn Carsten:]

We haven't really given any guidance as to the specific assets. I think what we’ve said, we're going to look to diversify the portfolio, and the balance and see what assets are in favor and how that compliments the overall portfolio in terms of growth versus stability. We'll do more of – we’ll look to grow with our affiliate business. I think Crest was a great example of that. There is organic growth on the Nautilus gas gathering system as our affiliate continues to drill more and expand their operations out in the Permian, Crestwood will continue to grow to meet the needs. And we'll look for all those types of opportunities where affiliate is growing whether it’s in the Permian, Marcellus, Utica on shore or offshore. So that's another area where we would see some growth linked to the affiliate businesses.

[Gabe Moreen:]

Got it. Thank you very much.

[Operator:]

Thank you. And I'm showing no further questions. I like to turn call back to Ms. Courtney Selinidis. You may begin.

[Courtney Selinidis:]

Thank you very much for your interest in Shell Midstream Partners. If you have any additional follow-up question, please feel free to give me a call directly. My contact information can be found on the presentation material, as well as on our website. Thank you again.

[Operator:]

Ladies and gentlemen thank you for participating in today's conference. This does conclude the program. You may now disconnect. Everyone have a great day.