Shell Midstream Partners, L.P.
Q1 2016 Earnings Call Transcript

Published: 6 May 2016

[Operator:]

Good morning. My name is Andrea and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quarter 2016 Shell Midstream Partners Earnings Call. [Operator Instructions] As a reminder, this conference call may be recorded. I will now turn the call over to Arpan Shah, Investor Relations Officer. You may begin your conference.

[Arpan Shah:]

Thank you. Good morning and welcome to Shell Midstream Partners conference call for Q1 2016. With me today are John Hollowell, CEO of Shell Midstream Partners; Susan Ward, CFO; and Michelle Joy, Vice President Regulatory and Major Projects. The presentation materials shared this morning can be found on our website, shellmidstreampartners.com, under the Events and Conferences section. Slide 2 contains our Safe Harbor statements. 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 this morning’s press release and Appendix One 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 John Hollowell.

[John Hollowell:]

Thank you, Arpan. Good morning, everyone, and let me add my welcome to you for joining the call. As always, we appreciate your interest in Shell Midstream Partners. In today’s session, I’ll provide an update on the operational results for the quarter and an update on our 2016 plans. Then, Susan will talk you through the financial results. Q1 was a story of resilience and our diversified portfolio delivered another quarter of strong financial results during a continued challenging macro environment. As you can see on slide 4, Q1 volumes were slightly lower than the prior quarter due to a number of factors that I’ll talk about. But despite the lower volumes, our diversified portfolio was able to deliver a strong financial performance in changing markets. An example of this was our ability to capture significantly higher storage revenues at our Mars system during this period. In fact, the Partnership reported the highest quarterly cash available for distribution, excluding non-recurring items, since the IPO. Now, let’s turn to the operational performance for the quarter, as always, I’ll start with safety. Our commitment to Goal Zero resulted in another quarter of good safety performance. And just a few weeks ago, Shell Pipeline Company was awarded the 2015 API Pipeline Occupational Safety Performance Award for large operators, which we’re very proud of and I believe speaks to our continued focus on pursuing safety and operational excellence. Now, moving to asset performance, and I’ll begin with our crude systems. As you know, Zydeco is a very important onshore pipeline that spans Texas and Louisiana along the Gulf Coast and moves onshore and offshore volumes to key refining markets and trading hubs. This quarter, we saw a lower throughput on Zydeco, compared to the last quarter, primarily due to maintenance at connecting refineries, which is common in advance of the driving season. And this had a small negative impact on revenue. We continue to see strong demand for the system in the future and we are executing a number of projects to strengthen Zydeco’s position to meet our customers’ needs. Let me give you a few examples. We have talked in prior calls about the bottleneck for the highly desirable route from Houma to St. James on our prorated 18-inch line. And today I’m pleased to announce that we have reached an agreement in principle to offer our customers a route to St. James through a connection with low cap at the same tariff. We’re excited about the opportunity as it will provide an additional 100,000 barrels per day of available Zydeco capacity into St. James with no incremental CapEx required. We see this as a big win for our customers and for Zydeco. In late March, we began planned maintenance on the 16-inch segment from Caillou Island to Houma. While this impacted volumes in March and April, the expanded capacity will support growing offshore supply moving to Houma for the long-term. We’re also currently investing in a pump and electrical upgrade project on a 24-inch line from Houma to Clovelly. This work is underway and will expand that line’s capacity by 100,000 barrels per day later this year. And lastly, we expect additional throughput growth for the system this year from third-party connections underway at Channelview, near Houston, and at Port Neches. So as you can see, a lot of activity at Zydeco. Now, moving to our crude terminal at Lockport, where we enjoy long-term relationships with our customers dating back to the 1990s. As we said before, the value from Lockport is in storage and that remained 100% contracted for the quarter. Moving to our offshore systems, we have major pipeline corridors that span different geographic areas of the Gulf of Mexico. There were a number of factors that impacted Q1 for these systems, ranging from planned maintenance to market-driven changes in shipper behavior. At Mars, the flexibility on the system allowed us to capture significantly increased storage revenues as customers opted to store volumes versus deliver them. This storage trend may continue in the future periods. And these storage barrels are expected to generate additional revenue once they are taken out of storage and delivered. As a result of the storage decisions by our customers, Mars had lower delivery volumes but had higher equity income. Looking ahead at Mars, we expect planned maintenance on connecting production platforms in the next two quarters. Moving to Poseidon, volumes were lower due to platform work for future well tie-ins and planned maintenance. And finally for our offshore systems, Auger continued to perform well in Q1 with relatively stable throughput. In April, there was a turnaround on one of the connecting production platforms, which has been completed. Now shifting to our refined product systems, Bengal and Colonial, both systems performed well with high utilization and increased income over the last quarter and at Bengal a major contract was renewed for five years. This agreement accounts for 58% of the contracted capacity. Now, let me provide with you an update on our plans for the year. As you know, in 2015 we delivered ratable growth as we said we would. We successfully delivered $1.2 billion in drop downs, which combined with strong asset performance, resulted in top tier distribution growth of more than 35% for the year. Two weeks ago, the Partnership increased its distribution by 6.8% with strong coverage. We continue on track to deliver top-tier distribution growth in 2016. Our plans for 2016 remain the same. Our aggregate drops will be similar in size to our drop downs in 2015 and we’re confident in our ability to achieve this. Our sponsor, Royal Dutch Shell, is committed to the long-term success of Shell Midstream Partners. Our strategically located assets provide important midstream solutions to Royal Dutch Shell and they are keen to see the partnership succeed and grow. Shell’s CEO has announced a $30 billion divestment program through 2018. Drop downs in Shell Midstream Partners will certainly be a part of realizing this strategy. So, in summary, Shell Midstream Partners continues to perform well during the quarter, despite a challenging macro environment due to the quality and diversification of our assets, stability of our cash flow generation and continued ability to deliver [stable] growth. We remain focused on positioning the partnership to deliver top-tier distribution growth in 2016. Now let me stop there and hand the call over to Susan Ward to talk through the financial results of the Partnership in greater detail. Susan?

[Susan Ward:]

Thanks, John. Good morning, everyone. Turning to slide 7, the change in revenue for the quarter was primarily a result of three factors. First, more than half of the $7.9 million reduction in revenue is related to lower deferred revenue in the quarter. Shippers used more of their committed capacity and as a result deferred revenue was $1.1 million in Q1 versus $5.5 million in Q4. We do not anticipate that a large bank of credits will build up this year since shippers are meeting their volume commitments. Secondly, as John mentioned, the lower throughput volumes on Zydeco had a small $2.4 million impact on total revenue. And thirdly, there was a $1.3 million allowance oil impact related to lower throughput and allowance oil sales prices. On costs and expenses, lower G&A and O&M expense in the first quarter partly offset the revenue decrease and contributions from Mars, Poseidon, Bengal and Colonial to the MLP’s equity investment and dividend income in the aggregate equaled $26 million for the quarter, up $0.7 million. Adjusted EBITDA, attributable to the Partnership, was $65.5 million for the quarter, equal to the prior quarter. As you can see, the Partnership again delivered strong financial performance underpinned by the flexibility and resilience of its assets. As John noted, the MLP achieved its highest ever quarterly cash available for distribution when non-recurring items are excluded. Slide 8 shows the cash available for distribution for the quarter was $59.7 million compared to $67.9 million from prior quarter. Last quarter, we noted that the Partnership’s cash available for distribution benefited from $12.9 million of non-recurring items related to indemnification reimbursements and waiver payments. Excluding those items, this quarter’s cash available for distribution was approximately 8% higher than the fourth quarter figure. Distribution coverage for the first quarter is 1.4 times and our long-term target coverage ratio continues to be 1.1 times. Now turning to our balance sheet on slide 9, we maintain a conservative balance sheet to maximize the MLP’s financial flexibility. At quarter end, Shell Midstream Partners had $138 million of cash and cash equivalents on hand, including cash at Zydeco. The Partnership raised equity in the first quarter which was used to repay borrowings and for general Partnership purposes. We now have available $562 million of undrawn debt capacity on revolving credit facilities at attractive rates from an affiliate. As you can see from our results, we continue to be focused on financial discipline and are confident in our ability to fund the MLP’s growth plans for 2016. And with that, we will now open the line for questions.

[Operator:]

[Operator Instructions] And we have a question from the line of [Lynn Chen] with Height.

[Unidentified Analyst:]

You just mentioned that Shell parent company considered MLPs very strategic asset for part of their long-term plan. But also we heard from – somebody said Shell is also considered sell some asset globally, maybe including some US E&P asset. Can you talk a little bit about how do you think about if any sales for Shell asset in the United States are going to impact the MLP?

[Susan Ward:]

The $30 billion of divestments that our CEO at RDS noted is probably what you are referring to and that will be a mix of assets across the globe and different businesses over the next three years.

[John Hollowell:]

It will be defined too. It’s still a work in progress as to what those assets are and how they play out. I can say this, though, that the – what Shell does remain committed to [SHLX] for the long-term and we see SHLX as being a key vehicle and tool to use in the long term to provide key opportunities to have midstream solutions and to leverage those midstream solutions through the MLP.

[Unidentified Analyst:]

Can you also just, maybe, emphasize or clarify that, how should we think about the timing of next drop down?

[John Hollowell:]

If you look at this year versus last year, we’re kind of on schedule with when we did it last year so we feel confident in that. We’re focused on the headline size and make sure we meet top tier distribution growth. We’re working on our first drop and we’re confident in our ability to meet our headline size that we told you about before the end of the year.

[Operator:]

[Operator Instructions] And we have no further questions, I will now turn the call back over to Arpan Shah.

[Arpan Shah:]

Thank you very much for your interest in Shell Midstream Partners. For additional follow-up questions, please direct all questions to me. My contact information can be found on the presentation materials as well as on our website, shellmidstreampartners.com. Thank you.

[Operator:]

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