Shell Midstream Partners, L.P.
Q3 2015 Earnings Call Transcript

Published: 12 Nov 2015

[Operator:]

Good morning. My name is Tamara and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Third Quarter 2015 Shell Midstream Partners Earnings Call. All participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] I’d now like to turn the call over to Courtney Selinidis, Investor Relations Officer. You may begin your conference.

[Courtney Selinidis:]

Thank you, good morning and welcome to Shell Midstream Partners earnings conference call. With me today are John Hollowell, CEO of Shell Midstream Partners; Susan Ward, CFO and Michele Joy, Vice President, Major Projects and Regulatory. The presentation materials we will be using this morning can be found on our Web site, shellmidstreampartners.com under the Events & Conferences section and of course we will take questions at the end of the presentation. 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 differ are included here, as well as in this morning’s press release and under risk factors and our filings with the SEC. Today’s call also contains certain non-GAAP financial measures. Please refer to the press release issued yesterday evening and Appendix 1 of this presentation for important disclosures regarding such measures including reconciliation to the most comparable GAAP financial measure. With that I’ll turn the call over to John Hollowell to discuss, highlight from this quarter. John?

[John Hollowell:]

Thank you, Courtney. Hello everyone and let me add my welcome to the webcast. As you know the third quarter saw a significant volatility in the market as commodity prices remain low and other uncertainties both domestic and foreign caused unease across the sector. However, I see these challenging times as the real opportunity for Shell Midstream Partners to demonstrate its resilience despite a difficult backdrop. As a partnership, we have a lot to be proud of in the third quarter. Our business results exceeded expectations, transportation demand remains strong and we just announced our third dropdown in 2015. Operationally our pipeline assets continue to perform well in the quarter and our operational excellence translated into equally strong financial results even in a low commodity price environment given our fee-based cash flow. We’ve been able to deliver on our intent to be on top-tier distribution growth MLP due to these positive financial results. As announced earlier, the Board approved a $0.2050 distribution per limited partner unit for the third quarter, and this represents a 7.9% increase over the previous quarter distribution, and a total increase of 26.2% since our first distribution and we intend to maintain regular distribution growth into 2016. I want to reiterate the alignment between Shell Midstream Partners and our sponsorship. Shell Midstream Partners delivers on the priorities of our sponsor by allowing Shell to monetize infrastructure assets, while retaining strategic control, directly contributing to a portion of the divestment target set by Shell for 2016 to 2018. Our unitholders also benefit from our sponsor’s priorities as Shell Midstream Partners is an effective tool to own high quality assets and create significant unitholder value. A prime example of this is our most recent acquisition just announced yesterday of the Lockport Crude Terminal and the Auger Pipeline System. Like the two previous acquisitions completed in 2015, this transaction will be immediately accretive to the unitholders and demonstrates Shell’s commitment to dropdown high quality infrastructure assets into Shell Midstream Partners. I'll go into more detail on the new assets later in the presentation, but what's important here to note is that our commitment to the partnership strategy. We are delivering on exactly what we told you we would do. Now let's turn to the operational performance in the third quarter and I'll start off our discussion with the focus on safety. As I said before, safety is a value at Shell and I'm committed to working in ways that result in no accidents to people and no leaks to our assets. This quarter did have mixed safety results. I'm happy to report that we had no injuries to people across our operations. However, we did have a minor release on our operator system Bengal and a release on a non-operator system Colonial, while I never want to see these instances occur, I'm pleased to say that both were quickly identified and managed appropriately to minimize the environmental impact. In our offshore business we had the benefit of our Poseidon acquisition generating cash flow for the MLP for the entire third quarter. Remember, Poseidon pipeline is the only major pipeline system running west to east across several connecting pipeline systems. And this makes Poseidon well positioned to transport growing offshore production. Volumes on the system have increased in the third quarter primarily due to new volumes from the Lucius field. We also saw growing volumes on our Mars system. Total volumes of Mars increased by approximately 60,000 barrels per day in the third quarter compared to the second quarter. The increased volumes were due to a number of factors including a new well start up at the Medusa field and increasing volumes of the Amberjack system delivered to Clovelly. Our onshore systems Zydeco, Bengal and Colonial pipeline performed well in the third quarter. Bengal and Colonial’s results were above expectations due to high refinery utilization across the Gulf Coast. Zydeco continues to have a steady volume demand quarter over quarter. As a matter of fact several efforts underway to increase capacity along with system to better serve customer demand. An example of these efforts include the new tanks we're building at Port Neches which we anticipate to be online by December. We will utilize the tanks to optimize the system and increase the opportunity for spot volumes from Houston and Nederland. Ones the new connection from Sunoco Logistics is built which is now anticipated to come online during the second half of 2016 following permit delays. We will have the ability to transport an additional 100,000 barrels per day on the mainline segment. Another step we have recently taken on Zydeco is to launch an open season for the expansion of capacity between Houma and St. James. This portion of the system has been prorated since the middle of 2014 and we believe the expansion will further solidify Zydeco as the premier pipeline for crude transportation between Houston to Louisiana. The open season ends on December the 11th. As I mentioned earlier, we announced yesterday the acquisition of 100% of Lockport and Auger. The transaction size for the acquisition totaled of $390 million. Lockport is the first crude terminal acquisition for the partnership. It is located southwest of Chicago connecting Canadian and Bakken crude to Midwest refineries. It is comprised of 16 tanks and 2 million barrels of total capacity which is completely full and generating attractive cash flow. The Auger pipeline is 174 mile offshore corridor pipeline that transports crude from the Central Gulf of Mexico. Totaled capacity on the pipeline is 200,000 barrels per day to St. James via the Ship Shoal system and an additional 35,000 barrels per day into the Houma terminal via the Eugene Island system. Auger strengthens and connects with our existing integrated footprint in the Gulf of Mexico providing another complementary corridor pipeline. Auger is also located near the lower tertiary drilling area which is becoming a significant driver of current and future Gulf of Mexico production. Now looking at these two assets in the context of the total portfolio, we have and are growing a high quality base of advantage assets. This started earlier this year with our first dropdown of additional interest in Zydeco and Colonial for a headline size of $448 million. We funded the transaction primarily through past proceeds from private placement of common units which allowed us to maintain a conservative balance sheet while executive the high growth program. In our second dropdown we added the Poseidon pipeline to our portfolio of assets, which further increased our strategic footprint in the offshore Gulf of Mexico. The third and final dropdown in 2015 that we just discussed builds on our existing offshore asset base and introduces a new asset class to the mix with the addition of the Lockport terminal. 2015 has been a very successful and productive year for MLP with dropdowns totaling $1.2 billion for the year. So as you can see we hit the ground running on delivering a high growth strategy and we've done a good job diversifying our portfolio as we've grown. We've focused on mainstream, midstream assets with high quality customers and long-term contracts, largely shielded from commodity price exposure. And as we turned to 2016, we will continue to add the same quality of assets into our portfolio and we will do so at a ratable pace. Our unitholders can be assured that there will be no change to our top tier distribution growth guidance as we move forward. With that I'll turn the call over to Susan Ward to discuss the financials results of the partnership in greater detail. Susan?

[Susan Ward:]

Thank you, John. Good morning everyone. The largest factor affecting the third quarter versus the second quarter 2015 was the increase of a 36% interest in Poseidon Pipeline following its acquisition on July 1st. Financial results of the full quarter of Poseidon are reflected in our third quarter income from equity investments. Total revenue for the period representing 100% of Zydeco as a fully consolidated entity increased approximately $15 million from the prior quarter. This increase in revenue was largely due to deferred revenue from minimum volume commitment credit exit rates. A portion of the cash associated with the deferred revenue was recognized in prior periods for purposes of calculating cash available for distribution. Our equity investments which now include Mars, Bengal and Poseidon all reported strong financial results for the quarter. The increase in dividend income which represents Shell Midstream Partners interest in Colonial is largely due to high gasoline demand in the summer months. After adjusting for non-controlling interest, net income attributable to Shell Midstream Partners for the third quarter was 54.3 million, up nearly 70% from the second quarter. On Slide 7, you can see the cash available for distribution for the third quarter was 46.4 million after adjusting for interest, Zydeco maintenance capital and minimum volume commitment. Total cash distributions for the period were 30.3 million resulting in a coverage ratio of 1.5 times. Now looking to our balance sheet on Slide 8, today we priced an equity offering with gross proceeds of $260 million. We will fund this latest acquisition with a combination of 50 million of cash generated from operations, proceeds from the public equity offering and borrowing under our upsized credit facility. Interest rates on our affiliate bank revolving credit facilities remain attractive at a rate of about 1.5%. As of the end of the third quarter, there was roughly 421 million drawn down on the revolvers and in connection with the transaction we increased the revolving credit facility to 580 million in total. Following the acquisition, total debt will be approximately $500 million bringing our debt to EBITDA on a run rate basis to 2.3 times, which is consistent with our goal of investment grade credit ratios. This most recent equity offering allows us to maintain a conservative balance sheet and retain a greater degree of financial flexibility for future dropdowns. This concludes our prepared remarks. We’ll now open the line for question.

[Operator:]

Thank you. [Operator Instructions] And our first question comes from the line of Brian Zarahn with Barclays. Your line is now open.

[Brian Zarahn:]

Poseidon and Mars and you referenced the solid volume growth. Now how was performance relative to your expectation? And does your outlook change for your Gulf of Mexico pipeline system looking ahead?

[John Hollowell:]

Yes, the volumes were higher than expected particularly on Mars, as we continue to get those volumes ramped up off the Amberjack system. And we still see the strong growth continuing, Brian, we don’t see any reason why that won’t be the case as new fields continue to ramp up in the Gulf of Mexico between Lucius and Jack St. Malo along with the existing connections that we have.

[Brian Zarahn:]

Now any change to your outlook on Poseidon from what you referenced during the dropdown?

[John Hollowell:]

No, change Brian.

[Brian Zarahn:]

And then on the recent dropdown, can you elaborate on the contract structure for the other pipe?

[John Hollowell:]

Yes, let me, I have got Michele in the room, let me turn it over to her to talk a bit about that.

[Michele Joy:]

So the Auger Pipeline System, this is Michele, is located fully offshore and serves a number of fields directly some of whom which have a life of lease agreement. Those that don’t if you look at the overall structure of the Auger System they are -- Auger is the only system to which they are connected and in general when that happens, these production fields will only deliver into that pipeline. So if you look at Llano, Auger, Cardamom, Conger, Enchilada Auger is the only system on which they serve. And then we also have some agreements where we take volumes off of the Poseidon system onto Auger that is that the election of the producers who are coming off the Poseidon system and those will be on a nomination basis.

[Brian Zarahn:]

I guess turning to Lockport, can you elaborate a bit on potential organic opportunities at the terminal?

[Michele Joy:]

Certainly, Lockport as we’ve indicated is a terminal south of Chicago, it is fully subscribed at the moment, it has however quite a bit of land around it, it's really only developed about half the land that is available and we're currently in discussions with some opportunity to -- where third-party would build a dock that would be connected to Lockport which would result in additional volume moving through Lockport to serve that dock but would also enhance the overall capabilities coming off of Lockport and making it ever more attractive than it already is.

[Brian Zarahn:]

And then looking on organic, can you talk a bit more about the potential Zydeco expansion and the opportunity that you see for that system.

[John Hollowell:]

Yes, Brain as you well know that segment of the system has been oversubscribed for quite a while and we continue to see demand for that we did a non-bind open season that's open now, we've had strong additional customers, we'll continue to follow that it closes December the 11th and then we'll understand better how we can go forward with expanding the system. We're encouraged with what we see so far from the customer interest so.

[Brian Zarahn:]

And then last one for me, do you still expect to provide an update on dropdown inventory by year-end?

[John Hollowell:]

Yes, Brian we're going to do that by year-end, we're going to be participating in the conference in December and we plan to make that part of our discussions at that conference.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from the line of Faisel Khan with Citigroup. Your line is now open.

[Faisel Khan:]

Just a question on Auger, I mean it looks like volumes could peak-out on that system, sometime in 2015 to 2017, I just was looking at some of the projects that have come online and that are coming online it seems from that production with ramp and then also sort of stabilize out, can you just give us a little more color on sort of how you see that volumes sort of ramping and stabilizing?

[John Hollowell:]

It's a great question, so what we've seen on the system is we had to recently start up fields like Cardamom, Shell’s Cardamom field et cetera on the system that start up towards the end of last year and also we have the Lucius field that started up south of there that gets on to some and some goes on to Auger so we're seeing the lion share there, basin has got a corridor pipeline system like Auger much like our other corridor pipelines we actually see relatively stable throughputs overtime, in fact actually growing a bit. For Auger I think, you will begin to see that stay stabilized for the next year or two but then you will start to see growth for some of those development opportunities that are south of Auger that are currently under development by other operators, anything, more to add to that, Michele?

[Michele Joy:]

Yes, certainly, we're in discussions with the number of systems that have -- that are looking to develop and our seeking an export opportunity both the Poseidon 24 line are actually by genesis south of Poseidon that connects to Lucius as well as the Auger system itself are in discussions directly with a number of production opportunities for who are actually asking for bids for export opportunities right now.

[Faisel Khan:]

And then in terms of the considerations for these assets that were purchased what was the -- how much of the consideration was allocated towards the terminal and then the Auger system?

[John Hollowell:]

We didn’t approach it that way Faisel, we actually dropped carved out these assets into our company we just considered as a bundled opportunity so we don't have that information by separate asset.

[Faisel Khan:]

And then how were you looking at the multiple when you dropped it down because Poseidon was a higher multiple and this is at a lower multiple just trying to understand sort of how we should look at things going forward too?

[John Hollowell:]

Well, each of these transactions we negotiate with our accomplished committee we take into account a number of things we take an account of the asset, we taken an account of the market, we take an account recent transaction et cetera and then we negotiate a final multiple with our accomplished committee so it's done on the transaction-by-transaction basis and that's what we did in this case and that's how we will continue to do them in the future. So we added the two dropped it into the pact and then negotiated the deal with our accomplished committee.

[Operator:]

Thank you. And I'm showing no further questions. I would like to turn the call back over to Courtney Selinidis for any closing remarks.

[Courtney Selinidis:]

Thank you very much for 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 material, as well as on our Web site of Shell Midstream Partners.

[Operator:]

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