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Phillips 66 Partners LP (NYSE:PSXP)

Q3 2013 Results Earnings Call

October 30, 2013 3:00 PM ET

Executives

Clayton Reasor - Senior Vice President, IR, Strategy and Corporate Affairs

Greg Garland - Chairman and CEO

Greg Maxwell - Vice President and CFO

Tim Taylor - President

Tom Liberti - Vice President and COO

Analysts

Stephen Maresca - Morgan Stanley

Brian Zarahn - Barclays

Jeremy Tonet - JP Morgan

Elvira Scotto - RBC Capital Markets

Operator

Welcome to the Third Quarter 2013 Phillips 66 Partners Earnings Conference Call. My name is Christine, 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 Clayton Reasor, Senior Vice President, Investor Relations, Strategy and Corporate Affairs. You may begin.

Clayton Reasor

Thank you. Good afternoon. And welcome to the Phillips 66 Partners inaugural quarterly earnings call and webcast. We thank you for joining us and appreciate your interest in Phillips 66 Partners.

Today we will share an operating and financial overview of the business. We’ll outline the key highlights of the third quarter. We’ll also have time for questions at the end of the presentation.

And with me on the call today are Greg Garland, Chairman and CEO; Greg Maxwell, Vice President and CFO; Tim Taylor, President; and Tom Liberti, Vice President and Chief Operating Officer.

Slide two contains our Safe Harbor statement. It is a reminder that we will be making forward-looking statements during the presentation and during the question-and-answer session about Phillips 66 and Phillips 66 Partners. Actual results may differ materially from what we present today and factors that could cause actual results to differ are included here, as well as in our filings with the SEC.

Now I’ll turn over to Greg Garland for some opening remarks.

Greg Garland

Thanks, Clayton, and good afternoon to everyone. We are excited to be here with you to discuss the initial quarterly results for Phillips 66 Partners. I’d like to start with a few key takeaways for the third quarter.

We closed the IPO as you know on July the 26th, so we are only now in our first full quarter as a new public entity. We believe that Phillips 66 Partners is well-situated and will grow and benefit from the close ongoing affiliation and support of our sponsor and parent Phillips 66.

The close alignment with Phillips 66 brings with it a long legacy of outstanding operations, a deep commitment to operating excellence and a disciplined management focused on personal and process safety, environmental stewardship, reliability, cost management and profitable growth. These principles were reflected in the third quarter as we achieved outstanding safety performance.

Phillips 66 Partners is and will continue to be a fee-based business supported by a number of long-term contracts that will have minimum volume commitments and price escalators indexed to inflation, meaning limited direct commodity price exposure. This should result in stable cash flows and a strong foundation for growth.

Our parent, Phillips 66 has plans for significant growth in its midstream businesses and expects to use the partnership as a vehicle for achieving that objective. Given its large portfolio of midstream assets and strategy for growth, we anticipate near-term opportunities to acquire additional assets. This will allow for significant Phillips 66 Partners growth in the near-term and provide the platform on attractive growth profile longer term.

As we look to the next several years, the partnership also has opportunities to acquire newly built projects from Phillips 66, as well as the previously announced ROFO assets, the Sand Hills and the Southern Hills pipelines. In addition, we plan to pursue third-party acquisitions and organic growth within the partnership.

We’re going to target the top quartile of distribution growth with the first year expected to be well above 20%. We are excited about the prospects for PSXP, significant fee-based growth early on will help the partnership achieve our desired investment grade credit rating, attain the size necessary to take on larger projects and enhance value for our unitholders.

And with that, I’ll turn the call over to Greg Maxwell to provide a more detailed update on the financial results.

Greg Maxwell

Thanks, Greg. Good afternoon, everyone. Before I get started, I wanted to point out that unless otherwise noted, all numbers that are referenced today will be for the period following the close of the IPO that occurred on July 26th through September 30th.

Now if I can direct your attention to slide four. Phillips 66 Partners had revenues of $21.2 million and as compared to the prior period or the period prior to the IPO, this reflects increases in pipeline tariff rates and related fees, updated fees for terminaling and storage and entry into agreements providing for minimum volume commitments.

Costs and expenses were in line with expectations and also as projected in our prospectus filed with the SEC on July 24th. Additionally, the Partners Board just declared our first cash distribution of $0.1548 per unit and this is payable on November 13th to unitholders of record as of November 4th.

Turning to slide five, EBITDA was $13.2 million and distributable cash flow was $12.6 million. The total cash distribution for the period will be $11.1 million, resulting in a coverage ratio of 1.13 and as we’ve indicated previously, we plan to target an overall annual coverage ratio of 1.1. However, on a quarterly basis you may see slight changes due to seasonality in our spending.

Slide six shows that at the end of the third quarter we had $421.6 million of cash and cash equivalents. This was mainly related to the net proceeds from the IPO. We also have access to a $250 million unused revolving credit facility and with that is a $250 million accordion feature. The bulk of these assets, along with this untapped credit facility, are available for use to fund organic growth opportunities, acquisitions from Phillips 66 and purchases from third parties.

In closing, we operated well during our first period following the IPO. And we are looking forward to growing and creating value for our unitholders.

We will now open the line up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from Stephen J. Maresca of Morgan Stanley. Please go ahead.

Stephen Maresca - Morgan Stanley

Hey good morning guys -- good afternoon. Sorry, it’s been a long day.

Greg Garland

Good afternoon.

Stephen Maresca - Morgan Stanley

How are you doing? When thinking about acquisitions, you obviously have a dowry up at PSX that’s available for you. Is the focus or can you describe the focus more there or do you think there’s right now knowing that that’s there for you longer term are there things on the third-party side that you are more focused on in near term? So just some color on that?

Tim Taylor

Yes, this is Tim Taylor. Really the portfolio of assets at PSX right now, both that exist today and in operation and then the new projects we have underway at the PSX level that are enhancing the capabilities to take advantaged crude for instance into the refining system are the kind of assets that we think about probably fit pretty well with the initial efforts around the partnership versus a large acquisition requisition at this point. We certainly look at everything but that would be probably the primary vehicle at this point.

Stephen Maresca - Morgan Stanley

Okay. And then you’ve got the $422 million cash position, how should we’d be thinking about that in terms of, would you use that all at once or is that going to be something that will be used over multiple transactions, basically the first -- will the first acquisition be of enough size to take all that down?

Tim Taylor

I think we maintain our flexibility about what that will be. So really that’s a significant amount of cash that allows us to have a lot of optionality. So I think we will continue to look at what that pool of assets are and where we want to go but that is clearly intended to be part of our funding mechanism for these early drops.

Stephen Maresca - Morgan Stanley

Okay. And then final point, you talked about targeting top quartile growth but then you also mentioned first year you think you’ll be well above 20%. Is that -- should we be thinking about 20% as a baseline for not just the first year, but maybe first few years given how you guys sit with no debt and abundance of assets from PSX?

Tim Taylor

I think just given the size, the MLP that we have that just the math on that and given the large opportunity set that we see in Midstream that we think that top quartile growth is there for us to look at. And the above 20%, I think, just says that given the size and the partnership today that we have the opportunity to drive that, certainly in the first quartile for the first few years.

And we’ve always said that above that is most likely in the first couple of years. So yes, I think that’s kind of our thinking at this point that it should be something that’s achievable and sustainable that way in that early part.

Stephen Maresca - Morgan Stanley

Okay. Thanks a lot, guys.

Greg Garland

Great. Thank you.

Operator

Thank you. Our next question is from Brian Zarahn of Barclays. Please go ahead.

Brian Zarahn - Barclays

Good afternoon.

Greg Garland

Good afternoon.

Tim Taylor

Hi.

Brian Zarahn - Barclays

Could we talk a little bit about the base business and on the pipeline side, where do you see the crude oil and product pipe volumes going forward relative to third quarter?

Tom Liberti

Volumes in the fourth quarter should be pretty similar to the -- this is Tom Liberti, to the third quarter. We don’t see anything, any major changes in any of the volumes. Assets are operating, so everything should be pretty much as we explained and detailed in the S-1.

Brian Zarahn - Barclays

Okay. And then, I was looking at the crude-by-rail projects at the parent level in New Jersey and Washington. Can you give us any color as to the cost for those terminals and expected returns and how that would fit into your overall dropdown strategy?

Tim Taylor

I think those are the kinds of assets that we look at and say they make a lot of sense. They can be fee-based assets for the partnership. And so I think that clearly gets into the valuation but we would expect those to have very competitive fees with what third-party, other opportunities exist in the marketplace and that kind of underpins that value that we have to place in terms of what the partnership is willing to pay.

So I think it is going to be just an example with the many great opportunities that exist between the sponsor, PSX and the partnership.

Brian Zarahn - Barclays

Just looking at some of your larger projects, then the crude rail terminals, the Sweeny fractionator and the Freeport LPG project, those are significantly larger. How do you think about those migrating to the MLP? Would that potentially be in pieces, or could potentially, could a frac be dropped down or the entire Freeport project and those are longer-term but just thinking ahead?

Tim Taylor

I think from -- PSX has stated that they intend to grow that and use the MLP from a value creation standpoint. So, I think the size and timing is really quite open. And I think as we continue to look at the values, both in the partnership, at the partnership level, I think PSX will be thinking through what is the right size. But we’ve not set any firm guidance on how to do that. But we have said that at the PSX level that those are the kinds of fee-based projects that we think make a lot of sense for the partnership to take a look at.

Brian Zarahn - Barclays

Thank you.

Operator

Thank you. Our next question is from Jeremy Tonet of JP Morgan. Please go ahead.

Jeremy Tonet - JP Morgan

Good afternoon.

Tim Taylor

Good afternoon, Jeremy.

Greg Maxwell

Hey, Jeremy.

Jeremy Tonet - JP Morgan

When you guys are thinking about potential dropdowns, could you give us your thoughts on how Sand Hills and Southern Hills stack up on a capital maturity basis versus some of the other assets out there, if the maturity of the project makes sense now and if there’s room for potential other assets to be dropped down ahead of them? Thanks.

Tom Liberti

Jeremy, this is Tom. As we look, those are starting up right now and so we want to make sure that those have the level of maturity that maximizes both for PSX and for PSXP and with the portfolio that we currently have those are nice assets to drop. We also have other opportunities. So we will just look every time at different assets. We will look and study those assets and see which we think is right at the time.

Jeremy Tonet - JP Morgan

Okay. Great. Thank you.

Operator

Thank you. Our next question is from Elvira Scotto of RBC Capital Markets. Please go ahead.

Elvira Scotto - RBC Capital Markets

Hi. Good afternoon. You talked about also potentially pursuing organic growth projects at the PSXP level. Can you talk about maybe your thinking on how you think about developing organic growth projects at PSXP versus the parent, if it is size or what kind of size organic growth opportunity you would pursue at the MLP versus the parent?

Tom Liberti

Right now, the size of the MLP really does dictate what we are looking at. So PSX, the parent, has the opportunity now for larger projects. And for right now, PSXP would be looking more at smaller organic growth projects.

Elvira Scotto - RBC Capital Markets

Okay. What size sort of in terms of comfort level at the MLP level?

Tom Liberti

Well, as we’ve said before, what we’ve talked about is keeping, making sure our debt is in the three times EBITDA kind of ratio. So right now, as we build the EBITDA up it would be dependent on where we are from an EBITDA standpoint also when and how we are able to issue equity.

Tim Taylor

I think $1 billion kinds of projects like the frac and the export terminal are clearly not within the purview of the partnership at this point given its capabilities. So that’s kind of a -- it is a very much a sliding scale and what you have in length of time to incubate. But I think really large capital, major steps, probably not within the partnership’s capability at this point. But over time, as the partnership grows that will change as well.

Greg Garland

The other thing, as we put out the S-1 and we are talking that there are some small projects available to us within PSXP where we can, for small capital increments increase capacity, adding a pump here, looking at new tankage and things like that. So there are some organic opportunities within the existing assets that we have today within the MLP.

Tim Taylor

Correct.

Elvira Scotto - RBC Capital Markets

Great. Thank you.

Operator

Thank you. We have no further questions. I will now turn the call back over to Clayton Reasor.

Clayton Reasor

Great. Well, thank you very much for the interest in PSXP. And if there are any follow-up questions, don’t hesitate to give us a call. We will be posting our presentation on our website and look forward to seeing and talking to you in the near future. Thank you.

Operator

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

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