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Sunoco Logistics Partners L.P. (NYSE:SXL)

Q1 2014 Earnings Conference Call

May 07, 2014 8:30 AM ET

Executives

Michael J. Hennigan – President and Chief Executive Officer

Peter J. Gvazdauskas – Vice President-Finance and Treasurer

Analysts

Abhiram Rajendran – Credit Suisse Securities LLC

Steve C. Sherowski – Goldman Sachs & Co.

Ethan Bellamy – Robert W. Baird & Co.

Michael J. Blum – Wells Fargo Securities LLC

Operator

Welcome to Sunoco Logistics Q1 2014 Earnings Conference Call. All lines have been placed in a listen-only mode until the question-and answer-session. Today's conference is being recorded. If anyone has any objections you may disconnect at this time.

I would now like to turn the call over to Mr. Mike Hennigan, President and CEO. You may begin.

Michael J. Hennigan

Thank you, Candy. Good morning, everyone. Welcome to Sunoco Logistics Partners conference call to discuss our first quarter 2014 results. I’m Mike Hennigan, President and Chief Executive Officer for the General Partner. Joining me today is Pete Gvazdauskas, Vice President of Finance and also on the call are Martin Salinas and Mackie McCrea.

In the course of our remarks and in the subsequent Q&A session, we’ll be referring to slides that have been posted on our website entitled First Quarter 2014 Earnings Conference Call, and we may be making some forward-looking statements. In that regard for the purpose of facilitating the discussion, I refer you to Slide 2.

With regard to our financial results, we are pleased to report first quarter EBITDA of $208 million and distributable cash flow of $158 million. Overall, we are pleased with our start in 2014 with our Crude Oil Pipeline segment leading the way despite some downtime on our Mid-Valley pipeline system.

Our Terminal segment had a record quarter anchored by the seasonable strength of our growing butane blending business and bolstered by the continued growth of our Nederland terminal. Our lease acquisition and marketing business was a little below our expectations as we had some negative timing, inventory and weather impact, but we are still expecting our first half 2014 results to look similar to our second half 2013 results.

As we continue to execute our growth plan, new assets are generating increasing ratable long-term cash flow to help offset the market declines, which we expect in our crude marketing business. We have increased the volumes on our Permian Express 1 pipeline to approximately 150,000 barrels per day at the end of the quarter, which is ahead of schedule and our Mariner West pipeline is running as planned expecting to move up to approximately 50,000 barrels per day by the end of the second quarter.

For the next step, additional pumps will be added to our system while the origin and destination facilities bring on their necessary towers to ramp up the full capacity on this system. We have two additional crude projects that will come online in 2014 Granite Wash Extension and the Eaglebine Express. These pipelines are on schedule to be operational in the third quarter of this year.

As we mentioned last quarter, we were very pleased to announce the successful open season for our Permian Express 2 project, which will increase the takeaway capacity out of the Permian Basin by approximately 200,000 barrels per day providing access to multiple markets and is expected to be operational in the second quarter of 2015. With the success of this open season and some capital spend timing updates on our previously announced projects, we are increasing our capital guidance for 2014 by $400 million to $1.7 billion.

On the Refined Products Pipelines side, our 85,000 barrel per day Allegheny Access pipeline will provide Midwest refiners with access to new refined product outlets and will provide marketers with access to Midwest products.

Due to the growth in domestic and Canadian crude production, Midwest refiners are in an excellent position to have access to price advantaged crude oil. They have had excellent margins as a result and are looking at ways to run more crude oil. This has created a surplus of refined product and an opportunity to broaden our Refined Products Pipeline network to be able to move Midwest barrels into the Eastern Ohio and Western Pennsylvania markets. This pipeline is expected to commence operations in the third quarter of 2014.

We continue to develop our Marcus Hook facility as a Northeast NGL hub which we continue to expand to make it capable of handling the full array of NGL products to meet the needs of producers and local, regional, and international consumers alike.

Let me give an update on our planned Mariner East service. Our Mariner East 1 pipeline with a capacity of approximately 70,000 barrels per day is expected to be able to deliver both ethane and propane by mid 2015. We’re targeting to start propane ahead of the full start-up by the end of 2014.

On the Mariner East 2 project, the open season remains open yet we are confident that we are developing a project that will meet the needs of the producers and consumers of the vast amount of liquids from the Marcellus and Utica Basin. Building on the strength of the product being fractionated in the basin, this project is intended to increase the takeaway capability of ethane, propane and butane to provide the flexibility for each product to get to the highest value market.

As we mentioned previously last year’s cold winter shifted the market demand, with shippers asking for pipeline access for propane to be directed to the local markets during these periods of extreme cold conditions. We moved as much propane as we could through Marcus Hook, but were limited without the pipeline in service. At the same time all the NGL will have the flexibility to be exported to create maximum value capture, if the market conditions allow.

Our Gulf Coast NGL project, Mariner South, which is a joint project with Lone Star demonstrates the synergy within our family of partnerships to export propane and butane from our Nederland Terminal on the Gulf Coast. This project is still on track to be operational by Q1 of 2015.

As mentioned previously, we expect to exceed last year’s record organic capital execution of $965 million, with updated guidance of approximately $1.7 billion for 2014. As for distribution growth, we’ve increased our quarterly distribution by 5% to $2.78 per common unit on an annualized basis, which represents our eight consecutive time we’ve raised our quarterly distribution by at least 5% and our 36th consecutive increase overall.

This also represents a 21% year-over-year increase compared to the first quarter of 2013.

As we’ve discussed in the past, our long-term business model of 80% blue bar and 20% red bar will generate an approximate 1.25 times coverage ratio. To the extent our red bar coverage is higher percentage then we’ll enjoy cash flexibility as a source of equity for funding future growth. We also continue to have strong balance sheet capacity to fund our ongoing expansion capital programs.

Our debt-to-EBITDA ratio was 3.5 times as of March 31. And if we add the pro forma impact of our in progress project which is permitted under our revolver financial covenants our ratio was 3.0 times. We will look to fund our base 2014 organic capital program in a manner that maximizes our distributable cash flow while maintaining our investment grade credit ratings.

We established our at-the-market or ATM equity program. Since our organic growth capital will be spent over time, we believe the program to issue equity over period of time will be more efficient and help minimize the negative carry of issuing units without the associated cash flows until our projects come online.

With our continued success in our growth program and in order to make our units more liquid and accessible to a broader retail investment base, our Board has approved a two-for-one unit split effective June 12, with a record date of June 5. This will mark the second time we split our units in less than three years.

As we continue to implement on our plan, we remained committed to sustainable, competitive distribution growth. We are confident our strategy is on track and we are committed to growing our cash flows over the near and long-term.

With that, I’ll ask the moderator to open the lines for any questions, you may have.

Question-and-Answer Session

Operator

(Operator Instructions) Thank you. Our first question is from Abhi Rajendran, Credit Suisse. Your line is open.

Abhiram Rajendran – Credit Suisse Securities LLC

Hi, good morning guys.

Michael J. Hennigan

Good morning, Abhi.

Abhiram Rajendran – Credit Suisse Securities LLC

A couple of quick questions. First, maybe on ethane exports, so you have always kind of touted the ethane export story as more real than the market was baking in. But kind of given some of the recent developments on that could you maybe just give us your updated thoughts on this and also maybe what it means for opportunities for Mariner East 2 in terms of Europe being a significant incremental opportunity or if it is more around Asia? Would just love to get your thoughts there.

Michael J. Hennigan

Sure, Abhi. Kind of repeating what I said in the past, we have been as you noted very bullish that the U.S. NGL market will be long. For ethane, for propane, for butane, we’ve taken a position that it will be longer than most consultants have typically stated. We still feel the same way mainly based on the growth that we are seeing in these basins. They continue to be bullish growth numbers. I encourage people to talk with producers and get their feel for that but at the end of the day, we still hold the same position that we’ve held before that we are bullish, that exporting NGLs will be a phenomenon for years to come in the U.S.

Positioning ourselves, we have our Marcus Hook terminal as you mentioned related to Mariner East 2. So, let me give you the update there as we continue to get a lot of support from the market. The open season remains open. Mainly two issues, one is we continue to work with several shippers to try and work through all the details that are involved in these long-term commitments.

At the same time, as you probably have noted, Antero has publicly announced support for our project at 51,000 barrels a day. We appreciate that support and we look forward to the partnership of working with Antero and we continue to work with the other potential shippers as we try and get to a close on this open season.

The other issue that I mentioned in my prepared remarks is last winter demonstrated the need to keep propane in the local market at times and shippers have reflected this market need and we are working through some of those details in addition. So mainly those two drivers continuing to work all the individual shippers and there are many and working on the phenomenon of the increased interest in local demand has forced us to continue to keep this open season a little further open than we originally had planned. We are still confident that we can get there but we need to continue to work till we get to the finish line.

Abhiram Rajendran – Credit Suisse Securities LLC

Okay, great. Just a quick follow-up on the crude oil acquisition and marketing. I think you mentioned that the first half earnings should be sort of in line with the second half level last year. Some of the main spreads have come in steadily over the course of this year. So could you give us some color on some of the puts and takes that suggest EBITDA is going to be solidly up in 2Q versus 1Q?

Michael J. Hennigan

Sure Abhi. This is always the toughest segment for us to report on and give guidance. As we have talked many times in the past. It’s very difficult to give guidance in this segment. The best way that I have described it in the past is there are multiple markets involved in our business. So there is the West Texas market, the East Texas market, the Gulf Coast market, the Oklahoma market, the Bakken market, all of those factors come into play.

We try and summarize that down to one indicator, WTI to LLS to try and give people a sense of the market. But in this particular quarter, we saw a lot of variation and a lot of volatility around each of those individual markets.

And at the end of the day as I mentioned in my prepared remarks, we were a little lower than we expected going into the quarter. We call it timing and we had some earnings tied up in inventory and we had some weather impacts. The weather was not cooperating for that business from a trucking standpoint at various points during the first quarter. But at the end of the day we think we are going to see a much better second quarter and that’s why we’ve guided the way I did in the prepared remarks.

Abhiram Rajendran – Credit Suisse Securities LLC

Okay, got it. Just one last quick one if I may. On the CapEx outlook for this year going up from $1.3 billion plus to $1.7 billion, could you just touch on whether this was – how much of this was a function of opportunity firming up or if there was any cost inflation associated with it? Any color there would be helpful.

Michael J. Hennigan

No, it’s not really related to cost inflation at all. It is related to two factors. The majority factor being as we mentioned last time that we would give additional guidance because we got PE 2 across the finish line. At the end of the last quarter and at our call, we had just revealed that PE2 would be a go project, but we hadn't gotten far enough along in the engineering to provide a meaningful number. At the same time every quarter as you guys know we have our slate of projects that we are constantly updating our estimates and there is some choice here and there. The main driver is PE 2, some little tweaks in the rest of our projects and the bottom line as we said our guidance for the year will come up about $400 million.

The other thing that I would just point out to everybody and I know this is a known fact, but we always report on a calendar basis. So these projects are overlapping year-to-year so we make our best estimate as to what we think is going to be our tally by the end of the year.

Abhiram Rajendran – Credit Suisse Securities LLC

Okay, great. Thanks very much.

Michael J. Hennigan

You are welcome.

Operator

Thank you. Next question Steve Sherowski, Goldman Sachs. Your line is open.

Steve C. Sherowski – Goldman Sachs & Co.

Hi good morning. Just a couple of quick questions first on Mariner East 2. Do you think you can go ahead with the project just based on Antero's 51,000 barrel commitment?

Michael J. Hennigan

Good morning, Steve. No, we cannot go ahead at that level. We still need additional support and we have communicated that to the market and like I said, we are working through a bunch of different individuals. We are confident that we can get there but we won't be there until we actually get there.

Steve C. Sherowski – Goldman Sachs & Co.

Okay. Obviously one of your competitors announced a pretty large ethane export project on the Gulf Coast. Just how do you see that impacting the competitiveness of your Mariner East 2 project proposal?

Michael J. Hennigan

Well, two ways. One is certainly that project reflects what we've been saying for quite some time now that we do believe ethane is going to be long across the U.S. The Gulf Coast is an area where we continue to believe it was going to be long. However, that’s the area where it has the most opportunity to get closer to balance because of all of the pet chems. But we were not surprised that the fact that the market wants to see U.S. ethane export from both coasts.

We really don't think it has impacted Mariner East 2, the second part of your question. In our view on Mariner East 2, it kind of reaffirms what we have been stating, why move ethane down to the Gulf of Coast, if it’s going to export. Obviously this project being announced shows that ethane is going to export from the Gulf Coast. So I think, it reinforces the thesis that we have been saying is that the barrels that are up in the Marcellus and Utica should really get to the European and Asian markets at the closest possible port and we think we have a competitive offer to get people out from Marcus Hook.

Steve C. Sherowski – Goldman Sachs & Co.

Again just a final quick question. Nederland volumes were really strong this quarter. Just what was the driver behind that and how sustainable are those volume at these levels?

Michael J. Hennigan

Yes, good question, Steve. The main driver there was the start-up of Keystone's southern leg from Cushing into the Gulf Coast. So we had told people many times before that we have reached agreement with TransCanada to terminate that pipeline in our Nederland Terminal. So that’s the major driver of what’s occurring there. In addition, the normal growth that’s occurring in the Gulf Coast related markets, we are very proud of our offering of service at Nederland and we think people continue to attract to that asset.

Steve C. Sherowski – Goldman Sachs & Co.

Okay, great. Thank you.

Michael J. Hennigan

You’re welcome.

Operator

Next question, thank you, Ethan Bellamy of Baird. Your line is open.

Ethan Bellamy – Robert W. Baird & Co.

Good morning, guys. A few questions. It looks like you are getting some NIMBY pushback on rights of way for Mariner pipeline siding. Do you expect that’s going to be impactful to construction costs or the timeline there?

Michael J. Hennigan

No, we don’t, Ethan. Obviously whenever you can gauge in a project you’re going to run into some local discussions. We’re very confident that we can work through those issues with all of townships that we’ve impacted. We have track record with Mariner West where we ran a pipeline from south of Pittsburgh through Ohio, through Michigan. It’s up and running and we’re confident that our team will work through all those local issues and not impact our project.

Ethan Bellamy – Robert W. Baird & Co.

Okay. Thanks, Mike. You outlined higher CapEx. For all of the projects that are on Page 6 of the slide deck through 2016, could you give us a ballpark estimate on the full CapEx bill for all those projects?

Michael J. Hennigan

Ethan, we don’t normally give the full array of the multiple projects. So we don’t give multiyear guidance. What we do try and do to give you a chance to be successful modeling is we give you the timing and we give you the overall for that year. Obviously you need to make your estimates on which part comes in which year and which not.

We also don’t have our smaller projects typically on that page. We just have our major projects. And then, like I said, at the end of the day, the other guidance that we have given that we think can help you quite a bit is take our macro capital estimate and we think a six multiple is still a pretty good estimation of the earnings that we are going to get from that array of projects.

Ethan Bellamy – Robert W. Baird & Co.

Okay. That’s helpful. Would we be safe to assume – maybe just ask this a different way, if we push forward the 2014 estimate into 2015 and 2016, are we going to be off materially?

Michael J. Hennigan

Yes, I mean my best counsel for you there is wait until the end of 2014 and you won’t have to guess and we’ll give you exactly what we’re going to do in 2015. Like I mentioned earlier, these are multiyear projects and it’s a little too soon to decide how it’s going to play out. Overall our philosophy is not to give guidance on individual projects. We give a year-to-year update on how we see things and try and give you the best timing once we announce them.

Ethan Bellamy – Robert W. Baird & Co.

Okay. Fair enough. And then, one big picture question. We’ve got a really an unprecedented build in crude oil storage inventories on the Gulf Coast. Could I get you to opine on what that means for you guys from a commercial and a strategic standpoint? I mean you guys are in part responsible for that build and have enabled it. And then, what you think that’s going to do to prices longer term?

Michael J. Hennigan

Sure. There is increased demand as you mentioned on the Gulf Coast. We continue to build out our Nederland Terminal. We have Haynesville in progress as we speak. That particular terminal is fully subscribed and it’s approaching 23 million barrels. So we are a large portion, like you said, of some of the growth down there. I think it’s just indicative of what the whole macro market has been saying not just to walk through, through many other people. Is it that the flow is north to south and west to east? As the growth in the U.S becomes more and more prolific and you can see the increasing demand – I mean productions out of each of these plays, the push of products move to where these imports are, which is along the Gulf Coast.

The second piece strategically is a question of will the U.S ever allow exports, and that is a question that we don't have a crystal ball on. We just try and position ourselves that if that ever does become a reality that we are positioned to participate in that. If it doesn’t become a reality we are trying to offer the best service we can along the Gulf Coast. And make sure with adequate tankers for all these increasing flows that are coming here.

Just earlier one that I mentioned was Keystone has started up, so that is a new asset. And as everybody knows there is many assets that are pointed towards the Gulf Coast that are going to be coming up– coming on line, both ours and some of our competitors.

Ethan Bellamy – Robert W. Baird & Co.

Okay, excellent, I appreciate it.

Michael J. Hennigan

You’re welcome Ethan.

Operator

Thank you. Our last question comes from Michael Blum of Wells Fargo. Your line is open.

Michael J. Blum – Wells Fargo Securities LLC

Hi, thanks, good morning. Just a couple of quick ones, following up on Mariner East 2. Do you have a sense yet for how big that pipeline could be from a capacity standpoint?

Michael J. Hennigan

Not yet, Michael. I mean while the open season is still open, we are staying flexible. I mean one of our challenges here is we want to get to the finish line at the same time we want to make sure that we’ve given everybody an opportunity who has shown interest in the project a chance to participate. So because it is new pipe we are not constrained at this point. So it’s kind of open ended. But we really need to just continue to work through this open season, until we get there.

And I know it has been difficult on the market, because that we continue to extend the open season. It’s not out of lack of effort on both our parts and the potential shippers, there is a lot of interest continued to work through the details and once we get to a final stage, then we will be able to give out more information.

Michael J. Blum – Wells Fargo Securities LLC

Okay, and then in terms of ethane exports in the Gulf Coast. Is that something that you could potentially living yourselves pursuing as a project maybe around as a follow on to Mariner South. Is that something that you look at?

Michael J. Hennigan

Sure, sure. We plan to extend our Nederland footprint as wide as we can. As you know, Mariner South is a propane and butane, but we certainly would be interested in ethane as another product that we could do there. So yes, our goal strategically is to continue to expand Nederland both on a crude basis as we just discussed, and then on a NGL basis as we have opportunities to do so.

Michael J. Blum – Wells Fargo Securities LLC

Okay, and then the last question just as it relates to the ATM you announced, so it sounds like you will use the ATM. Do you have any estimate for how we should think about, how much equity you think you could raise this year with the ATM.

Peter J. Gvazdauskas

Michael, this is Pete. We set the program at 250 and looking at no average daily trading volumes, we think if we wanted to, we could raise that amount but at this point, we are not going to give a projection at how much we plan to raise. We’ll certainly on the upcoming August call give you any updates, if we issue any equity during the second quarter.

Michael J. Blum – Wells Fargo Securities LLC

Okay, thank you.

Michael J. Hennigan

You’re welcome, Michael.

Operator

Thank you. We are showing no further questions.

Michael J. Hennigan

Okay, thank you everybody for joining us this morning and for your interest in our Partnership, people will be available for follow-up questions. Thank you, very much.

Operator

Thank you, for your participation. That does conclude today’s conference, you may disconnect at this time.

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