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Phillips 66 Partners LP (NYSE:PSXP)

Q2 2014 Earnings Conference Call

July 30, 2014 2:00 PM ET

Executives

Rosy Zuklic – Manager, IR

Tim Taylor – President

Greg Maxwell – VP and CFO

Analysts

Brian Zarahn – Barclays Capital

John Edwards – Credit Suisse

Jeremy Tonet – JPMorgan

Elvira Scotto – RBC Markets

Operator

Welcome to the second quarter 2014 Phillips 66 Partners Earnings Conference Call. My name is Christine, and I will be your operator for today’s call. (Operator instructions)

I will now turn to call over to Rosy Zuklic, Manager of Investor Relations. You may begin.

Rosy Zuklic

Thank you, Christine. Good afternoon and welcome to the Phillips 66 Partners’ second quarter earnings conference call. With me today are Tim Taylor, President of Phillips 66 Partners; Greg Maxwell, Vice-President and CFO; Bob Herman, Senior Vice-President Operations; and Tom Liberti, Vice-President and Chief Operating Officer.

The presentation materials we’ll be using this afternoon can be found on the event section of the Phillips 66 Partners’ website along with supplemental financial and operating information. We’ll have time for questions at the end of the presentation.

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

References in this presentation to operational and financial results for the first quarter of 2014, exclude amounts from predecessors. These are non-GAAP financial measures and the reconciliation to their GAAP counterparts which include predecessor results are included in the supplemental information accompanying our earnings release and posted on our website.

With that, I’ll turn the call over to Tim Taylor for some opening remarks.

Tim Taylor

Thanks, Rosy. Good afternoon everyone. I’d like to start by highlighting several key takeaways from the quarter. First and most importantly we delivered on our commitment to safety and operating excellence with no major instance or injuries. Second, we experienced higher throughput volumes in the second quarter, primarily reflecting the acquisition of the Gold Line products system and the Medford Spheres as well as increases on our Clifton Ridge, Sweeny to Pasadena and Hartford Systems.

Total pipeline volumes increased 28% over the prior quarter to 733,000 barrels per day. And terminal throughput volumes were up 23% to 910,000 barrels per day. In addition to operating well, PSXP reported solid financial results for the quarter. And last week, our Board of Directors approved the distribution increase of 10% over our prior quarterly distribution. This increase shows our strong commitment to delivering top quartile distribution growth to our unit-holders.

Phillips 66 Partners continues to develop options for growth, including organic development opportunities third party acquisitions and drop downs. Our sponsor, Phillips 66 is currently finalizing the purchase of the Beaumont crude and refined products terminal. This asset could potentially be added to the portfolio of qualifying assets of Phillips 66 that are candidates for dropdowns into PSXP. The terminal is strategically located in the Gulf Coast region, and can provide the potential for organic logistics investments for Phillips 66 Partners.

Now, I’ll turn the call over to Greg Maxwell, to provide a more detailed financial results for the quarter.

Greg Maxwell

Thanks, Tim. Good afternoon everyone. Beginning on slide 4, Phillips 66 Partners had second quarter revenues of $56.9 million. This is up $20.9 million over the first quarter. The increase primarily reflects the full impact of the acquisition of the Gold Line system and the Medford Spheres.

As Tim mentioned, we also had higher throughput volumes on our other systems compared to the first quarter. Total cost and expenses were $24.6 million. This is up $7.2 million from the prior quarter, driven primarily from – by a full quarter of increased operating cost associated with the acquisition.

The General Partners’ Board recently declared our second quarter cash distribution of $30.17 per limited partner unit, payable on August 13 to unit holders of record on August 4. This distribution is 10% higher than our previous quarter’s distribution of $27.43 per unit. And it’s 42% higher than the partnerships minimum quarterly distribution of $21.25 per unit.

Turning to slide 5, EBITDA for the quarter was $37.6 million, and distributable cash flow was $34.3 million. During the quarter PSXP provided a $700,000 credit to Phillips 66. This credit covered a portion of the prior quarters, minimum volume commitment deficiency payments on the Gold Line product systems.

We have maintenance capital expenditures of $3.4 million during the quarter. And this is consistent with our maintenance capital budget for the year of approximately $12 million. Total cash distributions for the quarter will be $23.9 million resulting in a 1.44 coverage ratio.

Slide 6 shows that we ended the quarter with $35 million of cash and cash equivalence. We currently have outstanding debt of $160 million in the form of a no payable to Phillips 66. Additionally, we have access to $250 million revolving credit facility that has a $250 million accordion feature. This facility remains undrawn.

Looking forward, we intend to position PSXP to achieve an investment grade credit rating to enhance us financial flexibility and facilitate low cost financing that will efficiently fund our future growth plans.

This concludes our prepared remarks. We’ll now open the line for questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions)

And our first question is from Brian Zarahn of Barclays. Please go ahead.

Brian Zarahn – Barclays Capital

Good afternoon.

Greg Maxwell

Brian.

Brian Zarahn – Barclays Capital

Given that Commerce Department is really on condensate exports, I mean, how do you view the opportunity to transport store and export condensate which could eventually maybe make its way down to the MLP?

Tim Taylor

Yes, Brian, this is Tim. I think fundamentally, we still see that condensate will continue to increase in production. And it really – I think the opportunity to export is still there. So I just think it continues to highlight the need, to build systems to be able to transport to market center and process it, take it across the dock and then export that. And so, we still like that as an opportunity. And we’re continuing to work that. That would clearly lend itself to a phi base [ph] structure that could be appropriate for the MLP.

Brian Zarahn – Barclays Capital

Okay. And then, now that you have your full quarter contribution from your first dropdown, how should we think about the next transaction from a size and timing perspective?

Tim Taylor

Well, we’ve continued to guide that distribution growth should be top quartile long-term. For us that’s 15%, 20% growth, annual growth. Short-term – in the shorter period, we thought with the inventory that we have and our opportunities in midstream we’ll be above that. But we haven’t been specific on timing, and we won’t be. But clearly we see the opportunity set to grow either organically, dropdowns or acquisitions. And this could play a key part in that. So I think we’re still – we look at it, we’re very consistent with what we said in our plan.

Brian Zarahn – Barclays Capital

Well, given if you don’t do another transaction, you will meet your objective of top quartile or top tier growth. So that’s so reasonable that the next transaction more likely would in 2015?

Tim Taylor

I just think we got a lot of flexibility around that. And we have a lot of opportunity to grow the midstream. And so, I think it all ties into that. So that’s why we don’t get into specific timing on that.

Brian Zarahn – Barclays Capital

Okay. And then Beaumont Terminal acquisition at the PSX [ph] level, any update to the dropdown inventory or midstream EBITDA? And you provided your analyst days [ph] about $1.5 billion, how should we think about – how the Beaumont Terminal is incremental?

Tim Taylor

Yes. Well, I think there are several increments around Beaumont. First it’s the base asset today. But clearly we’ve talked about the potential here to grow that and use that as a center piece so to speak on the Gulf Coast for our system and other parties as well. So a lot of growth potential with that. And we’ll be giving an update on that at a conference later this fall about our midstream EBITDA. But fundamentally, we believe that noise are today [ph] some additional EBITDA. But then there is significant opportunity to build around that and really around the entire midstream segment that we have.

Brian Zarahn – Barclays Capital

Yes. We’ll stay tuned. Thank you.

Tim Taylor

You bet.

Operator

Thank you. Our next question is from John Edwards of Credit Suisse. Please go ahead.

John Edwards – Credit Suisse

Yes. Just to clarify, so the last EBITDA inventory you gave out was about $1.5 billion. And I guess there are some other projects that are underway at PSX directly. So I guess longer term would it be better to think about that to be somewhere in the $2 billion range? Is that the right way to think about it or is that not it?

Tim Taylor

Well, you hit it. I mean, I think we’re continuing to see opportunities and moving out for an execution. We haven’t given a specific number and the guidance on that. But it is upward from that number.

John Edwards – Credit Suisse

Okay, great. That’s all I had. Thanks.

Tim Taylor

Yes.

Operator

Okay. Thank you. (Operator instructions)

Our next question is from Jeremy Tonet of JPMorgan. Please go ahead.

Jeremy Tonet – JPMorgan

Good afternoon.

Tim Taylor

Hi, Jeremy.

Greg Maxwell

Hi, Jeremy.

Jeremy Tonet – JPMorgan

Congratulations on the strong quarter there. Just a quick question, talked about you mentioned third party acquisitions as potential going forward. And I was just wondering if you could provide any updated thoughts on how you think about that? I think in the past, you talked about asset values being fully – fairly rich there. I was just wondering about NC level consolidation or any other thoughts from third party acquisitions, how that stocks up given everything you have upstairs and how – that’s just a great fit for you guys to continue executing on those dropdowns.

Tim Taylor

Yes. Well, I think that assets are very fully valued in midstream space today. So we continue to look at assets or things that would be accretive, number one. Number two, offer the potential for significant growth beyond that initial piece. So that’s how we’ve approached that. So I think that’s why we keep a very open mind. And I think that the Beaumont Terminal is an example of something that we feel has tremendous potential as we think about how we can utilize that asset.

Jeremy Tonet – JPMorgan

That makes sense. Thank you.

Tim Taylor

Okay.

Operator

Thank you. I will now – and we do have a question from Elvira Scotto from RBC Markets. Please go ahead.

Elvira Scotto – RBC Markets

Hi, good afternoon. Just a follow up question, how do you decide, you know, when you’re looking at the third party acquisitions whether you’re going to do them at the top or at the MLP?

Tim Taylor

Well, I think fundamentally, we had to start with the size and scale. And so, that’s our exhibit [ph]. Fundamentally, we still anticipate will do be able to execute larger and more transactions at PSXP over time. But the beauty with the sponsor like Phillips 66 is you have a way to manage that. So I think it is both a size, scale and timing issue in terms of how we look at them.

Elvira Scotto – RBC Markets

Okay, great. That helps. And my other question is on your distribution coverage ratio, just remind us again sort of what your long-term target is? Because you have a pretty healthy coverage ratio now.

Greg Maxwell

Elvira, just – we’ve talked about the coverage ratio target of being 1.1 times. We’ve also stated in the past we’ll fluctuate that from quarter to quarter given where the operations are and anything that we have coming up for the quarter or happened in that current quarter.

Elvira Scotto – RBC Markets

Okay, great. And just my last question, can you breakout the contribution from the dropdown in terms of the contribution to the volumes?

Greg Maxwell

Yes. I can tell you the increase in the second quarter versus the third quarter about 85% to 90% of that increase is attributable to the Gold Line, Medford drop.

Elvira Scotto – RBC Markets

Great. Thanks. That’s all I had.

Operator

Thank you. I will now turn the call back over to Rosy.

Rosy Zuklic

Okay. Well, thank you very much for joining us this afternoon. And if you have any additional questions, Tom, William or I am available. So please feel free to give us a call. Bye.

Operator

Thank you. And thank you ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may not disconnect.

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Source: Phillips 66 Partners (PSXP) Q2 2014 Results - Earnings Call Transcript

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