Phillips 66 Partners' (PSXP) Q2 2016 Results - Earnings Call Transcript

| About: Phillips 66 (PSXP)

Phillips 66 Partners LP (NYSE:PSXP)

Q2 2016 Earnings Conference Call

July 29, 2016 14:00 ET

Executives

Rosy Zuklic - General Manager-Investor Relations

Tim Taylor - President

Bob Herman - Senior Vice President, Operations

Kevin Mitchell - Vice President and Chief Financial Officer

Tom Liberti - Vice President and Chief Operating Officer

Analysts

Kristina Kazarian - Deutsche Bank

Justin Jenkins - Raymond James

Jeremy Tonet - JPMorgan

Tom Abrams - Morgan Stanley

Michael Blum - Wells Fargo

Ryan Levine - Citi

Operator

Welcome to the Second Quarter 2016 Phillips 66 Earnings Conference Call. My name is Erica, 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 Rosy Zuklic, General Manager Investor Relations. Rosy, you may begin.

Rosy Zuklic

Thank you, Erica, 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; Kevin Mitchell, Vice President and Chief Financial Officer; Bob Herman, Senior Vice President, Operations; and Tom Liberti, Vice President and Chief Operating Officer.

The presentation materials we will be using during the call can be found on the Events section of the Phillips 66 Partners website, along with supplemental financial and operating information. Slide 2, contains our Safe Harbor statement. It's 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. Factors that could cause actual results to differ are included here as well as in our filings with the SEC.

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

Tim Taylor

Thank you, Rosy, and good afternoon everyone. We had a strong second quarter on a number of fronts as we operated safely, completed the significant acquisition from our sponsor and conducted a large equity offering. In addition, earlier this week we announced a third-party asset acquisition. Our Board of Directors recently approved the second quarter distribution of $50.05 per unit, a 5% over the first quarter. Since our 2013 IPO, we've increased distributions in 11 consecutive quarters at a compound annual growth rate of 37%. We remain on track to achieve our goal of a 30% CAGR from fourth quarter of 2013 through 2018.

Distribution coverage this quarter increased to 1.21 times, while leverage improved to 3 times EBITDA. Our strong balance sheet and investment grade credit rating provide us with significant financial flexibility and position us well for continued growth.

Looking at operations on Slide 4; total pipeline throughput volumes for the quarter, excluding volumes from equity affiliates were 893,000 barrels per day, up 11% from the first quarter. Higher throughput was driven by increased volumes on almost all of our pipelines. Total terminal throughput volumes were just over 1 million barrels per day, 9% higher than in the first quarter. The terminal volume increase was mostly due to higher volumes at Clifton Ridge and Pasadena.

Average pipeline revenue increased $0.02 per barrel in the second quarter to $0.48. Average terminal revenue decreased by $0.02 per barrel from $0.40 in the prior quarter due to lower butane blending. Both of these rates exclude equity affiliates.

Turning to Slide 5; we continue to execute our growth plans through organic projects, dropdowns and third-party acquisitions. In the first quarter, we acquired a 25% controlling interest in the Sweeny Fractionator and Clemens NGL Storage Caverns from Phillips 66. In May, we acquired the 75% of these assets as well as the Standish Pipeline from our sponsor.

We expect approximately $90 million in annual EBITDA from these additions. The May transaction was financed primarily with equity including take back units to the sponsor in a $656 million public equity offering. This offering demonstrates our ability to finance our growth plans while creating additional debt capacity for future transactions.

Earlier this week, we announced that we are acquiring an additional 2.5% equity interest in the Explorer Pipeline. This acquisition will increase our ownership interest in Explorer to approximately 22%. The acquisition is expected to be immediately accretive to the unit holders and will be funded with cash and borrowings under the Partnership Revolving Credit Facility. We expect the transaction to close in August.

The first leg of the Bayou Bridge pipeline began operations early in the second quarter. It delivers crude oil from our Nederland, Texas to our Clifton Ridge terminal in Lake Charles, Louisiana. The second leg is expected to start up in the second half of 2017 and will connect Lake Charles to St. James, Louisiana. The project is a part of a joint venture in which we have a 40% interest.

In the Bakken, the Sacagawea Pipeline project continues to progress and is expected to be completed during the third quarter of 2016. The pipeline will feed the recently completed Palermo Rail Terminal, which is currently receiving crude by truck to load railcars. Now, I'll turn the call over to Kevin Mitchell to provide a more detailed update on the financial results for the quarter.

Kevin Mitchell

Thanks, Tim. Good afternoon, everyone. Beginning on Slide 6 a walk through our financials which excludes predecessor results. Because PSXP acquired a controlling interest in the Fractionator and Storage Caverns in the first quarter, we fully consolidated the financial results. The earnings associated with Phillips 66's 75% ownership prior to the May acquisition is removed through non-controlling interest.

Second quarter revenues and other income were $138.8 million, up $35.5 million from the first quarter. This increase was driven primarily by revenues from the assets acquired during the quarter, higher equity earnings and higher volumes throughout our asset portfolio.

Total cost and expenses were $66.6 million in the second quarter, up $18.8 million from the prior quarter, mainly due to expenses related to the assets acquired in the second quarter and higher maintenance expense at the Clifton Ridge Terminal and Pipeline.

After deducting non-controlling interest, net income attributable to PSXP was $67.5 million, up $15.2 million from the prior quarter. The recently approved second quarter cash distribution of $50.5 per limited partner unit will be payable on August 12.

The nest slide shows the significant growth we've delivered over the last year. Adjusted EBITDA increased 71% from the second quarter of 2015 to the second quarter of 2016. Over the same time period, distributable cash flow was up 77%.

Slide 8 walks through the DCF calculation. Adjusted EBITDA for the second quarter was $97.3 million and distributable cash flow was $84.4 million. During the quarter, we had deferred revenue impacts related to the expansion of the Clemens Storage Caverns, which increased distributable cash flow by $1.4 million.

Net interest expense was $10.9 million, and maintenance capital expenditures were $3 million. Total cash distribution of $69.8 million will result in a distribution coverage ratio of 1.21 times.

Slide 9 shows our financial position at the end of the second quarter. We ended the quarter with $36 million of cash and $40 million of outstanding borrowings under our $500 million revolving credit facility.

Our debt to EBITDA ratio at the end of the quarter was 3 times on a revolver covenant basis. Long term, we expect leverage to be at our targeted level of 3.5 times. Also in May, we launched a $250 million at the market equity issuance program. During the second quarter, approximately 263,000 common units were issued under our ATM generating net proceeds of approximately $14 million.

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

Question-and-Answer Session

Operator

Thank you. We will now begin the Question-and-Answer Session. [Operator Instructions]. Our first question comes from the line of Kristina Kazarian from Deutsche Bank. Please go ahead.

Rosy Zuklic

Hi, Kristina.

Kristina Kazarian

Hey, Rosy, can you hear me?

Rosy Zuklic

Yes, we can hear you now.

Kristina Kazarian

Oh perfect. All right, good afternoon guys and Rosy. So with the LPG export facility dapple up [ph] kind of nearing completion this year; can you guys talk about the next set of opportunities, parent level, more so than the PSXP level that you guys are kind of thinking about that could make its way down here? It also sounded like today we got a deferral in terms of the thought process on doing a frac two. So just industry trends you're seeing that led to that decision and what we should be thinking about in terms of the next opportunity set?

Bob Herman

Yes, Kristina, this is Bob Herman. I think when we look at the opportunities set in front of us, we still see a pretty rich backlog of projects, but most of our thinking right now is pivoting towards expanding and building out the current assets that we have that I would say are less dependent on volumes coming the drill beet. So things around, some of our refineries to bring, to pipeline crude in from some of the existing field, expansion of dock capabilities, expansion over Beaumont of crude and product storage. We've always seen those in our backlog. I think we just pulled them forward a little bit as we see things like frac two push out. We still think there's a need for frac 2, it's just not quite as soon as we might have thought two years ago. But as oil prices come back and volumes come up and methane comes out of rejection, we see a time in the not too distant future where frac Pasadena Gulf Coast tightens up and allows us to go forward with those type of opportunities. I think you'll see us continue to do a lot of smaller quick kit, maybe even higher return type projects around our existing projects.

Tim Taylor

Kristina, maybe just one thing, it’s Tim, to add to that. I look at our Beaumont Terminal that we have at PSX, Nederland, and you look at demand per storage, the export opportunity and so we're continuing to grow that. But that's an example of things that we're really building up and filling out that drive both commercial opportunity as well as mid-stream opportunity.

Kristina Kazarian

Perfect, and then on the incremental purchase in the Explorer Pipe you mentioned. Can you just give me any color on why now, and if you guys are interested in increasing your ownership further or any stats behind that?

Tim Taylor

Yes, I think the why now is because there was a partner that wanted to sell and several of the existing owners exercise the roofer [ph] they have on other parts. But we like that pipe a lot, that's a long time legacy asset for our sponsor and now for PSXP. So we own 22% of it, but that's a big pipe, that's 1,800 mile products pipeline from the Gulf Coast all the way into the Chicago market, averages about 650,000 to 660,000 barrels a day. So this is pretty good volume even at 22% interest. We thought it was an attractive opportunity for us and if those kind of opportunities came in the future, we would be very quick, I think, to pull the trigger again.

Kristina Kazarian

Okay, perfect, and last one for me. I know this morning you guys reiterated your $1.1 billion EBITDA run rate guidance by 2018, and it sounds like $2 billion of funding still to plan that PSX mentioned earlier. How do you guys think about when transacting in the markets, we kind of saw a bit of a range on multiples from you guys on the two transactions this year as well as sizing? Do you guys think, it's more about sensitivity to the multiple, more about market timings, what kind of factors should I be thinking about?

Tim Taylor

Yes, I think we think about all of those factors and you saw us do two transactions here in the first half of the year, and one smaller because we didn't think the market was there to support us, and as the capital markets opened up to us we went. Part of it is when the assets are ready to be dropped and obviously a lot of what our sponsors are doing that might find its way to PSXP overtime, we need to complete it and get it started up and get the bigger expenses kind of behind us. So we'll continue to look at every asset we've got and opportunity, and as we see the timing being right around the assets we'll assess whether it's the right in the equity and the debt markets and then go. We feel pretty good about the path we're on right now. It really hasn't changed over time. We've always said that we'd get to the $1.1 billion by the end of '18. It won't be a linear drop schedule, and hasn't been and I think we'll continue on that path. But you can expect us to be very active over the next couple of years here in both the equity issuance and the debt market to support the dropdowns.

Kevin Mitchell

I think we tried to do this in the past and we'll continue to do in the future. We want to maintain the flexibility we have so that when the market is there for us, not just the drop acquiring asset, we have the capability of doing that. So we try to keep the balance sheet as good as it's been so that we can take advantage of the opportunity when it's there.

Kristina Kazarian

Perfect, nice job on a busy quarter, guys.

Tim Taylor

Thanks.

Operator

Your next question comes from the line of Justin Jenkins from Raymond James. Please go ahead.

Justin Jenkins

Hey, good afternoon everybody. I guess I'll follow up on Kristina's last question and maybe ask at a different way. It was good refining fundamentals here, certainly a bit softer than we probably all like to see, but does that play into thinking in terms of cash needs it as PSX in terms of the urgency or the pace of the timing of the drop?

Tim Taylor

Most answer is a strong balance or moment of that market.

Justin Jenkins

No, it's perfect, I appreciate that answer. And I guess I'll turn my second one over to maybe the NGL market. Can you guys talk maybe about what you're seeing there from a volume perspective both now and maybe what you expect in the future? You saw a good bump and throughput on the Sand and Southern JV pipe, so just curious if that's from the expansion work that's going on, maybe a bit less methane rejection or maybe some combination of the two?

Tom Liberti

Yes, it's Tom. The expansion on Sand Hills especially is growing. We're looking now at capacity, total capacity between Sand and Southern are 460 capacity in the second quarter. So a lot of that is Sand expanding, and Sand has the…

Tim Taylor

You're going to see volumes come up because that things come out of rejection and Sand Hills and Southern Hills have upside just by the fact that ethane will come back into the stream, come back to market in Mont Belvieu. So I think we see slower overall NGL growth in the market, but it's still growing and then you got this tranche of need that's going to come with the crackers and maybe some export facility here as well. So I think the volume side will actually pull stuff back out the natural gas stream for a while.

Justin Jenkins

Perfect, I appreciate the color, guys.

Operator

Your next question comes from the line of Jeremy Tonet from JPMorgan. Please go ahead.

Jeremy Tonet

Good afternoon. I just want to follow up on Explorer a bit here and was wondering what you guys see in the M&A market as far as third-party opportunities that can turn, was this kind of just a onetime thing that popped up or do you see other things of interest to you guys especially some of the other guys in midstream right now. Their balance sheet might not be as strong as yours.

Tim Taylor

Yes, I think that's a really good question, Jeremy. I would say we're pretty active right now looking at assets that are out there would interest us or things that kind of fit right between our fairway. Crude product transportation pipelines, storage, docks, and there is quite a bit out there. I would say that there are some owners that are still very proud of their assets and so maybe bid [ph]. So everything we look at we compare against the backlog or projects that we have to organically there at PSXP or at sponsor and they really do have to compete for our attention. But I think we are very interested in assets that we think we can find synergies in or leverage with the rest of our existing system or around our sponsor's refining system. And so we won't hesitate to acquire those type assets at the right price and add them to our portfolio.

Kevin Mitchell

Yes, Jeremy, we just need to look at things in terms of the returns, make sure that via long run hurdle rates, and that they add value, then those are kind of the things we're interested in. So we continue to look, and Bob said valuation is still typically seem a little bit rich but we're always looking things that drive that long term value above that cost of capital and I mean the cost of capital long run that meets the hurdle rate that adds value.

Jeremy Tonet

Thanks for that. And then just want to refresh a bit. You guys talked about a bit before here as far as how you see the capital markets accessibility right now. You had a very large raise in May here, but just wondering are there any changes as far as how you guys think about what you can access over given periods of time and the pace of dropdowns that you look to achieve or things still very much in line there.

Kevin Mitchell

Jeremy, this is Kevin. I really think that our view of that hasn't really changed. So we're still on the path to the $1.1 billion EBITDA by the end of 2018, and you can kind of back end to some kind of assumption of what that means in terms of the pace of activity. And the markets were there for us in the second quarter, obviously more to come over the next two and a half years. But fundamentally we think the markets are going to be there both from the standpoint of the need for equity and debt.

Jeremy Tonet

Great, thanks. And then 2018 is still ways of at this point, but I'm just wondering if you could share any thoughts you have as far as how you think PSXP grows past that. Is it kind of a big step down at that point or do you guy's still see good stronger growth achievable? I know it's a ways out but any thoughts on your philosophy would be helpful.

Kevin Mitchell

Just high level Jeremy - when you think about the commitment that we've made, starting at 30% compounded annual growth rate, that's the anchors at that point, clearly the mathematics become difficult to continue 30% a year. So I think naturally is to step back but we still see this from a PSX standpoint even. We see this as a high value segment, adds commercial value to PSX so there is a good relationship between what the sponsor sees as strategic, and the opportunities that we have at PSXP. So we haven't given guidance on the specifics but I still think you'll see us look very favorably things that constraint at an overall position.

Jeremy Tonet

Okay, thank you are very much, that's it for me.

Operator

Your next question comes from a line of Tom Abrams from Morgan Stanley. Please go ahead.

Tom Abrams

Thanks. A couple of short-term questions; one is in the on the Sacagawea Pipe. Does the trajectory of the volumes on that depend on Dakota access starting up? That's the first one.

Kevin Mitchell

It's Sacagawea Tom, and it doesn't depend on Dakota access starting up. That line actually feeds the Palermo Rail Terminal, there will be some - there could be some volumes that find their way into it from that but it's basically up - it basically feeds the rail system.

Tom Abrams

All right. And secondly with your sponsor talking about refiners in general, trying to maybe needing to cut production as margin shrink; do you have any sense of how that might impact your volumes over the next quarter so?

Kevin Mitchell

No, I think - if you look at the last quarter, it's very strong, our sponsors refining system ran very strong. We obviously are transporting most of their volumes, there is a big component of the sponsors that goes out over the water and a lot of there - what we see on our pipes is the integrated barrels that feed our own marketing or other people's marketing systems, and they are typically kind of first moving barrel. So while we can see a little bit of a down tick in volumes that we wouldn't expect it to be very impactful at the PSXP level.

Tom Abrams

Excellent, thanks a lot.

Operator

Your next question comes from the line of Michael Blum from Wells Fargo. Please go ahead.

Michael Blum

Thanks. I really just wanted a question I had and I apologize if you've covered this under PSX call. So in terms of deferring - can you just give us a sense of where Sweeney sits today for utilization standpoint? And how do you see that ramping over the next 12 months?

Kevin Mitchell

Yes, so at Sweeney on - we typically don't like to talk about individual asset but we said today about 80,000 barrels a day is where we are, it's pretty close to design we've come up in the last quarter and essentially it's the heavier feed composition that we are seeing with that thing in rejection that we're kind of running to a limit that particular frac down there. And so as the income is back out of the stream, there is - it will head towards that 100,000 barrels a day. And we'll just continue to tweak and optimize that and hope we drive that a bit higher.

Michael Blum

Great, thank you.

Operator

Your next question comes from the line of Ryan Levine from Citigroup. Please go ahead.

Ryan Levine

In terms of the explorer transaction, could you provide any color around the valuation and also if there is any other tag along rights that you have that could be part of growth story?

Kevin Mitchell

No, we're not - we haven't disclosed the evaluation around that, nor who the selling party was. As long it - first tag along rights - I'm not sure, we already have a board seat there so we have our amount of control on the pipe and get our say on how capital projects that might expand that pipe, and future volume. So were - I'd say we're - it's like most of our JV's and that we've got opportunities commensurate with our 22% ownership. Yet governance do not change with this acquisition of the additional interest.

Tim Taylor

Yes, remember explorer is a sea-corp, so we have an equity interest in it, our 22% is an equity interest.

Ryan Levine

Are there any other assets that you may participate in buying up minority partners that are part of your growth story?

Kevin Mitchell

I think it comes back to my earlier comments on all assets. We have a lot of joint ventures that we're part of - as part of our sponsors, traditional transportation business. Any opportunities that might come along we will look at them, we'll comparative them to the organic backlog that we have and where they make sense we wouldn't hesitate to do that.

Ryan Levine

Okay. And then moving to capital markets, you've reinstated an ATM program and started to exercise that. What's the intent to use that program for? What are the proceeds it's going to be used for and should we expect that to be sizeable in the second half of the year?

Kevin Mitchell

Well, so it's a $250 million program. It just started up towards the end of the second quarter, so relatively small proceeds during that period. But really anticipate that being a facility to provide funding for some of the organic capital - to the extent that certain things - so I think we said the explorer acquisition will be funded with some of the revolver, it provides the ability to pay them some of that, so general it uses organic capital primarily.

Ryan Levine

Okay. And how is Bayou Bridge volumes ramping?

Kevin Mitchell

So Bayou Bridge - the first one that started up in April which goes from our Beaumont Terminal over to Lake Charles, Louisiana. And so we've been flowing barrels on that to the refinery and Lake Charles, it's a pretty good rate. We haven't disclosed that rate because it's competitive information for our sponsor. And then secondly, remember it doesn't start up until sometime in 2017, so the construction on that project is progressing well, we're in the right away and permitting phase and we don't see anything getting in the way of laying that pipe starting later this year and into next year and starting up. And then you'll see volumes ramp up to the total volume as we can get over to St. James and there - kind of a refining center in that part of Louisiana.

Ryan Levine

Okay, great, thank you.

Operator

[Operator instructions] Your next question comes from the line of Tom Abrams from Morgan Stanley. Please go ahead.

Tom Abrams

Thanks. I wanted to circle back to Dakota access, you may or may not want to comment but I think you've received some permits lately, just wanted to get a sense of - if we're all done with the permits now, we can start construction. And also if you're willing to comment on project financing there at all?

Kevin Mitchell

Yes, so first on the permitting; you're probably seeing the press, we've got our last set of federal permits, the army core engineers issued some permits for water crossings along the route and those were the last big ones. I won't say that we've gotten every permit because there is a lot of small municipality permit that you get for road crossings, and crossing roads and that along the way but those are pretty standard. We did start laying pipe during the second quarter, they are actively laying pipe along the entire northern route remembered that the copies from Patoka down to Beaumont is a repurposing of an existing line with a little bit of modifications along the way. So it's really the line from The Bakken down to Patoka, and they are actively laying pipe and doing their horizontal drills. We expect that pipe to be done by the end of this year and start line fill and commercial operations for 2017.

Tom Abrams

Project financing?

Kevin Mitchell

On project financing, we continue to work with our partners on that on progressing project financing and I think in the PSX call we talked quite a bit about it but…

Tim Taylor

Yes, I'd just say we would be hopeful of getting that completed relatively soon. And from a PSX standpoint, we'll take care of a significant portion of our remaining dapple capital expenditures for this year.

Tom Abrams

Great, thanks a lot.

Operator

We have now reached to the end of our Q&A session. I will turn the call back over to Rosy for closing remarks.

Rosy Zuklic

Thank you, Erica and think you all for your interest in Phillips 66 Partners. If you have additional questions please reach out to CW Mallon and myself. Bye.

Operator

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

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