Phillips 66 (PSX) — Q4 2018 Earnings Call Transcript

Good afternoon. And welcome to the Phillips 66 Partners fourth quarter earnings call. Participants on today's call will include Kevin Mitchell, Vice President and CFO; Tim Roberts, Vice President, Operations; and Rosy Zuklic, 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 is a reminder that we will be making forward-looking statements during the presentation and the Q&A. Actual results may differ materially from what we present today. Factors that could cause actual results to differ are included here as well as in our SEC filings. With that, I will turn the call over to Kevin Mitchell.

Thank you, Jeff, and good afternoon everyone. I will start on Slide 3 which shows our distribution history. Our Board of Directors approved a fourth quarter distribution of $83.5 per common unit, a 5.4% increase from the previous quarter. We reached the significant milestone with Partners achieving its 5-year 30% compound annual distribution growth target. We have delivered 21 consecutive quarters of increases since our IPO, demonstrating industry-leading distribution growth. Moving on to Slide 4, 2018 was a successful year for the partnership. We operated safely and reliably and achieved record financial results. The partnership reported 2018 earnings of $796 million, a 73% increase from the prior year. Adjusted EBITDA for the year was $1.1 billion, up 51% from the prior year. We accomplished our $1.1 billion run-rate adjusted EBITDA target ahead of schedule in the second quarter and ended 2018 at a $1.2 billion run-rate. We have grown Phillips 66 Partners at a rapid pace. We are well positioned to find an organic capital program to deliver continued growth. During the year, we sanctioned our largest project to date, the Gray Oak pipeline, and this quarter completed the expansion of the Sand Hills pipeline. On to Slide 5, the fourth adjusted EBITDA of $309 million is an increase of $4 million from the previous quarter. The improvement reflects strong performance from our equity affiliates driven by higher Bakken pipeline volumes that averaged more than 500,000 barrels per day. Our wholly owned assets benefited from increased volumes associated with higher utilization at Phillips 66 refineries. Fourth quarter distributable cash flow was $238 million, an increase of $20 million in the prior quarter primarily due to increased joint venture distributions and lower maintenance capital. Slide 6 highlights our financial flexibility and liquidity. We ended the fourth quarter with $1 million of cash and $125 million of outstanding borrowings under our $750 million revolving credit facility. Our debt-to-EBITDA ratio on a revolver covenant basis was 2.8x. Long term, we expect leverage to be around 3.5x. Our distribution coverage ratio is 1.39x. The 2019 adjusted capital budget of $1.2 billion is predominantly for our growth projects. JV level financing for the Gray Oak pipeline will reduce capital spending to approximately $600 million. The partnership's strong financial position enables funding of the 2019 capital program with operating cash flow and debt capacity. I'll now turn it over to Rosy to provide an update on our growth projects.

Thanks Kevin and hello everyone. Slide 7 lists the projects we have underway that will drive EBITDA growth for the next two years. Our disciplined approach to capital investment combined with our scale and financial strength have not only enabled us to implement a larger capital program but one that will provide strong returns. During the quarter, we made good progress on our growth projects. The Gray Oak pipeline will provide 900,000 barrels per day of crude oil transportation from the Permian and Eagle Ford to Texas Gulf Coast destinations. We have received 360 miles of pipes, trenched 75 miles, and have started construction on all 17 tanks. We remain on track for the pipeline completion in the fourth quarter of this year. Gray Oak will connect to multiple terminals in Corpus Christi, including the New South Texas Gateway Terminal that is being developed by Buckeye Partners. The terminal will have two deep-water docks and planned storage capacity of 6.5 million to 7 million barrels, up from the original project scope of 3.4 million barrels. We have a 25% ownership in the terminal, which is expected to be in operation by mid-2020. As announced this morning, PSXP is expanding its Sweeny capacity - net pipeline capacity by 80,000 barrels per day and net capacity in the Terminal we are adding 300,000 barrels of products storage along with connections to third-party terminals. The project enables the partnership to offer customers additional storage services at the Pasadena terminal while improving product placement optionality. The expansion is expected to be completed in the second quarter of 2020. Commercial operations for the Bayou Bridge Pipeline extension from Lake Charles to St. James, Louisiana are now expected to begin in March. Phillips 66 Partners owns a 40% interest in the pipeline joint venture. The remaining projects are on track to complete on schedule. This concludes our prepared remarks. We will now open the line for questions.

I want to start off with a two-part question on the pipeline tariffs. Just thinking about first quarter, I think they came in fourth quarter a little bit weaker than we thought, so just wondering how to think about that as we move forward and then also on the PSX call I believe they mentioned some heavy refinery turnaround coming up. How do we think about that as it impacts PSXP?

The pipeline tariff is actually what I would say is $0.62 to $0.63, which is actually the normal run rate. The fourth quarter and actually the third quarter both had normal T&D routine adjustments that are making that quarter-over-quarter variance look a little bit off. So if you look over the last eight quarters, $0.62 to $0.63 is really more of a normal run rate I would say that that's kind of a better gauge to use. And then to your second question as far as the utilization rate, you're spot on. The refining system for PSX guiding to the mid-80% is obviously going to have an impact on our throughput volumes. The first quarter tends to be weaker and the fourth quarter is always stronger, and that trend follows the refining system.

The second question is just on Southern Hills. I believe DCP and SemGroup are proposing to effectively convert Southern Hills into a gladiator crude pipeline and then build a new NGL line to replace Southern Hills. I guess first, am I thinking about that correctly? And then second, would you have an option to participate in gladiator maybe rather than develop Red Oak?

So obviously the open season is still ongoing, so it's a little bit too early to discuss much about that, but you are thinking about it correctly. DCP is considering converting the current Southern Hills pipeline at 190,000 barrels a day capacity for NGL as a crude line, which could be at 300,000 barrels a day. So they're thinking that if that gets converted to a crude line, then you could build another line for NGL.

Can you provide a little more detail around the ACE pipeline? You guys talked about those in the press release about an open season, you know when does the open season run through, is there anything in the budget for that pipeline in 2019?

Yes, we don't really give timelines on our open season, that's just a normal practice for us. I can't really tell you when it ends. It did just open recently, so think about a normal timing being somewhere in the 30 to 60 days. The open season is specifically for the new build pipeline, that's going to be from St. James down to Clovelly and the joint venture premises with it being ourselves, PBS and Harvest. Harvest would be contributing the CAM pipeline which currently runs from Clovelly up all the way to Marao, servicing the PSX Alliance refinery, the PBS refinery all the way up to Valero's refinery. We do have a premise in the budget for 2019, hoping to see the open season conclude here.

And then you guys didn't provide any EBITDA guidance, which is consistent with your previous comments, but should we read anything into your comments on, we will continue to reward our unitholders with increasing distributions, you know, versus your previous targeting top quartile distribution growth?

You're correct that we did not provide EBITDA guidance and we're really giving guidance in terms of looking at the fundamental business, the new assets that will be coming online if you look ahead to 2019. We expect to continue to increase the distribution. We expect to be competitive in that regard. We're just staying further away from hard targets around what that growth is going to look like.

And did the question we always ask, but given that many of your own large captures have eliminated IDRs or are in the process of eliminating IDRs, can you provide us your latest thoughts on IDR elimination and what are some of the key factors that keep PSX and PSXP from announcing an IDR elimination today?

Our comment on that is very consistent with what we've said in the past, which is PSXP has grown very successfully over the last five years. The IDR lifecycle continues to evolve over that time period. Clearly, it's much shorter than we originally assumed and we understand the way this works. We will address the IDRs much sooner than we originally expected. We expect this to be done in a way that is fair to the Phillips 66 shareholders and the PSXP unitholders, and we expect to get to that sooner than later but no specific guidance on exactly what those triggers are going to be.

A couple for me if you would. I guess the first one is related more - perhaps more of a question for PSX but on the fracs that's supposed to be on I think late 2020, but obviously that it's been quite a topic lately. Is there any ability to sort of accelerate those projects to bring them forward in 2020?

Yes, on that - this is Tim Roberts by the way. I'll answer that from the sponsor view. You're right; the PSX level looks like it's fairly well on schedule as it stands. It's hard to move these things forward because you have to line up fabrication space, shop space, procurement, contractors, and getting all that lined up. So it's hard to accelerate those. If we're going to see a movement forward, it might be slight, but not much.

And then I guess Kevin, just with the balance sheet availability that you talked about going up to 3.5x from the current level at 2.8x, any incremental thoughts on drop downs?

No, I mean you look at the program that we got today at PSXP; there's a significant organic capital program. We have the ability to continue to execute on that organic program. The drop-down from a PSX standpoint just remains an option for some point in the future if we think that's appropriate, but for now, we're focused on the organic build-out.

I just want to touch base on the South Texas Gateway. I think you noted mid-2020 for the completion there. I was just wondering if parts of that could come online earlier than that to coincide with Gray Oak at year-end '19 or how do you think about that coming online at stages?

Yes, Buckeye Partners, of course, is the operator of this, and just to kind of get everybody up to speed, the original scope of this project started at 3.4 million barrels, and now we're talking about it being at almost 7 million barrels. That mid-2020 timing is really reflecting the significant growth in the project's scope. As the facility becomes available, whether it be tanks or the docks, those will be made available to customers. There's no concern in our mind right now with any of the timing.

For DAPL, I was just wondering if you would be able to share what the environments were for the quarter and also it seems like there is definite interest for the expansion of the 570. What kind of timeframe would it take to achieve that capacity expansion?

As far as the quarter, both third and fourth quarters we ran over 500,000 barrels a day, and the open season that Energy Transfer went out with was successful and has concluded. We are looking to get it to the full capacity of 570,000 here in the short term. Minor modifications will need to be done to sustainably run at the 570. So I would think that you would see it at that sustainable rate in the next couple of quarters.

Last one if I could, it seems like the Borger and Liberty Pipes, the open seasons were announced at the PSX level if I'm not mistaken, and I was just wondering if you could extend it more as far as the drivers behind having this done at the PSX versus the PSXP level.

At this point, PSXP has a really ambitious and solid capital program already. We're looking at this from a PSX standpoint. We think that as we incubate this and see if there's a real project, the open season will tell us, and this doesn't preclude us from moving it down to the partnership at some point in the future.

Thank you, Julie, and thank all of you for your interest in Phillips 66 Partners. If you have additional questions, please call me or Brent. Thank you.