Phillips 66 (PSX) — Q1 2021 Earnings Call Transcript

Good afternoon and welcome to Phillips 66 Partners First Quarter Earnings Conference Call. Participants on today's call will include Kevin Mitchell, Vice President and CFO; Tim Roberts, Vice President and COO; and Casey Gorder, General Manager, Operations. Today's presentation materials 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. We will be making forward-looking statements during today's presentations and our Q&A session. Actual results may differ materially from today's comments. Factors that could cause actual results to differ are included here, as well as in our SEC filings. With that, I'll turn it over to Kevin.

Thank you, Jeff and good afternoon, everyone. In the first quarter, Phillips 66 Partners delivered safe, reliable operations despite the challenging operating conditions. Our results reflect winter storm impacts and the partnership's decision to exit the Liberty Pipeline project. We continue to execute our capital program during the quarter. We advanced construction of the C2G Pipeline and the South Texas Gateway Terminal was completed. These assets are supported by long-term customer commitments. The Board of Directors approved a first quarter distribution of $0.875 per common unit unchanged from the fourth quarter 2020. Moving on to slide 4 to discuss financial results. Phillips 66 Partners reported a first quarter loss of $18 million compared with earnings of $104 million in the fourth quarter. The decrease was primarily due to a $198 million impairment related to the partnership's decision to exit the Liberty Pipeline project compared with impairments of $96 million in the prior quarter. First quarter adjusted EBITDA was $289 million, down $29 million from the fourth quarter. The partnership's wholly owned and joint venture assets have reduced volumes and higher utility costs in the first quarter. This was largely due to the winter storms impacting the central and Gulf Coast regions. First quarter distributable cash flow was $233 million, down $7 million from the prior quarter. The decrease reflects lower earnings due to the winter storms, partially offset by lower maintenance CapEx in the first quarter. Slide 5 highlights our financial flexibility and liquidity. We ended the first quarter with $3 million of cash and $299 million available under our revolving credit facility. We funded $52 million of growth capital during the quarter. This included spending on the C2G Pipeline and investment in South Texas Gateway Terminal. The debt to EBITDA ratio on a revolver covenant basis was 3.2, which is consistent with our target to remain below 3.5. Our distribution coverage ratio was 1.17. On April 1st, we repaid $50 million of tax-exempt bonds. Also in April, the partnership borrowed $450 million under a new term loan agreement. Proceeds were primarily used to repay amounts borrowed under the partnership's revolving credit facility. Before turning the call over to Casey, I'll provide an update on Dakota Access Pipeline. We recognize there is ongoing uncertainty associated with the litigation. The pipeline continues normal operations during the legal proceedings. At a hearing on April 9, the Army Corps of Engineers indicated that they will not seek a shutdown of the pipeline and instead will leave the matter to the DC federal district court. That court is currently considering whether to grant the plaintiffs' motion to shut down the pipeline while the Corps completes its environmental impact statement. That decision could come at any time. The economic implications of any shutdown, while the legal process plays out, extend beyond the pipeline owners to producers, Tribal Nations, customers, state and local governments, consumers, and workers throughout the energy value chain. The Dakota Access pipeline has a history of safe operations, and we believe it should be allowed to operate while the litigation continues. Phillips 66 Partners remains focused on operating excellence, strong balance sheet, and disciplined capital allocation. Now, Casey will provide an update on our growth projects.

Thanks, Kevin and hello everyone. Moving on to slide 6, I'll provide an update on our major projects, which continued to progress during the quarter. The South Texas Gateway Terminal commissioned additional storage, bringing total capacity to 8.6 million barrels. This completes the final construction phase. In addition, the terminal has up to 800,000 barrels per day of export capacity. Phillips 66 Partners owns a 25% interest in the terminal. We continued construction of the C2G Pipeline connecting the Clemens storage caverns to petrochemical facilities in the Corpus Christi area. We finished pipeline construction and the facilities construction is ongoing. The project is backed by long-term commitments and is expected to be completed in mid-2021. In addition, we continue to develop low capital, high return projects that optimize our existing portfolio of assets. These quick win opportunities enable us to meet customer demand while maintaining capital discipline. This concludes our prepared remarks; we will now open the line for questions.

Hi, thank you for taking my questions. Kevin, I wanted to go back to your comments about Dakota Access and regarding the situation here. Can you just walk us through your expectations on the next steps in the legal process including the recent appeal to the Supreme Court and your expected timeline on this?

Yes, so the next steps here are that Judge Forsberg issued an order asking the Army Corps of Engineers to update its latest estimate for completion of the EIS. And also for the Corps to provide its position if it has one and whether an injunction should be issued. So the judge requested the Corps come back to the court next week on that. And so that's really the next potential for that to be some kind of new statement is from some point next week onwards. I think consistent with what we said in the past, I think regardless of the outcome of what happens next, we believe this legal process is just going to continue progressing. So I still think there's actually quite a bit of uncertainty around DAPL despite our views that it should continue to operate, and we've been consistent in that from the beginning. I still think there's a fair amount of uncertainty around that. I think the appeal that you were referring to was the appeal by Dakota Access to the appellate court for a rehearing that was turned down. So that request for appeal was denied. And so really what we're left with is the Federal District Court Judge Forsberg and his request for the court to come back next week.

Okay. I guess in relation to the updated language in their recent Schedule 13D, can you talk about your thought process about the partnership as a viable standalone entity over the long-term? And if this is contingent on the DAPL outcome or do you view these two events as completely independent of one another?

Yes. And so that's really a PSXP filing, but really by PSX as an owner of PSXP. And if so from a sponsor standpoint, what that filing does is provide PSX with the flexibility to consider alternatives around its ownership and possible actions it may want to do and stay consistent within the SEC regulations. The previous 13B that was out there was from IPO and so that's the first time that there has been a change in that status. And so really what it does, it just gives PSX flexibility to consider alternatives around that. It doesn't mean to say anything is going to happen, but at least it provides that flexibility. But I do think that as you step back and look at the sort of MLP landscape, a lot has changed over the last seven, eight years or so, which is the duration of PSXP. And so we're now in a position where there is a lot less midstream growth opportunities out there in this environment we're in. You've also lost that cost of capital advantage that usually presents at the MLP. And so the ability to fund through equity is a lot more challenged, and on a relative basis when the cost of capital advantage isn’t there, it's just harder to justify projects at the MLP versus say the sponsor doing projects themselves. So it just puts more of a question mark around that. I wouldn't really tie that to DAPL. DAPL is an added uncertainty for the MLP obviously, but I don't think that DAPL on its own is going to drive any specific decisions around that.

Thank you.

Hey, good afternoon, guys. Kevin, if you could maybe just pick up on that question a bit and maybe I'll ask it differently. I guess if we could imagine for a second that we're beyond the DAPL situation and it's been resolved, let's call it mostly back to normal. Just curious what your priorities are in that environment and where you think you're focusing your time. You touched on it a bit there, but just curious how important it is for PSXP to be a growth vehicle again here in the near term. I think I heard on the PSX call, it sounded like the focus for the next few years is going to be deleveraging and harvesting that cash flow. I think you mentioned obviously the environment is not conducive to growth right now. And so I'm just curious, is that more or less the track that PSXP is going to follow as well?

Yes, I think it's natural to assume that what is being said at the PSX level around growth and growth in midstream is going to have a knock-on effect at the MLP. And so you look at where PSX today capital program, midstream has $300 million of growth capital, of which half of that is the MLP. And so compare that to the previous few years, that's a dramatic fall off and there are multiple reasons for that, but specifically the opportunities for a lot of those large-scale projects are no longer there. And so I just think that's going to shape the trajectory of the MLP into the future as well until we see some sort of dramatic change in the overall sector that will provide for attractive growth opportunities.

Understood. Appreciate the color there. Second one just on C2G, looks like startup is still on track for mid-2021, but I know you guys have mentioned in the past that the contract cash flows really don't start to show up until early 2022. As I realize there is something hard to guide to, but is there anything stopping you from marketing capacity on the pipeline until the contract commences?

Yes, this is Casey. No, there’s not and there may be some volumes in advance of that beginning of the 2022 startup of the kind of major contract on the asset, but we expect them to be hugely material either.

Understood. That's all I had. Thank you, guys.

Hey, everyone. Thanks for the time. Just wanted to circle up on that growth question. Understand growth coming down across the space, also understand the kind of cost of capital headwind for PSXP. We also had PSX kind of announcing it is starting to move forward, they got on track for just curious if that's something that if you guys are thinking about moving down to the partnership at any point?

Yes, I don't think so at this point. You will see that Frac 1 sits at the MLP over the course of the last two years or so PSX has completed Fracs 2 and 3. And I know originally Frac 4 was a quick follow on behind those two. PSX made the decision to suspend that given all the uncertainty last year in terms of trying to reduce its capital spending outlays and made the statement this morning that we'd anticipate going back to that in the second half of this year, but I think at this point it's reasonable to assume that's where it's going to reside, PSX will.

All right. Got it. Thank you. Maybe just one follow-up. Curious on the term loan, so it matures in a year, it's a little bit different from what we normally see from you, just curious if that’s getting a little bit more liquidity ahead of a DAPL announcement or if there is anything else going on there?

Yes, the primary objective there was we had been running and we've been doing in and out of the revolver up to that sort of $400 million, $500 million level periodically. And so we decided to term some of that out, although still relatively short term, which gives us plenty of flexibility, and it frees up liquidity on the revolver for whatever means we might need it. It's just when you have a revolver that's a $750 million revolver and if you're periodically getting into sort of two-thirds of that capacity, then you're dramatically reducing the available liquidity potentially at times when you might need it the most. And so we just felt it was the prudent thing to do to recreate that liquidity capacity.

Understood. That's it from me. Thank you.

Thank you for your interest in Phillips 66 Partners. If you have any further questions, please call Shannon or me. Thank you.