Q2 2020 Phillips 66 Partners LP Earnings Call
Name, it's David and I will be your operator for today's call.
This time, all participants are in a listen only mode.
Later, we will conduct a question and answer session. Please.
Please note that this conference is being recorded.
Well now turn the call over to Jeff Dietert, Vice President Investor Relations.
You may begin.
Good afternoon, and welcome to Phillips 66 partners second quarter earnings Conference call.
Participants on today's call will include Kevin Mitchell, Vice President and CFO.
Jim Robertson, Vice President operations, and Rosy, Zuklic, Vice President and Chief operating Officer.
Today's presentation materials can be found on the event section of the Phillips 66 partners website, along with supplemental financial and operating information.
Slide two contains our safe Harbor statement, we will be making forward looking statements during the presentation and our Q when 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 interest SEC filings.
With that I'll turn the call over to Kevin Mitchell.
Thank you, Jeff and good afternoon, everyone.
The second quarter Phillips 66 partners operated reliably and safely and achieved key milestones nice growth projects.
<unk> pipeline began full service and supply the first koodo into say, Texas Gateway terminal, which recently saw its first cargo loading.
The board of directors approved a second quarter distribution 87.5 cents per common unit, a 2% increase over second quarter 2019, and unchanged from the first quarter Twentytwenty.
Phillips 66 partners is well positioned to navigate the current business environment with our investment grade credit rating and strong liquidity.
We remain focused on operating excellence, maintaining our strong balance sheet and disciplined capital allocation.
Moving on to slide four to discuss financial results.
The partnership reported second quarter earnings of $255 million.
Includes recognition of an $84 million gain related to the partnership's prior year sale when interest than the grant pipeline.
Adjusted EBITDA and distributable cash flow were both down about $50 million.
The decreases from the first quarter reflect reduced volumes on wholly owned and joint venture assets driven by lower domestic oil production refinery utilization and product demand.
Slide five highlights our financial flexibility liquidity.
We ended the second quarter with $7 million of cash and $532 million available under our revolving credit facility.
The partnership funded $311 million approved capital during the quarter.
This includes investments in the group pipeline in South, Texas Gateway terminal as well spend on the CTG pipeline and the Sweeney to Pasadena pipeline.
In addition, the partnership continues to fund its share of commitments for the deferred Liberty pipeline project.
The debt to EBITDA ratio on the revolver Covenant basis was 3.1, which remains below our targeted long term leverage ratio of 3.5 or distribution coverage ratio was 1.09.
We recognize the uncertainty associated with the Dakota access pipeline litigation.
The economic implications of a temporary shutdown extend beyond the pipeline owners to customers state and local governments consumers and workers right the energy value chain.
Dakota access pipeline has a history of safe operations, and we believe it should be allowed to operate well. This matter continues through the judicial process.
The go to access pipeline has appealed the district court ruling to the DC Circuit Court, we believe the merits of the appeal or well timed it.
For the year distribution coverage for Phillips 66 partners could be negatively impacted by an adverse ruling on the Dakota access pipeline.
However, we will continue to target long term coverage in excess of 1.2 and take actions as necessary to achieve this.
Maintaining a strong balance sheet remains a top priority.
Now rosy will provide an update on our growth projects, thanks, Kevin and Hello, everyone moving on to fight it I'll talk about our growth projects.
We recently completed the storage capacity expansion at common cavern from 9 million barrel to 16.5 million barrel, which supports the see too deep pipeline and the Phillips 66, Sweeny Frac Sweeny Frac two and three.
The project was done ahead of schedule and on budget, we expect the new Cameron to contribute to third quarter result.
The Grail pipeline coming full operation from West, Texas, and the Eagle Ford <unk> to the Texas Gulf Coast, marking completion of the project. The partnership has a 42 in a quarter person ownership interest in the ground pipeline.
Great. Okay next to multiple refinery and export facility in Corpus Christi area, including the South Texas Gateway terminal.
The first dock and hate tanks totaling 3.4 million barrels storage capacity have been commission.
And the terminal began crude oil export operations in July.
Marine operations, including the second docs are expected to ramp up by the end of this year as additional phases of construction are finished.
We expect the project to be completed in the first quarter of 2021 with total storage capacity of 8.6 million barrel and up to 800000 barrels per day of export capacity.
No 66 partners, they 25% interest in the terminal.
This need at Pasadena capacity expansion read mechanical completion in July and began operations this quarter.
The project is supported by long term pipeline and terminal volume commitments from Phillips 66.
This concludes our prepared remarks, we will now open the line for question.
Thank you we will now begin the question and answer session.
As we open the call for questions as a courtesy to all participants please limit yourself to one question and a follow up.
If you have a question. Please press Star then one on your Touchtone phone, if you wish to be removed from the Q. Please press the pound key.
If you are using a speaker phone you may need to pick up the handset first before crushing the numbers.
Once again, if you have a question. Please press Star then one on your Touchtone phone.
<unk> Marine from Mizuho. Please go ahead your line is open.
Hi, good afternoon, everyone I'm, just wondering if sort of stirred I was for the dapple and just stay is.
Not achieved I guess youre.
Current outlook in terms of maintaining the distribution.
As well as your investment grade credit rating a wall. The I guess is prepared I'll just wanted to whats. Your thoughts are there any discussions you've had in the rating agencies and how much time, they might do you view to see the doubtful process through.
Yeah, I gave its Kevin I, you know I don't think we've said that and the event. The pipeline has to shut down the that means we will still hold a distribution at the same level and that's something we will we will evaluate well make a decision there I'm that.
At that point in time and the two main levers we've got available to ourselves are the distribution and the level of capital spend obviously when you look at the capital spend in terms of this year there's not.
That much flexibility, there's a lot more flexibility as you look into next year as all of these projects complete but in the event of the pipeline having to shut down we would that would be a reason for us to consider the distribution where that needs to be.
Understood. Thank you and then I guess I'll sort of question has to secure other offsets and lumbar Ken.
As a real terminal there I think the shoes have a partial entrusted with there'll be any benefit to that asset or could you get some customers volumes over time, so in the event adopt the shutdown.
Yeah, No. This is rosy games and yeah, you're thinking about it right and we would see benefit there at the Palomino rail terminal front from an event like that Uh-huh.
It brings it can you just talked about how much volumes are doing currently versus capacity.
I don't.
It's probably at a 60% rate right now.
Okay understood. Thank you.
[laughter].
Spiro Dounis from credit Suisse. Please go ahead, Sir your line is open.
Hey, guys.
First question just follow up on the Apple briefly now it's been covered a lot and the last few calls, but since the advent of an extended or more permanent shutdown, just curious where liberty withstand in that scenario just trying to understand I guess, how quickly can sort of mobile I can get that project backup on for around and is that a realistic alternative Korea.
Well I listen this is John Roberts for our so thanks for question you know.
I would say right now with Liberty that Worstell Liberty is going to probably be dependent we defer it it's really going to be dependent on our ability to get long term commitments. So after a long term investment grade commitments that people are willing to make producer shippers or anybody else wants to get on that line.
You know, obviously that would help and dairy achieving acceptable returns.
Actually those those are interesting for us I would say that I wouldn't have with the timing between the two I. It's hard to say that you know what happens on that backend has got a impact what's going to happen on liberty.
It could very well, but I think there it's too much uncertainty right now to be honest with you and show.
Plus we put liberty in place Liberty was really meant to be also powder River basin, coupled with some parts of the backend coupled with a barrels up in the Rockies DJ and show for it. So it really wasn't a Bakken twice as much I think that complemented it but it wasn't that specifically so I think at this point still.
So too early to call and we still look at Liberty on its own merits, if we ever enough interest that make sense to possibly advance our project they do it.
Got it thanks tend to make sense switching gears to Nbcs I believe the county here means that we'll see some of those nbcs realized in revenue on a forward basis as the credits are used up. So do you have any sense for what the total deficiency amount was this quarter I guess for both wholly owned and JV assets and maybe overhang.
Many quarters going forward, we can see that's partly I realized through EBITDA.
You know no.
From a I don't have a number for you, but I mean, it and it's hard to say, but just simply because so many of the jvs have different ways that you know when it comes to that just their distribution you know in some cases some of them a pay out like March April and May as opposed to actually paying out you know the actual corridor.
John.
But I you are thinking about it right you know as as the next month as the next quarter moves forward and we are actually seeing the volumes go closer to the NBC MPC levels, and we should actually start seeing benefits there from a cash flow perspective and earnings perspective.
Oh virus scotto from RBC capital markets. Please go ahead your line is open.
Hey, good afternoon, everyone. So again, we talked about the two levers in the event of the dapple shutdown that.
Yes X P itself could coal, which would be capex and distribution. So let's just start a minute with capex. He said that you know with the most of your growth projects essentially finished or or close to being complete you know this year are you still have some capex bad but.
What.
We have reasonable run rate for growth Capex of 2021 and beyond.
Hey, Elvira, it's Kevin you know that's.
If you just look at the major projects that we've got going the only one that has a decent amount of spend in 2021 is the CTG ethane pipeline and then the rest it will be small projects all of that so it's I guess I'm not in a position to give capital guidance for 2000.
21 at this point, but something we do later in the year, but I think the the point is we're highlighting that theres the potential for it to be quite a bit lower than where we were this year. So this year in aggregate something close to 900 million and so it could come down by a reasonable order magnitude from that but not in a position.
And to give a specific number at this point.
Okay. Thanks, and then just like my second question is just around the distribution. That's a lever that you said you.
You would look at the distribution so was that Oh I just trying to understand its apple were shut down.
You know with is the distribution should.
Should we think about it as okay that is like automatically we should think about the distribution going down or are you going to.
I mean, what happens in terms of either a timeline or what the ratings agencies say or look at your leverage or leverage forecast.
Yes, so we'll be looking holistically across the entire.
<unk> financial profile of the MLP as we give consideration to to those things and so the that.
The loss of.
EBITDA the loss of cash flow from the pipeline being shut down and if that's what happens that impacts certain elements of our metrics. The distribution can that can help offset that if we make a decision on the on the distribution, but we're also looking at leverage metrics as well because they get impacted so we're so.
Triangulating around all of those different elements and then also.
It depends on what's the sort of economic outlook, the broader economic position at that point in time so.
The distribution is an easy one to do but that doesn't mean to say that shutdown automatically means that a reduction, though I'm whatever percent, that's something that we won't make any wont be definitive around that until we're at that point, where we're ready to go there.
Thank you.
Theresa Chen from Barclays. Please go ahead your line is open.
Hi, I'm, just clarify expectations around the DAPL process, what are you expecting in terms of the timeline itself, but the appeal process.
Well from the process. It stands right now we're expecting some sort of response from the court of Appeals in time.
And any John can be daylight hours days for weeks. So we do think all the briefings and been submitted so thats been done.
They are now going through that process. So we'll hear when they come back with regardless, what the ever that outcome may be.
They're still as another Avenue to appeal, which would then.
<unk> process with send you exit Supreme Court, which I would suspect either party depending on one side of the decision drawn is probably going to take that that course, so that in itself you can get an emergency process through there and that again turns into that's not.
If you look at the nationwide permit for example that was just recently went up through an emergency process I believe that took around six weeks before they came back with response on that so.
That's not a given but it just gives us another data point on what that could potentially look like.
Okay. So from the time diet.
Permit landed or the appeal for the permit landed on D. Supreme Court's does to the time that decision what rendered it was six weeks.
Yeah, I think by the time the appeal process was started with the Supreme Court six weeks. So yeah, we may be saying the same thing Teresa, but yes, you can I look at it from the time you get an answer from this district court of Appeals.
We are looking to six weeks from that point on getting another answer if it goes through that process.
Got it and been relation to that the gap between the Nvcs and throughput, which you were made whole on on in terms of DCF and coverage. So I believe and please correct me if I'm wrong, but I believe that will be recognized in earnings once the make up period for.
The ship or your affiliate is over when you look at the timing of when each contract started within the year innocent got make a period, it's around a year on do you see any lumpiness in the recognition of earnings as we go on.
There there could be budget, but you're right I mean, I think I think that you know.
Every JV pipeline has a slightly different agreements with their shippers. So it's not going to be all the same and you know in in some cases like I was describing earlier to spiro the way the distributions of their cash is also a little bit off but so so that causes a little bit of lumpiness to.
But you are thinking about it right.
Jeremy Tonet from JP Morgan. Please go ahead, Sir your line is open.
Hi, good afternoon.
Just wanted to touch base I guess, what's your expectations for a refined product volumes, Oh and crude oil volumes.
Volumes, if you will over your system for the balance of the year. If you could just kind of give us like live snapshot of what you're seeing now and how recovery you think will progress across your your areas and how those volumes you know could recover over the balance the year that'd be helpful.
Yes, Jeremy we average 75% utilization in the second quarter and on the P.S. ex call, we talked about averaging in the low 80% range. During the month of July as we look forward into the rest of the a third quarter in the back half an hour.
Year, its really going to depend on how rapidly.
Demand recovers a knee economy recovers and what the demand for a refined products how that evolves in the back half of the year, we expect to increase utilization as a as demand continues to recover.
That's very helpful. Thanks, and just wondering if you could provide a bit more color on your JV EBITDA, a everything's kind of consolidated there and so wondering if you could give us a flavor if on the year over year look by the individual assets, which ones kind of had a bigger changes than others.
I think well the way I it from when I was I saw this quarter at least is just simply you know no surprise. The dapple pipeline came came in and that's just a lower from the first quarter and that's it just a result of the shutting of the wells that happened in the Bakken area Gray Okay.
With an increase from the first quarter and that's again to be expected as we saw an additional ramp up in that pipeline I mean, the new when it comes to the sand Hills and Southern Hills NGL pipes have been doing well and so we were pleasantly surprised to from the contributions that we receive from those types in this quarter.
Chris Okane Alfie from Jefferies. Please go ahead, Sir your line is open.
Hey, good afternoon, everyone.
Hi, Chris.
Kevin I just wanted to follow up on a game and L. virus questions regarding dapple I. Appreciate that this process is uncertain theres a lot of moving parts.
Our response will be shaped by lots of different things, depending on what the regulatory and legal outcomes are.
But as I understand you and the other co ventures in Dakota access provided a contingent equity contribution agreement in association with the spring 19, Midwest connector notes offering.
And your securities offer filings have made reference to an equity contribution trigger event.
I guess as determined by Dakota access, which would require central you'd have maybe put up your portion of the debt and so.
With regard to the I mean, obviously questions around what the courts do.
My question is more what what constitutes the trigger event.
Is it a timing related issue is it like if it stays sales in the DC circuit and at the Supreme Court is that a trigger event.
Is helping us better understand that.
Component as well.
Yes, so the [noise].
The way to think about that is a temporary shut down.
Would not be a trigger event.
But something that revoked the permit permanently would be a trigger event the whole notion of the triggering event. It's all it's really all around the permit the availability of the permit and therefore the ability of the pipeline to continue operations. So a interim period of shut down while the core.
Completes its work would would not be would not be a triggering event, but a permanent revoke of the permit wood.
That's how I think about it but Tim any and no. That's that's right that's exactly okay.
I clarify one comment I I just verified it's about eight weeks was the nationwide permit 12, not six so but that's still in the enhances Supreme Court. So that can be less than may not take it or could be longer. So that's just as a guideline from that last a ruling that they didn't make and there can be significant barriers around.
That is time period, absolutely. So this this that's just a data point not a wouldnt necessarily know that set in stone.
Okay. So with regard to if yeah, let's just say that us the efforts around securing a stay sale and we have to go through formal he I ask process and that might take a.
A year longer that you and your partners would effectively service the dapple that is that the way to think about it and then yes that's right.
Pending on the outcome of the I guess then.
That's at what point that the trigger event determination is made if I go back My service Everything's Fine if there's a challenge then it's an issue yeah. So in the event that there's a there's a period of 12 months or so whatever that period is of the pipeline being shut down and then the the cool ventures would probably have to put cash and to file.
On the debt service the interest expense.
Okay.
That's that's all I had thank you very much further clarifications.
Thanks, Chris.
Theresa Chen from Barclays. Please go ahead your line is open.
Hi.
Hello can you hear me, yes, [laughter] sorry, sorry.
Tim so to.
Youre at follow up on that the nation wide format.
Do you expect that this process a bold need the full Supreme court or that it would just be adjudicated by just proper.
Yes that now you're out of my League.
I I would probably have to referring just get back to you on what that is Teresa, but I don't think into full Supreme Court, but that's a gas so I'm going to pull back and say let me check.
Okay, and then if I could just squeeze one more oh wine slip from one investor how long would you be comfortable on running sub one times coverage, while DAPL plays out.
Well.
We.
Yes, we think about coverage really on an annual basis, and so you got the quarter by quarter. It can fluctuate and so you can certainly have a situation where in a given quarter you drop below one but you wouldn't expect that to continue over.
Multiple multiple quarters and so.
I'd say.
Extended.
Hey, shutdowns scenario isn't the event that would cause us to consider whether distribution needs to be if we need to take action on that.
But we wouldn't go for an extended period that sub one coverage.
Thank you very much.
We have reached the end of today's call I will now turn the call back over to Jeff.
Thank you David and thank all of you for your interest in Phillips 66 partners. If you have additional questions. Please call Brent or me. Thank you.
Thank you ladies and gentlemen. This concludes today's conference you may now disconnect.
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