Q4 2020 Phillips 66 Partners LP Earnings Call

Yeah.

Welcome to the fourth quarter, 'twenty and 'twenty Phillips 66 partners earnings Conference call.

My name is David and I will be your operator for today's call.

At this time all participants are in a listen only mode.

We will conduct a question and answer session. Please.

Please note that this conference is being recorded.

I will now turn the call over to Jeff Dieter Vice President Investor Relations, Jeff you may begin.

Good afternoon, and welcome to Phillips 66 partners fourth quarter earnings Conference call participants on today's call will include Kevin Mitchell, Vice President and CFO, Tim Roberts, Vice President and CFO 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 two contains our safe Harbor statement, we will be making forward looking statements during the presentation 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 and our SEC filings with that I'll turn it over to Kevin.

Thank you, Jeff and good afternoon, everyone.

And the fourth quarter Phillips 66 partners delivered strong operating performance and solid results and a challenging market environment.

The major milestone at the South, Texas Gateway terminal with the completion of the second dog and the loading of its first VLCC.

The board of directors approved a fourth quarter distribution 87, five cents per common unit unchanged from the fourth quarter 2019.

Moving onto slide four and discuss full year highlights.

Partnership demonstrated the strength of its fee based portfolio.

Spike the unprecedented challenges of 2020, adjusted EBITDA and distributable cash flow only declined modestly from our strong 2019 performance.

We continue to operate safely and reliably.

Phillips 66 partners reported earnings of $791 million.

Adjusted EBITDA for the year was $1 $2 billion.

We continued to execute our growth program.

Greg pipeline, our largest project to date with school operations and the second quarter and the expanded capacity at Clemens Caverns was placed into service in July.

In addition, we advanced the South Texas Gateway terminal and continued construction of the CTG pipeline.

These assets all supported by long term customer commitments and further integrate our portfolio.

Moving on to slide five to discuss financial results for the quarter.

The partnership reported fourth quarter earnings of $104 million compared with $206 million in the third quarter.

The decrease was due to $96 million and impairments related to investments and two crude oil logistics joint ventures.

Fourth quarter, adjusted EBITDA was $318 million.

This was an increase of $5 million from the third quarter due to higher Bakken pipeline volumes, partially offset by lower volumes on the sand Hills pipeline.

Fourth quarter distributable cash flow was $240 million and $3 million from the prior quarter.

The decrease reflects higher maintenance capex and the fourth quarter.

Slide six highlights our financial flexibility and liquidity.

We ended the fourth quarter with $7 million of cash and $334 million available under our revolving credit facility.

The partnership funded $90 million of growth capital during the quarter. This.

This included spend on the <unk> pipeline and investment in South, Texas Gateway terminal.

The debt to EBITDA ratio on a revolver covenant basis was $2 nine which is consistent with our target to remain below $3 five or.

Our distribution coverage ratio was one two.

We recognize the ongoing uncertainty associated with the Dakota access pipeline and litigation.

Earlier this week the appellate court affirmed that the core must prepare and environmental impact study, which is already underway and is expected to be completed by the end of the year.

And of course also affirmed the vacating of the easement under Lake Hawaii.

While the court did not mandate a shutdown of the pipeline and while the Eas is being prepared and recognize there was a pending motion for injunction on that issue and the lower court.

The economic implications of a temporary shutdown and extend beyond the pipeline owners to customers and state and local governments and consumers and workers throughout the energy value chain.

Dakota access pipeline has a history of safe operations and we believe it should be allowed to operate while this matter continues through the process.

We will continue to consider options as the legal process plays out.

Phillips 66 partners remains focused on those areas within our control, including safe reliable operations and disciplined capital allocation to maintain financial flexibility.

Casey will provide an update on our growth projects.

Thank you, Kevin and Hello, everyone.

Moving to slide seven and I'll provide an update on our major projects, which continue to progress during the quarter.

At the South, Texas Gateway terminal and a second dock commenced crude oil export operations and the fourth quarter this and.

Enables to Berthing and loading of two vessels at the same time with up to 800000 barrels per day of throughput capacity.

We expect construction to be completed and the first quarter of 2021 with total storage capacity of $8 6 million barrels Phillips.

Phillips 66 partners under 25% interest and the terminal.

We continued construction of the <unk> pipeline connecting Clemens storage caverns to petrochemical facilities and the Corpus Christi area.

The project is backed by long term commitments.

Pipeline construction is about 85% complete and is expected to startup in mid 2021.

We continue to execute on projects that optimize our existing asset base, including the zena lateral associated with the gray oak pipeline.

Our integrated portfolio has created a number of opportunities for capital efficient high return optimization projects we.

We will continue to identify and evaluate these quick win projects to meet customer demand, while maintaining capital discipline and.

<unk> thousand and 21 capital budget of $300 million includes a $165 million for growth and $135 million from maintenance capital.

Growth capital will be directed towards and flight and optimization projects.

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

Thank you and 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 queue. Please press the pound key.

If you are using a speakerphone you may need to pick up the handset first before pressing the numbers. Once again if you have a question. Please press Star then one on your touch tone phone.

Spiro <unk> with credit Suisse. Please go ahead and your line is open.

Hey afternoon guys.

Question for you Kevin first maybe in the past you talked about achieving a 1.5 billion dollar EBITDA run rate realized we're not there yet but barring the Bakken pipeline for a second is that still a good way to think about your earnings power I guess as the market normalizes of this current asset base or is it going to take incremental investment to get there at some point.

Yeah, I think to get to the $1 5 billion of EBITDA, you, probably don't quite get there with the current asset base and part if I remember right and Tim I need to confirm this for me I think we included and Liberty and that and so that's the big difference between what we had at the time, we made that statement.

Versus where we are today, so that's really the primary differentiator versus those previous projections.

Okay and that's a that's helpful. And then next question, perhaps not surprisingly just on Dakota access and I realize a fair amount is out of your control and I. Appreciate your update on that Kevin, but I guess, if we could just focus on what is in your control and I guess, that's how you would react to a potential closure and I think this is probably what's on most people's minds, but I guess what tools are at your disposal and.

From a legal perspective, but just in terms of the balance sheet and how you react to the extent that closure is actually just a temporary measure to the extent our only extends inside of a year. If that's really all and the I S is going to take you feel compelled to react to that or is that a weighted out type of strategy.

Well I think if we're in a situation where theres a shut down even if it's temporary theres going to be a fair amount of uncertainty as to how long that's going to last and so we do think about all of the options available to us and from a financial standpoint, there's really two main levers and that's growth capital and the distribution the growth capital has already come down.

And significantly so case, you mentioned $165 million and the budget. This year, that's significantly lower than where we've been the last couple of years, So theres a little bit of room, there, but not a lot.

And so I'd just say all options are on the table, we're not going to give any.

And that's specific guidance at this point of time other than to reinforce that any decisions. We make are going to be focused on preserving the balance sheet at PSX P and protecting the best interest of all the unit holders.

I understood. That's it from me, thanks, guys and have a good weekend.

Theresa Chen with Barclays. Please go ahead your line is open.

Hi, So I wanted to follow up on the <unk> topic.

And what are the units currently sit it looks like about 80% to 90% and.

Probability of a shutdown and is priced and to PSX feedstock and I wanted to hear from your own words, you know what are your expectation for that.

February 10th hearing what do you think the potential outcomes are and their respective likelihood.

And I'm curious and this is Tim and I think.

And Kevin actually summarizes.

Hills.

Fairly binary with regard to and it's either going to and keep running or it's not and then at that point. We've got options that we would want to look at and we're going to deal with energy transfer and they've got.

Their earnings call, they probably want to deal with.

Take the point on this but we're in discussions with them as far as what.

Legal options, we have obviously is and our interest and continue to pursue and keeping the pipeline range.

Yeah energy Transfer's, leading the legal effort on that project.

Okay, and and Kevin to your earlier comment about the distribution as a potential lever to preserve the balance sheet and protect unit holders.

And if the and.

Pipeline desk shot and you.

Pull that lever.

What kind of coverage do you think that the base business should target and.

And that you do have long term plans for the midstream business and equity markets remain close and would you target something higher than what you've had historically.

Well, it's yet another way to get.

And do it.

Path of trying to.

Speculate where we might go on the distribution, specifically, but we're triangulating around the.

And the balance sheet metrics.

Thinking about debt metrics as well as coverage metrics from a distribution standpoint, so it's not just about <unk>.

And having the cash generation and distributable cash flow to be able to cover the distribution. It's the broader picture of the balance sheet and the leverage metrics around that as well and so we're just thinking through all of those elements.

Thank you.

Again, or if you would like to ask a question press star one on your telephone Jeremy Tonet with J P. Morgan. Please go ahead. Your line is open.

Hi, good afternoon.

And Jeremy.

Just wanted to start with Phillips PSX had been yeah.

Talking about the renewable fuels business and potentially some expansion there just wondering if that could translate into opportunities for PSX P or how that might impact the partnership overall.

Yeah, and it can I would say right now and for example.

Rodeo PD rodeo.

You're still going to be moving the fuels, so that really doesn't change whether true renewable fuel or not and shutting them using pipelines and terminals to go ahead and get the product to market now good and bad side of that and is really PSX fee does not have much as far as any footprint and on the west coast. So this would benefit the PSX nutrient segment, but if our.

And where to expand into other locations from renewable clearly that may overlap with <unk> assets.

Yeah, and I would just say Jeremy so long as the.

It generates its qualifying EBITDA from that standpoint for the MLP then those type of assets would lend themselves to that structure. So there's no reason to think that if we had those type of assets within the broader portfolio. They couldnt be candidates to be in the and the MLP. So I think theres, certainly some something that could be possible and the future.

Sure.

Got it and maybe touching on a point you raised there just you know there is the potential for capacity rationalization and the refinery side and the U S going forward and just wondering whats PSX PS view on that how what kind of impact the partnership how do you see the refineries at PSX P stands on the cost curve there.

I would tell I mean, Germany, I think to keep it fairly simple business really where a lot of the PSP and <unk> assets are located around mid con and we feel we've got a highly integrated highly competitive footprint and so we do feel like we're well positioned both now and.

And in the future with those assets and we're PSX fees associated with those assets.

Got it that's very helpful and.

Just wanted to touch on terminal volume, so little bit there I think they might've touched down quarter over quarter, <unk> and <unk> when we thought maybe they would.

Up a little bit there just wondering if you could touch on drivers to that.

Yeah, I think on the on the volume piece, it's really just a reflection of our <unk>.

Refinery utilization and I think it was consistent with what we saw on the on the pipeline assets as well that you saw the terminal volumes decrease quarter over quarter.

John Mackey with Goldman Sachs. Your line is open.

I just wanted to follow up one more on dapple I understand the comments you made and how this ongoing process.

Looking for maybe a more specific one and you might be able to answer.

Just in terms of could you talk about what the specific trigger for <unk> and needing to share and needing to fund its share of the dapple that would specifically looked like and.

And if this was a temporary shutdown during and Eas for instance, what would happen in that case.

Yes, John this is Kevin.

A temporary shutdown.

And would be unlikely to trigger and action under the debt no you probably get into a how long is temporary but the way. We think about this sort of big picture is that it would take a permanent shutdown that would be sort of more conclusive in terms of.

And that determination around it being a triggering event and so that's that.

That's all laid out within the.

Loan.

Agreements around that in terms of that criteria and so the way we think about it a temporary shutdown would not be a trigger a permanent shutdown would be.

Understood. That's helpful. Thank you and maybe just turning to a slightly easier. One can you just comment on me and permit this quarter and and what drove that and what assets those were.

Yes, so we had two impairments both of them were.

Crude oil logistics late related one was a rail terminal and North Dakota. The other was a crude pipeline and the mid continent and both cases, it's really sort of a normal process, we assess all of our assets and then.

Investments for impairment periodically and just when we look at the future projections around production and revenues.

And so it didn't pass the threshold to maintain maintained.

Previous book value investment and so we took the appropriate impairment.

Great. Thank you.

We have reached the end of today's call I will now turn the call back over to Jeff.

Thank you. We appreciate your interest and Phillips 66 partners and please follow up with Shannon or me. If you have any further questions. Thank you.

Thank you ladies and gentlemen. This concludes today's conference you may now disconnect.

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