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Andeavor (ANDV) Q3 2018 Earnings Conference Call Transcript


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Andeavor (NYSE: ANDV)
Q3 2018 Earnings Conference Call
Nov. 07, 2018 , 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the Andeavor Logistics' Third Quarter Earnings Conference Call. My name is Michelle and I will be your operator for today's conference. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions) Please note that this conference is being recorded.

I would now like to turn the conference over to Kristina Kazarian. Kristina, you may begin.

Kristina A. Kazarian -- Vice President of Investor Relations

Good morning, and welcome to the Andeavor Logistics' third quarter 2018 earnings webcast and conference call. On the call today are Gary Heminger, our Chairman and CEO of Andeavor Logistics; Don Sorensen, President of Andeavor Logistics; Greg Goff, Executive Vice Chairman of MPC; Tim Griffith, CFO of MPC; Andy Woodward, Vice President of Finance of Andeavor Logistics and other members of the management team.

We invite you to read the safe harbor statements and non-GAAP disclaimer in our earnings release, which can be found on our website at andeavorlogistics.com, and includes reconciliations to certain non-GAAP measures we will be discussing today. It's a reminder that we will be making forward-looking statements during the call and during the question-and-answer session that follows. Actual results may differ materially from what we expect today. Factors that could cause actual results to differ are included there, as well as in our filings with the SEC.

Now, I will turn the call over to Gary Heminger for opening remarks.

Gary Heminger -- Chairman and Chief Executive Officer

Thanks, Kristina, and good morning to everyone and thanks for joining our call. I would like to start by welcoming Andeavor Logistics to the Marathon Petroleum family. The addition of this business deepens our presence in the Permian and Bakken regions. And the expanded platform will create new opportunities across some of the fastest growing production regions in the US. Andeavor Logistics delivered EBITDA of $309 million for the quarter, an increase of $66 million over the prior year. Distributable cash flow attributable to common unitholders was $251 million, up 70% year-over-year.

This provided distribution coverage of 1.05 times for the quarter. The company ended the quarter with $4.8 billion of debt and approximately 3.7 times last 12 months pro forma EBITDA. EBITDA growth during the quarter was primarily driven by contributions from the $1.6 billion dropdown completed in August. This acquisition included Permian Basin and Bakken crude oil logistics assets, as well as the majority of the remaining Andeavor refining logistics assets.

As we look forward, the macro backdrop in the Permian region of the business continues to be compelling. We believe that US production growth and global demand will remain strong across all key hydrocarbons of crude oil, natural gas and NGLs and support an expanded opportunity set for the key parts of our business.

In the Permian Basin, we continue to see a strong drilling and completion environment, which will continue to support the Permian region as one of the lowest cost in the United States. Lastly, as we referenced in the third quarter distribution announcements, we have held the distribution level flat as we evaluate the financial business plans of Andeavor Logistics. Given the evaluation of the business, we will not be providing any distribution growth guidance at this time.

As we continue to enhance our understanding of the business, we reiterate our focus on meaningfully higher coverage, moderate leverage levels and independent sustainability with limited parent support of the partnership. Additionally, MPC will be engaging advisors and will begin the process of assessing all options for the two MLPs in the near-term. Our comments on any potential combination of the partnerships will be limited through the evaluation process and an update will be provided to investors at the appropriate time.

Now let me turn this call over to Don to review operational highlights for the third quarter. Don?

Don Sorensen -- Senior Vice President, Logistics

Thanks, Gary. Moving to our business segments, terminaling and transportation reported segment EBITDA of $180 million, an increase of $38 million year-over-year. Terminaling throughput was $1.8 million barrels per day, an increase of 3% from last year and pipeline transportation throughput was $1.1 (ph) million barrels per day, an increase of 18% year-over-year.

Compared to the prior year, results were primarily driven by contributions from the 2018 drop down, which contributed $19 million of segment EBITDA during the quarter, the Western Refining Logistics acquisition, the 2017 Anacortes Logistics Asset drop down as well as organic growth projects. These improvements were partially offset by lower volumes on our Northwest products system due the planned refinery downtime, as well as some unplanned third-party refinery maintenance in Salt Lake City.

Internally in a transportation, we continue to find ways to partner with our parents refining a commercial operations to grow this business, as well as optimize our assets and attract additional third-party business. Construction of the Los Angeles Refinery Interconnect Pipeline project continues and is expected to be completed by the end of the year. Additionally, we recently completed an expansion project at our Stockton, California terminal which allows renewable fuel offloading and generates higher terminal throughput. We also completed a new pipeline connection enabling third-party connectivity into our Southern California pipeline system and at our East times terminal in California.

Moving to gathering and processing. Segment EBITDA was $130 million, an increase of $27 million from the prior year. The year-over-year increase was primarily driven by contributions from the Permian Basin, crude oil volume growth, higher crude oil volumes on our Bakken Connolly Gathering System, and the Western Refining Logistics acquisition. The 2018 drop down contributed $7 million of segment EBITDA in the gathering and processing segment during the quarter.

During the quarter, we began construction on a crude oil gathering system for a major producer with connectivity into the High Plains Pipeline System. This project is expected to be completed in early 2019. We are also adding new well connections to our existing gathering systems including the Connolly Gathering System.

In the Permian, construction continues on our Conan Crude Oil Gathering System and we expect it to be fully operational by the end of this year. For the third quarter volumes on the system were approximately 90,000 barrels per day. We have been connecting on average two central tank batteries to the system each week and expect that to continue through year end. By the end of the year, we could see as much as a 40% increase in the volume from the third quarter. Our project to connect the Conan system to the recently dropped Andeavor Logistics' real pipeline is expected to be completed in early 2019. The connected system will provide producers additional takeaway options out of this growing basin were pipeline capacity has remained limited today.

Turning to our natural gas and natural gas liquids business, gas gathering and processing throughput were 722,000 million BTUs per day. Please note that due to the adoption of a new revenue recognition standard reported gas volumes were lowered by approximately 184,000 million BTUs per day. On a comparable basis, volume decreased approximately 6% from the prior quarter, driven primarily by natural production decline in the Rockies. As mentioned previously, this was due to an expiration of certain processing agreements with minimal impact to earnings. This volume decrease was partially offset by increased volumes in the Bakken to the recently completed Robinson Lake gas processing facility expansion.

NGL volumes increased 4% from the prior quarter to 9,500 barrels per day. As our gas processing facilities in the Rockies were an ethane recovery for a portion of the quarter. We expect initial operations of the North Dakota NGL Logistics Hub to start in late fourth quarter 2018 as construction remains on schedule. The segment of the former Bakken linked pipeline is currently undergoing NGL line fill with expectations with our first rail shipment in November. This project should be fully operational in the first quarter 2019 and we expect it to deliver annual EBITDA of $24 million, representing approximately a 6.5 times EBITDA investment multiple.

Shifting to wholesale. Segment EBITDA for the third quarter 2018 was $11 million, an increase of $2 million from the prior year. This increase compared to the prior year was driven by higher wholesale margin environment.

With that let me turn the call over to Andy to cover some financial highlights.

Andrew Woodward -- Vice President, Finance

Thanks, Don. We reported EBITDA of $309 million and distributable cash flow attributable to common unitholders of $251 million for the third quarter, both of which increased substantially versus the same quarter last year. Please remember, third quarter EBITDA includes approximately $6 million of transaction costs related to recent acquisitions.

Moving on to distributions. On October 26, 2018, we announced our third quarter distribution of $1.03 per limited partner unit or $4.12 per unit on an annualized basis. Our distribution coverage was 1.05 times in the third quarter. Distributable cash flow was adjusted by $18 million related to revenue recognition accounting standards, timing on recognition of minimum volume commitments and expenses related to recent transactions.

Turning to our balance sheet. As of the end of the third quarter, total debt, net of unamortized issuance cost was $4.8 billion and with approximately $1 billion of availability under our revolving credit facilities. We ended the quarter with a leverage ratio of 3.7 times below our target of 4.0 times.

Net capital expenditures for the third quarter 2018 were $175 million which included $159 million of growth investments and $60 million of net maintenance capital. Andeavor Logistics expects to invest approximately $640 million in growth capital and $80 million in net maintenance, capital in 2018. Please be aware that 2018 capital expenditures have been retrospectively adjusted to include the historical investments of the assets from the 2018 dropdown. Prior to the August 6, 2018 effective date of the acquisition. Detailed information regarding 2018, capital expenditures, can be found in the tables in the press release.

Now, let me turn the call back over to Kristina.

Kristina A. Kazarian -- Vice President of Investor Relations

Thanks, Andy. As we open the call for questions. We ask that you limit yourself to one question plus a follow-up. You may reprompt for additional questions as time permits.

With that, we will now open the call to questions. Michelle, we're ready.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from the line of Jeremy Tonet with JPMorgan. Your line is open. Please go ahead.

Jeremy Tonet -- JPMorgan -- Analyst

Good morning.

Gary Heminger -- Chairman and Chief Executive Officer

Hi, Jeremy.

Jeremy Tonet -- JPMorgan -- Analyst

Just want to pick up -- thanks. Want to pick up with thoughts you put out there, as far as ANDX and kind of reviewing coverage leverage in financial flexibility there. And on the numbers we see to get coverage for ANDX to reach MPLX that level, it take kind of a an extended period of time to achieve that. So I'm wondering are there other avenues to get to this final position, as far as similar metrics or is just kind of a waiting game to growing into those type of metrics.

Tim Griffith -- Senior Vice President and Chief Financial Officer

Jeremy, this is Tim. I think we'll -- again there's sort of continuing evaluations going on, so that we make sure we've got a crystal clear understanding of the business and its prospects, we're -- this is really part of this overall evaluation, we've indicated that the intent will be to move -- cover substantially higher to manage leverage at appropriate levels. And that's exactly what we'll do. So I would say over the sort of coming months, I think we'll have a more crystallize view on how we want to approach it. And we'll certainly report out at the appropriate time.

Jeremy Tonet -- JPMorgan -- Analyst

Thanks for that. And just wanted to see on the crude oil gathering volumes, it looked like that it was a bit lighter than we were expecting. Any additional color that you can provide there?

Don Sorensen -- Senior Vice President, Logistics

Yeah, Jeremy. This is Don. When you look at it on a year-over-year basis the bulk of what we've seen there has been a little bit of a drop-off in the Bakken, we are seeing some sequential growth quarter-over-quarter as we move through '18 and then still continue and expect very strong growth in the Permian.

Jeremy Tonet -- JPMorgan -- Analyst

Thanks for that. That's it for me.

Operator

Thank you. Our next question comes from the line of Spiro Dounis with Credit Suisse. Your line is open. Please go ahead.

John Mackay -- Credit Suisse -- Analyst

Hey, guys. That's really John Mackay on for Spiro. I just wanted to follow up on Jeremy's last question there. Could you just kind of walk us through maybe by each basin. What we saw for quarter-over-quarter on G&P? Just trying to get apples-to-apples, after the drop?

Don Sorensen -- Senior Vice President, Logistics

Yes, Spiro, this is Don again. I think when you look at the Bakken as we noted, we've certainly are seeing some strong opportunities and gathering particularly around well connects in our Connolly Gathering System area. So as we look at that quarter-over-quarter. We're certainly seeing that walk up and then when you look at the Permian Basin for us really so much of that is that's came to us with the Conan System as part of the dropdown and it was noted, we've seen continued strong growth with that and really by the end of the year we expect to see potentially 40% increase over where we were at in ending the third quarter.

John Mackay -- Credit Suisse -- Analyst

And then just on the Rockies. If we were down a little bit quarter-over-quarter, how do we see that trending into 2019?

Don Sorensen -- Senior Vice President, Logistics

Yeah. What we're seeing in the Rockies is it's been that natural decline, but with some of the new producers coming into both the Green River Basin in the Uinta Basin, we're working very closely with them and we actually see the potential for that decline to get arrested somewhat and potentially start turning the other direction for us.

John Mackay -- Credit Suisse -- Analyst

All right. That's helpful. Thanks. Just one last one, prior to the merger, we had some kind of longer-dated guidance from ANDX. Just wondering if that still intact specifically looking at that $1.6 billion of EBITDA by 2020 that they had talked about.

Andrew Woodward -- Vice President, Finance

Yeah, John. We're not in a position to affirm guidance at this point, so just stay tuned and we'll continue to do our work. And as soon as we finish this evaluation, we'll be back to talk to the investors.

Jeremy Tonet -- JPMorgan -- Analyst

Great. Thanks very much, guys.

Operator

Thank you. (Operator Instructions) Our next question comes from Shneur Gershuni with UBS. Your line is open. Please go ahead.

Shneur Gershuni -- UBS -- Analyst

Good morning, guys. It's Shneur Gershuni here. I was just wondering if we can get a little granular if possible. When you sort of put out your -- the commentary about you want leverage and you want coverage to be at x point. You showed us a trailing a leverage metric, which seems to be within your wheelhouse. In terms of how the coverage improves over time historically endeavor when it was previously they had given guidance of a cadence of about $1.5 billion up to 2020 and it had to do with the drop that was just put into place as well as the accounting system. Can we expect that same cadence of growth kind of in the Permian and the Bakken and so forth over the next several quarters and we can see the coverage catch-up as well. Also, I was just wondering if you can at lease talk specifically about the cadence of those assets.

Gary Heminger -- Chairman and Chief Executive Officer

Don, you want to talk about the operations?

Don Sorensen -- Senior Vice President, Logistics

Yeah, in terms of the cadence of the assets, when you look at Conan, we're finishing up the work on that and we'll have that at least the first phase of that project fully implemented by the end of the year and seeing a very quick ramp on the volumes and (inaudible) yield better contribution from that project. And then as I mentioned in the Bakken, it's really those opportunities around our Connolly Gathering System and the other project that were -- the other gathering projects that we're in the process of constructing that will be completed in the first quarter that will bring that additional growth in the Bakken basin for us.

Shneur Gershuni -- UBS -- Analyst

So, is it fair to conclude that, that's going to give us growth on a year-over-year basis. And we could see the coverage improvement that you're targeting?

Andrew Woodward -- Vice President, Finance

Well, as I just said earlier, we are not in a position today to give you any guidance on what the coverage will be in '19 or what the EBITDA expectations are for '19 and '20. We will finish our work and as soon as we're comfortable with that and we'll make it public.

Shneur Gershuni -- UBS -- Analyst

Okay. And as a follow-up question, given the announcement of doing a strategic review. Has the conflicts committee been formed as of yet?

Andrew Woodward -- Vice President, Finance

Well, absolutely we've formed the conflicts committee day one, and in fact, the conflicts committee remains to be the same conflicts committee that was for ANDX prior to our merger, except for one person who stepped off due to a conflict, but other than that it's -- the conflicts committee remains the same.

Shneur Gershuni -- UBS -- Analyst

Any chance we'll get an update by the Analyst Day, or is that too soon?

Andrew Woodward -- Vice President, Finance

You won't see any updates prior to the Analyst Day and that -- I don't want to put any false hopes out that on Analyst Day, we're going to have a conclusion. As you know, this takes time, we've had a number of questions over the past that we hired advisors yet, the ANDX has not engaged an advisor yet. First, we're doing our internal work to determine what is the best path forward, and then we will engage the appropriate advisors, I should say the conflicts committee will engage their advisors.

Shneur Gershuni -- UBS -- Analyst

All right. Perfect. Thank you very much guys, appreciate the color.

Andrew Woodward -- Vice President, Finance

You're welcome.

Operator

Thank you. And I'm showing no further questions at this time, and I would like to turn the conference back over to Kristina Kazarian for any further remarks.

Kristina A. Kazarian -- Vice President of Investor Relations

Thank you for joining us today and thank you for your interest in Endeavor Logistics. Should you have additional questions or would like clarification on neither topics discussed this morning, we will be available to take your calls. With that. Michelle, I'll turn the call back to you.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.

Duration: 21 minutes

Call participants:

Kristina A. Kazarian -- Vice President of Investor Relations

Gary Heminger -- Chairman and Chief Executive Officer

Don Sorensen -- Senior Vice President, Logistics

Andrew Woodward -- Vice President, Finance

Jeremy Tonet -- JPMorgan -- Analyst

Tim Griffith -- Senior Vice President and Chief Financial Officer

John Mackay -- Credit Suisse -- Analyst

Shneur Gershuni -- UBS -- Analyst

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This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

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