New York, September 30, 2020 -- Moody's Investors Service ("Moody's") affirmed
Phillips 66 Partners LP's (PSXP) Baa3 senior unsecured rating.
The outlook remains stable.
"Phillips 66 Partners' Baa3 long-term credit rating
reflects its increasingly diverse business and strong majority owner which
continues to account for a large portion of its business,"
stated James Wilkins, Moody's Vice President.
The following summarizes the ratings.
..Issuer: Phillips 66 Partners LP
....Senior Unsecured Shelf, Affirmed
(P)Baa3
....Senior Unsecured Regular Bond/Debentures,
Affirmed Baa3.
Outlook Actions:
..Issuer: Phillips 66 Partners LP
....Outlook, Remains Stable
RATINGS RATIONALE
Phillips 66 Partners LP's Baa3 senior unsecured rating reflects its strategic
and operational importance to Phillips 66 (A3 stable), both through
PSXP's integrated midstream asset base with Phillips 66's refining assets
and as a growth and financing vehicle for Phillips 66. Phillips
66 holds a 74% limited partner interest in PSXP as of June 30,
2020, after the partnership bought the IDRs from Phillips 66 and
converted the 2% economic GP interest into a non-economic
GP interest on August 1, 2019. PSXP has increased its scale,
growing EBITDA to $1.125 billion for the twelve month ended
June 30, 2020 (including Moody's analytical adjustments),
while maintaining moderate financial leverage. Much of PSXP's stable
cash flow is derived from long-term, fee-based contracts
with minimum volume commitments and a few minimum fee contracts.
It has a visible growth trajectory that is underpinned by rising volumes
handled by its legacy assets and earnings from organic growth projects.
In the second quarter 2020, the Gray Oak Pipeline (Gray Oak),
in which PSXP has a 42.25% ultimate ownership interest,
commenced full operations. Moody's expects PSXP to continue
to engage in growth capital projects after it reduced growth spending
in 2020 as a result of the coronavirus pandemic. PSXP may also
consider asset dropdowns from Phillips 66's midstream assets and
third party acquisitions as options to manage future growth.
PSXP's rating is tempered by its high distributions associated with
its master limited partnership (MLP) structure and a reliance on debt
and/or equity capital markets to fund growth. The partnership has
a long-term leverage target of 3.5x. PSXP's
largest recent growth project, the joint venture, Gray Oak,
issued $1.4 billion of senior notes in September 2020 to
fully repay its term loan bank facility. As a result of the payoff
of the term loan, the equity contribution agreement support behind
the loan, of which PSXP's share was $583 millon, was
terminated. PSXP's share of Dakota Access / Energy Transfer
Crude Oil pipeline's EBITDA is ~$225 million based on its
25% ownership interest, but the pipeline has been the subject
of litigation. If the litigation results in a final judgement that
causes a shutdown of the pipeline's operations, a loss of
earnings and any requirement through the contingent equity contribution
agreement for PSXP and its Dakota Access co-owners to contribute
funds to repay debt at the Dakota Access pipeline financing entity would
be a credit negative for PSXP.
The stable outlook reflects the highly contracted nature of PSXP's revenue
stream and also assumes that PSXP will finance future asset dropdowns
with a balanced mix of debt and equity, and drive leverage towards
its long-term target of 3.5x.
PSXP has adequate liquidity through 2021 supported by steady cash flow
from operations and a revolving credit facility. As is typical
of most MLPs, a substantial portion of cash flow after maintenance
capital and preferred distributions are distributed to common unit holders,
requiring issuance of third-party debt and equity for the long-term
funding of growth capital expenditures and dropdowns. PSXP had
$215 million of borrowings and $3 million in letters of
credit as of June 30, 2020, under its $750 million
unsecured revolving credit facility due July 30, 2024. The
revolver has a maximum 5x debt/EBITDA leverage covenant (5.5x in
an acquisition period). The covenant leverage ratio was 3.1x
as of June 30. PSXP has no debt maturities until 2024.
If the Dakota Access entity is required to repay its debt as a result
of the final judgement in the litigation previously mentioned and assuming
the entity does not otherwise have funds to repay the debt, PSXP's
share of the maximum potential contribution to the Dakota Access entity
under the contingent equity contribution agreement is approximately $631
million as of June 30, 2020. If such a funding requirement
did occur, PSXP could look to its revolver, new debt or equity
issuance, and contributions from its sponsor as sources of funding
as well as conserve cash flow by reducing its distributions and capital
expenditures.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The ratings could be upgraded if PSXP were to increase in size and scale,
leverage is maintained below 4.0x, and there is greater visibility
of earnings growth as a result of projects coming online. The ratings
could be downgraded if Debt to EBITDA exceeds 5x, PSXP acquires
significant incremental assets with weaker business risk profiles,
or there is a substantial drop in Phillips 66's credit quality.
PSXP is an MLP formed by Phillips 66 to operate and develop primarily
fee-based crude oil, refined petroleum product and natural
gas liquids (NGL) pipelines and terminals and other transportation and
midstream assets which are integrated with Phillips 66 assets.
Phillips 66 holds a 74% limited partner (LP) interest in PSXP as
of June 30, 2020, after the partnership bought the IDRs from
Phillips 66 and converted the 2% economic GP interest into a non-economic
GP interest on August 1, 2019.
The principal methodology used in these ratings was Midstream Energy published
in December 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1147839.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
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same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
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issued on a support provider, this announcement provides certain
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support provider and in relation to each particular credit rating action
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provides certain regulatory disclosures in relation to the provisional
rating assigned, and in relation to a definitive rating that may
be assigned subsequent to the final issuance of the debt, in each
case where the transaction structure and terms have not changed prior
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For any affected securities or rated entities receiving direct credit
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to rated entity, Disclosure from rated entity.
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Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
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for additional regulatory disclosures for each credit rating.
James Wilkins
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Steven Wood
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
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U.S.A.
JOURNALISTS: 1 212 553 0376
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