Moody's Assigns 'Baa3' Rating to Phillips 66 Partners (PSXP); Outlook Stable

October 11, 2016 11:07 AM EDT

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Moody's Investors Service, ("Moody's") assigned a Baa3 rating to Phillips 66 Partners (NYSE: PSXP) announced senior unsecured notes offering. The company's Baa3 senior unsecured rating was affirmed. The outlook is stable.

The proceeds of the announced notes offering will be used to fund the majority of a $1.3 billion dropdown from Phillips 66 (A3 negative) of refinery logistics assets consisting of various crude, product and NGL pipelines and terminals.


..Issuer: Phillips 66 Partners LP

....Senior Unsecured Regular Bond/Debenture, Assigned Baa3

Outlook Actions:

..Issuer: Phillips 66 Partners LP

....Outlook, Remains Stable


..Issuer: Phillips 66 Partners LP

....Multiple Seniority Shelf, Affirmed (P)Baa3

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa3


PSXP's Baa3 senior unsecured rating reflects a Ba1 stand-alone credit profile and one notch of uplift from Phillips 66, which owns PSXP's 2% general partner interest, 57% limited partner (LP) interest and incentive distribution rights (IDRs). The Ba1 stand-alone credit profile reflects PSXP's small, albeit rapidly increasing, size, high distributions associated with its' master limited partnership (MLP) structure and a reliance on debt and equity capital markets to fund growth. PSXP benefits from its long term minimum volume contracts - and a few minimum fee contracts - with Phillips 66, which cover about 85% of PSXP's revenue base, as well as management and operation of PSXP's assets by Philips 66 personnel. The rating also benefits from a visible growth trajectory that will be comprised principally of drop downs from Phillips 66 that will be dominated by assets covered by fee-based contracts with Phillips 66, along with a measure of organic growth projects and third party acquisitions. Moody's expects 2017 leverage to approximate the 4.4X level that existed at December 31 2015 as a result of full year EBITDA from the recently dropped assets and a greater component of equity funding of additional dropdowns. The one notch of uplift reflects the strategic and operational importance of PSXP to Phillips 66, both through its integrated asset base and the strategic importance of PSXP's midstream assets to Phillips 66's refining assets, and as a growth and financing vehicle for Phillips 66.

PSXP's liquidity is adequate through 2017. Typical of most MLPs, all free cash flow after maintenance capital is distributed to LP unit holders and the GP, leaving the long-term funding of growth capital expenditures and drop downs reliant on debt and equity capital markets. We expect PSXP to fund drop downs from Phillips 66 as well as some organic growth projects through 2017 with a proportion of equity and debt that supports a decline in adjusted leverage into the low 4X range. The $750 million unsecured revolving credit facility maturing in 2021 is expected to remain largely undrawn. The revolver has a leverage covenant of a maximum 5x debt/EBITDA (5.5x in the event of acquisitions), which at June 30, 2016 was 3.1x. We expect PSXP to be in compliance with its financial covenant through 2017.

The stable outlook reflects the highly contracted nature of PSXP's revenue stream and the substantial majority of its throughput and EBITDA being derived from Phillips 66. The stable outlook also assumes that PSXP will finance future asset dropdowns with a balanced mix of debt and equity, and drive leverage towards 4x.

PSXP's ratings could be upgraded as it increases size and scale and maintains leverage around 4x. To achieve a stand-alone Baa3 rating we would expect EBITDA to be sustainable above $750 million ($333 million LTM June 2016). Continuing to provide a notch of uplift would be dependent upon the then relationship and contractual linkages with P66. An upgrade of Phillips 66's A3 rating would not prompt an upgrade of PSXP's rating until size and scale indices have improved.

PSXP's ratings could be downgraded if debt/EBITDA appears likely to remain above 5x on a sustained basis, or should it acquire significant incremental assets with weaker business risk profiles. A substantial drop in Phillips 66's credit quality would prompt a reassessment of PSXP's rating.

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