Phillips 66 Partners (PSXP) Assigned 'BBB' by S&P

Standard & Poor's Ratings Services said today that it had assigned its 'BBB' long-term corporate credit rating to Houston-based Phillips 66 Partners (NYSE: PSXP). The outlook is stable.

PSXP's "fair" business risk profile reflects the stable cash flows coming from long-term fee-based contracts with its general partner Phillips 66, which accounts for most of the partnership's cash flow. This strength is partly offset by PSXP's small size and limited asset and geographic diversity. The partnership's "significant" financial risk profile reflects our expectations for total debt to EBITDA of 3.5x to 4x, an aggressive growth strategy, and the master limited partnership structure that provides an incentive for PSXP to pay out most of its cash flow after maintenance capital spending to unitholders each quarter.

We assess the stand-alone credit profile (SACP) at 'bb' and we view the partnership as strategically important to its general partner, Phillips 66.

Our rating approach reflects PSXP's close ties with Phillips 66, which owns 100% of the general partner and a 73.3% limited partner interest in PSXP. Phillips 66 is also the partnership's most significant customer, accounting for about 95% of total revenue, of which 85% is take-or-pay commitments. We also believe Phillips 66 would, under many scenarios, provide meaningful support to PSXP if it came under stress or could not access the capital markets. PSXP's assets consist of about 925 miles of various crude oil and refined products pipelines, as well as rail facilities, storage, and terminals with more than 12 million barrels of storage capacity.

PSXP has a small, but growing, asset base of pipelines and storage that support the crude oil supply and refined products distribution for seven of Phillips 66's refineries located on the Gulf Coast, in the Midwest, and on the East and West coasts of the U.S. We expect that most of PSXP's growth during the next several years will come almost entirely from midstream assets purchased from and developed by Phillips 66, which could produce an additional $2.3 billion of EBITDA.

The stable outlook reflects our belief that the partnership will maintain total debt to EBITDA in the 3.5x to 4x range and adequate liquidity as it funds organic growth and acquires assets from Phillips 66.

The most likely downside scenario would stem from a downgrade of Phillips 66, which would likely result in a downgrade of PSXP. We could lower the ratings on Phillips 66 if we believed the company's financial risk profile could weaken, such that debt to EBITDA was consistently above 3x and funds from operations to debt was below 30% under a midcycle refining margin environment. This could occur if we lower our midcycle expectations for refining profitability downward significantly, or if management increases leverage by aggressively funding acquisitions, growth capital spending, share repurchases, or special dividends with debt. While not anticipated, we could also downgrade PSXP if the partnership's debt to EBITDA rises materially above 4x.

The most likely upside scenario would stem from an upgrade of Phillips 66, which would likely result in an upgrade of PSXP. An upgrade is unlikely in the near term, however, given our expectation that Phillips 66's consolidated financial leverage could increase as the company grows its midstream business through PSXP, and that the volatile and capital-intensive refining business will still account for roughly one-half of EBITDA.

However, we could consider raising the rating over time if we believed net debt to EBITDA would stay below 2x through the commodity cycle and Phillips 66's nonrefining segments represented a much larger share of future consolidated EBITDA, mitigating the refining assets' cash flow volatility.

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