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Sunoco Logistics Partners' (SXL) CEO Mike Hennigan on Q2 2015 Results - Earnings Call Transcript


Good morning. Welcome to Sunoco Logistics Q2 2015 Earnings Conference Call. All lines have been placed in a listen-only mode until the question-and-answer session. Today's call is being recorded. If anyone has any objections, you may disconnect at this point.

I would now like to turn the call over to Mr. Mike Hennigan, President and CEO. You may begin.

Mike Hennigan - CEO

Thank you, Jill. Good morning, everyone. Welcome to Sunoco Logistics Partners' conference call to discuss our Second Quarter 2015 results. I'm Mike Hennigan, President and Chief Executive Officer for the general partner. Joining me today is Pete Gvazdauskas, our Chief Financial Officer and also on the call is Mackie McCrea.

In the course of our remarks and in the subsequent Q&A session, we'll be referring to slides that have been posted on our Web site entitled Second Quarter 2015 Earnings Conference Call, and we may be making some forward-looking statements.

In that regard for the purpose of facilitating the discussion, I refer you to Slide 2. With regard to our second quarter 2015 financial results, we're pleased to report EBITDA of $326 million and distributable cash flow of $264 million. As we discuss the quarter results, I’ll continue to use the Blue Bar Red Board terminology that we’ve used in the past, to describe the type of earnings been generated. As a remainder blue bar refers to stable repeatable cash flows, which is also supported by long term commitments. Red bar refers to cash flows that are opportunistic in nature and may or may not be sustainable.

We are pleased to report that our blue bar earnings grew about 30% in the second quarter on year-on-year basis. This is about the same growth that we experience in the first quarter. As you know, growing blue bar earnings is core to our strategy and it is our view that investors are looking for long term ratable growth and that is exactly what we are providing.

Second, we mentioned last quarter that we had some earnings get trapped on the balance sheet in our Terminal segment as a result of LIFO accounting adjustment. As expected this accounting adjustment was reversed in the second quarter. The magnitude of the LIFO accounting impact was approximately $25 million in the second quarter. A better way to say it and to illuminate the accounting inventory noise, is that we’ve earned $547 million of EBITDA and $424 million of distributable cash flow in first half of the year.

Third, unlike the first quarter where we experienced an environment of very low red bar earnings, particularly in our Terminal segment. This quarter red bar earnings recovered enabling us to achieve of 1.5 times coverage ratio in the second quarter.

Now let me turn to our particular segments, our Crude Oil Pipelines system performed well overall but still remain hampered by the integrity work on the West Texas Gulf and Mid-Valley pipeline system. As a remainder, reduced operating conditions have been imposed on the Mid-Valley pipeline system, as a result we executed the first phase of integrity high access [ph] work in May with no issues and expect to execute the final phase in the third quarter, as we continue to work with PHMSA to restore the system to full capability.

The integrity work and reduced throughput impacted our quarterly results by approximately $10 million. We should note again, there is also an approximately $10 million shift in earnings to the Crude Oil leas acquisition and marketing group and away from our Crude Oil Pipelines segment. Until 2011, we had these two segments combined, which illuminate this noise between the segments, but we experience in the issue again.

Our lease acquisition business performed well in the quarter as WTI Midland’s LLS spread improved from the levels seen in the first quarter and there was some contribution from the Contango market structure. Unfortunately, spread have come in for the third quarter with the August and September spread down to approximately $3 per barrel.