Phillips 66 Partners LP (NYSE:PSXP) might not have the fattest distribution yield among master limited partnerships, but the company is expected to grow its payout by a compound annual rate of 30% through 2018. That rapid growth puts the Phillips 66 (NYSE:PSX) subsidiary on a lot of investors' radars. Growth, however, is only good if the foundation of that growth is solid. To determine the strength of Phillips 66 Partners' foundation, I put it to the test by comparing the company to a hypothetical perfect MLP. Here's how it stack ups.

1. An MLP should have a bounty of fee-based assets
Given that MLP investors typically desire income stability, the perfect MLP would be loaded with fee-based assets, because these lock in cash flow. While it would be ideal for an MLP to generate 100% of its cash flow from fee-based assets, having more than 75% of its cash flow secured by fee-based assets is our target range.

When it comes to a foundation of fee-based assets, Phillips 66 Partners is as perfect as it gets, because the company only owns fee-based assets. Further, the cash flow from its assets are secured under long-term contracts, which provide years of income security for the company.

Source: Phillips 66 Partners Investor Presentation. 

2. A solid balance sheet
Another important factor for an MLP, especially in light of the recent downturn, is having a solid balance sheet. What I'm looking for here is an investment-grade credit rating and/or a debt-to-EBITDA ratio of 4.0 times or less.

Again, we have a winner as Phillips 66 Partners fits both criteria. The company has an investment-grade BBB/Baa3 credit rating from the major rating agencies and a target debt-to-equity ratio of 3.5 times. Further, the company has low-cost debt, with the nearest maturity being 2020, so it doesn't really have to worry about any potential issues with tightening credit in the energy sector.

3. A strong distribution coverage ratio
The perfect MLP will have a very secure distribution, and one of the key ways to measure this is the distribution coverage ratio. We're looking for a distribution coverage ratio of between 1.05 and 1.10 times because it tells us that the company isn't paying out all of its available cash flow, leaving it with a little bit of wiggle room.

Phillips 66 Partners is well in the safe zone, having maintained a coverage ratio in excess of that range since going public a few years ago, as shown on the slide below. 

Source: Phillips 66 Partners Investor Presentation.

Further, the company has a long-term target to keep its coverage ratio around 1.10 times -- again, staying well within that safe zone.

4. A history of distribution growth
Another characteristic of the perfect MLP is having a long history of distribution growth. This shows us that the company knows how to create value for its investors throughout the energy cycle.

Phillips 66 Partners has clearly done this in its short time since being separated from Phillips 66, as the chart on the above slide demonstrated. While it doesn't have the lengthy history of a lot of other MLPs, it has shown strong growth during the worst downturn in years, which is saying something given that many other energy companies have struggled to maintain investor payouts during the downturn.

5. A visible growth project backlog
In addition to a history of growth, we'd also like to see visible signs that more growth is on the way. Having a number of projects in the pipeline is the best indicator of future growth.

Currently, Phillips 66 Partners has $275 million in announced organic growth projects under construction, which are detailed on the following slide.

Source: Phillips 66 Partners Investor Presentation.

In addition to this announced growth, the company has also identified a number of future organic growth projects.

Further, because of its close relation with parent Phillips 66, it has the opportunity to participate in the growth Phillips 66 is creating within its own midstream business. That's because Phillips 66 is building a number of midstream assets that it plans to drop down to Phillips 66 Partners over the next few years, with the companies recently completing a $1.1 drop-down transaction. Looking ahead, Phillips 66 plans to drop down upwards of $10 billion in assets to Phillips 66 Partners by 2018.

It's this combination of organic growth and drop-down deals that very clearly show growth on the horizon. This is why the company expects to deliver 30% annual distribution growth through 2018.

Investor takeaway
There's quite a compelling case to be made that Phillips 66 Partners is the perfect MLP. It's loaded with fee-based assets, has a solid balance sheet, and has a secure and growing distribution with a clearly visible path to future distribution growth. So, while its current distribution yield isn't as high as other MLPs, the company's total return as a result of its robust distribution growth make it look very compelling.