Welcome to the Second Quarter 2021 Phillips 66 Partners Earnings Conference Call. My name is Hilary and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

I will now turn the call over to Jeff Dietert, Vice President, Investor Relations. Jeff, you may begin..

Good afternoon and welcome to Phillips 66 Partners Second Quarter Earnings Conference Call. Participants on today's call will include Kevin Mitchell, Vice President and CFO; Tim Roberts, Vice President and COO and Casey Gorder, General Manager, Operations.

Today's presentation materials can be found on the Events section of the Phillips 66 Partners website, along with supplemental financial and operating information. Slide 2 contains our Safe Harbor statement. We will be making forward-looking statements during today's presentations and our Q&A session.

Actual results may differ materially from today's comments. Factors that could cause actual results to differ are included here as well as in our SEC filings. With that, I'll turn it over to Kevin..

Thank you, Jeff and good afternoon, everyone. In the second quarter, Phillips 66 Partners delivered solid financial results and reliable operating performance across the business. Our earnings reflect higher throughput on our wholly owned and joint venture assets.

During the quarter we advanced our capital program, to continue construction of the C2G pipeline connecting the Clemens storage Caverns to petrochemical facilities in the Corpus Christi area. The pipeline is expected to be operational in the fourth quarter of this year.

The Bakken pipeline optimization project continues to progress with the next phase of incremental capacity commencing service this month. The C2G pipeline and the Bakken pipeline are both supported by long term commitments.

In July, the Board of Directors approved the second quarter distribution of $0.875 per common unit, unchanged from the first quarter of 2021. Phillips 66 Partners remains committed to safe, reliable operations, a strong balance sheet and disciplined capital allocation. Moving to slide 4 to discuss financial results.

Phillips 66 Partners reported second quarter earnings of $225 million compared with a first quarter loss of $18 million. Our first quarter results include a $198 million impairment resulting from the partnerships decision to exit the Liberty pipeline project.

Adjusted EBITDA was $337 million this quarter, an increase of $48 million from the prior quarter. The improvement in earnings and adjusted EBITDA reflect higher volumes and lower utility costs following the first quarter winter storms, as well as higher pipeline and terminal volumes due to increase utilization Phillips 66 operated refineries.

Second quarter of distributable cash flow was $267 million, up $34 million from the prior quarter. The increase reflects improved earnings, which are partly offset by higher maintenance capital in the second quarter. Slide 5 highlights our financial flexibility and liquidity.

We ended the second quarter with $2 million of cash and $734 million available under our revolving credit facility. We funded $44 million of growth capital during the quarter. This included spends on the C2G pipeline and funding for the Bakken pipeline optimization project.

The debt to EBITDA ratio on a revolver covenant basis was 3.0, which is consistent with a target to remain below 3.5. Our distribution coverage ratio was 1.34. In April, repaid $60 million of tax exempt bonds and borrowed $450 million under a new term loan agreement.

Proceeds were primarily used to repay amounts borrowed under the partnerships revolving credit facility. This concludes our prepared remarks. We will now open the line for questions..

Thank you. We will now begin the question and answer session. [Operator Instructions] Your first question comes from the line of Spiro Dounis with Credit Suisse..

Hey, Anthony and team. Kevin, you're generally not in the practice of providing firm guidance but was hoping maybe to help frame what the second half of the year might look like relative to the first half. We'll just be helpful to hear your thoughts on the macro environment.

Maybe any specific drivers performance as we add here into the second half?.

Yes, Spiro. I think Tim's going to make a few comments on that..

Yes. Spiro. With regard to the macros, I mean, obviously the first quarter was impacted by and one there's a seasonal element coupled with the fact that you had there winter storms. So as things were picked up and there is been a recovery in the overall market from COVID we've benefited clearly in 2Q with regard to refining utilization.

And then also we've seen some increasing production out in the basins. I mean, nothing too extreme. But nonetheless, you are seeing a normalization going on as demand is picking up globally. We would expect that to continue through the third quarter. And then through the fourth quarter, obviously there are some elements that you see some seasonality.

But generally speaking, second quarter moving into third quarter we feel very constructive, especially as demand continues to pick up globally..

Great, Kim, thanks for that. Second question is just around capital return. Seeing some peers now start to re commence distribution growth and formalize and buyback programs just given that that stabilization in the macro outlook.

So I'm just curious how you guys are describe your capital return goals as we say here today, what you sort of need to see first, either reconvince distribution growth or initiate a buyback program and buyback specifically, we're seeing some peers buyback at ECF levels or yields of around 11%, PSXP, of course trading north of that right now, sort of imagine that scene is attractive, but I'm sure you've got duration there that will be helpful to sort of lay out..

Yes Spiro. As you look at the overall capital allocation priorities, it really all comes down to how we manage coverage and leverage. So from a, in terms of the committed outflows, we've got the maintenance capital which that's going to continue. So this year, I think that maintenance capital budget is $135 million or so.

And I don't anticipate that being dramatically different as you look into future years, the growth capital this year, the budgets $165 million. That's as there's more limited opportunities than we've had historically or in the earlier years of the MLP and that probably continues to be relatively low compared to historical levels.

But at the same time, you look at where we are from a coverage standpoint this quarter 1.34, which, for PSXP is quite strong. But in overall, the overall scheme of things that doesn't actually give you that much flexibility. I think, and one of the reasons it was strong in the second quarter is because we had a lower maintenance capital.

So you can revert to some of the more normal maintenance capital in absolute dollar terms that's maybe $50 million, a quarter of coverage to basically fund growth capital and then whatever other discretionary uses of capital you may have out there.

So I don't think there is a lot of room to do much for a period of time, at least beyond some modest amounts of growth capital within the sort of overall construct of the available cash that we have available..

Got it. That’s a super covered. Thanks for that Kevin. All right, thanks..

Thanks Spiro..

Your next question comes from the line of Michael Blum with Wells Fargo..

Good afternoon. I want to maybe stay on these topics.

Can you just maybe expand a little bit on your comments on growth capital? Do you see any either large or small potential projects on the horizon whether it kind of nature of those and if the answer is not really then I just love your latest thoughts on just how you view the MLP within the structure of Philips family if there really isn't a need to finance any growth in midstream.

Thanks..

Yes. I think that you'll see continued, I'll call them optimization projects around the existing infrastructures. PSXP is a really nice portfolio of assets. And they will continue to be opportunities to invest around those. They tend to be relatively small projects, but they also tend to be very attractive economics. And so we'll continue to do that.

Given where, if you just step back and look at the sort of macro midstream environment, where generally there is the sort of major pieces of infrastructure are already in place to feed the needs of the right there. So I think it's much less likely that you're going to see significant investment in organic growth projects.

So I think it's going to be more continuation of some of these smaller optimization type projects from that standpoint.

Tim do you have any other perspective on that?.

I think you've covered it. To give us a little bit of context on the smaller projects, Michael is going to be at one of our sites, maybe on [indiscernible] and we may have to add 10 miles of pipe. We had a storage tank in some of our terminals, we may add truck racks.

But that's the type of scope we're talking about as far as the incremental optimization opportunities..

Great. Thank you very much..

Your next question comes from the line of John Mackay with Goldman Sachs..

Hey, everyone, thanks for the time. I just wanted to follow up on part of Michael's question that didn't quite get an answer there.

I think just curious if you can spend a minute or two talking about how PSX is looking at PSXP from a strategic standpoint here and kind of what the outlook there could be?.

Well, I think given that this is a PSXP call, I think all we can do is we iterate what we've said in the past and in reference to the 13-D filing that was done, I think must be coming up to a year ago. Now it was about a year ago. And that was basically gave PSX the flexibility to consider alternatives around the path forward for the MLP.

But it certainly does not obligate any particular decisions or path forward. And I think we just leave it at that, those statements still hold true that the 13-D gives the PSX flexibility to consider alternatives. But there is really no more to say on that at this point..

I think it feels like a year, that would have been like six months ago. But that's fine like on -- maybe just one smaller one, just in terms of the smaller projects that could come up. I'm just thinking in terms of messaging.

Are these things that you guys expect to kind of keep talking about in releases or the kind of thing where, hey, if we don't start to see something in next couple of releases, maybe it looks like 2022 CapEx could be a lot lower?.

Yes. Look, I think it does depend on the size of the project. It's hard for us with regard to a release to be talking about maybe a $3 million project. So I would say it depends on what the size of the project would be. I mean some of these, if you're adding a pipeline or pipe, some stub a lateral onto an existing pipe with some tanks.

I mean, you can get up into the 10s of millions of dollars there, but not 100s of millions of dollars.

So depending on where that is and it's hard for me to give you that cut off, it feels material that PSXP obviously, we would have some sort of release but certainly during earnings calls or even in our Qs we'll talk about projects that are underway or projects that most projects are underway or are being completed..

That makes sense. Thank you very much..

Your next question comes from the line of Jeremy Tonet with JPMorgan..

Hi, good afternoon..

Hi Jeremy..

I just want to start with the DAPL expansion there.

Wondering if you might be able to provide some color as far as the first expansion come online, what was the cost for PSXP on that? What type of capacity was coming online with this first expansion here? And are there any regulatory approvals that are needed to put that capacity in service?.

Yes, Jeremy, thanks. Good question. So yes the expansion takes capacity up to around 750,000 barrels a day. The spending relative to PSXP in 2021 is a little bit under $550 million. We think that through next year we'll be at kind of $325 million or so is kind of a capital number. That's where we kind of zero on the capital invested front..

And on the regulatory approvals, those have already been received. So nothing outstanding at this point in time..

Starting up this month. .

Yes. That [indiscernible] capability and permissioning and it started --.

That's very helpful. Thanks to that.

And then with the C2G pipeline here being perspective is tied to the [indiscernible] cracker or just any other drivers to that timeline shift?.

No, it's really weather related was the timeline shift. And we've said all along that the real kind of commercial in service date would be year end. And then there may be some potential to flow some barrels North bound between kind of mechanical completion and commercial in service at the end of the year.

With weather delays that window for kind of North bound volumes has narrowed. But I think we said last quarter, we didn't expect those to be material anyway and still wouldn't expect them to be material. So no change to the ultimate in service date of the larger project or the NBCs underpinning that project..

Got it. That's very helpful. Thanks. And last one, if I could sneak it in. It seems like the midstream landscape has changed a bit. And there has been maybe a little bit more activity on the M&A side particularly as it relates to liquids, logistics, terminals, what have you.

Just wondering, I guess PSXP's thoughts on consolidation, the midstream sector at all, if there's any thought you want to share there..

I think Jeremy, you've probably heard us say in the past that we do think that if you just take a sort of big picture, view that across [Technical Difficulty] and so there's a lot of players out there in midstream.

And I think part of one of the impediments to more consolidation or at least easier consolidation is just the capital structure across the midstream space with so many of these MLPs with different governance models which I think precludes some of that potentially happening.

But ultimately, I think for the mid stream business to compete well, it needs to be, there needs to be some consolidation, we drive efficiencies, shut down idle plants and leverage the infrastructure that's available and create some value that way..

We have reached the end of today's call. I will now turn the call back over to Jeff. .

Thank you for your interest in Phillips 66 Partners. Please give Shannon or me a call if you have any follow up questions. Thank you..

Thank you. Ladies and gentlemen this concludes today's conference. You may now disconnect..