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Phillips 66 Partners (NYSE:PSXP)
Q2 2018 Earnings Conference Call
Jul. 27, 2018 2:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the second-quarter 2018 Phillips 66 Partners earnings conference call. My name is Julie and I'll 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.

Jeff Dietert -- Vice President, Investor Relations

Good afternoon, and welcome to the Phillips 66 Partners second-quarter earnings conference call. Participants on today's call will include Kevin Mitchell, vice president and CFO, and Tom Liberti, vice president and chief operating officer. The presentation materials we will be using during the call 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. It's a reminder that we will be making forward-looking statements during the presentation and a Q&A session. Actual results may differ materially from what we have presented today. Factors that could cause actual results to differ are included here as well as in our SEC filings.

With that, I will turn the call over to Kevin Mitchell.

Kevin Mitchell -- Chief Financial Officer

Thank you, Jeff, and good afternoon, everyone. The Partnership reported net income of $186 million, a $14 million increase from the previous quarter. Adjusted EBITDA was a record $276 million, driven by strong operating performance. We have achieved our $1.1 billion run-rate adjusted EBITDA target ahead of schedule.

Distributable cash flow increased 5.2% to $204 million. Our board of directors approved a second-quarter distribution of $0.752 per common unit, a 5.3% increase from the previous quarter. Our distribution coverage ratio is 1.38 times.

Moving to Slide 4, a rapid growth since the 2013 IPO has enabled the partnership to significantly increase distributions 19 consecutive quarters at a compound annual growth rate of 30%. We are on pace to achieve our 30% five-year distribution growth target at the end of 2018. Looking ahead, we have a strong portfolio of projects to drive future growth.

On the Slide 5, second-quarter adjusted EBITDA was $276 million, an increase of $29 million from the previous quarter. Our joint ventures contributed higher earnings from increased volumes, including record throughput at the Bakken and Sand Hills pipelines.

Earnings from our wholly owned assets increased following completion of first-quarter turnarounds at the Phillips 66-operated Borger and Sweeny refineries.

Slide 6 highlights our financial flexibility and liquidity. We ended the second quarter with $151 million of cash and no outstanding borrowings under our $750 million revolving credit facility.

Our debt to EBITDA ratio on a revolver covenant basis was 2.9 times. Long-term, we expect leverage to be around 3.5 times. The partnership's strong financial position allies it to fund the 2018 capital program with cash on hand, debt capacity and selective use of the ATM program.

With that, I'll turn the call over to Tom Liberti for an update on our growth projects.

Tom Liberti -- Chief Operating Officer

Thanks, Kevin. Hello, everyone. As you can see from our project list, the strong operating performance and rapid growth of the partnership has allowed us to take on large organic projects. We continued to advance our growth portfolio during the quarter.

The Gray Oak Pipeline is our largest organic project to date and demonstrates our financial strength to take on projects of this scope and magnitude. Gray Oak expands our footprint into the high growth Permian Basin with strong customer-driven demand for crude oil takeaway capacity for the Gulf Coast.

Phillips 66 Partners recently completed the expansion open season from the Gray Oak Pipeline system. The pipeline will have an initial capacity of 800,000 barrels per day based on shipper commitments of 700,000 barrels per day and the reservation of capacity for walk-up shippers. Gray Oak is expandable to approximately 1 million barrels per day and is expected to be in service by the end of 2019.

Total cost for the project is anticipated to be approximately $2 billion. Phillips 66 Partners will be the largest equity owner in this pipeline project. In Corpus Christi, the Gray Oak Pipeline will connect to the New South Texas Gateway Terminal that's being developed by Buckeye Partners. We have 25% ownership.

The project allows us to capitalize on the full midstream crude oil value chain by offering complete logistics solutions to our Gray Oak customers.

Phillips 66 recently announced plans to expand NGL fractionation at its Sweeny hub by 300,000 barrels per day. Partners are supporting the strategic expansion by increasing storage capacity at Clemens Caverns by 6 million barrels. Clemens Caverns will have 15 million barrels of the storage capacity of completion, which is expected in late 2020. This is a great example of how integration with our sponsor provides accretive growth projects for the MLP.

The Sand Hills pipeline capacity and throughput continue to increase to meet the demand from growing NGL production in the Permian Basin. Sand Hills capacity reached 425,000 barrels per day in the second quarter and is expected to be at 485,000 barrels per day by the end of this year. Throughput in the second quarter was a record 416,000 barrels per day. We own a one-third interest in Sand Hills, and it has been a strong contributor to our EBITDA growth.

Construction continues on the Bayou Bridge pipeline extension from Lake Charles to St. James, Louisiana, with commercial operations expected to begin in the fourth quarter. The pipeline currently operates from Nederland, Texas, to Lake Charles, Louisiana, and we have a 40% ownership in the pipeline.

At the Phillips 66 Lake Charles refinery, the partnership is adding product export capability to our Clifton Ridge Marine Terminal. Partners is developing a new pipeline that will connect clean product storage in Lake Charles to the terminal and provide up to 50,000 barrels per day of product export capacity to meet growing demand. This $25 million project is expected to be completed in mid-2019. We have a long-term agreement with Phillips 66 that includes minimum volume commitments for the pipeline and marine dock.

We are further expanding our footprint at the Phillips 66 Lake Charles Refinery with the construction of a new 25,000 barrel per day isomerization unit. The unit will increase production of higher octane gasoline blend components. We have a long-term agreement with Phillips 66 for processing services including a minimum volume commitment. We are making good progress on this project and now expected to be completed in the third quarter of 2019, which is sooner than originally promised.

This concludes our prepared remarks and we will now open the line for questions.

Questions and Answers:

Operator

[Operator instructions]. Dennis Coleman from Bank of America Merrill Lynch. Please go ahead. Your line is open.

Dennis Coleman -- Bank of America Merrill Lynch -- Analyst

I wonder if I might start with the Gray Oak line, and just if I can ask a little bit about the equity option from the partners that would take your interest down, I wonder, is there anything you can say about that contract? Is it at cost? What are the timing options and when does the option expire?

Tom Liberti -- Chief Operating Officer

Yes, I can't give you any of the details or I can't tell you the options will expire by the end of this year but what I can tell you, Dennis, is if they exercise the buy-in options they have, they will proportionately fund their share of the capital.

Dennis Coleman -- Bank of America Merrill Lynch -- Analyst

And I'm sorry, you said the option would expire by the end of the year?

Tom Liberti -- Chief Operating Officer

By the end of this year.

Dennis Coleman -- Bank of America Merrill Lynch -- Analyst

Fantastic. OK. Lots of good projects going on, so I almost hesitate to ask this but we did have some dropdowns in our model toward the end of year just we aren't quite sure how you were going to get to the 1.1 and obviously you hit that but can you talk about dropdowns more generally and does it change your thoughts of having now achieved the 1.1 billion EBITDA run rate?

Kevin Mitchell -- Chief Financial Officer

Yes, Dennis, this is Kevin. You're right that we typically not ... Well, we have not given specific dropdown guidance that will continue to be the case. As you can see we have quite a suite of growth projects under way and so we're going to see organic growth at the MLP anyway that's going to continue for a period of time as these projects come up in these different timelines when these different assets will come into operations. So you will see some phase-in of that growth.

From a sponsor perspective, there still is a healthy backlog of projects or assets available that could be drop-down candidates and it's nice to know that's fair but for the time being really focused on the organic projects and don't really see any immediate need to go into the dropdown pool at this point.

Dennis Coleman -- Bank of America Merrill Lynch -- Analyst

Sure. And I guess the growth rate is strong. So just a little clarification. So I guess one more for me and then I'll turn it to others but on the Clemens Caverns, anything you can say there about cost, contract structure, terms of contracts.

Any more detail you can provide would be great.

Tom Liberti -- Chief Operating Officer

Yes, Dennis, this is Tom, what I can tell you is the CAPEX spend there. We're expecting about $150 million of capex for that expansion going from 9 million to 15 million barrels of storage there.

Dennis Coleman -- Bank of America Merrill Lynch -- Analyst

Great. And nothing on the contracts or the term, nothing there?

Tom Liberti -- Chief Operating Officer

I won't get into specific details and things. They look similar to different terms that we have today.

Dennis Coleman -- Bank of America Merrill Lynch -- Analyst

OK. Very good. Thanks for your answers.

Operator

Elvira Scotto from RBC Capital Markets. Please go ahead. Your line is open.

Elvira Scotto -- RBC Capital Markets -- Analyst

Just a couple of quick ones from me. So I guess PSXP, you guys hit that $1.1 billion run rate a couple quarters early. Was that just a faster than expected ramp on Sand Hills and the Bakken pipeline. Is that sustainable or alternatively does that 1.1 actually grow and you exit the year something above that cause I know that there are some projects and expansions coming online by yearend like Bayou Bridge but I'm just not sure how much contribution they provide?

Tom Liberti -- Chief Operating Officer

Elvira, it's Tom. Certainly, I mean second quarter was a good quarter, Sand Hills was ramping, DAPL had high volumes. In addition to that, with the PSX refineries running at high rates, the Border complex and the Sweeny to Pasadena pipelines were also very high but that's a normal kind of run rate. So hitting that number is kind of a run-rate number that we had.

We also have other projects coming on between now and the end of the year, including Bayou Bridge more expansion at Sand Hills, the [Inaudible] gas line that's coming in. So, yes, we hit it a little bit, we hit it a little bit earlier than the end of the year. We said we hit it by the end of the year, so we got that $1.1 billion. When we think that way, it's going to fluctuate from quarter to quarter a little bit with seeing sometimes some one-off items in the quarter, but we're pretty comfortable that that 1.1 is a good run rate, especially with other projects coming online.

Kevin Mitchell -- Chief Financial Officer

Elvira, this is Kevin, just to clarify, hitting that $1.1 billion early doesn't mean that we're sort of setting a new bar for the 4Q, 2018 run rate. And Tom outlines various reasons why you'll see ... there're some factors that will help move that up, there're some of the projects come up, obviously, we've had growth activity under way but you've also got, for example, the maintenance capital program is sort of backend weighted to the second half of the year, so you got other factors at play there. And in the tail end of the year, you usually see more refinery maintenance activity, downtime turns around activity as well. So you got those other moving parts.

So we just look at it as we've hit that target early. We're not resetting a new objective for the end of the year.

Elvira Scotto -- RBC Capital Markets -- Analyst

Thank you. That's very helpful. Just switching over to Gray Oak, can you talk a little bit on financing the Gray Oak pipeline even if you ultimately own say 42.25% of the pipeline, that's about $845 million of capex. The balance sheet obviously looks pretty strong.

So would PSXP be willing to finance Gray Oak with the bigger mix of debt versus equity?

Kevin Mitchell -- Chief Financial Officer

So, just a couple of comments on that. As we look at all of the growth projects that we have under way at the MLP right now. We can accommodate all of those with funding on the same way that we're talking about the 2018 capital program. So between cash on hand, debt capacity because we have a fair amount of capacity given where we said balance sheet right now and then some sort of selective use of the ATM program.

We can deal with all of that.

Now when you look at Gray Oak, specifically as a project, and would we consider project financing it, that's certainly a possibility. It's not something that we have really progressed or worked hard at this point in time but the nature of that asset could lend itself to sort of stand-alone project financing, and that's something we may well look at but also the pullback is with the cash, the debt capacity, little bit of ATM. And we know we can execute through these projects anyway.

Elvira Scotto -- RBC Capital Markets -- Analyst

Thank you. And then just the last one from me. Do you have any sort of timeline from when you may provide a little bit more granular guidance for 2019?

Kevin Mitchell -- Chief Financial Officer

Really not. So you've heard us say top tier, curtail growth in distribution, expect that to continue and with this sort of portfolio, projects that we got under way. If those come up, I think it's pretty reasonable to see that that's very achievable but not going to commit to either a specific growth target or even a commit to the timing of giving a specific target beyond the top curtain.

Elvira Scotto -- RBC Capital Markets -- Analyst

Great, thank you. That's all I had.

Operator

Jerren Holder from Goldman Sachs. Please go ahead. Your line is open.

Jerren Holder -- Goldman Sachs -- Analyst

Thanks. Good afternoon. Maybe you can start with Gray Oak, I guess, some texture details now that you guys have had an open season and it looks to finalize a bit more. Just in terms of like how long the pipeline is a diameter.

And what type of return you guys are expecting based on the amount of commitments that you have?

Kevin Mitchell -- Chief Financial Officer

Yes. I would say Jerren, we're a 30-inch pipe in the base pipe. The schedule that we have is it still remains on track for a year-end of '19 start-up. We're working that right now with right-of-ways permitting and the procurement of long lead items, they're all on schedule.

The pipe that we have ordered is ordered. It's been a load of domestic steel mills. So everything's kind of online for end 2019 kind of start-up of the deadline.

Jerren Holder -- Goldman Sachs -- Analyst

On returns, any sort of indication?

Kevin Mitchell -- Chief Financial Officer

Typical midstream organic returns, I think you can ...

Jerren Holder -- Goldman Sachs -- Analyst

OK. And with that apply to the NGL storage that you guys are doing as well Kevin?

Kevin Mitchell -- Chief Financial Officer

It would, yes.

Jerren Holder -- Goldman Sachs -- Analyst

OK. And then, lastly, well also how should we expect capex spending to a degree that we have projects that come online by 2019 and in the case of storage 2020, just in terms of allocation across the next couple of years. So how should we think about that spending profile?

Kevin Mitchell -- Chief Financial Officer

You are asking about what the capital spend will be '19-'20?

Jerren Holder -- Goldman Sachs -- Analyst

I guess in the context of to a degree that Gray Oak is $2 billion, and of course, you have some share of that. If the bulk of that like back half of '19 throughout 2019, you're already doing a lot of that now, how should we think about like as the allocation of the capex? What's included in this year's budget versus what could flow into next year and the year after?

Kevin Mitchell -- Chief Financial Officer

We've already announced our 2018 budget. We've increased our capital budget in 2018 to $750 million. 2019 is going to be a heavy spend year. You probably can expect an uptick with that with 2019.

Now we look at 2020 with projects that are on the table.

Jerren Holder -- Goldman Sachs -- Analyst

And then lastly on maintenance capex recognizing that the second half is going to be higher than the first half. Should we still expect your original guidance or should we expect to see some little bit lighter than that?

Tom Liberti -- Chief Operating Officer

Yes, we were $12 million in the first quarter, we're $10 million in the second quarter. We think the second half is probably going to be about twice that much in the first half, do probably somewhere in that range. So it's a little less than the original budget that we had.

Operator

Jeremy Tonet from J.P.Morgan. Please go ahead. Your line is open.

Jeremy Tonet -- J.P.Morgan -- Analyst

Just want to go back to Gray Oak one more time. And I was just hoping to dive-in into a little bit more detail and maybe what milestones have you achieved in the background that we in the outside might not be aware of? How is that progressing with the right-of-way downstream or upstream connections well been laid, just trying to get a better feel for executing against the timeline?

Tom Liberti -- Chief Operating Officer

Well, I think again with the end of the second of the season, the expansion of the season last week, we've been kind of working all along. So we're right on track where we want to be for right-of-ways permitting. And again some of the long lead items, the procurement of those long lead items are always critical and those have been made. So it remains kind of on schedule.

So we think we're very comfortable right now that's looking at the end of ... and it's the end of 2019, Jeremy, not 2018 but the end of 2019.

Jeremy Tonet -- J.P.Morgan -- Analyst

And just other pipeline type kind of started their development earlier than what you guys had publicly announced and they kind of have the similar end time frame. And so it seems a little bit more compressed what you guys have laid out versus what they are doing? Or maybe we're misjudging that they are just speaking on the outside?

Tom Liberti -- Chief Operating Officer

Jeremy, I think we're real comfortable with our timeline.

Jeremy Tonet -- J.P.Morgan -- Analyst

And then Kevin this might be more of a PAN level question but basically, their E&B has listed that as something that could be the best at your partner there. And just wondering what you can say as far as how this could impact PSXP in the future if that were to come in the family, if there any interest or is this something that just doesn't make sense at the PSX level as you guys already have access to those feedstocks as it is today and there is nothing to be gain by getting you the half?

Kevin Mitchell -- Chief Financial Officer

Yes, I mean, you are right it's probably a parent level question and just looking at it from that perspective. And we've said all along that JV is being in place for a long period of time and that's ultimately being set us challenges but on average, it's being pretty successful over that 20 plus years. And we're not in any rush to do anything different with our ownership in DCP. We know what Enbridge has said on that.

And we'll see how their process plays out. I mean there was an argument that would say there is a strategic fit within the broader PSX portfolio but at the same time, you look at the things we've been able to do with DCP as a JV. And that's how it worked very well and integrated very nicely in the context present with them of Sand Hills pipeline and the expansion and the provision of NGLs then into the Sweeny Hub at PSX. So no real update on that at this point.

Jeremy Tonet -- J.P.Morgan -- Analyst

Gotcha, fair enough. And then one last one if I could, just wondering a high-level thinking for the philosophy for the partnership if you could just opine on, how do you think about distribution growth relative to coverage, relative to leverage seems like you kind of have a very nice mix of those three going on right now? And then just wondering how that overlays with the IDRs? And I think you mentioned a certain shelf life to them. And you might have said in the past and maybe it's a little bit shorter than what you originally thought. And how that all worked together? Any updates on these fronts that you'd be able to share at this point?

Kevin Mitchell -- Chief Financial Officer

Yeah, I think our managing right now is very consistent with what we've said in the last, probably the last few months, in terms of we expect the distribution growth to continue, it will moderate from the sort of 30% CAGR that we've been on this last five years but still expect to be able to deliver very competitive, probably top quartile distribution growth. And fund that growth through cash, through some debt, ATM. And so you're sort of managing the different metrics in terms of distribution growth coverage, leverage metrics, keep the balance sheet healthy, have moderate growth and everything should work OK from that perspective. Likewise, on IDRs, we've said for a while that that sort of lifecycle to the IDRs is probably shortened quite a bit from where we would have initially thought.

And acknowledge that at some time we will not get be ranked to even with the IDRs. Having said that, you look at where we trade today. And we're still pretty competitive from a cost-of-capital standpoint. And with limited to no need to go out into the equity markets, there's not anything compelling right now that makes us feel we have to deal with it right now although acknowledge is going to get done.

Tom Liberti -- Chief Operating Officer

And Jeremy as we've said even with the high-growth program that we're on and with the organic projects we're looking at, we're still talking to that 1.1-1.2 kind of coverage ratio range and still looking at a leverage target of around 3.5 times.

Operator

Barrett Blaschke from MUFG Securities. Please go ahead. Your line is open.

Barrett Blaschke -- MUFG Securities -- Analyst

A lot of mine have been asked, but congratulations on hitting the 1.1 a bit early. And I guess more of a housekeeping item. Is there anything that's planned later in the year at sort of the parent level that could create some speed bumps any sort of downtime or anything like that that you see on the horizon that could cause it to pull back at all?

Kevin Mitchell -- Chief Financial Officer

Yes, Barrett, this is Kevin. Really, I don't think so. You have the normal activities. We'll have seasonal refinery maintenance turnaround activity but that's all I would consider as normal, so no.

Operator

Richard Roberts from Scotia Howard Weil. Please go ahead. Your line is open.

Richard Roberts -- Scotia Howard Weil -- Analyst

Hi, good afternoon guys and also congrats on a good quarter. Maybe let's talk about on dropdowns and fully recognized that we won't get any hard guidance here but just high-level sort of making sure we understand how you're thinking about things. From this point forward, are dropdowns going to be purely opportunistic maybe just based on the help of capital markets? Or if they're going to be some kind of growth target range, even internal that you're going to use dropdowns to backfill in the queue. I guess I'm just wondering if there's a deliberate strategy on sort of how you migrate through rest of that PSX midstream portfolio into the MLP?

Kevin Mitchell -- Chief Financial Officer

Yes, so I think that's really a sponsor level question but I'd say that dropdowns provide the optionality for us to deliver on an outcome that we deem is appropriate, which means it's very much and it depends. So there is no firm or heart guidance around where dropdowns present. They provide a tremendous optionality for EBITDA growth for the MLP but as long as we have a strong portfolio of organic growth projects, I'd say, generally speaking, the dropdowns would fall, it would be prioritized lower in the overall scheme of things. And so that's probably the best way to think about it.

They always provide good opportunity too because they have a quite a list of assets up top that could be dropped, and most of them relatively quickly. And so I just think it provides good optionality.

Tom Liberti -- Chief Operating Officer

And you know Richard, the top quartile growth, certainly isn't as high as what it used to be. And certainly, we think we can get into top quartile growth when you look at organic projects. Those will be coming online in stagger times as Kevin was saying before, so that EBITDA is going to grow from that standpoint, and certainly can be translated to grow in the CAGR and distribution. And the dropdowns in that portfolio certainly doesn't go away and we're adding to that on PSX level.

So that's always there if top quartile heats up and it's a higher growth rate.

Richard Roberts -- Scotia Howard Weil -- Analyst

It's tough time moving target these days. Tom, can you remind us what's the current sort of drop-down inventory looks like at PSX?

Tom Liberti -- Chief Operating Officer

Yes, at PSX, we can say is about $700 million to $900 million, in that range. We just say, Richard, that after at PSXP, we have $1.1 billion of EBITDA.

Richard Roberts -- Scotia Howard Weil -- Analyst

OK. And then on Gray Oak, just one last one, if, is there any color you can give us on the contracts there just high level, the average term of the contracts or maybe even just what the mix between producers, refiners, marketers looks like?

Kevin Mitchell -- Chief Financial Officer

Yes, we really aren't giving information on the shippers on that Richard.

Operator

Selman Akyol from Stifel. Please go ahead. Your line is open.

Selman Akyol -- Stifel Financial Corp. -- Analyst

All right. Thank you. Good afternoon. Two quick ones for me.

First of all, OEM seemed to deep down sequentially from the first quarter 97 and 85. Is there anything behind that? Was there anything unusual in 1Q that we missed?

Kevin Mitchell -- Chief Financial Officer

Some of the second quarter was MSLP with the turnaround. So there was a little bit extra maintenance there.

Selman Akyol -- Stifel Financial Corp. -- Analyst

OK. And then also, if you take a look at just your sort of term loan storage revenue that seems to be taking down sequentially as well even going back to the fourth quarter of last year. Is that a trend that's expected to be continued? Or would we expect to stabilize from here?

Kevin Mitchell -- Chief Financial Officer

No. I think what you're saying a lot in the terminal is the Clifton Ridge. It's the crude terminal down there. Actually, we had a little power outage but it's such a big throughput on the troop side effects us.

Operator

Theresa Chen from Barclays. Please go ahead. Your line is open.

Theresa Chen -- Barclays -- Analyst

Hi. I wanted to follow up on Elvira's earlier question about financing. Kevin, when you talked about those three levers of financing with cash on hand, debt capacity, and selective ATM use. Was the assumption that you were going to be the 42.25% interest owner? Or can that also work even if you are 75% owner?

Kevin Mitchell -- Chief Financial Officer

No. It works even at the higher ownership level.

Theresa Chen -- Barclays -- Analyst

OK. So you're willing to go above your target leverage level at that point if in the interim it's only temporary?

Kevin Mitchell -- Chief Financial Officer

We don't actually go above that target level. We still can stay within those parameters.

Theresa Chen -- Barclays -- Analyst

And for the project itself, following up on of Greg's comments during the parent call of the 6x to 8x EBITDA multiple for a traditional midstream project and pipes being on the lower end of that. If the 6x is applicable to Gray Oak, is that predicated on the year 700,000 barrels per day of commitments that you have? Or is it also including some walkup volumes and potential expansion of the mine?

Kevin Mitchell -- Chief Financial Officer

I think the multiple in that range is basically on the committed volumes and things. Some of the walk-ups would be incremental to that.

Tom Liberti -- Chief Operating Officer

Yes, and maybe the other way of saying that is when we do our economics or project of economics on an asset like that we're using committed volumes, so the walk-up is an upside.

Theresa Chen -- Barclays -- Analyst

And the capacity for the South Texas Gateway Terminal and your share of that, was that predicated on that 800 for the pipe or can it accommodate more?

Tom Liberti -- Chief Operating Officer

Yes, the terminal can accommodate with the tankage. You can always increase the tankage as there is more demand. It's basically based on what people commit to running through that terminal.

Operator

Tom Abrams from Morgan Stanley. Please go ahead. Your line is open.

Tom Abrams -- Morgan Stanley -- Analyst

I got a couple of questions but first, I just wanted to make a comment that with a lot of your peers not raising distribution? It probably can be a tough quartile looks like 7% or 8% per-year increase?

Kevin Mitchell -- Chief Financial Officer

Yes, we've noticed that also.

Tom Abrams -- Morgan Stanley -- Analyst

Well, the second, sorry, on the Grey Oak project in particular. You've got four origination points, four destination points. And is it going to be where it's, say, in the third quarter you get 200,000 up, and the fourth quarter you get 400,000, and then the first quarter you get 200,000? Or is that all 800, boom, fourth quarter '19?

Kevin Mitchell -- Chief Financial Officer

I think that is probably to be determined a little bit, Tom, but we plan on the most if not all the line being up by the December 1.

Tom Abrams -- Morgan Stanley -- Analyst

And then this is than industry question, but I wanted to ask about steel. And you've indicated you had U.S. orders, it's being rolled and so forth. How happy are you that you have that in hand, not only with tariff standpoint but just from an availability standpoint and a lead time? For instance, if there was a competing pipe or another pipe out there that didn't have steel orders yet.

Would they be behind the eight-ball quite a bit or not?

Kevin Mitchell -- Chief Financial Officer

It's hard to speak for another company. Thanks but we're happy that our steels are ordered and things we're ready to go.

Operator

We have no further questions at this time. I will now turn the call back over to Jeff.

Jeff Dietert -- Vice President, Investor Relations

All right. Thank you. We appreciate your interest in Phillips 66 Partners. If you have any questions please call Rosie or me.

Thank you.

Operator

[Operator signoff]

Duration: 34 minutes

Call Participants:

Jeff Dietert -- Vice President, Investor Relations

Kevin Mitchell -- Chief Financial Officer

Tom Liberti -- Chief Operating Officer

Dennis Coleman -- Bank of America Merrill Lynch -- Analyst

Elvira Scotto -- RBC Capital Markets -- Analyst

Jerren Holder -- Goldman Sachs -- Analyst

Jeremy Tonet -- J.P.Morgan -- Analyst

Barrett Blaschke -- MUFG Securities -- Analyst

Richard Roberts -- Scotia Howard Weil -- Analyst

Selman Akyol -- Stifel Financial Corp. -- Analyst

Theresa Chen -- Barclays -- Analyst

Tom Abrams -- Morgan Stanley -- Analyst

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