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Phillips 66 Partners LP (NYSE:PSXP)
Q4 2019 Earnings Call
Jan 31, 2020, 2:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the Fourth Quarter 2019 Phillips 66 Partners Earnings Conference Call. My name is Kenzi and I will be your conference 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 Phillips 66 Partners fourth quarter earnings conference call. Participants on today's call will include Kevin Mitchell, Vice President and CFO; Tim Roberts, Vice President, Operations; and Rosy Zuklic, Vice President and Chief Operating Officer. 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 includes our Safe Harbor statement. We are going to be making forward-looking statements today. Actual results will likely be different. Factors that could cause results to differ are included here as well as in our SEC filings. With that, I'll turn the call over to Kevin Mitchell.

Kevin J. Mitchell -- Director, Vice President and Chief Financial Officer

Thank you, Jeff and good afternoon everyone. During the fourth quarter, Phillips 66 Partners delivered strong operating performance, advanced major growth projects, and maintained its strong financial position. Our Board of Directors approved a fourth quarter distribution of $0.875 per common unit, an increase of $0.01 per common unit from the previous quarter. Year-over-year, we have increased the per unit cash distribution 11%. We continue to maintain our record of quarterly distribution increases since the July 2013 IPO.

Moving on to Slide 4. 2019 was another successful year for the partnership. We continued to operate safely and reliably and delivered record earnings and adjusted EBITDA. We ended the year at a run rate EBITDA of $1.4 [Phonetic] billion. During 2019, we completed a transaction to eliminate our general partner's incentive distribution rights. With a simplified structure, strong balance sheet, attractive organic growth opportunities, and sponsor alignment, Phillips 66 Partners is a sector-leading MLP. In 2019, PSXP delivered a 56% total unitholder return. We made good progress on our growth program this year. In November, we started the initial operations on our largest project to date, the Gray Oak Pipeline. In addition, the Bayou Bridge Pipeline extension, the Lake Charles products pipeline and the Lake Charles as isomerization unit were completed. These assets are running well, meeting our expectations, and contributing to EBITDA growth.

Moving on to Slide 5 to discuss the financial results. The partnership reported record fourth quarter earnings of $255 million and adjusted EBITDA of $345 million. EBITDA increased $22 million from the third quarter. The improvement reflects increased volumes on our wholly owned assets and a full quarter contribution from the Lake Charles as isomerization unit. Our wholly owned pipelines and terminals also achieved record volumes for the year. Fourth quarter distributable cash flow was $254 million, a decrease of $1 million from the prior quarter driven by the timing of distributions from our joint ventures.

Slide 6 highlights our financial flexibility and liquidity. We ended the fourth quarter with $286 million of cash and $749 million available under our revolving credit facility. In October, we paid off $300 million of senior notes due February 2020. The debt to EBITDA ratio on a revolver covenant basis was 2.9. Our distribution coverage ratio was 1.27. We continue to target a long-term leverage ratio of up to 3.5 and distribution coverage ratio over 1.2. The partnership advanced its major projects during the quarter funding $146 million of growth capital. This included spend for the C2G Pipeline, Sweeny to Pasadena capacity expansion, Clemens Caverns, and the South Texas Gateway Terminal. As we begin 2020, we remain committed to maintaining our strong financial position and disciplined capital allocation. Now, Rosy will provide an update on our growth projects.

Rosy Zuklic -- Vice President and Chief Operating Officer

Thanks, Kevin and hello everyone. Slide 7 lists the projects we have ongoing. All of these projects are backed by long-term volume commitments and are expected to deliver typical midstream returns. The Gray Oak Pipeline started initial operations in November. Gray Oak is currently moving crude from West Texas to Central Junction, Helena, and Three Rivers. This section of the pipeline is operating in line with expectations and we continue to progress toward full service in the second quarter of 2020. Gray Oak will connect to multiple terminals in the Corpus Christi area including South Texas Gateway Terminal. The marine export terminal will have two deepwater docks with storage capacity of 8.5 million barrels and up to 800,000 barrels per day of throughput capacity. Phillips 66 Partners owns a 25% interest in the terminal, which is expected to start up in the third quarter of 2020. The remaining projects listed are progressing as planned. Phillips 66 Partners 2020 adjusted capital budget is $867 million. This includes $734 million for growth projects and $133 million of maintenance capital. This concludes our prepared remarks. We will now open the line for questions.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Theresa Chen from Barclays. Your line is open. Please go ahead.

Theresa Chen -- Barclays -- Analyst

Good afternoon. Thank you for taking my questions. Rosy for the South Texas Gateway Terminal, I understand the facility is expected to start up in the third quarter with initial service, but can you provide some color on the timing and pace of the ramp up to full service there?

Rosy Zuklic -- Vice President and Chief Operating Officer

Sure, I'll start off with a little bit of info and of course, Tim's here, he can give us a little bit of color as well. So let me first back up with, you know, as you know, Buckeye has started initially with this facility at 3.4 million barrels of storage and since then, we've expanded the facility to now be 8.5 million barrels of storage and having capacity for two VLCC capable docks. In the fall of 2019, Buckeye received the U.S. Army Corps of Engineers permit to be able to start the work on the dock and since then, they've been working on the dock and everything has been moving in the right direction. So everything looks good from that perspective. So with projects this size and scale, the way we see it is, is that as tanks become available, as the dock becomes available, those are going to be made available to obviously our shippers. It's not all going to be available at the same time, it's going to be a phased approach. I don't know if, Tim, there is any sort of color from the exact timing when in the third quarter or anything.

Timothy D. Roberts -- Director and Vice President, Operations

Yeah, third quarter -- we would expect early in the third quarter as far as getting one of the burps out and then potentially around again mid-year with terminals, there is a -- terminals -- tanks, excuse me, multiple tanks coming on and as they are commissioned and we get filled and then subsequently can actually utilize the first dock which both docks don't have to come up at the same time, then we'll start progressing barrels going through the facility.

Theresa Chen -- Barclays -- Analyst

Got it. And when do you think all 8.5 million barrels and both docks will be in service?

Rosy Zuklic -- Vice President and Chief Operating Officer

At this point, it's probably too ready to tell. I would speculate sometime later in the year, but I honestly don't have an exact number. We'll just have to wait and see as things progress.

Theresa Chen -- Barclays -- Analyst

Got it and switching gears a bit, I wanted to touch on some of the Greg's comments on the PSX call related to how the Midstream inventory should ultimately end up at PSXP and of that $800 million to $900 million qualifying income amount, how much of that consists of what we would call inside the refinery gate assets versus the more attractive large-scale assets that could be backed by more third-party cash flows like the export infrastructure at Beaumont, Freeport and such?

Kevin J. Mitchell -- Director, Vice President and Chief Financial Officer

Yes, Theresa, this is Kevin. So yes, Greg talked about the $800 million or so of existing EBITDA that's available to drop and of course, he also clarified that there's a significant amount of investment under way at the PSX level that we'll continue to grow that EBITDA number and so that $800 million is all what we would consider sort of the true Midstream assets, it's not refinery -- inside the refinery fenced type of infrastructure that if you sort of contractually arrange, you know, put the appropriate arrangements around it, you could make it Midstream qualifying. So it's all what we would consider through Midstream EBITDA. Got it. And in terms of financing, again, echoing Greg's words that secondary equity markets are currently closed. Any thoughts on other avenues of financing? Would you consider doing another press or a pipe, for example? Yes. I wouldn't really speculate around what our future financing would be and as we look at any of those kind of transactions, we're always triangulating around the balance sheet, the leverage ratios, maintaining coverage and funding the transaction. I mean, to me a pipe is just a form of an equity issuance and so I think of just common equity in the sort of broader sense whether you go about that through a sort of public offering or you go about it through a pipe-type mechanism, that's all a variation, you end up in the same place from that standpoint. The preferred is certainly another option to consider. We've obviously --we've done that in the past and that's proven to be very, very successful for us, but I'm not going to speculate too far on exactly what that might look like.

Theresa Chen -- Barclays -- Analyst

Thank you.

Operator

Phil Stuart from Scotiabank. Please go ahead, your line is open.

Philip Stuart -- Scotiabank -- Analyst

Good morning, everyone and congrats on another solid quarter. I was hoping that maybe we could talk about the EBITDA ramp kind of throughout 2020. Obviously, you guys did a great job of growing EBITDA in 2019 in kind of hitting that $1.4 billion kind of annualized run rate in 4Q a little bit ahead of schedule. As we look out on a quarterly basis, it seems like 1Q '20 is probably going to be the low point, given the seasonal turnaround and the fact that you're not going to have a full contribution from Gray Oak. I was wondering if you guys could maybe walk us through kind of how EBITDA growth stair steps throughout the year and if that $1.5 billion kind of annualized run rate exit 4Q20 is still a good figure. Yes. So you're right, Phil. First quarter is normally a seasonally weaker quarter for the MLP and there's two main reasons. One, we're coming off of butane blending. So the fourth quarter benefits from butane blending and the first quarter ends up having that 10% volumes coming off and so that ends up always being a headwind for the first quarter. And then additionally, just in general, refinery turnarounds tend to be a little bit higher in the first quarter and you may have heard that in the PSX earnings call, they guided to about a 90% utilization rate and so if you think about the fourth quarter, that ran at about 97% utilization and then you think about, specifically the assets that are tied to the PSXP refining system -- or excuse me, the PSXP asset, they ran very, very well, whether it was Ponca or Borger and so if you think just overall 90% utilization rate, so that's going to be an additional headwind. And then as part of the Gray Oak, Gray Oak is really, with second quarter being when we expect full ramp up, it's really not going to be of anything substantial to offset those two headwinds. So first quarter will be certainly the weakest quarter. And then the way it naturally progresses, if you just look at history is the second quarter is a little bit stronger than the first. The third quarter is stronger than the second. And then the fourth quarter always ends up being the strongest quarter for the fourth. And we still believe that the $1.5 billion run rate EBITDA is what we'll exit 2020 with.

Kevin J. Mitchell -- Director, Vice President and Chief Financial Officer

And if you look at the table of organic growth projects that come online this year. So you go from-- literally Gray Oak is really the first one that's making a contribution. Sweeny to Pasadena is at 2Q. 3Q, you got South Texas Gateway, and then 4Q Clemens Caverns expansion. So there's a nice kind of ramp up through the year as the projects come up. Of those, Gray Oak is by far the most significant in terms of as an individual project.

Philip Stuart -- Scotiabank -- Analyst

Great. I really appreciate the color there. And then just as far as Gray Oak goes, understanding that initial service has begun, and appreciate the kind of updated commentary on kind of the 2Q '20 being the first quarter of kind of full service. Just wondering if there are any material milestones that really need to be hit between now and then that could push that back or maybe bring it forward a little bit?

Kevin J. Mitchell -- Director, Vice President and Chief Financial Officer

Really, the milestone at this point is the finish line. So we're at a point now where we've got multiple spreads working with regard to terminals, finishing up connections, the pipes in the ground, it's really just finishing up the terminals, power connections, I&E work, hydro testing, any kind of terminals. I mean, we are completely in the weeds on many different fronts, but this is typical as you're getting ready to finish the project. I've seen this in previous experienced petrochemical facilities. Nothing big, but a lot of little things and they all got to get done. So that's where we're at in this homestretch.

Philip Stuart -- Scotiabank -- Analyst

All right. Thanks so much. That's it for me.

Operator

Chris Sighinolfi from Jefferies. Please go ahead. Your line is open.

Christopher Sighinolfi -- Jefferies -- Analyst

Hi everyone. Good afternoon. Rosy, I just wanted to follow-up on Theresa's discussion about the capital growth projects. Obviously, there was a scope change, you guys talked about -- and have been earlier talked about by PSX with regard to the South Texas Gateway Terminal. From the third quarter to the fourth quarter, just comparing these slides, the right cost came up on Sweeny to Pasadena. I'm assuming given that the original budget was given in December that's already been contemplated in what you gave because it's consistent with what you gave today. Is that right or were there offsets [Speech Overlap].

Rosy Zuklic -- Vice President and Chief Operating Officer

Right. The $867 million of capex is not changing at this point. That's right.

Christopher Sighinolfi -- Jefferies -- Analyst

Okay and then you had mentioned -- I'm always just curious when slide decks change, what gets added and what comes out. You guys have been featuring sort of an anticipated six to eight multiple on the organic backlog and you've noted it as such on that same slide. I don't see at this time you had made a comment in your prepared remarks about a consistent Midstream multiple and I'm just curious if you're hinting that it's changing at all.

Rosy Zuklic -- Vice President and Chief Operating Officer

No and it's funny because we actually in preparing these slides thought that someone would bring it up. And I don't know if you noticed that we actually changed the look of the slides, and it's a much more cleaner look, and the new slide layout does not have ticker boxes. So that's why I made a point of saying it in my script.

Christopher Sighinolfi -- Jefferies -- Analyst

Okay, fair enough and then the final question for me, and I noticed this when you guys gave the original budget. Just the significant step-up in maintenance budget from last year to this year, is there a particular item that's driving that or I guess, what is driving that change, and what's the cadence, I guess, if we look at the future?

Rosy Zuklic -- Vice President and Chief Operating Officer

There isn't any one particular item. Just in general, we have an integrity and reliability program that we have throughout the company, whether it's PSX or PSXP. And it just so happens that for 2020, a lot of the pipelines that we've identified. We have a lot of 40-year, 50-year and 60-year vintage pipeline throughout this both PSX and PSXP system that we want to increase just the reliability and integrity of the pipeline systems. The good news is that a lot of the work that we're doing is really more on the identifying things before they happen and so what you're seeing really in 2020 is we're actually increasing. So the spend that we have is more like 9% of EBITDA, but as, obviously, you know, what we'll see is that going forward, it'll be more like 6% of EBITDA, which is what historically our spend has been and so 2020 is an anomaly in that it's a bump up compared to where it's been, but I would say that just simply because we are growing the level of the maintenance expense is probably more in that $130 million where we're finding 2020 to be, but it will end up being more like 6% of EBITDA, which, again, has been more of a historical level.

Christopher Sighinolfi -- Jefferies -- Analyst

Okay. So driven there maybe more acutely because of some particular programs, but in general as the business grows, you just think that's probably the new ballpark. Is that a fair recharacterization?

Rosy Zuklic -- Vice President and Chief Operating Officer

That's right. The business will obviously get bigger, but the amount as a percentage will be smaller.

Timothy D. Roberts -- Director and Vice President, Operations

You'll find our maintenance, when you look at it across, whether it's the PSX level for Midstream or with the PSXP, we have a number for the year, but it really is not ratable per quarter. And again, based on specific size, complexity of a project in a region. So it really does, like you said, it's not a big number, which is good, but the other side of it is, is it just -- it really isn't ratable and it's not predictable year-over-year with regard to always the fourth quarter will be the highest or such and such. It really does move depending on the project and what needs to get done and when based on our priority list.

Christopher Sighinolfi -- Jefferies -- Analyst

Okay. I guess, if I could, one more question for me. And it's just regarding the preferred equity position. I don't know whether this is for you or for Kevin, but do you just contemplate that remaining a preferred stake or do you contemplate conversion of that at some point or take out of that simply?

Kevin J. Mitchell -- Director, Vice President and Chief Financial Officer

Well, the way things stand right now, the preferred equity holders have the right to convert that to common equity at their election. And so that's really a question for them. I don't know that they haven't signaled anything around an interest to do that upon certain price thresholds being met of the common units and at certain point in time, which I think is October of this year, we have the right -- if those criteria are met, we have the right to force that conversion, but that's something for a point in the future. So in our assumption, we just assume it stays where it is as a preferred equity for the time being.

Christopher Sighinolfi -- Jefferies -- Analyst

Okay. All right. I took a lot of time this morning. I appreciate you guys enabling me to do that. So thanks again.

Kevin J. Mitchell -- Director, Vice President and Chief Financial Officer

Thanks.

Operator

We have no further questions at this time. I will now turn the call back over to Jeff -- we do have another question that's come up. Elvira Scotto from RBC Capital Markets. Your line is open. Please go ahead.

Elvira Scotto -- RBC Capital Markets -- Analyst

Hey, good afternoon. Sorry for keying in late. The questions that I have are absent a like a big project, is there a certain level of growth capex maybe smaller projects that PSXP can kind of find year in and year out, certain kind of sustainable level of growth capex longer term that we can think about?

Kevin J. Mitchell -- Director, Vice President and Chief Financial Officer

I'm just thinking through that. I mean, there probably is, I mean, as you know, we've grown the MLP significantly through a combination of dropdown, which is more in the earlier -- sort of earlier stages of the PSXP's life cycle and then in the last two or three years, there's been a lot more organic opportunities, albeit, still projects that originated at the PSX level and so as we look at it, we still think that that's probably the path to continued growth at the MLP.

What we do find with the infrastructure we have in place, we do continue to come upon relatively small investment opportunities that are nice return projects that give a good little boost to growth, to EBITDA generation and so there probably is a level, I don't think we've really defined what that is. Obviously, it would be significantly lower than where we've been lately where we're sort of $800 million total capital spend number, it would be something significantly lower than that, but with the size of the portfolio that we have at the MLP and the fact that, that is continuing to grow, it makes sense that there would be sort of continued almost incremental type opportunities to provide additional return and growth.

Christopher Sighinolfi -- Jefferies -- Analyst

Thanks for that. And then the last question that I have is, at the PSX level and on the call, they talk about advantage and how that's going to provide about $1.2 billion of enhancements, I think through the end of 2021. Does any of that flow through to the PSXP level or how should we think about advantage as it relates to PSXP?

Kevin J. Mitchell -- Director, Vice President and Chief Financial Officer

I think where that would manifest itself at the PSXP level, so to the extent that there is a capital projects being done at the MLP, which of course, there are. That's an element of the benefits that we're seeing in terms of more effective execution of our capital projects and so you'd expect to see it from that standpoint. There's a significant focus around how we look at our sort of value chain from beginning to end. That's not going to show up the same in the MLP because that's really all around the hydrocarbons and so the MLP model, which is more of a sort of tolling arrangement type volumes, volumes times a tariff or a fee, you're less like -- you're not going to see that same sort of value chain focus, but the other area is that value chain focus identifies investment opportunities that we might not have done previously and so to the extent those investment opportunities makes sense for the MLP, you'll see some benefit there. And then the other element is in terms of operations and using sort of digital data having the ability to do data analytics and drive better decisions around how we actually operate our assets and the MLP will benefit from that just as much as at the PSX level for those assets, let's say that the MLP. So there are certainly some elements of that will flow and be for the benefit of the MLP.

Elvira Scotto -- RBC Capital Markets -- Analyst

Great. Thank you very much.

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

Thank you for your interest in Phillips 66 Partners. If you have additional questions, please call Brent or me. Thank you.

Operator

[Operator Closing Remarks]

Duration: 26 minutes

Call participants:

Jeff Dietert -- Vice President, Investor Relations

Kevin J. Mitchell -- Director, Vice President and Chief Financial Officer

Rosy Zuklic -- Vice President and Chief Operating Officer

Timothy D. Roberts -- Director and Vice President, Operations

Theresa Chen -- Barclays -- Analyst

Philip Stuart -- Scotiabank -- Analyst

Christopher Sighinolfi -- Jefferies -- Analyst

Elvira Scotto -- RBC Capital Markets -- Analyst

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