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Phillips 66 Partners LP (NYSE:PSXP)
Q1 2020 Earnings Call
May 1, 2020, 2:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the First Quarter 2020, Phillips 66 Partners Earnings Conference Call. My name is David, and I will be your operator for today's call.

[Operator Instructions]

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

Jeffrey Dietert -- Vice President of Investor Relations

Good afternoon, and welcome to Phillips 66 Partners first 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 contains our safe harbor statement. We will be making forward-looking statements during the presentation in 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 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 first quarter, Phillips 66 Partners delivered solid financial results, operated reliably and safely and advanced its growth projects. We achieved the major milestone in April with Gray Oak Pipeline starting full operations.

The Board of Directors approved a first quarter distribution of $0.875 per common unit, a 4% increase over the first quarter of 2019 and unchanged from the fourth quarter of 2019. Phillips 66 Partners is navigating the current business environment from a position of financial strength, supported by a fee-based portfolio of high quality assets, investment grade credit rating and strong liquidity. We remain focused on maintaining our strong balance sheet and disciplined approach to capital allocation. In this challenging environment, we deferred the Liberty Pipeline, postponed FID on the ACE Pipeline and held the quarterly distribution flat.

Moving to Slide 4 to discuss financial results. The Partnership reported first quarter earnings of $226 million and adjusted EBITDA of $321 million. The $24 million decrease in adjusted EBITDA was driven by wholly owned assets due to low utilization rates in Phillips 66 Refineries.

First quarter distributable cash flow was $269 million, up from $254 million in the fourth quarter. The $24 million increase in joint venture distributions over the prior quarter reflects the first distribution from Gray Oak Pipeline. Slide 5 highlights our financial flexibility and liquidity. We ended the first quarter with $92 million of cash and $747 million available under our revolving credit facility. The Partnership funded $196 million of growth capital during the quarter. This included investments in Gray Oak, the Liberty Pipeline after it was acquired and the South Texas Gateway Terminal. The debt-to-EBITDA ratio on a revolver covenant basis was 2.9. Our distribution coverage ratio was 1.35. We continue to target a long-term leverage ratio of up to 3.5. Given current market conditions, we expect the coverage ratio for the year to be between 1.1 and 1.2. Looking ahead, we remain focused on maintaining a strong financial position and disciplined capital allocation as we navigate through these unprecedented times.

Now Rosy will provide an update on our growth projects.

Rosy Zuklic -- Vice President & Chief Operating Officer

Thank you, Kevin, and hello, everyone.

Slide 6 lists the projects we have ongoing. The Gray Oak Pipeline has started full operations. Service from West Texas to Corpus Christi and Ingleside, Texas started on April 1. More recently, the Eagle Ford segment of the pipeline came online, marking completion of the project. We own 42.25% in the Gray Oak Pipeline. This is a significant milestone for PSXP and further enhances our stable asset portfolio. Construction continues at the South Texas Gateway Terminal in Ingleside. 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 Sweeny to Pasadena capacity expansion project remains on track, and we expect to reach mechanical completion in June. This is a great project for the partnership with long-term pipeline and terminal volume commitments from Phillips 66. In response to the uncertainty in the current market environment, the Liberty Pipeline project has been deferred, and the final investment decision on ACE Pipeline has been postponed. We will continue to fund sustaining capital to ensure safe operations as well as the remaining in-flight [Phonetic] growth projects included on this slide. These projects are all progressing as planned.

Looking ahead to the second quarter, we anticipate results to decrease from the first quarter, mainly due to lower domestic production and refinery utilization. This impacts many of our wholly owned and joint venture assets. We anticipate the impact from reduced throughput to more than offset increased earnings from the Gray Oak Pipeline.

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

Questions and Answers:

Operator

[Operator Instructions]

And our first question comes from the line of Spiro Dounis with Credit Suisse.

Spiro Dounis -- Credit Suisse -- Analyst

Good afternoon everyone. First question, just maybe to sort of visit some of the guidance provided around the last analyst day. You laid out a target exit of about $1.5 billion as the EBITDA exit rate for 2020. Is that still a target that you see as intact? And just maybe how to think about some of that forward guidance that you guys had previously given out?

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

Hey Spiro, it's Kevin. That was -- that guidance was what we had at that point in time with the projects we knew were under way and would come online over the course of this year. What it didn't anticipate is the situation that we're going through just now in terms of the impacts on both the refined products side of the business, which is sort of tied to the PSX refining portfolio and where those assets are running; and then also on the crude throughput, long-haul pipeline business. So we're not giving specific guidance at this point. I think the way to consider that $1.5 billion is probably when we get to some -- back to some form of normal state, it's not unreasonable to think that we would get back to -- anticipate getting back to that $1.5 billion level, but it's probably pushed out based on the way we see things right now. As you know, there's a lot of uncertainty as to what this recovery looks like. I think it's clearer on the products side that once the country gets back to work and people start moving, that you'll see refined product demand increase and refining utilization will rise to meet that demand, and you'll see that part of the business get back to normal. It's harder to get a read on the impact in the upstream sector, but I also go back to the view that $20 oil prices aren't sustainable forever. So it's just a question of timing.

Spiro Dounis -- Credit Suisse -- Analyst

Yes. I appreciate that. It makes sense. Second one, it might sound crazy to talk about drop-downs right now. But is there a mutual interest to drop down assets here to just maybe provide PSX with some liquidity and help you sort of bolster up some of your cash flows? Or is that really a discussion for another time?

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

Yes. Realistically, that's probably a discussion for another time. It's kind of a -- it's really a PSX question anyway because they would -- those conversations are all initiated at that level. But it's hard to see, even from a Phillips 66 Partners standpoint, funding a drop-down transaction. If the objective was -- would be to get cash back to the PSX level, then the funding would have to be either equity, and these aren't equity markets to be going out and to raise funds or debt, and we're sort of trying to manage our way through the balance sheet and leverage as it is. So it doesn't feel like it's the right timing.

Operator

[Operator Instructions]

Your next question comes from the line of Robert Mosca from Mizuho.Please go ahead, your line is open.

Robert Mosca -- Mizuho -- Analyst

Hi, good afternoon everyone. So I think you kind of answered one of my questions on drop-downs. But thinking about it from a different angle, I know on the management -- on the PSX call, there were some comments from management about a possible reduced opportunity set from an organic standpoint in midstream for 2021. And I guess thinking a little bit further out is -- would, I guess, the growth maybe come from inorganic acquisitions, looking at '21, whether it be by size drop-downs or maybe some third-party M&A and kind of thinking about like how the growth strategy shifts in your view?

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

Yes. I think that the -- where the growth opportunities come from -- right from the beginning, we've said that at PSXP we have the potential to grow through organic means, through drop-downs from the parent and also through acquisitions. And while we haven't done any acquisitions for a while, we have done some, relatively small, but we've done some acquisitions back in the sort of, I think, 2016 time frame. And in principle, none of that is any different. We still see that the growth will come from -- through those three different sources. And at different points in time, different areas will be prioritized depending on where the most attractive opportunities are. Most recently, we've seen the best opportunities in the organic space -- or I'd sort of categorize as organic drop-downs where the project comes -- the asset project comes from PSX, but it's early stage construction, then it becomes an organic project at the MLP. If those opportunities are not there, if the projects are not there with the kind of returns we would expect, then we'd look at other ways of accomplishing growth. But I'd also say, whatever we do, it's got to meet our return thresholds, our investment criteria. It has to make sense for the MLP. So potentially, acquisitions at some point in the future, certainly possible. And in a sort of sustained down cycle, you often see that trend of consolidation. And PSXP could be positioned for that, but it's not something that we're focused on right now.

Robert Mosca -- Mizuho -- Analyst

Okay. That's helpful. And then just maybe an easier one on the distribution. Is that going to be kind of a touch-and-go quarter-to-quarter evaluation? Or do you see yourselves maybe holding it flat for the remainder of 2020 and seeing how things shake out afterwards?

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

Yes. I mean every distribution is a decision by the -- by quarter. So it's a decision we make every time. This is a break in practice for us by holding it flat, but it just felt like the prudent thing to do given the environment. So a lot of this will be -- will depend on how things transition and shake out over the remainder of the year as to whether we -- whether or at what point we get back to increasing the distribution.

Operator

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

Jeffrey Dietert -- Vice President of Investor Relations

All right. 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: 13 minutes

Call participants:

Jeffrey Dietert -- Vice President of Investor Relations

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

Rosy Zuklic -- Vice President & Chief Operating Officer

Spiro Dounis -- Credit Suisse -- Analyst

Robert Mosca -- Mizuho -- Analyst

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