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Phillips 66 Partners LP (NYSE:PSXP)
Q3 2020 Earnings Call
Oct 30, 2020, 2:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the Third Quarter 2020 Phillips 66 Partners Earnings conference Call. My name is David, and I will be your operator for today's call. [Operator Instructions] 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 third 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 two contains our safe harbor statement. We will be making forward-looking statements during the presentation 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 Mitchell.

Kevin Mitchell -- Vice President and Chief Financial Officer

Thank you, Jeff, and good afternoon, everyone. In the third quarter, Phillips 66 Partners delivered safe, reliable operations. We captured improved market conditions reflected by higher pipeline throughputs. During the quarter, we advanced our major growth projects. Volumes on the Gray Oak Pipeline continued to ramp up and at the South Texas Gateway Terminal, additional storage came online. These assets are operating well and contributing to our results. The Board of Directors approved a third quarter distribution of $0.875 per common unit, a 1% increase over third quarter 2019. Moving on to slide four to discuss financial results. The partnership reported third quarter earnings of $206 million and adjusted EBITDA of $313 million. Adjusted EBITDA from wholly owned assets improved $23 million due to increased volumes associated with higher utilization at Mid-Continent refineries operated by Phillips 66. Adjusted EBITDA from the joint ventures improved $21 million due to higher volumes, including the ramp-up of Gray Oak Pipeline and the start-up of South Texas Gateway Terminal. Third quarter distributable cash flow was $243 million, up $25 million from the prior quarter. The increase reflects higher earnings from wholly owned assets and increased joint venture distributions.

Slide five highlights our financial flexibility and liquidity. We ended the third quarter with $2 million of cash and $457 million available under our revolving credit facility. The partnership funded $160 million of growth capital during the quarter. This included spend on the C2G Pipeline and investment in South Texas Gateway Terminal. In addition, the partnership continues to fund its share of prior commitments for the deferred Liberty Pipeline project. The debt-to-EBITDA ratio on a revolver covenant basis was 2.8, which is consistent with our target to remain below 3.5. Our distribution coverage ratio was 1.22. Phillips 66 Partners remains committed to disciplined capital allocation and maintaining our investment-grade credit rating.

Now Rosy will provide an update on our growth projects.

Rosy Zuklic -- Vice President and Chief Operating Officer

Thanks, Kevin, and hello, everyone. Moving on to slide six, I'll talk about our growth projects. We continue to advance the C2G Pipeline project. The 240,000 barrels per day ethane pipeline will run from the Clemens Caverns near Sweeny, Texas to Gregory, Texas. The pipeline is backed by long-term commitments and will serve petrochemical customers in the Corpus Christi area. Pipeline construction is roughly 55% complete, and it is expected to start-up in mid-2021. At the South Texas Gateway Terminal, the first dock and 5.1 million barrels of storage capacity have been commissioned, and the terminal began crude oil export operations in July. Terminal operations are expected to ramp up through the end of this year as additional phases of construction are finished. We expect the project to be completed in the first quarter of 2021 with total storage capacity of 8.6 million barrels and up to 800,000 barrels per day of export capacity. Phillips 66 Partners owns a 25% interest in the terminal. As we near the completion of these in-flight capital projects, we expect the 2021 capital budget to be approximately $300 million. Details of our 2021 capital program will be provided in December.

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

Kevin Mitchell -- Vice President and Chief Financial Officer

David, do you have questions for us.

Questions and Answers:

Operator

[Operator Instructions] Spiro Dounis from Credit Suisse. Please go ahead, your line is open.

Spiro Dounis -- Credit Suisse -- Analyst

Thank you. I'd like to go back and maybe just get a little bit more color on some topics that came up on the PSX call earlier. Topic of refinery closures came up. And I think if I heard you guys correctly, it sounds like the remaining PSX refineries beyond Rodeo are fairly well insulated here going forward, barring another downturn. So one, did I interpret that correctly? And how are you guys assessing the risk of more closures here from PSXP's perspective as a service provider to those refineries?

Kevin Mitchell -- Vice President and Chief Financial Officer

Yes, Spiro, it's Kevin. I think the way to think about this, you look at the PSXP portfolio. And generally, it's focused on -- to the extent the PSXP assets are tied to Phillips 66 refineries, that tends to be down in the middle of the country, so sort of Mid-Continent and to Gulf Coast for the most part, which is generally where from a Phillips 66 standpoint, we've talked about being our sort of core -- the core parts of the portfolio. And so I think that's a lot of what that comment meant in terms of relatively insulated. But I think if you go back and just do a -- take the hypothetical situation of Phillips 66, took action around a particular refinery to idle it, then it really depends on what asset are we talking about, exactly what's the contractual contract details in place between the two entities. We have a disclosure in the 10-K that states that any short-term idling would have no impact. The MVCs, those commitments would hold, but something in an excess of 12 months would enable Phillips 66 to get out of that. But that is not -- that doesn't apply across the board, every asset, every refinery. So it really is a case-by-case type of situation.

Spiro Dounis -- Credit Suisse -- Analyst

Okay. That's helpful color. Next one, just on some of the things that came up. Greg had made some comments around Midstream assuming to elaborate on a few of them. So first, he mentioned the Midstream industry probably sees consolidation over the next few years. M&A hasn't really been part of your strategy historically. So just wondering how you think PSXP fits into that mold. And then second, you talked about the life cycle of MLPs being shorter than before. Is that an indication that you're spending a little more time evaluating the C-corp structure? Just want to understand how to interpret that comment.

Kevin Mitchell -- Vice President and Chief Financial Officer

Yes. Let me answer the second one first, and then we'll come back and talk about the first one. So the comment around the MLP life cycle is really just reflecting. If you go back to where we were, say, five years ago and then look at what's happened in the space -- in the Midstream sector over this subsequent five years, you've seen C-corp conversions. You've seen roll-up transactions. And so you actually have a -- the MLP universe is quite a bit smaller now than it was back at that point in time. And so it's just reflecting the reality of what has happened that this life cycle has somewhat shortened. It really wasn't meant to intend any specific intentions around a specific course of action around it. It's just somewhat reflecting what we've seen take place in the market over this time period. And then the other question on consolidation. We've always said that PSXP would have the ability to grow by organic means, i.e., direct capital investments and growth projects at the MLP [Indecipherable] from the parent company and through acquisitions.

We've done a small number of asset-specific acquisitions, and those were earlier on, probably for like three, four, five years ago kind of time frame in terms of that. But in principle, we have felt that the PSXP could position itself to participate in broader industry consolidation. We think it needs to happen in the Midstream space. You're seeing it happen in a pretty big way in the upstream right now. And that's, I think, for the Midstream to compete well. Bigger is better. Scale is helpful. The ability to be more efficient to drive cost efficiencies, commercial synergies through the entire Midstream value chains. And so we think that's likely to happen.

Operator

Theresa Chen from Barclays. Please go ahead, your line is open.

Theresa Chen -- Barclays -- Analyst

Hi, Kevin, I would like to unpack your last comment about PSX potentially participating in broader asset consolidation across Midstream. Are there particular assets or geographical locations which assume a certain part of the value chain that you think would fit well and appeal to PSXP more than others?

Kevin Mitchell -- Vice President and Chief Financial Officer

Well, so you look at the portfolio that we have in PSXP today, and you've got crude value chain and NGL value chain assets. And some of which are integrated with PSX assets, some of which are not in sort of stand-alone. And so I think you look at where can you leverage the existing portfolio into something bigger and create a broader opportunity in that respect. Because if you don't approach it that way, then the opportunity to drive cost efficiencies and potentially commercial synergies are just not there. And so that's how I think about it. But I don't know, Tim, if you have any other comments around that.

Timothy Roberts -- Vice President, Operations

I think, Kevin, you hit it spot on. It's really about how do we build out the value chain and make sure as we were positioned so that we can support the upstream consolidation that's going on, as mentioned Kevin earlier. So yes, that's right.

Theresa Chen -- Barclays -- Analyst

Got it. And shifting to DAPL, can you give us an update on the evolution of the process, where you think it goes over the near-term and key milestones from your perspective to keep an eye on? And also related to that, can you tell us about the movement on Bayou Bridge that is directly related to DAPL? [Indecipherable] Bayou Bridge's EBITDA.

Timothy Roberts -- Vice President, Operations

This is Tim, Theresa. So I'll cover that a little bit. Let me talk about DAPL real quick. Really, nothing's changed. We still had two items that need to be addressed by district court and an appellate court in D.C. We fully expect that those will be addressed based on the briefing schedules we've seen sometime toward the end of the year, maybe rolling into early next year. But we expect them both around the same time. But regardless of what happens, our expectation is that they're likely going to get appealed. So I think the process is one of an appeals process that likely goes forward. Now from the standpoint of Bayou Bridge, I can't get into a lot of details that we don't want to share at that point with you. Plus, you got to remember, Energy Transfer is the commercial REIT on that. But what I can tell you is that is a pipeline that we do on heavies and lights on. And I think that may help you with some of your answer, hopefully.

Operator

[Operator Instructions] Jeremy Tonet from JPMorgan. Please go ahead, your line is open.

Jeremy Tonet -- JPMorgan -- Analyst

Hi, good afternoon. I was just hoping you might be able to provide a little bit more color on the joint ventures, how those businesses performed if Gray Oak and, I guess, Sand Hills, Southern Hills, just wondering if those things kind of met expectations, anything kind of stood out there in particular? Just any color on the JVs would be helpful.

Rosy Zuklic -- Vice President and Chief Operating Officer

Sure. Jeremy, this is Rosy. Yes, during the quarter, all of our JVs actually performed well. I mean I think as Kevin covered during the prepared remarks, Gray Oak actually was one of the leading ones that contributed to the quarter. Sand Hills did well, but it performed well last quarter. So I would say that as a standout Gray Oak and the Bakken and Explorer were actually were the three JVs that contributed an upside this quarter compared to last quarter.

Jeremy Tonet -- JPMorgan -- Analyst

Got it. That's helpful. And just want to see valuations in the space have kind of declined a lot this year, as we all know. And just wondering, with the yield standing where it is, is there ever a situation where that capital could be kind of better deployed, be it lowering leverage or unit repurchases or what have you? Just wondering if you could kind of refresh us on your capital allocation philosophy, given how everything in the world has changed so much.

Kevin Mitchell -- Vice President and Chief Financial Officer

Yes. Jeremy, it's a good question. And -- step back and priority is to maintain -- have a strong balance sheet, maintain that investment-grade credit rating. And we also have expectations that we can continue to invest in growth in the MLP. We're fortunate that we have a very strong MLP, a great portfolio, really strong assets. The balance sheet is solid. We have a fair amount of room from a leverage standpoint if we need to utilize that. But I also think that from an equity valuation standpoint, we're hesitant to make any immediate decisions around that because I really believe that the sort of DAPL cloud that's hanging over PSXP is having a significant impact on valuation. And so we're reluctant to make decisions that could have long-term consequence as until this whole DAPL position plays out. And so I don't want to be rash in making decisions around that. And so that's really, really sort of frames up how we think about that.

Operator

We have reached the end of today's call. 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. I'd like to thank Brent Shaw for his significant contributions to the Investor Relations group. Brent has been promoted to another area within Phillips 66, and I'd like to welcome Shannon Holy to the Investor Relations team. If you have any questions, please call Shannon or me. Thank you.

Operator

[Operator Closing Remarks]

Duration: 17 minutes

Call participants:

Jeff Dietert -- Vice President, Investor Relations

Kevin Mitchell -- Vice President and Chief Financial Officer

Rosy Zuklic -- Vice President and Chief Operating Officer

Timothy Roberts -- Vice President, Operations

Spiro Dounis -- Credit Suisse -- Analyst

Theresa Chen -- Barclays -- Analyst

Jeremy Tonet -- JPMorgan -- Analyst

More PSXP analysis

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