Phillips 66 Partners LP (PSXP) Q2 2021 Earnings Call Transcript

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Phillips 66 Partners LP (PSXP)
Q2 2021 Earnings Call
Aug 3, 2021, 3:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Welcome to the Second Quarter 2021 Phillips 66 Partners Earnings Conference Call. My name is Hillary, 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.

Jeff Dietert -- Vice President of Investor Relations

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 two contains our safe harbor statement. We will be making forward-looking statement during today's call and our Q and 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.

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

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 a 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 four 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 included a $198 million impairment resulting from the partnership's 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 increased utilization of Phillips 66 operated refineries.

Second quarter distributable cash flow was $267 million, up $34 million from the prior quarter. The increase reflects improved earnings, which were partly offset by higher maintenance capital in the second quarter. Slide five 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 spend 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 our target to remain below 3.5. Our distribution coverage ratio was 1.34. In April, we repaid $50 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 partnership's revolving credit facility.

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

Questions and Answers:

Operator

Thank you.[Operator Instructions] Your first question comes from the line of Spiro Dounis with Credit Suisse.

Spiro Dounis -- Credit Suisse -- Analyst

Hey Kevin, I know you're generally not in the practice of providing firm guidance, but was hoping maybe you could help frame what the second half of the year might look like relative to the first half. It would just be helpful to hear your thoughts on the macro environment, maybe any specific drivers of performance as we head here into the second half.

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

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

Timothy D. Roberts -- Executive Vice President, Midstream

Yes. Spiro, with regard to the macro, I mean, obviously, the first quarter was impacted by, one, there's a seasonal element coupled with the fact that we had the winter storms. So as things have picked up and there's been a recovery in the overall market from COVID, we've benefited clearly in two Q with regard to refining utilization. And then also, we've seen some increase in 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, we -- second quarter moving into third quarter, we feel very constructive, especially as demand continues to pick up globally.

Spiro Dounis -- Credit Suisse -- Analyst

Great. That's helpful, Tim, thanks for that. Second question is just around capital return. Seeing some peers now start to recommence distribution growth and formalize some buyback programs, just given that stabilization on the macro outlook. So I'm just curious how you guys have described your capital return goals as we sit here today, what you sort of need to see first to either recommence distribution growth or initiate a buyback program. And on buyback, specifically, I think we're seeing some peers buy back at DCF levels or yields of around 11%. PSXP, of course, trading north of that right now. So I would imagine midstream's attractive, but I'm sure you got the durations there that would be helpful to sort of lay out.

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

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 the 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 is -- the budget is $165 million. That's -- 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 historic levels. But at the same time, if you look at where we are from a coverage standpoint, this quarter, 1.34, which, for PSXP is quite strong, but in the overall scheme of things, that doesn't actually give you that much flexibility.

I think -- and one of the reasons that we're strong in the second quarter is because we had lower maintenance capital. So you revert to sort 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 we might have out there. So I don't think there's 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.

Spiro Dounis -- Credit Suisse -- Analyst

Got it. Thanks for that helpful color. Thanks, Kevin Thanks guys.

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

Thanks, Spiro.

Operator

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

Michael Blum -- Wells Fargo -- Analyst

Good afternoon. I wanted to maybe stay on these topics. If you can 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? What are the kind of the nature of those? And if the answer is not really, then I'd just love your latest thoughts on just how you view the MLP within the structure of the Phillips family if there really isn't a need to finance any growth in midstream. Thanks.

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

Yes. I think that you'll see continued, I'll call them, optimization projects around the existing infrastructure. So PSXP has got a really nice portfolio of assets, and there 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 that are 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 a continuation of some of these smaller optimization type projects from that standpoint. I don't know. Tim, do you have any other perspective on that?

Timothy D. Roberts -- Executive Vice President, Midstream

No. I think you've covered it. To give you a little bit of context on the smaller projects, Michael, it's going to be at one of our sites, maybe on Gray Oak, where we had a connection in 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 opportunity.

Michael Blum -- Wells Fargo -- Analyst

Great. Thank you very much.

Operator

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

John Mackay -- Goldman Sachs -- Analyst

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 just how PSX is looking at PSXP from a strategic standpoint here and kind of what the outlook there could be.

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

Well, I think given that this is a PSXP call, I think all we can do is reiterate what we've said in the past and in reference to the 13D filing that was done, I think, must be coming up to a year ago now, I mean 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'd just leave it at that. Those statements still hold true that the 13D gives PSX flexibility to consider alternatives, but there's really no more to say on that at this point.

John Mackay -- Goldman Sachs -- Analyst

All right. That's fair. And I think it feels like a year. I thought that would have been like six months ago. So that's fine. A lot going on. Maybe just one smaller one. Just in terms of these 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 is it the kind of thing where, "Hey, if we don't start to see something in the next couple of releases, maybe it looks like 2022 capex could be a lot lower?"

Timothy D. Roberts -- Executive Vice President, Midstream

Yes. Look, I think at this point, it will depend on really the size of the project. It's hard for us with regard to our 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 tens of millions of dollars there but not hundreds of millions of dollars. So depending on where that is, and it's hard for me to give you that cutoff, we feel it's material to 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 and or projects that are underway or are being completed.

John Mackay -- Goldman Sachs -- Analyst

That makes sense. Thank you very much.

Operator

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

Jeremy Tonet -- JPMorgan -- Analyst

Hi. Good afternoon. Just wanted to start with the DAPL expansion there. Wondering if you might be able to provide some color as far as this 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 you need to put that capacity into service?

Casey Gorder -- General Manager, Operations.

Yes, Jeremy. Thanks for the 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 the capital number. That's where we kind of zero in on the capital invested front.

Timothy D. Roberts -- Executive Vice President, Midstream

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

Jeff Dietert -- Vice President of Investor Relations

Starting out up this month.

Timothy D. Roberts -- Executive Vice President, Midstream

Yes. That commenced the capability and the commencing, and it's starting. There it is. Jeff said.

Jeremy Tonet -- JPMorgan -- Analyst

That's very helpful, thanks for that.. And then with the C2G Pipeline here being pushed back a bit, is this tied to the Exxon SABIC cracker or just any other drivers to that time line shift?

Casey Gorder -- General Manager, Operations.

No. It's really weather related with the time line 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 northbound between kind of mechanical completion and commercial in service at the end of the year with weather delays, that window for kind of northbound 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 MVCs underpinning that project.

Jeremy Tonet -- JPMorgan -- Analyst

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 in the midstream sector at all, if there's any thoughts you're willing to share there.

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

I think we've -- 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 the midstream sector, you will see consolidation take place. You're seeing that happen in the upstream. And then based on this morning, you're starting to see some of that happening in the downstream. 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 midstream 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.

Operator

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

Jeff Dietert -- Vice President of Investor Relations

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.

Operator

[Operator Closing Remarks]

Duration: 17 minutes

Call participants:

Jeff Dietert -- Vice President of Investor Relations

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

Timothy D. Roberts -- Executive Vice President, Midstream

Casey Gorder -- General Manager, Operations.

Spiro Dounis -- Credit Suisse -- Analyst

Michael Blum -- Wells Fargo -- Analyst

John Mackay -- Goldman Sachs -- Analyst

Jeremy Tonet -- JPMorgan -- Analyst

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