Welcome to the First Quarter 2019 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.

Good afternoon. And welcome to the Phillips 66 Partners first quarter earnings 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. 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 is a reminder that we will be making forward-looking statements during the presentation and the Q&A session. Actual results may differ materially from what we present 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.

Thank you, Jeff and good afternoon everyone. In the first quarter, we operated well and delivered solid financial results during a period that was impacted by significant refinery turnarounds. We also advanced our major growth projects, including construction of the Gray Oak pipeline. During the quarter, Sand Hills pipeline achieved record volumes of 494,000 barrels per day following its fourth quarter expansion and the second phase of the Bayou Bridge pipeline was completed. Our Board of Directors recently approved a first quarter distribution of $0.845 per common unit, an increase of $0.01 from the previous quarter and 18% higher than the first quarter 2018 cash distribution. We have increased the distribution every quarter since the IPO in July 2013. Looking forward, we remain committed to delivering a competitive and growing distribution, while maintaining strong coverage and leverage ratios. Our portfolio of organic projects and financial strength position us well for future growth. Moving on to Slide 4 to discuss the financial results. Partnership reported first quarter adjusted EBITDA of $281 million compared with $309 million in the prior quarter. The decrease reflects lower volumes from our wholly-owned assets due to the impact of turnarounds at refineries operated by Philip 66. Earnings from our equity affiliate declined as a result of lower volumes on the Bakken from Explorer pipelines, partially offset by higher Sand Hills pipeline volumes. First quarter distributable cash flow was $226 million, a decrease of $12 million from the prior quarter, primarily due to lower earnings from our wholly-owned assets, partially offset by lower maintenance. Slide 5 highlights our financial flexibility and liquidity. We ended the first quarter with $2 million of cash and $15 million of outstanding borrowings under our $750 million revolving credit facility. Our debt to EBITDA ratio on a revolver covenant basis was 2.8 times. Our distribution coverage ratio is 1.3 times. Long-term, we are targeting leverage of 3.5 times and distribution coverage of over 1.2 times. The partnership continues to advance its major projects. In the first quarter, our growth capital spend was $195 million, including investments in the greater pipeline projects, as well as the new isomerization unit of the Philip 66 Lake Charles refinery and the Clemens Caverns expansion. The Partnerships strong financial position enables us to fund our capital program with operating cash flow and debt capacity. I will now turn it over to Rosie to provide an update on our growth projects.

Thanks Kevin and hello everyone. Slide 6 lists the projects we have ongoing that will drive EBITDA growth for the next two years. During the quarter, we advanced our growth projects. I will just take a moment to comment on the couple of the larger projects. We made progress in the Gray Oak pipeline. There is 900,000 barrels per day pipeline or transport crude oil from the Permian and the Eagle Ford to Texas Gulf Coast destination. Construction continues on the 850 miles of pipeline and the 17 facilities. We have purchased all the pipes, most of which has been delivered. 98% of the right of way has been acquired and all 17 foundations have enforced. We're experiencing cost pressures from higher steel costs, labor rates and right of way. The total cost of the project is now expected to be approximately $2.7 billion. We have all Army Corps of Engineer permit and the pipeline remains on track to start up in the fourth quarter of this year. Gray Oak will connect to multiple terminals in Corpus Christi, including the South Texas Gateway Terminal, in which PSXP has a 25% ownership. The Marine terminal will have two deep water docks with initial storage capacity of about 7 million barrels and up to 800,000 barrels per day of throughput capacity. The project has expanded since sanctioned and is supported by additional customer commitments. The facility is expected to start up by mid 2020. The remaining listed are all on schedule to complete on time. This concludes our prepared remarks. We will now open the line for questions.

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

Maybe just starting up on Gray Oak, if you could, just looking at the cost increase. I guess, is there any impact or any flow through on the tariffs you're going to be charging or this leading into some of the project returns at this point?

It's going to be eating into the project returns. But what I would say is -- what we have on the slide there was the projects being six to eight times multiple that’s true for all the projects. As we think about this project when it was originally sanctioned, it was sectioned at 385,000 barrels per day, obviously, the pipeline now at 900,000 barrels per day commitments of 800,000 barrels per day. Obviously, it was at first lending towards the lower end of the multiple with the increase is not going to be lending towards the higher end of the multiple, but still a great project. We still are very excited about it and still expect to have great returns. And obviously, once the pipeline is up and running, we will I'm sure find other opportunities around it.

And that answered my second question, which is on an expansion that would presumably at very accretive multiples over time, there's room for you to work that multiple down again.

That’s right.

Just to add a little further on that. The returns that we show, those build multiples are for the project on a standalone basis. As we've talked about, we're going into project financing on this project also, which will further enhance the returns on a levered basis. So still is very attractive to us.

Second question just with respect of to some of the midstream assets still up at PSX. Thinking specifically about Sweeny frac expansion and the LPG export terminal. Is there a logical pathway for that that’s making a way to PSXP? And I fully understand that you guys have shifted away from dropdowns. But seems like there were some interest comments on the PSX call around LPG export rates being around $0.10 right now, and I think that could maybe spark some long-term contracting, which makes this asset maybe little more attractive from an MLP and midstream standpoint?

So looking at that from a PSX standpoint. Clearly, the LPG export terminal and the fracs once complete, so fracs two and three, those assets would lend themselves to the MLP model, the MLP structure. So while as you rightly point out we've transitioned away from dropdown and a lot more organic focus, that still doesn’t preclude us from entering into dropdown transactions to get those assets down at the MLP. And I know no plans to do that anytime soon, but the potential is certainly out there.

Elvira Scotto from RBC Capital Markets, please go ahead your line is now open.

So just going back to the Gray Oak cost overrun. So it that going to be financed that incremental, will that just be financed off the revolver, or is that part of project financing? Or how do we think about that financing?

Maybe let me talk about capital in total and maybe we can hit it this way. So if I think about back in October, the PSXP board approved the $1.2 billion capital program. And so that is now -- because of the Gray Oak financing, the Gray overage largely its trending more to be about 10% higher, so somewhere in the $1.3 billion to $1.32 billion. The $1.2 billion, the original budget was post project financing was around $600 million. Now, it's looking to be between $700 million and $750 million. So that gives you an idea of how that's looking of the four project financing and after project financing and how the Gray Oak overage is impacting both numbers.

So to the extent that the net of financing capital budget for PSXP is increasing, just what Rosy has just described then in effect that becomes -- that will be funded by essentially debt at the PSXP levels, all other things being equal.

And is there any change in outlook to your maintenance CapEx spend?

No, not at this point. No, still around $80 million, $78 million, I believe is the number here.

And then just on the Grey Oak pipeline. Can you just help us understand, so of the commitments, which you've got contracted on there. I mean are you -- those contracts all come online day-one, and then as a follow up to that. How do you expect the actual volumes to ramp on Grey Oak?

So from a volumes perspective, the way we're thinking about is the fourth is when the pipeline is going to be available. And so the thought is as any major pipelines, it's going to take some time for, and also is when shippers are available effectively when the production available for them to bring in, it's going to take a little bit of time. And so I think that’s our involvement with obviously with the Bakken pipeline. It took a couple of months for that pipeline to fully be -- to fully come to full -- having the pipeline full. So it will take at least a couple of months. So sometime in the first quarter is where we're really thinking that the pipeline will have the full capacity.

And then just in terms of -- because I know the pipeline can go to Corpus Christi and then also into Sweeny. How much capacity can actually move into Sweeny?

We haven’t really given the split out. Tim, do you want to comment on that?

I think what we can tell you on that line is we haven’t disclosed that, not for any another reason with the exception that it is a new build pipeline. But we do expect that to meet commitments for PSX, PSX is undertaking some commitment on the pipeline. We're not the anchor shipper. But obviously this helps to optimize our Sweeny asset having those barrels available.

It is a less -- the line of size lower than what it would be going if we're going straight there.

Justin Jenkins from Raymond James, please go ahead your line is now open.

I guess, I want to start on Bayou Bridge and maybe see if you could offer any comments in terms of how that ramps gone here for the first month of operations? And then second question is does that give you maybe a bigger leg up with the ACE pipeline development process and how that may unfold?

So everything is going well with Bayou Bridge. As expected, the TSA started April 1, so we expect to see earnings starting a month later and then just cash distribution a month after that. So everything is expected. From an ACE perspective, you've hit on the head. I mean, it would be nice to have it all as you think about the way everything is playing out. You've got the Bakken pipeline going down to Beaumont, and then Bayou and then take crude all the way to St. James. And then ACE completed all the way to the Alliance, or the PSX Alliance refinery. And so that would be a nice tie into to not only Lake Charles but the Alliance refinery, so its parts of the plan.

And I guess second question maybe on the operating, anything -- increase pretty big quarter-over-quarter, looks like a similar offset on the revenue line. But any color on maybe the choppiness there, Kevin, in terms of how the sequential costs play there…

Actually, what's happened there, Justin, if you allow me, the MSOP turnaround is what you're seeing there. There is about $50 million to $55 million associated with the MSOP turnaround. And so what you're seeing in the expense line is the expense for the turnaround and the revenue is the reimbursement. So when we drop that asset in, there was a pre-arrangement for PSX to reimbursement PSXP for turnaround expenses. And so the same phenomenon has actually happened in fact in the first quarter of 2018, it's just that the number was much more less, it was about $20 million. But that’s really what you're seeing there.

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

First, in terms of the potential expansion of the Bakken JV pipeline above the 570 current capacity. Can you remind us what is the potential hydraulic capacity of this system if you do add additional pumping and storage capabilities, but still taking into account the 24-inch segments [ed] cup?

So the pipeline today is at 570,000 barrels per day. As far as getting above the 570, I think from what I have seen, the pipeline has the ability to go up to 800,000 barrels. But that’s not necessarily what we're expanding to with this further expansion. We're currently -- the partners are looking into what further expansion to do, but we're not talking about actually doing any looping. We're really just talking about it in pumping and storage.

And that 800, 000 barrels per day, would that include lubing or would that still be within the 24 inch?

No, I believe that would just be adding just pumping, I don’t believe that would be any looping.

And then I wanted to touch on the recent open season to expand Bayou Bridge with various origins, including Bakken, PRB, Cushing, Permian and such. What are you seeing in terms of interest from shippers so far? And given these origins points, I’m guessing this implies potential connectivity with your other projects into development, be it Liberty and Red Oak at the parent or the Gray Oak lube at PSXP. Can you provide an update on how these projects are progressing?

From a PSX view, because of the projects working on as far as the open seasons with Red Oak and Liberty, I'll weigh in on that. From Bayou Bridge where it's located at and the connectivity it's got from Beaumont and you've got the Bakken coming in and there are other pipelines are going to be coming into that particular area to get barrels either to the Beaumont, Nederland area or get barrels to St. James, get barrels down to lube, or get barrels potentially to the refining system in southeast Louisiana. So we see some of these pipelines are going to be coming in and we're a logical alternative to getting down the Huston or other destinations. So we're just at this point working with our partners as far as a joint-tariff opportunities through binding an open season to see what the interest level is. It's no more than that. We think we're creating more optionality into the Louisiana side and we'll see what the interest is from people getting barrels in different basins down to that region.

And on the revenue reimbursement related to maintenance from the dropdowns. Is that like a forever type of thing, or do you pour like a certain amount of years and then it stops?

So we have a contractual agreement with MSPL for 15 years. And so we have -- we'll obviously have to renegotiate this once the contract is done. But this was just something that we did at the time of the drop…

Specific to that asset…

Correct…

What about the other assets?

No, we do not.

Jeremy Tonet from JPMorgan, please go ahead your line is open.

Just want to -- hope that you could clarify little bit for me, when you talk about the Liberty Pipeline in the DAPL expansion. Do these projects kind of overlap in any sense? Or could you clarify, I guess, what the objectives are with the two extensions?

I think they're really serving two different purposes. This is Tim Roberts again, by the way. From the PSX view and I'll talk specifically to Liberty. Liberty really is trying to access some different basins on the west side of the Bakken coupled with Powder River, DJ Wattenberg. So Liberty's really hitting a different part that Bakken doesn't really fully serve currently. So that's really the difference between the two pipelines. We still think there's room for continued expansion on the eastern side of the Bakken and then obviously on the western side as we head out towards, again, Powder River and those other basins.

And just want to go to Gray Oak real quick. Just a clarifying question, with regards to the economics thing closer than an 8 times still multiple at this point. Our understanding is that PSXP received a promote in the whole formation of the partners coming in. And so when you state that level of economics is that before or after considering the promote payment?

It's after.

Dennis Coleman from Bank of America Merrill Lynch, please go ahead your line is open.

I guess just one last question on Gray Oak. Any guidance you can -- how much has been spent? Where do you stand percentage wise with the project? I guess really what I'm trying to get at is what the spend level is from here?

So maybe I'll try to tackle this question holistically. So the project is about 60% done, and this is all inclusive engineering and construction, obviously, in and of itself is going to be at a different stage than engineering. But as I think about the projects being 50% done from expense perspective, it's largely there maybe a little bit more weighted towards the back half with some of it falling in 2020. So the vast majority is going to be remaining in 2019. Obviously, because you're going to have a little bit of spending in 2020, maybe you're going to see that in the first quarter of 2020.

Barrett Blaschke from MUFG Securities, please go ahead your line is open.

Most of my have been addressed but I did want to ask. Rosy, you said before what the three drivers were for cost increases on Gray Oak. Can you give us a little breakdown? Is it mostly coming from materials costs, labor or right of way, just if you could quantify it a bit?

No, I can't. But additionally one of the things that I'd also want to touch on and Greg spoke to it in the PSX calls is that we also have facilities. One of the things that Gray Oak offers that some of the other pipelines don't offer is optionality and that optionality has been built into our facilities. And so the facilities also are adding -- have added also some costs. But I'm not going to be able to give you a split between those things.

Michael Blum from Wells Fargo, please go ahead your line is open.

Just a couple more on the Bakken pipeline, so just to clarify. Do you intend to get to the 800,000 of capacity by late 2020? That was the first part. And then the second part is, what capital would be involved with that? And then I guess the third part of that is. Is this an FID project, because I know it's not listed on the slide? Thanks.

I guess I’m sure I understand by late 2020, you mean by…

I think energy transfer is really the right person to ask that as the operator of the pipeline.

I’m just referencing in your press release where it says the partner are progressing plans to further increase the capacity by late 2020, that’s what I’m referencing.

No, the partners are talking about obviously increasing the capacity of the pipeline. And so at this point, we're talking though the details of exactly what we're going to do. So we don’t have much more to give you at this time. And as far as that timing, we're going to work through the permitting and all that stuff. Hopefully, we do it before 2020 but don’t really have more color to give you.

Ryan Levine from Citi, please go ahead your line is open.

I just wanted to clarify one point on Bayou Bridge. Given the open season that’s outstanding. Is there any potential for the existing contracts to be altered in connection with that open season, or would everything be additive?

It would be additive. The contracts that we have in place are long-term contracts, five to 10 years. And so we're really looking for additive.

Chris Sighinolfi from Jefferies, please go ahead your line is open.

Kevin, if I could just start I want to follow with on Spiro's dropdown question, but asking in the context of Greg's comments from the PSX, called out the potential to eliminate PSXP IDRs. He had noted desire to have such a transaction be accretive to the LP unit holder. And I’m just curious if that means slightly to entail a combination of dropdown and IDR elimination at one time. And then also how we might think about accretion relative to -- you've noted it competitive and growing distribution but one where a numerical growth rate hasn’t been provided. Any help with that would be really helpful?

So certainly doing a dropdown transaction and doing an IDR elimination at the same time is a -- that’s a formally you have seen out there, that’s been done by several others. And we would certainly give back considerations. But I would say at this point while we -- and so Greg laid out our thinking around IDRs in terms of acknowledgment that this is something we need to get to and we will get to and we want to make sure we do this in a way that works for both the MLP and for the general partner. We don't have any specific guidance to give on either when it's going to happen exactly other than sooner than we would have originally anticipated, or exactly what that structure is going to look like. So you've highlighted that due to the dropdown along with that is something that we could consider and would consider, but that’s not say that we don’t have any firm plans to do that as such. And then from a distribution standpoint, we have steered away from giving specific growth guidance. You see the portfolio of organic projects that we have and the approximate timing of when those projects complete, and the estimates of EBITDA generation that will come from that. And so you can see that we have a portfolio that will allow us to continue to grow the distribution. But we're not going to get into -- get caught up in a specified target or objective around exactly what that growth needs to be. We want it to be competitive. But we also are mindful of the need to manage the big picture in terms of the balance sheets, leverage metrics, coverage metrics, the ability to continue to fund growth, given that this is predominantly pretty much mostly a self-funding model now. And so we just try to balance all of those factors.

Okay, that is very helpful. I appreciate that color. I did have two follow-ups I think probably for Rosy. It was helpful the reminder on the MSLP reimbursement as it pertains to the income statement. I also noticed that as it pertains to the maintenance capital, you had a footnote there. Looks like there's a modest differential between maintenance capital and then what's recorded in the DCF. And it seems like that's attributable to the same thing. I just wanted to make sure I understood that correctly?

I believe so, yes.

It looked like previously you had 15 versus 9, and I just didn't know if that was related to the same 15 year agreement on turnarounds, which we saw last year as well.

Yes, I believe that is the case. I will look into it, because I don't know that I've confirmed that for you. But I believe that is the case.

And then the final question for you on this, Rosy, obviously, predominantly the capital programs being debt financed. I did see a little bit noted in the PSX release in terms of what PSXP had raised, I think it was $32 million in the period. I was just curious if there was any formal expectation for an equity component to merry alongside the debt being raised?

Certainly, not from the standpoint of doing an actual equity offering. We have the ATM program in place and we utilize that, which provides a little bit of funding but that's really minor in the context of the overall capital program.

So we shouldn't expect what we saw in the first quarter to be a run rate or anything of that nature?

So first quarter was $32 million or so, which is still ATM. So I mean it's not unreasonable to assume they'll be something like that that will continue. But you're not going to see as a several hundred million dollar equity offering…

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

I just had a quick follow-up related to one of Elvira's questions on the Gray Oak ramp. So Rosy, completely understand that it's going to take a couple of months to get to full capacity, so sometime within Q1 of 2020. But for the commitments, will they also ramp around the same time frame when we get to 800 by Q1 2020 as well? Or will the actual commitments in volumes? Is it expected to ramp at a slower pace versus capacity?

No, it'd be consistent with capacity.

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

Thank you for your interest in Phillips 66 this afternoon and Phillips 66 Partners. If you have any questions, please call Brent or me. Thank you.

Thank you, ladies and gentlemen. This concludes today's conference. You may now disconnect.