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MarketScreener Homepage  >  Equities  >  Nyse  >  Phillips 66 Partners LP    PSXP

PHILLIPS 66 PARTNERS LP

(PSXP)
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PHILLIPS 66 PARTNERS LP : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

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07/31/2020 | 03:09pm EDT
Unless otherwise stated or the context otherwise indicates, all references to
"Phillips 66 Partners," "the Partnership," "us," "our," "we," or similar
expressions refer to Phillips 66 Partners LP, including its consolidated
subsidiaries. References to Phillips 66 may refer to Phillips 66 and/or its
subsidiaries, depending on the context. References to our "General Partner"
refer to Phillips 66 Partners GP LLC, and references to "Phillips 66 PDI" refer
to Phillips 66 Project Development Inc., the Phillips 66 subsidiary that holds a
limited partner interest in us and wholly owns our General Partner.

Management's Discussion and Analysis is the Partnership's analysis of its
financial performance, financial condition, and of significant trends that may
affect future performance. It should be read in conjunction with the
consolidated financial statements and notes thereto included elsewhere in this
report. It contains forward-looking statements including, without limitation,
statements relating to the Partnership's plans, strategies, objectives,
expectations and intentions. The words "anticipate," "estimate," "believe,"
"budget," "continue," "could," "intend," "may," "plan," "potential," "predict,"
"seek," "should," "will," "would," "expect," "objective," "projection,"
"forecast," "goal," "guidance," "outlook," "effort," "target" and similar
expressions normally identify forward-looking statements, but the absence of
these words does not mean that a statement is not forward-looking. The
Partnership does not undertake to update, revise or correct any of the
forward-looking information unless required to do so under the federal
securities laws. Readers are cautioned that such forward-looking statements
should be read in conjunction with the Partnership's disclosures under the
heading: "CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS."


BUSINESS ENVIRONMENT AND EXECUTIVE OVERVIEW


Partnership Overview
We are a growth-oriented master limited partnership formed to own, operate,
develop and acquire primarily fee-based midstream assets. Our operations consist
of crude oil, refined petroleum products and natural gas liquids (NGL)
transportation, terminaling, processing and storage assets. We conduct our
operations through both wholly owned and joint venture operations. The majority
of our wholly owned assets are associated with, and are integral to the
operation of, nine of Phillips 66's owned or joint venture refineries.

We primarily generate revenue by providing fee-based transportation, terminaling, processing, storage and fractionation services to Phillips 66 and other customers. Our equity affiliates primarily generate revenue from transporting and terminaling crude oil, refined petroleum products and NGL.

Our common units trade on the New York Stock Exchange under the symbol PSXP.


How We Evaluate Our Operations
Our management uses a variety of financial and operating metrics to analyze our
performance, including: (1) volumes handled; (2) operating and maintenance
expenses; (3) net income (loss) before net interest expense, income taxes,
depreciation and amortization (EBITDA); (4) adjusted EBITDA; and (5)
distributable cash flow.

Volumes Handled
The amount of revenue we generate primarily depends on the volumes of crude oil,
refined petroleum products and NGL that we handle in our pipeline, terminal,
rail rack, processing, storage and fractionator systems. In addition, our equity
affiliates generate revenue from transporting and terminaling crude oil, refined
petroleum products and NGL. These volumes are primarily affected by the supply
of, and demand for, crude oil, refined petroleum products and NGL in the markets
served directly or indirectly by our assets, as well as the operational status
of the refineries served by our assets. Phillips 66 has committed to minimum
throughput volumes under many of our commercial agreements.

Operating and Maintenance Expenses
Our management seeks to maximize the profitability of our operations by
effectively managing operating and maintenance expenses. These expenses
primarily consist of labor expenses (including contractor services), utility
costs, and repair and maintenance expenses. Operating and maintenance expenses
generally remain relatively stable across broad ranges of throughput volumes but
can fluctuate from period to period depending on the mix of activities,
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particularly maintenance activities, performed during the period. Although we
seek to manage our maintenance expenditures on our facilities to avoid
significant variability in our quarterly cash flows, we balance this approach
with our high standards of safety and environmental stewardship, such that
critical maintenance is regularly performed.

Our operating and maintenance expenses are also affected by volumetric
gains/losses resulting from variances in meter readings and other measurement
methods, as well as volume fluctuations due to pressure and temperature changes.
Under certain commercial agreements with Phillips 66, the value of any crude
oil, refined petroleum product and NGL volumetric gains and losses are
determined by reference to the monthly average reference price for the
applicable commodity. Any gains/losses under these provisions decrease or
increase, respectively, our operating and maintenance expenses in the period in
which they are realized. These contractual volumetric gain/loss provisions could
increase variability in our operating and maintenance expenses.

EBITDA, Adjusted EBITDA and Distributable Cash Flow We define EBITDA as net income (loss) plus net interest expense, income taxes, depreciation and amortization.

Adjusted EBITDA is EBITDA, further adjusted for:

•The proportional share of equity affiliates' net interest expense, income taxes and depreciation and amortization.

•Transaction costs associated with acquisitions.

•Certain other noncash items, including expenses indemnified by Phillips 66.

Distributable cash flow is defined as adjusted EBITDA less (i) equity affiliate distributions less than proportional EBITDA, (ii) maintenance capital expenditures, (iii) net interest expense, (iv) income taxes paid and (v) preferred unit distributions, plus adjustments for deferred revenue impacts.


EBITDA, adjusted EBITDA, and distributable cash flow are not presentations made
in accordance with generally accepted accounting principles in the United States
(GAAP). EBITDA, adjusted EBITDA and distributable cash flow are non-GAAP
supplemental financial measures that management believes external users of our
consolidated financial statements, such as industry analysts, investors, lenders
and rating agencies, may find useful to assess:

•Our operating performance as compared to other publicly traded partnerships in
the midstream energy industry, without regard to historical cost basis or, in
the case of EBITDA and adjusted EBITDA, financing methods.

•The ability of our business to generate sufficient cash to support our decision to make distributions to our unitholders.

•Our ability to incur and service debt and fund capital expenditures.

•The viability of acquisitions and other capital expenditure projects and the returns on investment of various investment opportunities.


The GAAP performance measure most directly comparable to EBITDA and adjusted
EBITDA is net income. The GAAP liquidity measure most directly comparable to
EBITDA and distributable cash flow is net cash provided by operating activities.
These non-GAAP financial measures should not be considered alternatives to GAAP
net income or net cash provided by operating activities. They have important
limitations as analytical tools because they exclude some items that affect net
income and net cash provided by operating activities. Additionally, because
EBITDA, adjusted EBITDA, and distributable cash flow may be defined differently
by other companies in our industry, our definition of these non-GAAP financial
measures may not be comparable to similarly titled measures of other companies,
thereby diminishing their utility.


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Business Environment
We do not own any of the crude oil, refined petroleum products and NGL we handle
and do not engage in the trading of those commodities, and therefore have
limited direct exposure to risks associated with fluctuating commodity prices,
although these risks indirectly influence our activities and results of
operations over the long term.

Our throughput volumes primarily depend on the volume of crude oil processed and
refined petroleum products produced at Phillips 66's owned or operated
refineries with which our assets are integrated. These volumes are primarily
dependent on Phillips 66's refining margins and maintenance schedules. Refining
margins depend on the price of crude oil or other feedstocks and the price of
refined petroleum products. These prices are affected by numerous factors beyond
our or Phillips 66's control, including the domestic and global supply of and
demand for crude oil and refined petroleum products. Throughput volumes of our
equity affiliates primarily depend on upstream drilling activities, refinery
performance and product supply and demand.

The outbreak of Coronavirus Disease 2019 (COVID-19) and its development into a
pandemic continues to result in significant economic disruption globally.
Actions taken by governments to prevent the spread of the disease included
travel and business restrictions, which resulted in substantial decreases in the
demand for many refined petroleum products, particularly gasoline and jet fuel.
The lack of demand for petroleum products has resulted in low crude oil prices
and refining margins. As a result, crude oil producers have shut in high cost
production and refiners have reduced crude oil processing rates. These actions
have reduced throughput volumes on both our and our joint ventures' assets.

The depth and duration of the economic consequences of the COVID-19 pandemic are
currently unknown. However, the near-term outlook for petroleum product demand
remains highly uncertain, prices remain volatile, and margins and volumes remain
challenged. Our customers, including Phillips 66, may continue to have adverse
economic effects in the near term.

While we believe we and the majority of our joint ventures have substantially
mitigated our indirect exposure to commodity price fluctuations through the
minimum volume commitments in commercial agreements during the respective terms
of those agreements, our ability to execute our growth strategy will depend, in
part, on the availability of attractively priced crude oil in the areas served
by our crude oil pipelines and rail racks, demand for refined petroleum products
in the markets served by our refined petroleum product pipelines and terminals,
and the general demand for midstream services, including NGL transportation and
fractionation.


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RESULTS OF OPERATIONS

Unless otherwise indicated, discussion of results for the three and six months
ended June 30, 2020, is based on a comparison with the corresponding periods of
2019.

                                                                       Millions of Dollars
                                                     Three Months Ended                                        Six Months Ended
                                                           June 30                                                  June 30
                                                             2020                2019                 2020             2019
Revenues and Other Income
Operating revenues-related parties                  $         236                 256                  494              552
Operating revenues-third parties                                5                   7                   14               13
Equity in earnings of affiliates                              104                 137                  240              256
Gain from equity interest transfer                             84                   -                   84                -
Other income                                                    1                   1                    2                3
Total revenues and other income                               430                 401                  834              824

Costs and Expenses
Operating and maintenance expenses                             84                  85                  172              224
Depreciation                                                   31                  29                   61               58
General and administrative expenses                            17                  17                   34               35
Taxes other than income taxes                                  10                   9                   21               20
Interest and debt expense                                      28                  27                   57               54
Other expenses                                                  5                   -                    7                -
Total costs and expenses                                      175                 167                  352              391
Income before income taxes                                    255                 234                  482              433
Income tax expense                                              -                   1                    1                2
Net income                                                    255                 233                  481              431

Less: Preferred unitholders' interest in net income             9                   9                   19               19
Less: General partner's interest in net income                  -                  71                    -              140
Limited partners' interest in net income            $         246                 153                  462              272

Net cash provided by operating activities           $         215                 276                  489              481

Adjusted EBITDA                                     $         269                 319                  590              600

Distributable cash flow                             $         218                 254                  487              480


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                                                   Three Months Ended                                          Six Months Ended
                                                        June 30                                                    June 30
                                                            2020                2019                 2020              2019
Wholly Owned Operating Data
Pipelines
Pipeline revenues (millions of dollars)         $             97                 117                  208               226
Pipeline volumes(1) (thousands of barrels
daily)
Crude oil                                                    806               1,000                  873               980
Refined petroleum products and NGL                           825                 995                  846               882
Total                                                      1,631               1,995                1,719             1,862

Average pipeline revenue per barrel (dollars)   $           0.65                0.64                 0.66              0.67

Terminals

Terminal revenues (millions of dollars)         $             33                  39                   76                79
Terminal throughput (thousands of barrels
daily)
Crude oil(2)                                                 380                 456                  420               463
Refined petroleum products                                   690                 809                  719               773
Total                                                      1,070               1,265                1,139             1,236

Average terminaling revenue per barrel
(dollars)                                       $           0.33                0.33                 0.36              0.34

Storage, processing and other revenues
(millions of dollars)                           $            111                 107                  224               260
Total operating revenues (millions of dollars)  $            241                 263                  508               565

Joint Venture Operating Data(3)
Crude oil, refined petroleum products and NGL
(thousands of barrels daily)                                 942                 772                  890               730


(1) Represents the sum of volumes transported through each separately tariffed
pipeline segment.
(2) Bayway and Ferndale rail rack volumes included in crude oil terminals.
(3) Proportional share of total pipeline and terminal volumes of joint ventures
consistent with recognized equity in earnings of affiliates.


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The following tables present reconciliations of EBITDA and adjusted EBITDA to
net income, and EBITDA and distributable cash flow to net cash provided by
operating activities, the most directly comparable GAAP financial measures, for
each of the periods indicated.

                                                                     Millions of Dollars
                                                   Three Months Ended                                        Six Months Ended
                                                         June 30                                                  June 30
                                                           2020                2019                 2020             2019

Reconciliation to Net Income

Net income                                        $         255                 233                  481              431
Plus:
Depreciation                                                 31                  29                   61               58
Net interest expense                                         29                  26                   57               53
Income tax expense                                            -                   1                    1                2
EBITDA                                                      315                 289                  600              544

Proportional share of equity affiliates' net
interest, taxes and depreciation and amortization            38                  29                   73               55
Expenses indemnified or prefunded by Phillips 66              -                   1                    -                1
Transaction costs associated with acquisitions                -                   -                    1                -
Gain from equity interest transfer                          (84)                  -                  (84)               -

Adjusted EBITDA                                             269                 319                  590              600
Plus:
Deferred revenue impacts*†                                    5                  (4)                   7               (4)

Less:

Equity affiliate distributions less than (more
than) proportional EBITDA                                   (10)                 13                   (9)              22
Maintenance capital expenditures†                            28                  12                   43               21
Net interest expense                                         29                  26                   57               53
Preferred unit distributions                                  9                   9                   19               19
Income taxes paid                                             -                   1                    -                1
Distributable cash flow                           $         218                 254                  487              480

*Difference between cash receipts and revenue recognition. †Excludes Merey Sweeny capital reimbursements and turnaround impacts.

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                                                                     Millions of Dollars
                                                   Three Months Ended                                        Six Months Ended
                                                         June 30                                                  June 30
                                                           2020                2019                 2020             2019
Reconciliation to Net Cash Provided by Operating
Activities
Net cash provided by operating activities         $         215                 276                  489              481
Plus:
Net interest expense                                         29                  26                   57               53
Income tax expense                                            -                   1                    1                2
Changes in working capital                                   (3)                (11)                 (15)              23
Undistributed equity earnings                                (5)                 (1)                  (9)              (3)
Gain from equity interest transfer                           84                   -                   84                -
Deferred revenues and other liabilities                       2                   1                    2               (8)
Other                                                        (7)                 (3)                  (9)              (4)
EBITDA                                                      315                 289                  600              544

Proportional share of equity affiliates' net
interest, taxes and depreciation and amortization            38                  29                   73               55
Expenses indemnified or prefunded by Phillips 66              -                   1                    -                1
Transaction costs associated with acquisitions                -                   -                    1                -
Gain from equity interest transfer                          (84)                  -                  (84)               -

Adjusted EBITDA                                             269                 319                  590              600
Plus:
Deferred revenue impacts*†                                    5                  (4)                   7               (4)

Less:

Equity affiliate distributions less than (more
than) proportional EBITDA                                   (10)                 13                   (9)              22
Maintenance capital expenditures†                            28                  12                   43               21
Net interest expense                                         29                  26                   57               53
Preferred unit distributions                                  9                   9                   19               19
Income taxes paid                                             -                   1                    -                1
Distributable cash flow                           $         218                 254                  487              480

*Difference between cash receipts and revenue recognition. †Excludes Merey Sweeny capital reimbursements and turnaround impacts.

Statement of Income Analysis


Operating revenues decreased $22 million, or 8%, and decreased $57 million, or
10%, in the second quarter and six-month period of 2020, respectively. The
decrease in the second quarter was primarily attributable to lower volumes on
wholly owned assets. The decrease in the six-month period was primarily
attributable to the recognition of deferred revenues related to turnaround
activity at Merey Sweeny LLC (Merey Sweeny) in the first quarter of 2019, as
well as lower volumes.

Equity in earnings of affiliates decreased $33 million, or 24%, and decreased
$16 million, or 6%, in the second quarter and six-month period of 2020,
respectively. The decreases in both periods were attributable to lower earnings
primarily due to decreased volumes. These lower earnings were partially offset
by an increase in earnings from Gray Oak Pipeline, LLC, as the pipeline
commenced full operations during the second quarter of 2020. See Note 4-Equity
Investments, in the Notes to Consolidated Financial Statements, for additional
information.

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Gain on equity interest transfer reflects the second-quarter 2020 gain
recognition related to a co-venturer's prior-year acquisition of a 35% interest
in the consolidated holding company that owns an interest in Gray Oak Pipeline,
LLC. See Note 4-Equity Investments, in the Notes to Consolidated Financial
Statements, for additional information.

Operating and maintenance expenses decreased by $52 million, or 23%, in the six-month period of 2020. The decrease was primarily due to turnaround activity at Merey Sweeny in 2019.


CAPITAL RESOURCES AND LIQUIDITY
Significant Sources of Capital
Our sources of liquidity include cash generated from operations, distributions
from our equity affiliates, borrowings from related parties and under our
revolving credit facility, issuances of additional debt and equity securities,
and funding from joint venture partners. We believe that cash generated from
these sources will be sufficient to meet our short-term working capital
requirements, long-term capital expenditure requirements and our quarterly cash
distributions.

Operating Activities
We generated $489 million in cash from operations during the first six months of
2020, an improvement over cash from operations of $481 million for the
corresponding period of 2019. The improvement was primarily driven by lower
deferred revenue impacts and lower operating and maintenance expenses, partly
offset by lower operating distributions from equity affiliates.

Equity Affiliate Operating Distributions
Our operating cash flows are also impacted by distribution decisions made by our
equity affiliates. During the first six months of 2020, cash from operations
included distributions of $249 million from our equity affiliates, compared with
$259 million during the same period of 2019. We cannot control the amount or
timing of future distributions from equity affiliates; therefore, future
distribution payments by these and other equity affiliates are not assured.

ATM Programs
We have authorized an aggregate of $750 million under three $250 million
continuous offerings of common units, or at-the-market (ATM) programs. The first
two programs concluded in June 2018 and December 2019, respectively. We did not
issue any common units under our ATM programs during the three months ended
June 30, 2020. For the six months ended June 30, 2020, on a settlement date
basis, we issued an aggregate of 40,570 common units under our ATM programs,
generating net proceeds of $2 million. For the three and six months ended June
30, 2019, we issued an aggregate of 212,336 and 834,368 common units under our
ATM programs, respectively, generating net proceeds of $10 million and $42
million, respectively. Since inception in June 2016 through June 30, 2020, we
issued an aggregate of 9,487,055 common units under our ATM programs, and
generated net proceeds of $494 million, after broker commissions of $5 million
and other costs of $3 million. The net proceeds from sales under the ATM
programs are used for general partnership purposes, which may include debt
repayment, acquisitions, capital expenditures and additions to working capital.

Revolving Credit Facility
At June 30, 2020, borrowings of $215 million were outstanding and $3 million in
letters of credit had been drawn under our $750 million revolving credit
facility.

Transfer of Equity Interest
Gray Oak Pipeline, LLC was formed to develop and construct the Gray Oak
Pipeline, which transports crude oil from the Permian and Eagle Ford to Texas
Gulf Coast destinations that include Corpus Christi and the Sweeny area,
including the Phillips 66 Sweeny Refinery, as well as access to the Houston
market. We have a consolidated holding company that owns 65% of Gray Oak
Pipeline, LLC. In December 2018, a third party exercised its option to acquire a
35% interest in the holding company. Because the holding company's sole asset
was its ownership interest in Gray Oak Pipeline, LLC, which was considered a
financial asset, and because certain restrictions were placed on the third
party's ability to transfer or sell its interest in the holding company during
the construction of the Gray Oak Pipeline, the legal sale of the 35% interest
did not qualify as a sale under GAAP at that time. The Gray Oak Pipeline
commenced full operations in the second quarter of 2020 and the restrictions
placed on the co-venturer were lifted on June 30, 2020, resulting in the
recognition of the sale under GAAP. Accordingly, at June 30, 2020, the
co-venturer's 35% interest in the holding
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company was recharacterized from a long-term obligation to a noncontrolling
interest on our consolidated balance sheet. In addition, the premium of
$84 million previously paid by the co-venturer in 2019 was recharacterized from
a long-term obligation to a gain in our consolidated statement of income for the
three and six months ended June 30, 2020. For the six months ended June 30,
2020, the co-venturer contributed an aggregate of $61 million to the holding
company to fund its portion of Gray Oak Pipeline, LLC's cash calls. Excluding
the co-venturer's 35% interest in the consolidated holding company, we have an
effective ownership interest of 42.25% in Gray Oak Pipeline, LLC.


Off-Balance Sheet Arrangements


Dakota Access, LLC (Dakota Access) and Energy Transfer Crude Oil Company, LLC
(ETCO)
In March 2019, a wholly owned subsidiary of Dakota Access closed an offering of
$2.5 billion aggregate principal amount of unsecured senior notes, consisting
of:

•$650 million aggregate principal amount of 3.625% Senior Notes due 2022. •$1.0 billion aggregate principal amount of 3.900% Senior Notes due 2024. •$850 million aggregate principal amount of 4.625% Senior Notes due 2029.


Dakota Access and ETCO have guaranteed repayment of the notes.  In addition, we
and our co-venturers in Dakota Access provided a Contingent Equity Contribution
Undertaking (CECU) in conjunction with the notes offering.  Under the CECU, the
co-venturers may be severally required to make proportionate equity
contributions to Dakota Access if there is an unfavorable final judgment in the
ongoing litigation related to an easement granted by the U.S. Army Corps of
Engineers (USACE) to allow the pipeline to be constructed under Lake Oahe in
North Dakota. Contributions may be required if Dakota Access determines that the
issues included in any such final judgment cannot be remediated and Dakota
Access has or is projected to have insufficient funds to satisfy repayment of
the notes. If Dakota Access undertakes remediation to cure issues raised in a
final judgment, contributions may be required if any series of the notes become
due, whether by acceleration or at maturity, during such time, to the extent
Dakota Access has or is projected to have insufficient funds to pay such
amounts. At June 30, 2020, our share of the maximum potential equity
contributions under the CECU was approximately $631 million.

In March 2020, the court presiding over this litigation ordered the USACE to
prepare an Environmental Impact Statement (EIS), and requested additional
information to enable a decision on whether the Dakota Access Pipeline should be
shut down while the EIS is being prepared. On July 6, 2020, the court ordered
the Dakota Access Pipeline to be shut down and emptied of crude oil by August 5,
2020, and that the pipeline should remain shut down pending the preparation of
the EIS by the USACE, which the USACE has indicated is expected to take
approximately 13 months. Dakota Access filed an appeal and a request for a stay
of the order. On July 14, 2020, an appeals court granted a temporary stay of the
lower court's order directing the pipeline to be shut down and emptied of crude
oil. The appeals court has not yet ruled on the motion for a stay during the
appeals process. In addition to the potential obligations under the CECU, if the
pipeline is required to cease operations pending the preparation of the EIS, and
should Dakota Access and ETCO not have sufficient funds to pay ongoing expenses,
we also could be asked to support our share of the ongoing expenses, including
scheduled interest payments on the notes of approximately $25 million annually.

Gray Oak Pipeline, LLCGray Oak Pipeline, LLC has a third-party term loan facility with a borrowing
capacity of $1,379 million, inclusive of accrued interest. Borrowings under the
facility are due on June 3, 2022. We and our co-venturers provided a guarantee
through an equity contribution agreement requiring proportionate equity
contributions to Gray Oak Pipeline, LLC up to the total outstanding loan amount,
plus any additional accrued interest and associated fees, if Gray Oak Pipeline,
LLC defaults on certain of its obligations thereunder. At June 30, 2020, the
term loan facility was fully utilized by Gray Oak Pipeline, LLC and our 42.25%
proportionate exposure under the equity contribution agreement was $583 million.
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Capital Requirements

Liberty Acquisition
In February 2020, we entered into a Purchase and Sale Agreement with Phillips 66
PDI to acquire its 50% interest in the Liberty Pipeline joint venture for $75
million. The purchase price reflected the reimbursement of project costs
incurred by Phillips 66 prior to the effective date of the transaction. The
transaction was funded through a combination of cash on hand and our revolving
credit facility and closed on March 2, 2020. Liberty Pipeline LLC was formed to
develop and construct the Liberty Pipeline system which, upon completion, will
transport crude oil from the Rockies and Bakken production areas to Cushing,
Oklahoma. On March 24, 2020, we and our co-venturer announced we are deferring
the development and construction of the Liberty Pipeline system as a result of
the current challenging business environment.

Capital Expenditures and Investments
Our operations are capital intensive and require investments to expand, upgrade,
maintain or enhance existing operations and to meet environmental and
operational requirements of our wholly owned and joint venture entities. Our
capital requirements consist of maintenance and expansion capital expenditures,
as well as contributions to our joint ventures. Maintenance capital expenditures
are those made to replace partially or fully depreciated assets, to maintain the
existing operating capacity of our assets and to extend their useful lives, or
to maintain existing system volumes and related cash flows. In contrast,
expansion capital expenditures are those made to expand and upgrade our systems
and facilities and to construct or acquire new systems or facilities to grow our
business, including contributions to joint ventures that are using the
contributed funds for such purposes.

Our capital expenditures and investments represent the total spending for our
capital requirements. Our adjusted capital spending is a non-GAAP financial
measure that demonstrates our net share of capital spending, and reflects an
adjustment for the portion of consolidated capital spending funded by certain
joint venture partners. Additionally, the disaggregation of adjusted capital
spending between expansion and maintenance is not a distinction recognized under
GAAP. We disaggregate adjusted capital spending because our partnership
agreement requires that we treat expansion and maintenance capital differently
for certain surplus determinations. Further, we generally fund expansion capital
spending with both operating and financing cash flows and fund maintenance
capital spending with operating cash flows.

Our capital expenditures and investments were:

                                                                            Millions of Dollars
                                                                             Six Months Ended
                                                                                  June 30
                                                                           2020                    2019
Capital expenditures and investments
Capital expenditures and investments                             $          611                     746
Capital expenditures and investments funded by certain joint
venture partners*                                                           (61)                   (422)
Adjusted capital spending                                        $          550                     324

Expansion                                                        $          507                     297
Maintenance                                                                  43                      27

*See Note 4-Equity Investments, in the Notes to Consolidated Financial Statements, for additional information.

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Our capital expenditures and investments for the first six months of 2020 were
primarily associated with the following activities:

•Contributions to Gray Oak Pipeline, LLC to complete construction of the pipeline system.

•Contributions to Liberty Pipeline LLC for its committed purchases.

•Construction activities related to a new ethane pipeline from the Clemens Caverns to petrochemical facilities in Gregory, Texas, near Corpus Christi.


•Contributions to South Texas Gateway Terminal for construction activities
related to the marine export terminal that will connect to the Gray Oak Pipeline
in Corpus Christi, Texas.

•Construction activities related to increasing capacity on the Sweeny to Pasadena refined petroleum products pipeline.

•Construction activities related to increasing storage capacity at Clemens Caverns.

•Spending associated with other return, reliability and maintenance projects.


Cash Distributions
On July 21, 2020, the Board of Directors of our General Partner declared a
quarterly cash distribution of $0.875 per common unit which, excluding
distributions to holders of our preferred units, will result in a total
distribution of $200 million attributable to the second quarter of 2020. This
distribution is payable on August 13, 2020, to unitholders of record as of
July 31, 2020.

The holders of our preferred units are entitled to receive cumulative quarterly
distributions equal to $0.678375 per preferred unit. Preferred unitholders will
receive $9 million of distributions attributable to the second quarter of 2020.
This distribution is payable on August 13, 2020, to preferred unitholders of
record as of July 31, 2020.

Debt Repayment
On April 1, 2020, we repaid the $25 million tranche of tax-exempt bonds due
April 2020. The two remaining tranches, totaling $50 million, mature in April
2021.

Contingencies

From time to time, lawsuits involving a variety of claims that arise in the
ordinary course of business are filed against us. We also may be required to
remove or mitigate the effects on the environment of the placement, storage,
disposal or release of certain chemical, mineral and petroleum substances at
various sites. We regularly assess the need for accounting recognition or
disclosure of these contingencies. In the case of all known contingencies (other
than those related to income taxes), we accrue a liability when the loss is
probable and the amount is reasonably estimable. If a range of amounts can be
reasonably estimated and no amount within the range is a better estimate than
any other amount, then the minimum of the range is accrued. We do not reduce
these liabilities for potential insurance or third-party recoveries. If
applicable, we accrue receivables for probable insurance or other third-party
recoveries. In the case of income-tax-related contingencies, we use a cumulative
probability-weighted loss accrual in cases where sustaining a tax position is
less than certain.

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  T    able of     Conten    ts
Based on currently available information, we believe it is remote that future
costs related to known contingent liability exposures will exceed current
accruals by an amount that would have a material adverse impact on our
consolidated financial statements. As we learn new facts concerning
contingencies, we reassess our position both with respect to accrued liabilities
and other potential exposures. Estimates particularly sensitive to future
changes include any contingent liabilities recorded for environmental
remediation, tax and legal matters. Estimated future environmental remediation
costs are subject to change due to such factors as the uncertain magnitude of
cleanup costs, the unknown time and extent of such remedial actions that may be
required, and the determination of our liability in proportion to that of other
potentially responsible parties. Estimated future costs related to tax and legal
matters are subject to change as events evolve and as additional information
becomes available during the administrative and litigation processes.

Regulatory Matters
Our interstate common carrier crude oil and refined petroleum products pipeline
operations are subject to rate regulation by the Federal Energy Regulatory
Commission under the Interstate Commerce Act and Energy Policy Act of 1992, and
certain of our pipeline systems providing intrastate service are subject to rate
regulation by applicable state authorities under their respective laws and
regulations. Our pipeline, rail rack and terminal operations are also subject to
safety regulations adopted by the Department of Transportation, as well as to
state regulations.

Legal and Tax Matters
Under our amended omnibus agreement, Phillips 66 provides certain services for
our benefit, including legal and tax support services, and we pay an operational
and administrative support fee for these services. Phillips 66's legal and tax
organizations apply their knowledge, experience and professional judgment to the
specific characteristics of our cases and uncertain tax positions. Phillips 66's
legal organization employs a litigation management process to manage and monitor
the legal proceedings against us. The process facilitates the early evaluation
and quantification of potential exposures in individual cases and enables
tracking of those cases that have been scheduled for trial and/or mediation.
Based on professional judgment and experience in using these litigation
management tools and available information about current developments in all our
cases, Phillips 66's legal organization regularly assesses the adequacy of
current accruals and recommends if adjustment of existing accruals, or
establishment of new accruals, is required. As of June 30, 2020, and
December 31, 2019, we did not have any material accrued contingent liabilities
associated with litigation matters.

Environmental

We are subject to extensive federal, state and local environmental laws and
regulations. These requirements, which frequently change, regulate the discharge
of materials into the environment or otherwise relate to protection of the
environment. Compliance with these laws and regulations may require us to
remediate environmental damage from any discharge of petroleum or chemical
substances from our facilities or require us to install additional pollution
control equipment at or on our facilities. Our failure to comply with these or
any other environmental or safety-related regulations could result in the
assessment of administrative, civil, or criminal penalties, the imposition of
investigatory and remedial liabilities, and the issuance of governmental orders
that may subject us to additional operational constraints. Future expenditures
may be required to comply with the Federal Clean Air Act and other federal,
state and local requirements in respect of our various sites, including our
pipelines and storage assets. The impact of legislative and regulatory
developments, if enacted or adopted, could result in increased compliance costs
and additional operating restrictions on our business, each of which could have
an adverse impact on our financial position, results of operations and
liquidity.

As with all costs, if these expenditures are not ultimately recovered in the
tariffs and other fees we receive for our services, our operating results will
be adversely affected. We believe that substantially all similarly situated
parties and holders of comparable assets must comply with similar environmental
laws and regulations. However, the specific impact on each may vary depending on
a number of factors, including, but not limited to, the age and location of its
operating facilities.

We accrue for environmental remediation activities when the responsibility to
remediate is probable and the amount of associated costs can be reasonably
estimated. As environmental remediation matters proceed toward ultimate
resolution or as additional remediation obligations arise, charges in excess of
those previously accrued may be required. New or expanded environmental
requirements, which could increase our environmental costs, may arise in the
future. We believe we are in substantial compliance with all legal obligations
regarding the environment and have established the environmental accruals that
are currently required; however, it is not possible to predict all of the
ultimate costs of
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  T    able of     Conten    ts
compliance, including remediation costs that may be incurred and penalties that
may be imposed, because not all of the costs are fixed or presently determinable
(even under existing legislation) and the costs may be affected by future
legislation or regulations.

Indemnification and Excluded Liabilities
Under our amended omnibus agreement and pursuant to the terms of various
agreements under which we acquired assets from Phillips 66, Phillips 66 will
indemnify us, or assume responsibility, for certain environmental liabilities,
tax liabilities, litigation and any other liabilities attributable to the
ownership or operation of the assets contributed to us and that arose prior to
the effective date of each acquisition. These indemnifications and exclusions
from liability have, in some cases, time limits and deductibles. When Phillips
66 performs under any of these indemnifications or exclusions from liability, we
recognize non-cash expenses and associated non-cash capital contributions from
our General Partner, as these are considered liabilities paid for by a principal
unitholder.


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           CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This report includes forward-looking statements. You can normally identify our
forward-looking statements by the words "anticipate," "estimate," "believe,"
"budget," "continue," "could," "intend," "may," "plan," "potential," "predict,"
"seek," "should," "will," "would," "expect," "objective," "projection,"
"forecast," "goal," "guidance," "outlook," "effort," "target" and similar
expressions, although the absence of these words does not mean that a statement
is not forward-looking.

We based the forward-looking statements on our current expectations, estimates
and projections about us, our operations, the operations of our joint ventures
and the entities in which we own equity interests, as well as the industries in
which we and they operate in general. We caution you these statements are not
guarantees of future performance as they involve assumptions that, while made in
good faith, may prove to be incorrect, and involve risks and uncertainties we
cannot predict. In addition, we based many of these forward-looking statements
on assumptions about future events that may prove to be inaccurate. Accordingly,
our actual outcomes and results may differ materially from what we have
expressed or forecast in the forward-looking statements. Any differences could
result from a variety of factors, including the following:

•General domestic and international economic and political developments
including: armed hostilities; expropriation of assets; changes in governmental
policies relating to crude oil, refined petroleum products or NGL pricing,
regulation or taxation; actions taken by the members of OPEC affecting the
production and pricing of crude oil; and other political, economic or diplomatic
developments, including those caused by public health issues, outbreaks of
diseases and pandemics, including the COVID-19 pandemic.
•The continued ability of Phillips 66 to satisfy its obligations under our
commercial and other agreements.
•Reductions in the volume of crude oil, refined petroleum products and NGL we
transport, fractionate, process, terminal and store.
•Changes to the tariff rates with respect to volumes that we transport through
our regulated assets, which rates are subject to review and possible adjustment
by federal and state regulators.
•Changes in revenue we realize under the loss allowance provisions of our
regulated tariffs resulting from changes in underlying commodity prices.
•Fluctuations in the prices and demand for crude oil, refined petroleum products
and NGL.
•Changes in global economic conditions and the effects of a global economic
downturn on the business of Phillips 66 and the business of its suppliers,
customers, business partners and credit lenders.
•Potential liabilities associated with the risks and operational hazards
inherent in transporting, fractionating, processing, terminaling and storing
crude oil, refined petroleum products and NGL.
•Curtailment of operations due to severe weather disruption or natural
disasters; riots, strikes, lockouts or other industrial disturbances; or failure
of information technology systems due to various causes, including unauthorized
access or attack.
•Accidents or other unscheduled shutdowns affecting our pipelines, processing,
fractionating, terminaling, and storage facilities or equipment, or those of our
suppliers or customers.
•The inability to obtain or maintain permits in a timely manner, if at all,
including those necessary for capital projects, or the revocation or
modification of existing permits.
•The inability to comply with government regulations or make capital
expenditures required to maintain compliance.
•The failure to complete construction of announced and future capital projects
in a timely manner and any cost overruns associated with such projects.
•Our ability to successfully execute our growth strategies, whether through
organic growth or acquisitions.
•The operation, financing and distribution decisions of our joint ventures,
which we may not control.
•Costs or liabilities associated with federal, state, and local laws and
regulations relating to environmental protection and safety, including spills,
releases and pipeline integrity.
•Costs associated with compliance with evolving environmental laws and
regulations on climate change.
•Costs associated with compliance with safety regulations, including pipeline
integrity management program testing and related repairs.
•Changes in the cost or availability of third-party vessels, pipelines, railcars
and other means of delivering and transporting crude oil, refined petroleum
products and NGL.
•Direct or indirect effects on our business resulting from actual or threatened
terrorist incidents or acts of war.
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  T    able of     Conten    ts
•Our ability to comply with the terms of our credit facility, indebtedness and
other financing arrangements, which, if accelerated, we may not be able to
repay.
•Our ability to incur additional indebtedness or our ability to obtain financing
on terms that we deem acceptable, including the refinancing of our current
obligations; higher interest rates and costs of financing would increase our
expenses.
•Changes in tax, environmental and other laws and regulations.
•The factors generally described in "Item 1A. Risk Factors" in our 2019 Annual
Report on Form 10-K filed with the SEC on February 21, 2020, and in Item 1A. of
Part II of this report.
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T able of Conten ts

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