Tesoro Logistics' Management Discusses Q4 2012 Results - Earnings Call Transcript

Feb.12.13 | About: Tesoro Logistics (TLLP)

Tesoro Logistics LP (NYSE:TLLP)

Q4 2012 Earnings Call

February 12, 2013 08:30 am ET

Executives

Phil Anderson – President

Rick Weyen – Vice President of Operations

Chris Castro – Manager, Investor Relations

Analysts

[Samar Wolbacher] – Raymond James

Brian Zarahn – Barclays Capital

TJ Schultz – RBC Capital

Sharon Lui – Wells Fargo

Bernie Colson – Global Hunter Securities

Operator

Good day ladies and gentlemen, and welcome to the Tesoro Q4 2012 and Full Year Results. My name’s Stephanie and I will be your conference operator for today. (Operator instructions.) As a reminder, this conference is being recorded for replay purposes. And now I’d like to turn the call over to Mr. Chris Castro, Investor Relations Manager. Please proceed, sir.

Chris Castro

Thank you, Stephanie. Good morning everyone and welcome to today’s conference call to discuss our Q4 2012 and full year earnings. Joining me today are Phil Anderson, President, and Rick Weyen, Vice President of Operations. Gregg Goff, our Chairman and CEO and Scott Spendlove our CFO are travelling and not able to participate on this morning’s call.

We issued a press release yesterday announcing our results. That release, along with additional financial and operational information and reconciliations for non-GAAP financial measures is available on our website at www.tesorologistics.com. Please refer to the forward-looking statements disclosure in the earnings press release which says statements made during this call that refer to management’s expectations and/or future predictions are forward-looking statements intended to be covered by the Safe Harbor provisions of the Securities Act and which there are many factors that could cause results to differ from our expectations.

I want to remind everyone that our Q4 financials include historical results of the Anacortes Rail Facility including periods in which we didn’t own the asset. We have provided additional information in our release that is comparable on a period-to-period basis focusing on results of operations of TLLP assets following the acquisition. For purposes of this call we will focus on the results that include only TLLP’s ownership of the asset and exclude predecessor results. With that I’ll turn the call over to Phil.

Phil Anderson

Thanks, Chris. Good morning everyone and thanks for joining us on the call today. You have our earnings release and I’ll go over some of the details of the results in a moment, but I’d like to start with some recent highlights.

On January 23 we announced a cash distribution for Q4 of $0.4725 per limited partner unit or $1.89 per unit on an annualized basis. This represents a 4% increase over the quarterly distribution paid in November of 2012 and a 30% increase over Q4 2011. This distribution was the result of another strong quarter for Tesoro Logistics as we continued to make significant progress on our growth strategy.

From an organic growth perspective we expanded our proprietary trucking fleet and continued to grow volumes on our High Plains System. For Q4 we had distributable cash flow of $19.6 million and EBITDA of $25.7 million. This includes $1.2 million of transaction costs related to the acquisition of the Long Beach, Anacortes and Northwest Products System assets. Distributable cash flow increased $5.4 million or 27% versus Q3 results.

From an acquisition perspective, we closed the purchase of the Anacortes Rail Facility and announced the acquisition of Chevron’s Northwest Product System. In addition to being immediately accretive, the Northwest Product System brings us significant third-party revenue and further diversifies our asset base. This transaction is currently under review by the FTC and we expect to close it this quarter.

We’ve also made significant progress putting in place the necessary funding for our 2013 growth plans. On October 5th, we executed our first follow-on equity offering, selling over 4.2 million units, netting the partnership approximately $170 million. On January 4th of this year we completed the expansion of our revolving credit facility to $500 million, allowing for additional financial flexibility. We are currently undrawn against this facility. On January 14th we closed our second follow-on equity offering, selling approximately 9.7 million, netting about $392 million. Our focus going forward is to close the Northwest Product System acquisition and acquire the first tranche of the BP Carson Logistics assets.

Turning to the details of Q4, revenues in the crude oil gathering segment were up from the prior quarter due to increased volumes in our High Plains business in both the pipeline and trucking operations. The higher volume primarily reflected incremental demand for movements in the [Energy’s] COLT Rail terminal and also includes the first third-party shipments on the High Plains System.

We expect to continue to increase our volumes on the pipeline and remain focused on the objective to reach 100,000 barrels per day of throughput this year. We’re working with several producers, regional takeaway pipelines and rail facility operators to further optimize the flow of the pipeline and provide additional outlets for the System.

Our trucking business realized record volumes and our proprietary volumes continue to grow as we deploy our new company-owned trucks. For Q4 we hauled approximately one-third of the volume on proprietary trucks and expect that to reach two-thirds of the volume later this year.

Revenues in the terminalling, transportation and service segment were up $6.3 million sequentially due to a full quarter’s contribution of the Long Beach assets and a half-quarter contribution from the Anacortes Rail Facility. The Long Beach asset contributed about $4.5 million of EBITDA during the quarter and provided about 100,000 barrels per day of volume. Throughput during the quarter was negatively impacted by extended downtime at LA area refineries but has rebounded this quarter. The Anacortes Rail Facility contributed about $2.4 million of EBITDA during the quarter. Volumes in that facility have performed nicely and we’re very happy with the performance of that asset.

Operating expenses before depreciation were sequentially higher in the quarter by $1.2 million and that’s primarily related to these new assets. Total capital expenditures in the quarter were $13.5 million. This includes $9.7 million of expansion capital and $3.8 million of maintenance capital, of which $2.6 million was reimbursed. Looking forward, we expect total capital spending in Q1 to be approximately $15 million as we move into the final phase on multiple growth projects. This includes maintenance spending of $6 million, of which we expect $3 million to be reimbursed.

To conclude, we’re working to complete the acquisition of Chevron’s Northwest Product System in Q1. We expect that acquisition to add approximately $33 million of annual EBITDA and require about $4 million of annual maintenance capital. We continue to work closely with Tesoro on the integration planning efforts around the Carson acquisition. We expect to be offered the assets in a couple of transactions with the stated goal of completing the first transaction contemporaneous with Tesoro’s closing sometime before mid-2013 subject to regulatory approval.

With the proceeds of the equity offering that we completed in January and the expansion of the revolver we believe we are in a strong financial position to close on the Northwest Product System acquisition and the first half of the Carson Logistics assets while maintaining an appropriate balance of debt and equity on the balance sheet.

TLLP begins 2013 with a significantly enhanced portfolio of base assets that we believe will generate annual EBITDA of about $140 million annually. With the Northwest Product System acquisition and expected opportunity to purchase the Carson Logistics assets we expect to further diversify the base and generate new opportunities to optimize assets and grow the business organically in the future.

With that, thank you again for joining us on our call and I’ll turn it over to Stephanie for questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions.) The first question comes from the line of [Samar Wolbacher] from Raymond James. Please go ahead, sir, your line is open.

[Samar Wolbacher] – Raymond James

Good morning, guys. Just trying to get a handle on your various expansions and growth projects. Last quarter you guys provided a nice chart outlining the ongoing growth projects and their progress. Has anything changed this time around in terms of timing, earnings expectations?

Phil Anderson

No. All of the projects that we put in that schedule last quarter still stand and we still have the same expectations as we did last quarter on those.

[Samar Wolbacher] – Raymond James

Okay. And any additional growth projects that you guys are looking at?

Phil Anderson

We continue to look at quite a few growth projects. The Bakken area presents some significant opportunities and I think later this year we’ll have some additional color on additional growth activities up there. We also continue to work with Tesoro on advantaged crude opportunities to move advantaged mid-continent and Canadian crudes into Tesoro’s West Coast opportunities and we believe that will generate some significant growth opportunities in the future.

[Samar Wolbacher] – Raymond James

Okay, great. Thanks, that’s very helpful. Just thinking beyond, the growth opportunities beyond the Carson assets, can you give us a sense of what your thought process is on the dropdowns of the remaining ROFO assets still left at the parent level, including the terminals on the West Coast and the pipelines and terminals in Alaska?

Phil Anderson

Sure. You know, if you look at the defined ROFO assets from the original IPO there due remain significant assets at our parent company available for dropdown. We expect to work on those assets really, actually work goes on behind the scenes today to get those assets prepared for future dropdown. My estimate is that over the next couple years post- the BP acquisitions we’ll bring those remaining assets into TLLP as well as there are other assets potentially in the Tesoro portfolio that we would look at during that time.

[Samar Wolbacher] – Raymond James

Okay, great. Is there any way you can quantify just the amount of assets that are still left for dropdown?

Phil Anderson

You know, we do not have EBITDA for those assets as they remain integrated into Tesoro’s downstream business and don’t presently have a revenue stream associated with them. That’s analysis that continues to be ongoing. We’ve given some PP&E value on those assets historically but that’s really not a very good proxy for their value in a disaggregated business format. So it’s a long way of saying, Samar, that we really don’t have an estimate of what those generate.

[Samar Wolbacher] – Raymond James

Okay, understood. I appreciate the color, thank you.

Operator

And the next question comes from the line of Brian Zarahn of Barclays. Please go ahead, your line is open.

Brian Zarahn – Barclays Capital

Good morning, Phil. Can you maybe provide a little more color on the potential opportunity to bring more discounted crude to Tesoro’s West Coast refineries, sort of what would be… I know it’s in early innings but what type of assets do you think you might either build or buy to help bring the discounted crude to the West Coast?

Phil Anderson

Yeah, that work continues very much so at the Tesoro corporate level. I think most of the ways being looked at to move crude to the West Coast likely involve rail terminal assets, and we do participate with Tesoro on those activities. There are not significant rail facilities on the West Coast outside of our Anacortes facility to bring actual unit train-type cargos in and so that would likely generate some significant organic projects.

Brian Zarahn – Barclays Capital

And in terms of, do you think it would be unit trains directly to Northern or Southern California or a combination of rail and marine transportation?

Phil Anderson

I think ultimately it’s probably an all of the above approach, Brian.

Brian Zarahn – Barclays Capital

Okay. On the Carson dropdown, you mentioned you said you’d expect the first one to take place with the closing. Can you talk a little about roughly what size the transactions could be? It seems like they’ll likely be bigger than your previous dropdowns but can you give maybe a little color as to roughly the size of the transactions and how much? I think you said maybe half by the end of the year but maybe a little more color on how you expect the pace to proceed.

Phil Anderson

Sure, Brian. As Tesoro has indicated they believe there’s roughly about $1 billion of logistics assets in the Carson integrated chain there, and that includes your traditional marketing terminals as well as some static storage facilities, a products pipeline as well as marine terminals. We expect to be offered the marketing terminals and the static storage terminals first. That value is likely a little more than half of that $1 billion, and then likely the second half of those assets we would look to pull those in we’ve said within 12 months of the initial transaction. I think we’d like to do it a little sooner if possible.

Brian Zarahn – Barclays Capital

Okay. Any sort of rough feel for what the maintenance CAPEX will be on all of the Carson Logistics assets?

Phil Anderson

Not at this point. It’s probably on a percentage basis maybe a little higher than the current percentage on our assets.

Brian Zarahn – Barclays Capital

Okay. Final one from me on the Northwest Products System, can you talk maybe a little about any synergies or any potential growth opportunities to increase volumes on the System?

Phil Anderson

Yeah, for us our primary synergy is to bring some additional Tesoro volumes onto that System through the northern leg of that from Pasco to Spokane that are currently in a third-party terminal. There’s a little bit of operational synergies as well, just as we integrate the assets into our overall system.

Brian Zarahn – Barclays Capital

Okay, thank you Phil.

Operator

Thank you. The next question comes from the line of TJ Schultz of RBC Capital. Please go ahead, your line is open.

TJ Schultz – RBC Capital

Hey guys, good morning. I guess just a couple questions on the Bakken. First, on the High Plains volume it sounds like some of the interconnects are up. I guess as we think about the mix of volumes on that system between Mandan and COLT and elsewhere I’m just trying to connect with that with your plans to hit 100,000 barrels a day. Just kind of any updated thoughts on volumes or mix that we should be thinking about when that would get there in 2013?

Phil Anderson

Sure, and I’ve got Rick Weyen here, our Vice President of Operations, to add additional color. In general what we’re seeing is significant growth of production volumes in the southern area of the Bakken and coming into our system at the Johnson’s Corner area and then flowing to Mandan at that point. We think there is significant demand to move that crude north on our system and that leg, from Johnson’s Corner north presently flows south. And so we are looking at opportunities to reverse that segment of the system and deliver barrels either into Enbridge or COLT or a couple other rail facilities that exist on the north side of the lake there in North Dakota.

Rick Weyen

This is Rick, just to add a little color, we are in negotiations with several people both on adding new barrels to the system as well as tying in to a couple of different rail facilities. So we are going to be starting to make some northbound movements in Q1 on a limited basis and we plan to expand that through the year as we increase origins and destinations.

TJ Schultz – RBC Capital

Okay, thanks. And then on trucking I know you previously mentioned that in Q4 there was kind of a delay in some of the proprietary trucking volumes that had an impact. Has any of that kind of carried over into Q1 versus where your initial expectations were that kind of backed your guidance for 2013? And then maybe just more generally if you could discuss some of the hurdles you’re facing to kind of increase those volumes.

Phil Anderson

Yeah, the primary hurdle is receiving the trucks. Just about anything with a tank, whether it’s a truck or a rail car or a static tank sitting on the ground is difficult to get these days, or challenging. We’ve seen delays in receiving those trucks. We received all of the complement we were expecting in Q4. They came in later in the quarter than we expected. It takes another sort of six to ten weeks to outfit these trucks for duty in North Dakota so we are in the process of still deploying them, although our plans for Q1 are not materially different than what we had planned to do this year and that continues to ramp up pretty close to our expectations there. So our plans on a full-year basis as they relate to trucking remain on track and it is a source of some additional opportunities potentially later in the year that we don’t have in our plans.

TJ Schultz – RBC Capital

Okay great, thanks.

Operator

Thank you. The next question comes from the line of Sharon Lui from Wells Fargo. Please go ahead, your line is open.

Sharon Lui – Wells Fargo

Hi, good morning. Just looking at the crude oil gathering segment and the average revenue per barrel for the pipeline and trucking, it looks like I guess the rates were down sequentially? Maybe if you can just talk about the variance and how we should think about the rates going forward given the mix of volumes.

Phil Anderson

Sure. Sharon, that impact that I mentioned with TJ about volumes coming in more on the southern end of the system drove a smaller or shorter average haul on the system. So even though volumes did go up about 8000 barrels a day we did offset that impact with a lower average tariff on the system. Our expectation is that the tariffs should not diminish significantly from where we’re at now although the volume should continue to grow from that southern leg now moving north really, and generate incremental revenue over and above the base at that point.

Sharon Lui – Wells Fargo

Okay, that’s helpful. And the same thing on the trucking side?

Phil Anderson

Yeah, the trucking is not a big decrease. If you look back a couple quarters I think you see there’s some natural variation on that segment. The 284 we had during the quarter is the second highest rate we’ve had and I think it’s just a slightly shorter average haul.

Sharon Lui – Wells Fargo

Okay, that’s helpful. And then I guess looking at the first half of the year, any potential impact on the partnership from I guess the downtime at Anacortes or at Wilmington?

Phil Anderson

Not at this point. As we mentioned the Long Beach asset has been running at volumes more in line with our expectations so the downtime that Tesoro is having at its Wilmington refinery is baked into our numbers. Those volumes, like I said, continue to move appropriately. As far as the downtime at Anacortes, Tesoro seeks to maximize the amount of Bakken crude it brings into that asset and so we continue to see demand to move volumes into that rail facility throughout the turnaround.

Sharon Lui – Wells Fargo

Okay. And are the volumes still around 40,000?

Phil Anderson

They’re actually a bit higher than that – I would say more in line with around 45,000 barrels a day which was our expectation there.

Sharon Lui – Wells Fargo

Great. And then I guess on the acquisition front, Tesoro’s focus has always been on I guess its existing geographic footprint. Would that preclude the partnership from pursuing assets like the [Huff] package in the Northeast? What are your thoughts around that?

Phil Anderson

We always keep our eyes open to opportunities wherever they are, although with our parent being focused on the Western US we believe our best opportunities are in the Western US as well. So I would definitely say that our focus is the Western US and at the point in time we believe there’s an appropriate value to be captured from a step out transaction we’ll look at it but that’s not our focus.

Sharon Lui – Wells Fargo

Okay great, thank you so much.

Operator

Thank you. And the next question comes from Bernie Colson from Global Hunter. Please go ahead, your line is open.

Bernie Colson – Global Hunter Securities

Good morning. I was hoping you could provide some color on how up in the Bakken, on the gathering side you’ve obviously got more kind of pad drilling going on up there and how you see that growing. Is there some, are you going to be able to take advantage of that? Is that going to eat into trucking volumes? Just any general color you can provide on how that’s developing would be helpful.

Phil Anderson

Sure. You know, we do see these multi-pads going in and so you do have significant volumes coming in in a more focused location. Simultaneous to that there is a significant amount of pressure on a state-wide basis to reduce the traffic amongst the trucks and such of which the crude trucks are a significant part. We are working with many producers to work on plans to either hook up their installed gathering systems or in some cases we are looking at building gathering systems for producers up in that area.

The big driver for that will be once we get these destinations north of the river opened up for transport on the system, but we do see significant demand from that. Ultimately when you take a truck off the road and replace it with gathering assets our margin on the pipeline is probably significantly better than our average trucking margin so we think that’s a winner for TLLP in the long term.

Bernie Colson – Global Hunter Securities

Okay, that’s great, thanks. I was hoping you could just give kind of what the major puts and takes were from Q3 to Q4 given that we’re looking at about $24 million EBITDA in Q3, up about $2 million in Q4 despite the fact that I think about $7 million to $8 million of EBITDA should have been added from Long Beach/Los Angeles and the Anacortes acquisitions. I know there was that $1.2 million acquisition cost bucket in there but are there any other I guess big items that you could outline for us?

Phil Anderson

Sure. Well let’s, our EBITDA for Q4 was $25.7 million – that did include $1.2 million of acquisition costs, and that was up about $5.4 million over Q3 which was $20.3 million. The major ins and outs during the quarter – the crude oil gathering segment was up about $1 million and that reflected primarily the higher volumes on the system as well as the increase in the proprietary trucking which drives down our O&M costs on a per barrel basis. And then in the terminalling and storage segment we were up about $5.3 million which primarily reflected a full quarter impact of Long Beach versus a half quarter that was in Q3; and then a half quarter impact from Anacortes which we closed on during mid-quarter. So within that segment, that $5.3 million almost entirely reflects the net timing impact of those two terminals.

Bernie Colson – Global Hunter Securities

Okay, alright. Thank you.

Operator

Thank you. (Operator instructions.) And we have no further questions. Ladies and gentlemen, that concludes your conference call for today. You may now disconnect.

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