Mark Buscovich - Manager FP&A & IR
Anne-Marie Ainsworth - President & CEO
Bo McCall - SVP of Commercial & Business Development
Ken Owen - VP & CFO
John Tysseland - Citi Group
Jerren Holder - Barclays Capital
Cory Garcia - Raymond James
Jeremy Tonet - JPMorgan
Oiltanking Partners (OILT) Q4 2012 Earnings Conference Call March 7, 2013 10:00 AM ET
Welcome to the Oiltanking Partners Fourth Quarter Earnings Conference Call. (Operator Instructions). This conference is being recorded today March 7, 2013. I would now like to turn the conference over to Mark Buscovich, Manager FP&A and IR. Please go ahead sir.
Thank you operator. Good morning everyone and welcome to today’s conference call to discuss Oiltanking Partners fourth quarter and full year 2012 results. After the markets closed yesterday we issued a press release announcing our financial results which is available on our website at oiltankingpartners.com. You can also access a replay of today’s call from the investor relation section of the partnerships website or be recorded replay until March 14.
Information on how to access the replay was provided in yesterday’s earning release. Information reported on the call speaks only as of today March 7, 2013 and therefore you’re advised that any time sensitive information may no longer be accurate as of the time of any replay.
Before I turn the call over to Anne, I would like to remind you that certain statements made by management during the conference call will include the use of statements that are forward-looking in nature, and the statements made during this call that refer to management's expectations or future predictions are forward-looking statements and reflect management's current expectations, opinions, views, or beliefs with respect to future events, and are based on what we believe are reasonable assumptions. No assurance can be given, however, that these events will occur; and therefore, many factors could cause results to differ from management's expectations and actual results may differ materially from those projected in forward-looking statements. Material factors that could cause our actual results to differ from our projected results are described in our filings with the SEC. We expressly disclaim any obligations to update or revise any forward-looking statements made during this call and request that you refer to the forward-looking statements made in our earnings press release for additional information. With that, I'll turn the call over to Anne-Marie Ainsworth, President and Chief Executive Officer of the Partnerships (inaudible).
Good morning everyone. We appreciate you joining us on the conference call today. Also with me this morning is Bo McCall, Senior Vice President of Commercial and Business Development and Ken Owen, Vice President and Chief Financial Officer as well as additional members of management. I’ll begin by sharing with you how pleased I’m to have joined such an exceptional team here at Oiltanking Partners. Carlin Conner and this group have done an outstanding job building our storage, terminaling and pipeline assets developing a top tier customer base as well as anticipating and responding to the extra-ordinary growth opportunities that have emerged over the last few years. I have inherited a very strong foundation and I’m excited to be in a position to help steer the partnership during the next chapter of growth. The fourth quarter of 2012 was a record quarter for the partnership, the strong results were driven by growth in our storage fee revenues and higher throughput volumes of liquidities liquified petroleum gas or LPG exports. In fact during the fourth quarter we averaged a record 823,000 barrels per day of product through our facilities via our advantaged waterfront, pipeline and rail connectivity and truck handling facilities.
And the opportunities for expansion are continuing to grow, the flow of crude oil and natural gas liquids to the Gulf Coast region is continuing to and my expectation is that volumes will remain high as domestic oil and gas producers maintain robust levels of activity in many of the developing shale plays and as Canadian production makes its way to the Gulf Coast. These increasing volumes are continuing to drive the need for crude oil and product storage by our customer base which includes most of the major refiners in the Gulf Coast area.
Over the next several years we’re expecting to continue to see an increase in crude volumes to be a pipeline, rail car and truck and a continued growth in demand for product exports. We’re responding to this demand by constructing additional crude oil storage capacity and pipeline. In the fourth quarter of 2013 we placed into service our new pipeline projects and three 275,000 barrel tanks, a fourth tank will go into service during the second quarter. As we previously announced Appelt Phase I is expected to be operational by the end of this year and Appelt Phase II is on track and is expected to be in service by the end of 2014. Phase II is similar in size to Phase I and the volume is also contracted with high quality customers on a long term basis.
The first two Phases of Appelt once complete will bring total partnership storage capacity to over 25 million barrels by the end of 2014. Yesterday we announced a $44 million project we’re very excited about, Bo will speak in more detail about the project but I’ll mention that the (inaudible) construction project and plans to significantly increase our ability to export LPGs and our terminal on the Houston Ship Channel has been in the works for some time now. We’re very pleased to be moving forward and expanding the partnerships, long term relationship with enterprise product partners, due to our key role in the logistical supply chain of crude oil refined petroleum products, chemical feedstock’s and LPGs, we’re continuing to see demand for our services beyond our announced expansion plans. As mentioned we’ve additional land for storage, tank expansion, a world class deep water dock system with expansion capabilities as well as excellent pipeline connectivity to the major refiners and third party pipelines in the Gulf Coast area.
We see our connectivity and our superior deep-water dock system as a competitive advantage as the export market for LPG and refine products continues to grow due to increased production of domestic natural gas, crude oil and natural gas liquids. We continue to pursue opportunities that could lead to additional expansion project announcements in 2013 and we believe that our strong balance sheet and financial liquidity positions us well to take advantage of these opportunities.
I’ll now turn the call over to Bo to discuss our growth, projects and prospects in more detail. Bo?
Thank you Anne, we’re hard at work continuing to execute on our crude expansion projects that we announced over the past year in the Houston Market, As Anne, mentioned we have placed in a service our new crude pipelines and three of the four tanks consisting of 825,000 barrels for online.
We expect the four tanks to be operational during the second quarter, with all four tanks online the Houston facility will be earning fees on an additional 1.1 million barrels of storage for most of 2013 at attractive rates. In addition and as previously announced we have another 6.5 million barrels of crude storage expansion projects underway on our Appelt property near our Houston terminals. The first phase of that expansion is well underway consisting of approximately 3.2 million barrels of crude storage capacity. Phase I is on time and on budget. This phase will come online during the course of 2013 with a first three tanks or approximately 1.2 million barrels potentially coming online in mid-summer with a balance of the tanks coming online by the end of 2013.
As of today the (inaudible) foundations on all 10 tanks and Appelt Phase 1 are complete. The first three tanks are near completion with construction starting this month on their internal routes. The remaining tanks are burning stages of construction and are progressing very well and tracking to our expectations. This capacity is fully subscribed by high quality diverse customer base with an averaged fix fee contract life of 6.3 years all with our customary CPI escalators.
I’m also pleased to announce that construction on Appelt Phase 2 began this month as Anne, mentioned the $70 million project near in our existing property represents an additional 3.3 million barrels of new crude oil storage. It is expected to be placed in the service during the third and fourth quarter of 2014 and is contracted to excellent customers.
During the fourth quarter we also purchased additional land nearby our Appelt project that we’re working to commercialize with potential customers. We believe the land can support approximately 3 million barrels at additional storage capacity. In Houston the new third party pipelines that we have connected to are coming online slowly delivering crude from Eagle Ford and (inaudible). To support these new crude these new crude volumes we have seen increased demand for domestic crude barge and vessel movements out of our facilities and we expect that trend to grow.
Also we announced yesterday in expansion of our relationship with enterprise products partners that extends into 20-26 whereby we plan to significantly increase our ability to export LPGs in our terminal on the Houston ship channel. As a part of this agreement we will construct a new vessel dock and add infrastructure to existing docs with a capability of handling significantly more LPG vessels at multiple docks. The $44 million expansion is expected to be completed by the end of 2014, but more importantly we anticipate that export volumes and associated revenues could increase prior to that date based upon the new agreement with enterprise.
We have had a successful long term relationship with enterprise at our Houston terminal for over 20 years and we believe that both parties that kept pace with the export demand by continuing to add necessary infrastructure to become the preferred LPG export facility throughout the Gulf Coast.
In conjunction with enterprises most recent expansion at our facility we will increase the loaning capacity for a low ethane propane from a current rate of almost 4 million barrels per month to approximately 7.5 million barrels per month. This dock expansion project will provide incremental loading capacity and position us well to capitalize on the robust international demand for LPGs.
In Beaumont we’re working on exciting opportunities there as well, as of the end of 2012 we had begun a new service for an existing customer whereby we’re exporting refined products. We anticipate that the base line for this business will remain attractive for the foreseeable future and can see some upside if demand continues to be strong. In addition we’re looking at a variety of commercial projects in Beaumont and are starting to see potential support for crude projects, the potential demand for an additional deep-water dock and potential support for additional product export projects.
In support of these crude projects of Beaumont we’re also working with local refiners to potentially develop a crude oil distribution system with connectivity to these plants as well as the new and existing in-pound pipelines into the Beaumont/Port Arthur area. With light sweet crude volumes growing in the Houston market the Beaumont market is starting to see deliveries of the price advantage crudes. We’re also pursuing opportunities to expand our current (inaudible) system and local pipeline infrastructure. With that I will turn it over to Ken.
Thank you Bob, as a remainder today we will discuss certain non-GAAP financial measures like distributable cash flow and adjusted EBITDA which are defined and reconciled in our earnings release. For the fourth quarter of 2012 our net income was 15.2 million or $0.38 per unit compared to 11.9 million or $0.30 per unit for the fourth quarter of 2011. The partnerships strong results for the fourth quarter of 2012 were primarily led by higher revenues from higher storage and throughput volumes and due to higher storage service fees compared to the same period of 2011.
Revenues increased approximately 5.2 million or 17.9% to 34.1 million during the fourth quarter mainly due to additional revenues from new storage capacity that was placed in the service in December 2011 and April 2012 as well as due to an escalation at storage fees resulting in an increase in storage service fee revenue of 2.9 million. Additionally the fourth quarter benefited from higher throughput fee revenue of 1.9 million largely attributable to higher LPG exports during the 2012 period and an increased ancillary service fee revenue of 0.4 million.
Looking at our revenue by service category we achieved a 14% increase in storage service fees, a 30% increase in throughput fees and a 22% increase in ancillary service fees in the fourth quarter of 2012 compared to the prior year period.
Adjusted EBITDA increased 25.1% to 19.8 million for the fourth quarter 2012 compared to 15.9 million for the fourth quarter of last year. The increase was primarily due to the higher throughput volumes and higher storage service in ancillary service fees partially offset by higher operating and SG&A expenses. For 2012 our net income was 62.6 million or a $1.57 per unit compared to 62.4 million in 2011. We would like to remind you that the 2011 period included an income tax benefit of 27 million as a result of the elimination of deferred tax accounts related to the conversion to a non-taxable entity in connection with our IPO. Net income for 2011 excluding this benefit and other gains and losses was 41.3 million.
For 2012 revenues increased 15.4% or 18.1 million to a 135.5 million due to higher storage service revenues at 9.8 million attributable to additional revenues from the new crude storage capacity as well as an escalation in storage fees. Throughput fee revenues were higher by 5.1 million primarily due to higher LPG exports in 2012, ancillary service fee revenues also increased by 3.2 million approximately 2.1 million of which relates to revenues from pipeline related construction projects for customers that were completed and realized in 2012.
On January 22nd, we declared a quarterly cash distribution of $0.39 per unit or a $1.56 on an annualized basis which represented a 14.7% increase during the fourth quarter of 2011 distribution. We’re also product of that fact that the fourth quarter distribution was our 5th consecutive quarterly increase since going public in the third quarter of 2011.
Distributable cash flow for the fourth quarter of 2012 provided a distribution coverage ratio of 1.14 times the amount needed for as to fund the distribution payable to both the general and limited partners for the quarter. For the full year of 2012 our distribution coverage ratio was 1.2 times. During 2012 we have spent over a 146 million on our capital expenditures projects. For 2013 we currently anticipate spending to between a $135 million and $145 million including the portion of capital we expected to spend in 2013 on our recently dock project.
As of December 31st, 2012 we had borrowings of 6 million under our $150 million revolving line of credit with total debt outstanding of approximately a 150 million at year end of partnership had a debt to EBITDA ratio of 1.9 times. Due to our relatively underleveraged financial position we continue to enter the phase of funding as previously announced 2013 and ’14 projects primarily with long term borrowings from oil banking finance.
We remain excited about the substantial organic opportunities in front of us and we remain focused on maintaining a partnership with the investment merits that we have discussed since going public. We value being a traditional looking MLP with a fee based business underpinned with long term contracts with high quality customers and little to no direct commodity price exposure. We’re very pleased with our operational and financial performance since going public in 2011 and continue to believe we’re well positioned both strategically and financially to capitalize on both organic and strategic opportunities for the benefit for the partnerships of unit holders.
With that we would be happy to take your questions. Operator?
(Operator Instructions). Our first question is from the line of John Tysseland with Citi Group. Please go ahead.
John Tysseland - Citi Group
Now NEPD (ph) is up and the export expansion is online how should we expect that impact to partnerships results, does, can take a fee on (inaudible) basis as the export volumes crush your dock or is the expansion a flat monthly fee. Any sense of what impact on cash will that be for the first quarter too?
Yes John this is Bo, the basic structure of the relationship really is not changing that much, we will continue to get a throughout fee on all barrels going across our dock. As it was announced in the press release the existing system can do about 4 million barrels a month, the expansion will get up to 7.5. So we will continue to see throughput fees on all those barrels. The one change in the amendment of the contract is we will have a margin sharing component which will be incremental revenue to us and really can’t disclose or discuss much about how that’s calculated but we there is a potential to participate in a margin share with enterprise.
John Tysseland - Citi Group
And is there any way you can kind of give us an idea. There is a lot going on in terms of what came online in the first quarter and fourth quarter. Any sense on the quarter by quarter basis where you expect numbers to go in the first quarter, I think it's a fairly jump but just wanted to know if you were willing to give any guidance there?
Well their facility is coming online kind as we speak so one I point you to in our 10K we disclosed our customers that represent over 10% and enterprise is one of those. So if you look at, in 2012 we earned a little over $17 million in revenue, I’m just talking about revenue from enterprise and prior year was around 14 million. So that job in 2012 over 2011 was really attributable to additional volumes coming through the system under the current refrigeration capacity they have.
Now that the new refrigeration capacity is coming online as we see right now we would anticipate that increasing but giving any particular guidance on a quarter-over-quarter basis we’re not really prepared to give that kind of guidance at this point.
John Tysseland - Citi Group
And then also looking at the amount of crude price going up coast and your location on the Houston Ship Channel and I guess even in addition to the new pipeline connectivity that you guys have, are there any opportunities for Oiltanking to pursue any other types of export facilities such as condensate splitter and if so what needs to happen for such a project to move forward and what can be timing there?
The volumes coming into the Houston market right now are coming in slow, there have been announced other crude splitter projects in Houston ship channel, there is also splitter capacity in the Beaumont region but we’re looking at an analyze and that possibility as volumes continue to flow in. In terms of exporting today we do have customers that have contracted (inaudible) vessels. They are taking barrels to other domestic ports and also to Canadian ports as well and we expect that activity to continue to increase as well.
Thank you. The next question is from the line of Jerren Holder with Barclays Capital. Please go ahead.
Jerren Holder - Barclays Capital
Looking at your storage revenues in the fourth quarter, it appears that the average monthly fee decrease from the previous quarters is in here. Is there any specific reason for that?
No specific reason. In fact when we look at the new contracts well we don’t disclose what the precise storage fee is. Our new contracts that we’re signing up for the new tanks that have just come into service as well as the tanks that we’re contracting for Appelt Phase 1 and Phase 2 are at higher rates. You really need to look at the storage rates, when you look at just the storage fee revenue, when you’re trying to back into your rate looking at an annual basis because we do have some we have some revenues from some customers that transfer to throughput fee revenues of their in excess of their minimums, their monthly minimums commitments and so you can have a little bit of noise when you look at just a quarter over quarter period depending on how if they have reached their minimum. So I would look at it on an annualized basis.
Jerren Holder - Barclays Capital
Got it and with regards to the LPG dock expansion, are there minimum commitments in that agreement as well with like I said from additional volumes, can you move through a dock or no?
Repeat again please.
Jerren Holder - Barclays Capital
With regards to the LPG dock expansion, are there minimum commitments in the agreements meaning the additional LPG being exported and what not through?
No we’re just adding additional capacity to allow enterprise customers to come in and based on the ongoing trend and growing market for exports we expect that to continue.
Yeah the relationship with enterprise on our propane and butane or the LPG import and export doesn’t have any particular minimum throughput commitments.
Thank you. The next question is from the line of Cory Garcia with Raymond James. Please go ahead.
Cory Garcia - Raymond James
Actually just a sort of extended a bit more on the LPG expansion news and really more of a clarification enterprise came up this morning and sort of noted the potential opportunity it's taking its propane exports up to 10 million barrels per month. Just curious if that was in reference to your Houston complex or is that something else they were referring to?
No we expect that to be in regard to the Houston complex, as Ken mentioned their system is coming online right now so these are 7.5 million barrels a month target is kind of what is contemplated and it could be some upside there I mean likewise we continue to reserve existing land for any potential expansions they may have in the future and obviously if they hit 10 million barrels a month I’m assuming they will have to make some additional upstream expenditures to get to that number.
Cory Garcia - Raymond James
Okay absolutely and then also there is then quite a bit of talk recently regarding the railing of heavy Canadians down at the Gulf Coast and particularly in the sort of the Port Arthur market and I’m wondering if you can provide some color and how perhaps you guys are looking to leverage that trend and what opportunities could be out there for Oiltanking.
I mean it's a trend that’s going on right now; we’re talking to multiple customers and entities about that. I think that the Canadian barrels depending upon what happens with the approval of the XL project, the TransCanada XL project. There is some concern about giving incremental barrels down and also there are some land lock barrels but barrels that aren’t connected in Canada to some of the existing collection points and we’re talking to customers about that’s where we’re looking that projects both in Houston and in Beaumont for that as well.
Cory Garcia - Raymond James
Okay great and I guess one sort of final question and recognizing that you guys are obviously almost entirely fee based and don’t necessarily trade around in the commodity market in Houston with all the likes in crude that we have seen come into the market in recent months, has there been a weakness in sort of the spot pricing there relative to what the typical relationship has been relative to seaborne imports.
Well we don’t really track that, we don’t take any commodity exposure so I really couldn’t comment on that.
(Operator Instructions). The next question is from the line of Jeremy Tonet with JPMorgan. Please go ahead.
Jeremy Tonet – JPMorgan
All my questions have been asked this morning but I was wondering if you guys can provide a bit more color with regards to how much expansion capabilities do you have as far as the Houston ship channel as far as docks on the Houston ship channel there, could you provide any color on that?
Well in this project we’re going to build an additional deep-water dock we also have the capacity to add an additional deep-water dock and I think probably three or four barge docks.
Jeremy if I could comment not only in the area that Bo was just referring towards the question that you asked but we’re excited about all of our growth opportunities going forward. We look at four key avenues, we look at the organic growth, we look at JV opportunities, third party strategic acquisitions and then drop down opportunities as well. In the organic area we have an our current list is exceeds over $300 million and once we’re successfully commercialized these projects will be completed over the next three years. We also have some interesting JV opportunities, we’re looking in the, we’re having discussions in the rail and pipeline and terminal assets and generally they do have accrued storage and a transportation focus but not all of them. One key thing to point is that these projects could be potentially developed outside of the partnership if persuade but we’re still very excited about the prospect nonetheless and then the third party acquisitions although we have been participating at some auction process maybe it has not really been too successful but we do tend to look at some strategic opportunities for growth for growing our adjusting footprint and for our operational synergies as well that can facilitate increasing volumes through our facilities and then regarding drop down opportunities we will evaluate potential drop downs as assets become both MLP qualifying and MLP quality and when they are offered to the partnership.
We don’t have any drop down growth opportunity currently in plans for 2013 but we do see 2014 as a potential.
Thank you. There are no further questions at this time. I’ll turn it back over to Ms. Ainsworth for any closing comments.
My thanks to each of you for joining us on the call today. I appreciate your questions and the answers in the partnerships and we do look forward to our next quarterly update with you. Thank you very much and have a good day.
Ladies and gentlemen this does conclude the conference call. If you like to listen to a replay of today’s conference please dial 303-590-3030 and entering the access code of 4592997. Thank you for your participation. You may now disconnect.
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