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Transmontaigne Partners L.P. (NYSE:TLP)

Q4 2012 Earnings Call

March 12, 2013 11:00 am ET

Executives

Charles L. Dunlap - Chief Executive Officer of TransMontaigne GP LLC, Chief Executive Officer of TransMontaigne Inc and President of TransMontaigne Inc

Frederick W. Boutin - Chief Financial Officer of Transmontaigne Gp L L C - Gp, Executive Vice President of Transmontaigne Gp L L C - Gp and Treasurer of Transmontaigne Gp L L C - Gp

Analysts

Erik M. Keener - River Road Asset Management, LLC

Selman Akyol - Stifel, Nicolaus & Co., Inc., Research Division

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the TransMontaigne Partners Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Mr. Charles Dunlap, Chief Executive Officer. Please go ahead.

Charles L. Dunlap

Thank you, Jeff. Good morning, and welcome, everyone, and thanks for joining this conference call to review our accomplishments for 2012. As in the past, joining me on the call will be Fred Boutin, our Chief Financial Officer; and Greg Pound, our Chief Operating Officer.

2012 was another strong year for our base operations. I'd like to share with you some of our more significant highlights. We increased our distributable cash flow from $53 million to $58 million and paid distributions for the year totaling $2.55 per unit, an increase of $0.07 over 2011. We maintained our distributable cash flow cushion for the year of $16 million, which represents a 38% cushion.

Our annual revenues increased from $152.3 million to $156.2 million while holding our operating costs and capitalized maintenance expenditures almost flat. These revenues and distributable cash flow were records for the company.

We commenced commercial operations of our 1 million barrels of crude oil storage at Cushing, Oklahoma, which will generate revenues of about $4.5 million per year.

On December 20, 2012, we acquired our 42.5% interest in the BOSTCO terminal project for approximately $79 million from Kinder Morgan Energy Partners. We funded this acquisition utilizing additional borrowings under our credit facility, which we amended in connection with the repurchase of this BOSTCO interest. The amendment increased the maximum borrowing line of credit under the facility from $250 million to $350 million. And upon completion of the project and assuming we maintain 42.5% interest, we expect our total payments for the project to be approximately $183 million, which includes our December 20 payment of $79 million.

BOSTCO is a new black oil terminal facility under construction in the Houston Ship Channel, and it's designed for the handling of residual fuel, feedstocks, distillates and other black oils. Initial phase of BOSTCO -- of this BOSTCO project involves construction of 50 storage tanks with approximately 6.1 million barrels of storage capacity and an estimated -- kind of an estimated cost of $425 million.

The BOSTCO facility docks will benefit from one of the deepest vessel drafts and one of the nearest access points in the Houston Ship Channel and will be well-positioned to capitalize on the increasing exports of petroleum-related products. The BOSTCO facility is scheduled to be in commercial operation in the fourth quarter of 2013. And completion of the full 6.1 million barrels of storage capacity and related infrastructure is scheduled for early 2014.

Additionally, we are evaluating a bolt-on project, which will add 900,000 barrels of distillate storage to this project, and we expect construction to commence this year. Morgan Stanley Commodities Group has recently advised us that they intend to extend TSAs for both Florida and the Southeast regions, and we expect to finalize these negotiations within the next 60 to 90 days.

Looking back on 2012, it was certainly a year which began with disappointment having to exit the BOSTCO project, but it ended on a very high note with our entry -- re-entry back into the project. This is a project that is a significant development for TLP and its unitholders and puts us on a growth trajectory for the next several years.

So with that, I will turn the mic over to Fred, and he'll go into more detail regarding our operations during the year. Fred?

Frederick W. Boutin

Distributable cash flow for our year ended December 31, 2012, was $58.1 million compared to $53.1 million for 2011. While 2011's operating income and net earnings was slightly higher than 2012's, the decrease was due to a $9.6 million gain we recognized in 2011 on the formation of the Frontera joint venture. We recognized no such gains in 2012, and we do not consider such gains in our computation of distributable cash flow.

Other items affecting our results of operations include increased revenue of approximately $3.9 million. We benefited from higher revenues in all our regions except Brownsville, and the only reason we recorded lower revenues in our Brownsville region was because during the second quarter of 2011, we contributed a significant portion of our Brownsville assets to the Frontera joint venture. Since we do not consolidate Frontera, we no longer record those revenues in our financials. Including Frontera's revenues, along with the revenue from our remaining assets in Brownsville, there was an increase in revenue in 2012. So essentially, all our regions had increased revenue in 2012 over 2011.

Operationally, some of the changes that impacted our revenue were: 2012 was our first full year for the new tanks in Collins compared to a partial year in 2011. Similarly, we had a full year of results in 2012 from the Pensacola terminal, which we acquired -- had a full year in 2012 in the Pensacola terminal that we acquired in 2011.

In mid-2012, we began receiving revenue from the new crude tanks in Cushing. We had a variety of contract renewals. We had increased volumes on our Diamondback pipeline, which transports LPG into Mexico. Management fee income was higher, primarily due to our management of the Frontera joint venture. These positives were partially offset by lower product gain income.

Direct operating costs increased only slightly year-over-year from $64.5 million to $66 million. Our capitalized maintenance expenditures were $7.8 million compared to $7.8 million last year. So there was no change. We did experience our highest direct operating costs of the year in the fourth quarter. Hopefully, this does not come as a surprise to anyone today as we did specifically state this as our expectation in our September 10-Q third quarter earnings release, and we stated it on our third quarter earnings call. We generally experience higher direct operating costs in our fourth quarter as it is the time of the year that is most conducive to performing repairs and maintenance.

I would like to call your attention to the disclosure we have on our press release regarding our firmly committed revenue. In 2012, approximately 75% of our total revenue was firmly committed, and approximately 88% of that firmly committed revenue was attributable to contracts with remaining terms of 1 year or more.

Moving now to a brief discussion of our liquidity. Our credit facility, which matures on March 9, 2016, provides for a maximum borrowing line of credit of $350 million. At December 31, we had an outstanding balance of $184 million and a leverage ratio of 2.6x our consolidated EBITDA. At December 31, we had approved investments and expansion projects with remaining expenditures of approximately $105 million, which includes the balance of our expected Phase 1 investments in BOSTCO.

Attachment B to the press release includes our computation of the distributable cash flow that we generated during the quarter and the year. We use this as a measure of how we are performing relative to our quarterly distributions.

During the year, we generated $58.1 million of distributable cash flow, which was an increase of $4.9 million over the prior year. During the quarter, we generated $10.2 million of distributable cash flow, which was a decrease of $3.4 million compared to the fourth quarter of last year. As I just explained, this decrease is attributable to the timing of our repairs and maintenance expenditures being more weighted to the fourth quarter of this year. As previously mentioned, our direct operating cost increased year-over-year by only a slight amount. During 2012, we generated distributable cash flow in excess of our distributions of approximately $15 million or 38%.

And with that, Jeff, at this point, we are ready for any questions that folks may have.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from the line of Erik Keener with River Road Asset Management.

Erik M. Keener - River Road Asset Management, LLC

One quick question on revenues, if I might. Overall, they came in very much as expected, but there were some puts and takes in there. Can you talk about individual drivers by segment, why Brownsville was a little bit better and why maybe Gulf Coast and the Southeast were a little bit lighter in terms of growth than they were year-to-date run rate? Is that all acquisitions, new assets that impact? Or is there something else going on there?

Frederick W. Boutin

Yes, I can shift that a little bit. Just going through the regions, Gulf Coast, for instance, we had the Pensacola terminal full year there. That was probably the driver there. In the Midwest, the driver were the tanks in Cushing, which came online in August. And in Brownsville, really, the driver was Frontera, which was a -- generated the decrease. Beyond that, there were not a lot of meaningful individual items, just a collection of things.

Erik M. Keener - River Road Asset Management, LLC

Okay. But on Brownsville, it looks like revenue picked up pretty significantly from the run rate through the first 3 quarters of the year, so was there a positive impact somewhere in Q4?

Frederick W. Boutin

Yes. We had -- well, yes. The other thing in Brownsville was the LPG pipeline. So we had additional volumes going through that pipeline. I think I mentioned that, the pipeline that goes down into Mexico. So we had higher -- which LPG shipped more in the colder months.

Erik M. Keener - River Road Asset Management, LLC

Okay. And Gulf Coast would have slowed down a little bit in Q4 because of the timing of Pensacola last year. Right?

Frederick W. Boutin

Well, Pensacola was in the -- we did that, I think, around April 1 or so, March of 2011. And so that would have been in...

Erik M. Keener - River Road Asset Management, LLC

Would have been in both Q4s?

Frederick W. Boutin

Yes. So the -- it's probably product gains if you're looking at quarter-over-quarter. I would think that would be the other impact. Then in the River, there was -- we had some contract -- various contract renewals, fewer out-of-service credits, some volumes, little higher volumes at Baton Rouge. And in the Southeast, we had the Collins/Purvis facility that had come online in July of 2011, and we had fewer out-of-service -- so there's a lot of things going on.

Erik M. Keener - River Road Asset Management, LLC

And then on River, perfect segue, you guys had talked in the past about potentially retrofitting some of the assets along the River to take any crude that comes out of the Utica Shale. Any updates on that?

Charles L. Dunlap

No, we're continuing to look at opportunities. The whole shale plays in -- near some of those River terminals are still evolving. I don't think the Utica is going to work here in the short term, but Arch City would be a candidate that we're looking at perhaps transloading facilities to handle some of the crude that can then move by barge down to the refining complex -- complexes on the River. There may be other opportunities in Mississippi. There are some new shale plays there. So we're looking at those, but it's still early stage.

Erik M. Keener - River Road Asset Management, LLC

So more of a long-term growth opportunity?

Charles L. Dunlap

Yes.

Erik M. Keener - River Road Asset Management, LLC

Okay, like those 2. On BOSTCO, really excited that you guys are involved in the project again and hoping to get a little bit more detail to help me model out and expect what's going to come in the future. Can you give us any idea of what the project looks like beyond Phase 1? Maybe how many phases are there, what the total investment would be, what the time line is?

Charles L. Dunlap

The first phase, as I mentioned, is about $425 million. That's the 6.1 million barrels of black oil storage. There's a bolt-on phase that we're looking at right now that I believe will be approved shortly, and construction could -- will commence this year. That's the additional 900,000 barrels of distillate storage. And that'll have a very attractive rate of return to it because, keep in mind, in the first phase, we've built out a lot of infrastructure for these later phases. So the return on investment for the first phase is not as robust as what we're going to see on these subsequent phases. So okay, you have the 900,000 barrels as the second -- next phase, and then there's another potential 3 million barrels of storage that could be a combination of distillate and black oil or maybe all distillate. But we're just starting to evaluate that. That has not been permitted yet, so we're still in the early stages. But the important point is, that is another phase that's going to have an attractive rate of return, and we're getting a lot of interest from the customer base regarding those later phases. In fact, the 900,000 barrels of distillate storage is pretty well committed.

Erik M. Keener - River Road Asset Management, LLC

Excellent. That's great to hear. Can you talk a little bit more about the economics, and you started to hint at this, of Phase 1? Maybe what the project IRR is? Target revenues?

Charles L. Dunlap

No, we don't give that kind of guidance. But I can tell you, the magnitude of the first phase will increase our asset base by a little over 30% and will have an accretive impact on distributable cash flow.

Frederick W. Boutin

And then certainly, the future phases will be much higher rates of return because they're just bolt-on projects.

Erik M. Keener - River Road Asset Management, LLC

Okay. Does the first phase look to be more dilutive or accretive in terms of margin potential for TransMontaigne overall?

Frederick W. Boutin

Well, it's definitely accretive -- should be accretive to the distribution.

Erik M. Keener - River Road Asset Management, LLC

Okay. Too early to say on margins, how that falls down the income statement?

Frederick W. Boutin

Well -- I mean, as far as falling down the income statement, it's an investment. So you're not going to see very much on the income statement other than the equity pick up that we have.

Erik M. Keener - River Road Asset Management, LLC

Okay. A little hit in that line. All right. On leverage, you guys are funding the project from the balance sheet right now. How quickly can you pay debt down? What's target leverage? And is there a point at which a secondary would be an attractive option?

Frederick W. Boutin

Well, the -- it's pretty easy to see where BOSTCO would take our debt to about $280 million. And you can calculate our EBITDA, for 2012, was around $71 million. That doesn't include anything from BOSTCO. So even without any EBITDA from BOSTCO, our leverage would be under 4x. And certainly, we're going to have EBITDA coming from BOSTCO. So certainly, our leverage is very much under control even with all the spend on BOSTCO. So we will -- yes, there may come a time when doing an equity offering makes sense, but we'll make that decision whenever we do it. We don't feel rushed at all to go out and do any kind of financing because we've got all the wherewithal that we need to do the project today without any additional financing.

Erik M. Keener - River Road Asset Management, LLC

Okay. One more if I may on BOSTCO. You talked a little bit about how there will be some EBITDA contribution. Can you talk a little bit about how construction will be phased in terms of the investment, the quarters and how we should see that debt build up versus EBITDA come on to the balance sheet and then how the investment will be depreciated?

Frederick W. Boutin

Well, yes. There will be -- the depreciation will take place at BOSTCO, and it'll flow through into the earnings that we pick up. But if you look in our press release, in the, let's say, the distributable cash flow Attachment B, you see a couple of line items there, one, where we actually back out the earnings or loss from unconsolidated affiliates. Well, there's nothing in there today from BOSTCO. But when there is earnings from BOSTCO, we will back that out in computing our distributable cash flow, and we will include the distributions that we actually receive from BOSTCO. So what you're seeing right there is related to Frontera. But in the future, that's how the results from BOSTCO will flow through to our distributable cash flow. So you'll be able to see it. And it'll be broken out between BOSTCO and Frontera so you'll be able to drill right into the results from BOSTCO. And as far as timing, like any project, you've got to spend the money before you start earning income from it. And so -- I mean, very roughly, most the money will be spent throughout the rest of this year and probably into the first quarter of next year, and there will -- the tanks will come online over -- there will be a few tanks come online before the end of the year, and then there'll be most of the tanks come online into the first half of next year.

Erik M. Keener - River Road Asset Management, LLC

Any rough split on that? 25-75? Or...

Frederick W. Boutin

You're probably going to have about a couple million barrels come on-stream in the fourth quarter of this year.

Erik M. Keener - River Road Asset Management, LLC

So 2/3-1/3? Or 1/3-2/3 rather?

Frederick W. Boutin

More like 20%, 25% this year, and then the balance will be fully completed and operational by the end of -- or the beginning of the second quarter. I think April is our target date for it to be fully online in 2014.

Erik M. Keener - River Road Asset Management, LLC

Okay. One last one for me. You guys talked about the one distillate bolt-on project for BOSTCO. And in the press release, you start to talk about other construction projects approved outside or in total. Is there anything outside of BOSTCO that's been approved for new construction like the Cushing outsource [ph] that you guys did last year?

Frederick W. Boutin

Yes. Very, very nominal. So nothing that would really show up in your model.

Operator

[Operator Instructions] You have a question from the line of Selman Akyol with Stifel.

Selman Akyol - Stifel, Nicolaus & Co., Inc., Research Division

So with the extension from Morgan Stanley, I guess you guys said you're going to be reaching in the next 60, 90 days with them, as well as seeing the additional investments at BOSTCO. Can we presume there's been some thawing on their part for approving additional projects? Or is there any read into that at all?

Charles L. Dunlap

No, no. We'll -- they'll evaluate each project on a case-by-case basis. I wouldn't read anything more into that.

Selman Akyol - Stifel, Nicolaus & Co., Inc., Research Division

Okay. When we think about this in terms of BOSTCO again, how big can you see Phase 2, Phase 3 being in terms of additional dollars? Or is there any way to put bookends around it?

Charles L. Dunlap

Phase 2, which is the 900,000 barrels of distillate storage, is probably going to come in around $55 million of capital.

Frederick W. Boutin

That's at the BOSTCO level.

Charles L. Dunlap

That's at the BOSTCO level. Right. So presumably, we'd want to have 42.5% of that. And the later phases really haven't been engineered yet, but if you're talking about 3 million barrels of additional, you're looking at, at least a couple of hundred, maybe $250 million of investment, at ballpark -- at the BOSTCO level.

Selman Akyol - Stifel, Nicolaus & Co., Inc., Research Division

I appreciate that insight. As we think about the cash that this project is going to throw off, would you just imagine that they would retain in order to fund the next -- to fund Phase 2? Or will they fully distribute and then you'll have to make contributions?

Charles L. Dunlap

Our partner is Kinder Morgan, and they want to see the distributable.

Frederick W. Boutin

Just as much as we do.

Charles L. Dunlap

As much as we do. Yes. [indiscernible].

Frederick W. Boutin

So I think it'll be easy to -- I think that's the right way to do it. And we'll -- in essence, it's a lot like we're doing our own project. We fund the capital and we get the distribution.

Selman Akyol - Stifel, Nicolaus & Co., Inc., Research Division

Fair enough. And then maintenance capital for 2013?

Frederick W. Boutin

Well, I mean, it's $7.8 million or $7.9 million -- $7.8 million for the last 2 years. Nothing really dramatic's changed in our system, so we haven't provided guidance. But I think you could take a pretty good guess.

Operator

Ladies and gentlemen, this conference will be available for replay after 1 p.m. today until March 19 at midnight. You may access the AT&T executive playback service at any time by dialing 1 (800) 475-6701 and entering the access code 284246. International participants may dial 1 (320) 365-3844. Ladies and gentlemen, that does conclude the conference for today. Thank you for your participation and for using AT&T Executive TeleConference Service. You may now disconnect.

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