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Transmontaigne Partners L.P. (NYSE:TLP)

Q2 2013 Earnings Call

August 06, 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

Gabriel P. Moreen - BofA Merrill Lynch, Research Division

Erik M. Keener - River Road Asset Management, LLC

Brian Brungardt - Stifel, Nicolaus & Co., Inc., Research Division

Operator

Ladies and gentlemen, thank you for standing by. 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 your host, Mr. Charles Dunlap. Please go ahead, sir.

Charles L. Dunlap

Thank you, Kiersten. Good morning, and welcome, everyone, to the TransMontaigne second quarter earnings call. Joining me again on this call, as in the past, will be Fred Boutin, our Chief Financial Officer; and Greg Pound, our Chief Operating Officer.

I would also like to point out that the statements that are going to be made during this call might include partnership's expectations and predictions that should be considered forward-looking statements and are covered by the Safe Harbor provisions of the securities act.

Moving to our second quarter results. I would point out that we met all of our budgeted targets for the quarter. And while this quarter's results were not as strong as last year's quarter, this is largely due to the extraordinary payments of $2.2 million that we received from KPMG related to the recovery of audit fees resulting from the independence issue. Fred will give you more details regarding our specific revenues and expenses for the quarter.

There have been significant developments both during and after the second quarter and I'd like to share those with you.

On June 15, we announced the 900,000-barrel expansion of BOSTCO, the Morgan Stanley Capitals Group -- Commodities Group, will be leasing 6 150,000-barrel distillate tanks and we expect to have these tanks in service by the fourth quarter of 2014. And in fact, we actually broke ground this week on this phase of the project. With this addition, BOSTCO, the BOSTCO Terminal project, will be up to 7.1 million barrels of capacity, with an estimated construction cost of about $485 million, making our share $209 million of the capital expenditure. The first phase is on schedule to commence partial operations this October.

On July 16, we entered into amendments with our terminaling services agreements with Morgan Stanley Commodities Group covering our Southeast, Florida and Midwest terminals. Our Southeast terminals were extended to July 31, 2015 with rolling evergreen renewals, unless terminated upon 24 months' notice. In the case of Florida, we also extended to January 31, 2015, with rolling evergreen renewals, unless terminated upon 18 months' notice.

Our Florida tanks relating to the bunker business and our Midwest terminals at Mount Vernon, Missouri and Rogers, Arkansas will not be renewed and will terminate on May 31, 2014. We are currently working with several third parties with regard to the leasing of these facilities and we will have more information on that as the year progresses.

On July 15, we increased our dividend distribution to $0.65 per unit. And on July 24, we issued 1,450,000 common units at an offering price of $43.82. And on July 30, the underwriters exercised their over-allotment option for an additional 217,500 units, netting TLP $69 million after all expenses. These proceeds were used to pay up standing borrowing under our credit facility and the offering was strongly oversubscribed with significant institutional purchasers. I would also like to point out that our distribution cushion for the quarter came in at 11%, and this is after the $1.3 million that was paid in distributions in connection with the offering of the 1,667,500 units.

We continue to generate new revenues from third-party customers at Brownsville and our continuing negotiations with other third-parties regarding capacity in our Florida, River and Midwest markets. This is all part of our continuing strategy to diversify our tenant mix.

So with that, I will turn it over to Fred to take you through the second quarter financial details.

Frederick W. Boutin

Thanks, Chuck. Distributable cash flow for our quarter and 6 months ended June 30, 2013, was $13.5 million and $31.3 million, respectively. This compares to $16.5 million and $32.5 million for the 3 and 6 months ended June 30 last year. The significant items affecting our results of operations this quarter, compared to the year-ago quarter, include the following: As we mentioned on our last call last quarter, during the year-ago quarter, we received a reimbursement from our previous auditors of approximately $2.2 million. This benefit was recognized in the second quarter of last year as a reduction of direct G&A quarter.

Wages and benefits increased approximately $0.6 million, primarily as a result of higher healthcare costs. Product gain income was approximately $0.5 million less than in the year-ago quarter. This varies with the volume of product, as well as the price of refined products.

Maintenance capital expenditures were about $0.6 million higher. As we mentioned in the past, our repairs and maintenance and maintenance capital expenditures do not occur ratably throughout the year. And most of the increase in maintenance CapEx this quarter was a result of some rather unusual IT security upgrades.

There is also a decrease in our revenue at our River terminals of approximately $1.3 million, which we previously disclosed in the first quarter. We disclosed that we would have that. And that loss of revenue was more than offset by an increase in revenue at our Midwest terminals related to the Cushing tanks of approximately $1 million and an increase in revenue associated with higher volume shift on our Diamondback pipeline. The overall revenue was up about $23 million compared to the year-ago quarter.

Moving on to a discussion of our liquidity. Our credit facility, matures March 9, 2016, provides for a maximum borrowing line of credit, $350 million. On June 30, before the equity offering, the outstanding balance was $254 million and we have a leverage ratio of 3.58x our consolidated EBITDA.

On July 24, we issued, pursuant to an underwritten public offering, 1.45 million common units at a price of $43.32 per common unit. On July 30, the underwriters exercised their over-allotment option to purchase an additional 217,500 common units at the same price per common unit.

The net proceeds from the offering of LP units was approximately $69 million after deducting underwriting discounts, commissions and offering expenses. Additionally, our general partner made a contribution of approximately $1.5 million to maintain its 2% GP interest. So in total, the proceeds, in connection with the offering, was about $70.5 million.

The net proceeds from the offering and contribution from the GP were used to repay outstanding borrowings under our credit facility.

At June 30, we had approved investments and expansion projects with remaining expenditures of approximately $60 million, most of which -- almost all of which relate to the balance of the BOSTCO Phase 1, as well as the Phase 1a investments in BOSTCO that Chuck mentioned.

Attachment B to the press release includes our computation of the distributable cash flow that we've generated during the quarter. And we use this as a measure of how we are performing relative to our quarterly distribution.

During the quarter, we generated $13.5 million of distributable cash flow. Over the quarter, we are distributing $12.1 million, which includes $1.3 million related to the units issued in the offering. These new units were issued prior to the record date and, accordingly, qualified for the distribution. Since the offering took place after the end of the quarter, we were not able to pay down our debt until after the end of the quarter, and the operating results do not reflect the reduction in interest expense that we expect to see in future quarters.

Even after the distribution on the newly issued units, and the increase in the distribution that we have from $0.64 to $0.65 per unit, we generated distributable cash flow in excess of our distributions of approximately $1.3 million or 11%.

And with that, Kiersten, we're ready for any questions that folks may have.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Gabe Moreen from Bank of America Merrill Lynch.

Gabriel P. Moreen - BofA Merrill Lynch, Research Division

Not to get greedy here with this question, since I know you just announced 1a in terms of BOSTCO. Congrats on getting that than. But just, I was wondering what your latest thinking is in terms of a potential Phase 2 there? And where discussions have been with customers? And then also I'm just curious, I know you have said Morgan Stanley Commodities took the capacity on Phase 1a, are they are also a capacity holder on Phase 1, just outside of 1a?

Charles L. Dunlap

Phase 1, they are not a capacity holder. They're not in the black oil business, Gabe. So most of that $6.1 million is black oil or BGL. They are active in the distillate export markets, so that's why they leased up the 900,000 in Phase 1a. Phase 1a, to refresh your memory, is about a $55 million project. The ground has been broken and we expect those tanks will be in service by the end of 2014. In the end, it's a very attractive project in terms of rates of return, much stronger than Phase 1 because all of the infrastructure has been built out in the first phase. And the same will be true with Phase 2. We're in the process of permitting that and evaluating the final tankage configuration. There has been a strong interest and demand, and that will be a mix of more black oil tanks, as well as distillate tanks for the export market.

Gabriel P. Moreen - BofA Merrill Lynch, Research Division

Any thoughts, Chuck, in terms of timing on announcement, I guess, the final go-ahead on Phase 2, which sounds reasonably encouraging that you might get done?

Charles L. Dunlap

Possibly this year. The board hasn't approved it yet. But the engineering is underway and, as I said, the initial permitting is underway. So it's conceivable we might be able to make an announcement before the end of the year.

Gabriel P. Moreen - BofA Merrill Lynch, Research Division

Got it. And then a question, I guess, on the capacity. You're remarketing in Florida, beginning in '14, as well as the pipeline in Arkansas. Can you just talk about maybe a little bit market dynamics there in terms of the latest you're seeing? If you've had any initial additional interest in those assets since you've, it sounds like, started to remarket some of the capacity in anticipation of '14?

Charles L. Dunlap

Well, they're 2 totally different markets. The Midwest, in negotiations with several third-party customers and we're confident that we'll be able to conclude something by the end of the year. And the same is true with Florida, we're in negotiations with a couple of parties regarding the bunker tanks and it's a little early in the process to make predictions at this point, but that bunker market will continue to be served by someone and it is a strong market. The cruise ships aren't going away, so we're optimistic that we'll be able, for us, to renew those tanks with a third-party.

Gabriel P. Moreen - BofA Merrill Lynch, Research Division

Got it. And then last question for me is, I guess, in terms of the ramp-up on Phase 1 at BOSTCO starting in fourth quarter and then fully in service in mid '14, is there anything going to help us with in terms of modeling around kind of how much the EBITDA run rate you're expecting? Obviously, it will kick in the middle of '14, but how much of that will sort of show up in fourth quarter, first quarter versus the full run rate in second or third quarter?

Charles L. Dunlap

Well, in the first -- in the fourth quarter, we'll be ramping up the first, roughly, 1.5 million barrels of the 6.1 million. So that will ramp up in stages, so you're not going to have a full quarter of earnings off that 1.5 million barrels of tankage. But the pace will certainly pick up when we get into the first quarter of '14 -- '14 and we'll be full service by the end of the second quarter in '14. I don't know if that will help you but...

Frederick W. Boutin

That's a good question, Gabe. Why don't we take that and maybe, next quarter, we can provide a little more guidance on that.

Operator

Our next question comes from Erik Keener from River Road Asset Management.

Erik M. Keener - River Road Asset Management, LLC

I wanted to ask a couple of questions to get a little more color on the revenue shortfall. Why it was lower in both the River segment? That's probably just driven by Valero leaving. But have there been any updates on maybe retrofitting that capacity for Utica takeaway? Or how are you guys looking at that today?

Charles L. Dunlap

Well, just to be clear, the revenue was less than it was in the first quarter of this year, where it was actually more than it was the year ago and it was generally what we expected it to be. So just to be clear about that.

Erik M. Keener - River Road Asset Management, LLC

But the River segment, in particular. So overall, revenue increased but River segment, in particular, was down over last year.

Charles L. Dunlap

That's correct. And yes, you're right. That is primarily a result of the Valero contract. And there are some discussions that we are involved in regarding the retrofitting of some capacity. It's probably not the same capacity that is -- was part of the Valero contract. But there is some other capacity on the River system and there are some discussions about that. But really, nothing that we're prepared to announce at this time.

Erik M. Keener - River Road Asset Management, LLC

Okay, and do you still have discussions on Valero's capacity that they have walked away from? Do you have third-party interest on that still?

Charles L. Dunlap

Yes. There's other companies that are interested in some of that capacity and we're working to put most of that to work.

Erik M. Keener - River Road Asset Management, LLC

Okay, similar question on the Gulf Coast segment. Is that -- was it just a quarter that was kind of lumpy and we didn't get a lot of revenue there? Or what was driving the shortfall in Gulf Coast?

Charles L. Dunlap

I think it was product gain, primarily, was the delta in Gulf Coast and that just moves around -- in the Southeast, we actually share the product gain with Morgan Stanley. And in the Gulf Coast, we get all of it. So if there is any change in product gain, then we feel it. The other thing is there were some reimbursable projects a year ago. And just to review the accounting, if we make some repairs on behalf of a customer and we spend the money and then they reimburse those. Well, the reimbursement shows up as revenue, and we have some of those last year that we did not have this year. So that was probably the other major impact in the Gulf Coast. But in general, not much else is really changing in that business.

Erik M. Keener - River Road Asset Management, LLC

Okay. Follow-up question on Gulf Coast. Kind of the future of that business. And I know we talked a little bit about interest on the capacity that Morgan Stanley is not going to renew. But with the increased level of E&P activity across the Gulf Coast, particularly from Pemex, who's gobbling up a lot of rigs to try and find more oil, do you have any idea of the impact that could eventually have on your Gulf Coast business? Whether it's Brownsville or whether it's some of the storage and terminaling tanks across the area?

Charles L. Dunlap

It's more likely to have an impact in Brownsville or the Houston area than it would on Florida. I wouldn't think Pemex would have that much of an impact to the Florida markets.

Erik M. Keener - River Road Asset Management, LLC

The oil has got to go somewhere, so...

Charles L. Dunlap

Well, there's no refining in Florida. So that's why I'm saying, it's more likely it's going to move to those other markets in the Gulf, where there is refining or transportation capability. Florida is primarily an end-user product market.

Erik M. Keener - River Road Asset Management, LLC

Right. And last one on BOSTCO. You guys have given us some guidance about how the IRRs or returns for the project kind of increase with each additional phase. Can you give us a ballpark of what those IRRs are? Maybe a revenue run rate in 2014 when things get up and running?

Charles L. Dunlap

You're right, we haven't done that and we're not prepared to do that now. But as I said to Gabe, we'll give that some thought over the next quarter and maybe we can come up with a way to provide a little bit of guidance on that.

Operator

Our next question comes from Lin Shen [ph] from HITE.

Unknown Analyst

For BOSTCO, from my understanding, they are fully subscript, by long-term lease. Can you talk about what's the average -- what is the average contract should be?

Charles L. Dunlap

In the first phase, the contracts run anywhere from -- there is, I think, 1 or 2 agreements that are 3 years. Most of them are 5 years. There are some that are 10, 10 and 7. So it's a range. They're all long-term in nature, though.

Frederick W. Boutin

And I think the objective was to not have them all be the same term. You don't want them go term up at the same time.

Charles L. Dunlap

Correct.

Unknown Analyst

So there's 3 to 5 years, you say?

Charles L. Dunlap

Some are 3, 5, some are 7, and there's one that's 10 years.

Unknown Analyst

So -- but the average, what do you think it should be like? 7?

Charles L. Dunlap

I think 5 years is a good average to use.

Unknown Analyst

Okay. And also, in BOSTCO, do you guys see any potential further extending opportunity given the strong demand in the market?

Charles L. Dunlap

Well, we want to get through these first 3 phases, get those permitted, and then we can assess future market demand, but that's certainly a possibility.

Unknown Analyst

So what kind of competition do you see over that area? Because there is a new MLP IPO coming, work point terminal. When I read their report, it claims to have a low cost competition. One to each for their terminal, over their area. I'm just wondering what do you think about your asset?

Charles L. Dunlap

So what limits the competition is the waterfront that we have. We have a deep water significant dock capacity that handled 4 different berths for Aframax vessels. There's very few locations left on the Houston Ship Channel that can afford that kind of deepwater capability. There are existing facilities but they're all pretty well maxed out. And so this is the -- probably one of the last great waterfront sites left. So I'm not too worried about competition. Plus the connectivity that we have with the Kinder Morgan System, the enterprise system, to all the refiners in the Houston Ship Channel also gives this site tremendous competitive position.

Operator

Our next question comes from Selman Akyol from Stifel.

Brian Brungardt - Stifel, Nicolaus & Co., Inc., Research Division

Most of my questions have been answered but I do have one follow-up. Where does the revolver balance stand for BOSTCO? And just to clarify, that's a maximum of $225 million, correct?

Frederick W. Boutin

Okay, first off, this isn't Selman, is it?

Brian Brungardt - Stifel, Nicolaus & Co., Inc., Research Division

Yes. Sorry, this is Brian on for Sel.

Frederick W. Boutin

Just to be clear, the revolver balance isn't directly related to BOSTCO. I mean, we have a $350 million revolver. And I think the balance on the revolver today is around $190 million and we also have about $10 million in cash. So if you start with the $254 million, whatever we had at the end of the quarter, subtract the $70.5 million, you should get to about $180 million. But we've got about $10 million of cash. So now, as far as the balance available for BOSTCO -- if whatever our investment in BOSTCO is today, we had a total that we could -- pursuant to the credit agreement, there is a basket or limitation on the amount that we can invest in BOSTCO and other joint ventures, which totals $225 million for BOSTCO and another $75 million for joint ventures, in general. So I mean, it's a very large basket and I think our total Phase 1, Phase 1a investment should be about $209 million in BOSTCO. So there's a long way to go and that's just a provision in the credit agreement that we should be able to go to the banks and work with them if we need to increase that, which I really would anticipate not having a big problem doing. So it is a provision and a credit agreement. I do not see it as limiting and I also doubt that it'd be difficult to change.

Operator

[Operator Instructions] Thank you, ladies and gentlemen, we appear to have no further questions at this time. This conference will be available for replay after 1:00 EST, today through 13th of August at 23:59 EST. You may access the AT&T teleconference replay system at anytime by dialing 1 (800) 475-6701 and entering the access code 299269. International participants dial (320) 365-3844.

That does conclude our conference for today. Thanks for your participation and using AT&T Executive Teleconference. You may now disconnect.

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