Tesoro Logistics' (TLLP) CEO Greg Goff on Q2 2014 Results - Earnings Call Transcript

| About: Tesoro Logistics (TLLP)

Tesoro Logistics LP (NYSE:TLLP)

Q2 2014 Earnings Conference Call

July 31, 2014 10:00 AM ET


Evan Barbosa - IR, Manager

Greg Goff - Chairman and CEO

Phil Anderson - President

Scott Spendlove - VP and CFO


Richard Roberts - Howard Weil

TJ Schultz - RBC Capital Markets


Good day, ladies and gentlemen and welcome to the Second Quarter 2014 Tesoro Logistics LP Earnings Conference Call. My name is Jinera, and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to Mr. Evan Barbosa, Investor Relations Manager. Please proceed.

Evan Barbosa

Thanks. Good morning, everyone, and welcome to today's conference call to discuss our second quarter 2014 earnings. Joining me today are Greg Goff, Chairman and CEO; Phil Anderson, President; and Scott Spendlove, Vice President and CFO.

Yesterday, we issued a press release announcing our second quarter results. That release along with additional financial and operational information and reconciliations for non-GAAP financial measures is available on our Web site at tesorologistics.com. Please refer to the forward-looking statements 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. As there are many factors, which could cause results to differ from our expectations.

With that, I'll turn the call over to Phil.

Phil Anderson

Thanks, Evan. Good morning, and thank you for joining us on the call today. You have our earnings release. I'll go over the details of the results and provide some highlights and guidance, then turn the call over to Greg.

Yesterday, we reported second quarter distributable cash flow of $49.6 million for the partnership, up 99% from the second quarter of 2013 excluding predecessor results. The year-over-year increase reflects significant growth from our organic investments and strategic acquisitions of the Northwest Product System and the Southern California Distribution System.

On July 24th, we announced a cash distribution of $0.615 per limited partner unit or $2.46 per unit on an annualized basis for the second quarter. This represents a 4% increase over the quarterly distribution paid in May of 2014 and a 21% increase over the last four quarters. Additionally, we reported adjusted EBITDA of 69.6 million, adjusted EBITDA excludes 2.8 million of Northwest Product System inspection and maintenance costs that were included in expenses, but paid with cash retained from the purchase price reduction for those assets.

Some of our quarterly accomplishments include in May, we successfully completed the open season for increased northbound capacity on the High Plains Pipeline with commitments of 65,000 barrels per day for an average duration of approximately six years. On May 12th, we announced the successful conclusion of our second open season after receiving commitments from third-party shippers to proceed with the construction of the Connolly Gathering System in Dunn County, North Dakota. This project will begin pipeline gathering deliveries into the High Plains System in late 2014 or early 2015.

In June, we delivered commercial storage capacity of 120,000 barrels at our Bakken area storage hub. It is fully committed on long-term contract. We expect to deliver another 240,000 barrels of capacity in the third quarter bringing total BASH terminal capacity to 360,000 barrels and our total commercial storage capacity on the High Plains System to 480,000 barrels all of which is committed.

On July 1st, we closed on the first part of an acquisition of West Coast Logistics assets, which included a truck terminal and six storage tanks with approximately 213,000 barrels of storage capacity located in the Nikiski, Alaska; a truck terminal rail loading and unloading facility and four storage tanks with a shale capacity of approximately 1.5 million barrels located at Tesoro’s refinery in Anacortes, Washington, and a truck terminal and rail loading and unloading facility located at Tesoro’s refinery in Martinez, California.

We expect to close the second portion of this acquisition a 70 mile long refined products pipeline connecting Tesoro’s Kenai refinery to Anchorage, Alaska late in the third quarter early fourth quarter this year. Additionally, we also plan to develop a new truck rack at the site of the acquired Anacortes terminal, which is expected to add 6,000 to 7,000 barrels per day of additional throughput. This project has a total estimated spend of $23 million and is expected to be completed in early 2015. Of that, we expect approximately $5 million to $10 million will be spent during 2014.

For the quarter, total capital expenditures were $47.5 million of which $6.1 million were reimbursed. This includes $42.9 million of expansion capital and $4.6 million of maintenance capital. Our total capital expenditure outlook for the year including spending related to the construction of the Connolly Gathering System and the Anacortes truck rack has increased 25% to $200 million or a 170 million net of reimbursements. This includes approximately a 160 million of growth capital and approximately 40 million of maintenance capital for the full year.

For the second half of the year, we forecast total capital spending of approximately $104 million net of expected reimbursements. Our current debt-to-EBTIDA level puts us slightly above our target ratio of three to four times. With some of our larger organic projects coming online this quarter, we expect that ratio to return to our target range by the end of the year.

In late June, we launched a $200 million continuous offering program also called an at-the-market equity offering program, or ATM, primarily to help fund our organic growth projects. So far, we have issued approximately 200,000 common units under the program for net proceeds of approximately 14 million, the majority of which settled in July. We are maintaining significant financial flexibility as we pursue additional growth in our business through investments and organic capital and third-party acquisition opportunities.

Now, turning to our operations for the quarter. In the crude oil gathering segment, we delivered 109,000 barrels per day on our High Plains Pipeline during the second quarter. This exceeded our guidance of over 100,000 barrels per day. We expect volumes to continue to grow during the balance of the year as shippers committed to the northbound reversal begin moving crude on to the system. For the coming quarter, we expect approximately 140,000 to 150,000 barrels per day. We’ve already seen a significant increase in volumes in July and we expect the FERC to finalize the tariff in August allowing us to implement the higher committed rates and the minimum volume commitments. Within trucking, we reported volume of 47,000 barrels per day up about 2,000 barrels per day from the first quarter. We expect to grow our proprietary fleet about 3,000 barrels per day in the third quarter, which we expect will improve our margins.

Moving to the terminalling and transportation segment. In terminalling, we reported volume of approximately 890,000 barrels per day which was within our expected range. The quarter-over-quarter increase was primarily due to continued strong contributions from our Southern California System acquired last year, as well as the optimization of Tesoro’s product distribution into our terminalling network. For the third quarter, we expect terminalling volumes to increase to a range of 950,000 to 975,000 barrels per day. This includes an incremental 35,000 to 45,000 barrels per day coming from the recently acquired West Coast Logistics assets.

In pipeline transportation, we shipped about 772,000 barrels per day for the second quarter which was at the top-end of our expected range. We expect to maintain a range of 750,000 to 775,000 barrels per day during the third quarter. We continue to be very pleased with throughput on the Southern California Pipeline System, as well as the North West Product System both of which we acquired last year.

Now I’ll the call over to Greg to discuss our strategic outlook.

Greg Goff

Thank you, Phil. We are pleased with the strong operational performance and the resulting EBITDA and distributable cash flow growth that we delivered in the second quarter. We continue to make strides in the execution of our strategy to grow our logistics business on both the organic growth and optimization fronts.

With the successful completion of our open season for the Connolly Gathering System, our first significant crude oil gather project, we are enhancing our already established position in the Bakken and building a foundation for ongoing growth as expected crude oil production ramps up in that area. Construction on the project began in July and we expect completion by the end of 2015. The anchor shipper has approximately 20,000 barrels per day of existing production in the area and we expect that to grow to approximately 60,000 barrels per day over the next several years.

In addition to the committed anchor shipper, we expect to connect other producers in the area providing a platform for additional growth on this system. The estimated capital investment is $150 million, of which we expect to spend $25 million in 2014, with the remaining spend to occur in 2015. We anticipate that first pipeline gathered barrels will be delivered into the mainline in late 2014 or early 2015.

We expect to continue to deliver growth in our High Plains System this year with the completion of the reversal project in the third quarter. We have expanded our, inter-connect with the Enbridge System and are also working on connections to two additional rail facilities which are expected to be completed by the end of the year. There are significant opportunities beyond our current organic projects to expand our position in the Bakken and grow our third-party business in support of our strategic objective.

In our terminalling and transportation segment, we remain focused on growing the utilization of these assets. Since acquiring our Southern California System, we have brought 20,000 barrels per day of incremental throughput to our optimization efforts. We expect to complete the expansion of our San Diego terminal during the third quarter allowing us to move an additional 8,000 to 10,000 barrels per day.

In Salt Lake City, we expect to complete a new black wax trucking receiving terminal late in the third quarter that will allow us to bring an additional 12,000 barrels per day of capacity into the TLLP system.

On strategic growth, we closed on the first portion of the West Coast Logistics assets acquisition from Tesoro on July 1st. We anticipate this transaction will contribute about $20 million of additional annual EBITDA and should be immediately accreted to unitholder distributions. Late last year, we announced some significant objectives to grow Tesoro Logistics through organic and strategic growth. As we have progressed through 2014, we’ve developed a strong portfolio of organic growth projects that will provide significant opportunities to grow our business for many years.

Our Bakken system remains well positioned for additional significant investments to meet the growing production and potential new takeaway pipeline opportunities. As we look into 2015, we see TLLP leading the development of the transport and pipeline in Alaska, this project would allow the growing production of Cook Inlet crude to move by pipeline to Tesoro’s refinery and marine terminal located at Kenai, Alaska.

In addition to that project, we continue to work with Tesoro on the development of projects such as the Vancouver Energy project and the Uinta waxy crude pipeline that we believe will provide substantial growth opportunities to TLLP. We believe all of our efforts to drive growth will continue to deliver higher EBITDA and distributions for our unitholders for years to come.

And now, we will take your questions, operator?

Question-and-Answer Session


(Operator Instructions) And your first question comes from the line of Richard Roberts with Howard Weil. Please proceed.

Richard Roberts - Howard Weil

Hey. Good morning, guys. A couple of questions for me, for one, I guess as you look across your asset portfolio, could you give us a sense of some of the organic investment opportunities you see in California and the Bakken? I don't mean specific projects, but maybe just how much capital you think you could put to work in those areas over the next couple of years?

Phil Anderson

Sure Richard, this is Phil. We are in the process of developing our 2015 investment program at this point. So, we are early days in terms of exactly which projects will approve to go forward with. But that being said I think Bakken we have given you a good indication of the amount of good capital we can deploy up there over the next year. I think in Southern California as we work with Tesoro aligning there logistics around those assets we do see some substantial opportunities to develop some organic projects around additional tankage, distribution capabilities, as well as some of the ancillary products that we believe we can improve Tesoro’s access to those products in the marketplace. So, early days in terms of giving a number but we expect those projects to be very meaningful.

Richard Roberts - Howard Weil

Okay, great, thanks. And then a second one maybe just to update us on the drop-down strategy. So I think the plan had been to stay pretty methodical as far as timing goes. I guess I am wondering, if you are able to go out and do a pretty substantial third-party acquisition or put together a pretty big organic project that is going to allow you to grow without having to do a drop. Is there still a plan to get those assets dropped down from Tesoro over the next couple of years, or would you defer some of those drop-downs if you were able to do something else?

Phil Anderson

Sure Richard, I think our plan is to stay methodical in terms of approach on the drop-downs. There is a lot of projects under development between Tesoro and TLLP some of the things we might such as Trans-Foreland which Greg mentioned, which might have been a drop-down in our view last year is now an organic project that we will likely undertake at TLLP. So, between existing assets and projects under development we will maintain a very robust dream of opportunities we believe that will allow us to continue to grow our logistics business at TLLP.

Richard Roberts - Howard Weil

Okay, great. Maybe just one more if I could, could you just remind us, the Vancouver rail project that Tesoro is working on, that is not included in the drop-down inventory as far as value of assets at Tesoro, is it?

Phil Anderson

It’s not.

Richard Roberts - Howard Weil

Okay, great. And Phil thanks very much. I appreciate it.


(Operator Instructions) Your next question comes from the line of TJ Schultz with RBC Capital Markets. Please proceed.

TJ Schultz - RBC Capital Markets

Hi. Good morning. Maybe, Phil, on one of those last points, the Cook Inlet pipe, what kind of drove that decision to move that to an organic project versus developing at the parent and then dropping down?

Phil Anderson

I think it’s a couple of things one is that it’s a relatively swift project in terms of execution. So from ability to deploy capital quickly and get a return coming back the timeline of that project works pretty well with our present size. I think the other thing is just commercially it’s easier for us to execute this at the TLLP level.

TJ Schultz - RBC Capital Markets

Okay. And then kind of the size of remaining drops, I guess you had $1.5 billion of assets available at the end of the year. You did the recent drop-down, and so that would be $1.2 billion remaining. I guess how big is the Cook Inlet that is moving now to an organic project, and what is the remaining kind of drop-down backlog asset value at the parent?

Phil Anderson

Sure. The Cook Inlet project is probably between $85 million to $100 million in terms of total CapEx. If you look at the total inventory of existing assets at Tesoro plus projects that we are working with Tesoro to help develop, that value remains in excess of a $1 billion of available opportunities for TLLP.

TJ Schultz - RBC Capital Markets

Okay. What is the percentage that are existing assets versus those that are considered still under development or are in the planning stages, such as Vancouver?

Phil Anderson

I don’t have a exact breakdown around that. A lot of the -- what becomes a dropdown versus organic project is even around some of the existing assets there is some additional growth activities around those that we’re not sure which side will ultimately pursue those. So it’s tough for us to draw a line on that.

TJ Schultz - RBC Capital Markets

Okay, understood. Just lastly, and sorry if I missed this, but what's your -- I think you gave your debt leverage post the close of the drop-down, and then your targeted range that you mentioned you'd get to by the end of the year?

Phil Anderson

So we’re about 4.2 on a pro forma basis at the end of the quarter. Our stated objective range is to be between 3 and 4 and as we look forward with the projects coming on in the third quarter and the growth as we continue to ramp-up in the fourth quarter, we expect to be well inside the top-end of our range.


And at this time, we have no further questions. That will conclude today’s conference. Thank you for your participation. You may now disconnect. Have a great day.

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