PBF Logistics' (PBFX) CEO Tom Nimbley on Q4 2015 Results - Earnings Call Transcript

| About: PBF Logistics (PBFX)

PBF Logistics LP (NYSE:PBFX)

Q4 2015 Earnings Conference Call

February 11, 2016, 11:00 ET

Executives

Colin Murray - IR

Tom Nimbley - CEO

Erik Young - CFO

Analysts

Theresa Chen - Barclays

Praneeth Satish - Wells Fargo

Operator

Welcome to the PBF Logistics Fourth Quarter and Full Year 2015 Earnings Conference Call and Webcast. [Operator Instructions]. It's now my pleasure to turn the floor over to Colin Murray, Investor Relations. You may begin.

Colin Murray

Thank you, Keith. Good morning and welcome to PBF Logistics fourth quarter 2015 earnings conference call. With me today are Tom Nimbley, our CEO; Erik Young, our CFO and several other members of the partnerships' senior management team. If you have not received the earnings release and would like a copy, you can find one on our website.

Before we begin, I’d like to direct your attention to the forward-looking statement disclaimer contained in today's press release. In summary, it outlines that statements in the press release and on this conference call that state the Partnership's or Management's expectations or predictions of the future are forward-looking statements, intended to be covered by the safe harbor provisions under federal securities laws. There are many factors that could cause actual results to differ from our expectations, including those we've described in our filings with the SEC.

Now, I will turn the call over to Tom Nimbley.

Tom Nimbley

Thank you, Colin. Good morning, everyone and thank you for joining us on today's call. As Eric will cover in more detail shortly we’re pleased with our fourth quarter results which were in-line with our previously announced guidance. Our assets all operated as expected and detailed rates, can be found in our earnings release issued this morning. On the back of our strong results we are pleased to announce an increase in the partnership's quarterly distribution to $0.41 per unit per quarter or a 5% increase versus the third quarter distribution. This represents compound annual growth rate of approximately 23% since our IPO. The distribution will be payable on March 8th to unit holders of record as of February 22nd.

Executing our disciplined growth strategy is a building block for PBF Logistics' continued expansion and drives support for increased distributions. To that end, last week we announced that we have agreed to purchase four clean products terminals, the East Coast terminals from Plains All American. Not only does the East Coast terminals acquisition represent PBF Logistics' first unaffiliated third party acquisition, it is precisely the type of transaction that PBF Logistics should be pursuing including expected synergies, we feel that the implied acquisition multiple is approximately seven times EBITDA and the assets are strategically positioned near PBF Energy's refining system where our relationship with our sponsor can be leveraged to potentially drive increased utilization, resulting in even lower implied acquisition multiples.

Given the turmoil in the MLP market and resulted expansion in equity yields we feel that being able to execute transactions at low multiples is essential. In conjunction with the transaction the partnership expects to [Technical Difficulty] to 5 million from cash on hand to improve infrastructure in order to increase throughput capability at the terminals.

Based on transaction cost of $100 million and including additional investment in synergy opportunities the partnership expects the East Coast terminals to generate approximately 15 million of pro forma EBITDA, include that 10 million to the partnership's distributable cash flow and provides line of sight for future growth.

The East Coast terminals are located in the Philadelphia market and are ideally situated in the sixth largest metropolitan area in the United States with significant local demand for refined products. The terminals provide critical link for the approximately 1.3 million barrels per day of refining capacity located within 100 miles of the terminals and associated downstream demand.

With extensive pipeline, truck and deep water marine connectivity the East Coast terminals have the flexibility to accommodate a wide variety of potential customer requirements. Lastly, the transaction is expected to close in the second quarter of 2016 and we will provide updates as appropriates as we work to consummate the acquisition.

Additionally, within the last five months, PBF Energy has acquired one refinery and intends to close on a second acquisition in the second quarter. Both have significant associated logistics assets. With these two transactions, PBF Energy has grown its backlog of MLP qualifying EBITDA by approximately 40%.

With that I would like to turn the call over to Erik Young.

Erik Young

Thank you, Tom. This morning we reported fourth quarter net income to the partnership of $17 million or $0.50 per common limited partner unit. We generated EBITDA of approximately $26 million which includes a one-time charge related to employee expenses. We had $20 million of cash available for distribution and coverage ratio of $1.37 times in excess of our longer term guidance of 1.15x. For the year ended December 31st, 2015 we reported net income to the partnership of approximately $75 million versus $30 million from the year-ago period.

Revenue for the quarter was approximately $37 million and total costs and expenses were just shy of $13 million including operating and maintenance expenses, G&A and depreciation and amortization. Interest expense and deferred financing cost were approximately 7.2 million in total. Despite reduced through-put at the Delaware City rail facilities the long term minimum volume commitments guarantee the revenue of PBF Logistics across the inevitable commodity price-driven utilization cycles at PBF Energy.

Consistent with our prior messaging, we continue to focus on maintaining a conservative balance sheet, especially in the current market environment. We ended the quarter with $18.7 million of cash, approximately $300 million of available liquidity and a net debt to EBITDA ratio of approximately 3.4 times on an annualized basis. 2015 was our first full year of operations and over the course of the year we established a solid financial position, put in place a permanent capital structure, and provided ample liquidity to grow the business.

As Tom described in detail, we intend to put that liquidity to good use with our pending acquisition of the East Coast terminals. We expect to finance the transaction using combination of cash on hand, borrowings from the partnership, senior secured revolving credit facility, and equity which may include common units sold to our sponsor, PBF Energy. Our long-term objective is to maintain our net debt to EBITDA ratio between 3 and 4 times. While the MLP market has faced significant challenges over the last few quarters, we see this as a time of opportunity. The East Coast terminals acquisitions is the first step in diversifying the PBF Logistics customer base and we will continue to look for strategic acquisitions where we can replicate our disciplined approach to growth in a turbulent market. This can only be accomplished by not overextending ourselves and maintaining a strong balance sheet.

Operator, we have concluded our remarks and now we'll open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions]. And we will take our first question from Theresa Chen with Barclays. Please go ahead.

Theresa Chen

Erik following up on your comments on the PBF call today related to financing at the partnership level, just to clarify, would it be reasonable to assume that the partnership does not intend to go into the public equity markets as long as the volatility remains any equity financing in the near-term will be supported by the parent?

Erik Young

I think what we would say at this point is we plan to close the transaction during the second quarter. A lot can happen between now and then. We've been consistent in our messaging from day one that PBF energy, and I think the parent has shown this thus far, the parent company has been very supportive of the Logistics Company. We did and we just stated on the prepared remarks that PBF Energy may actually invest in the transaction and buy equity in PBF Logistics. But at this point that's one of many levers that we think we have to pull when it comes time to actually write a check to plains for the terminals.

Theresa Chen

Okay. And can we also revisit your distribution growth policy. Can you give us an update on your thoughts about maintaining your stated 15% growth target in an environment when market doesn't really seem to be paying for growth? If we're in this environment for prolonged period of time do you think you would consider paring back the growth and I guess saving it until we see some normalization?

Erik Young

I think we would agree with you that we don't necessarily feel that we're being rewarded for the multi-year distribution growth guidance that we gave from the outset of PBF Logistics. But I also think that in this market we're content to kind of keep our heads down, continue to make strategic acquisitions, the purchase multiple of 7X clearly we have been vocal about this as yields have started to increase, acquisition multiples in turn need to therefore be reduced. So I think from our perspective, we're comfortable where we are in terms of this incremental distribution. We will be keeping a tight eye on the market because I think everyone knows with the turbulent nature of the market, it would be very difficult for anyone to go into the market and issue equity. At the same time, we have seen what's happened when other MLPs have significantly cut their distribution growth guidance. So I think for us at this point, it is very much let's be conservative, and make sure we have ample liquidity and move forward from there.

Theresa Chen

And following up on the comments on the recent third party acquisition, Tom, can you expand a little bit more and just provide some more color on the commercial opportunities and synergies you hope to leverage from the [indiscernible] terminals with your existing assets?

Tom Nimbley

Sure. First of all, there is existing third party business, notionally $10 million of EBITDA that we expect to retain and then attempt to grow from there. The other major elements is the facility, particularly at Paulsboro Terminal has a very nice product rack. We will be moving PBF's production rack barrels out of our Paulsboro refinery over there and signing up for an agreement with the terminal when we've closed it. We also hope to be able to move other barrels through that rack with existing customers. We see real opportunities from the parent on wholesale market and expansion. This is an area of major focus for us. For many years the parent company -- the first couple of years was basically using third parties, Morgan Stanley in this case, to sell our products. We are now developing a much more robust wholesale system and these tanks will be very valuable.

Commercially we see opportunities to play market structure. We have [indiscernible] we can look to see how we can use some of these tanks to further the EBITDA for the parent company and of course enter into contracts with the MLP. And then frankly the resource relative to one of the things that the parent company is excited about in this transition is our current East Coast system is really kind of constrained on Logistics both in Delaware and the Paulsboro refinery, with the dock capability and the tanks we have in this acquisition. We think we're going to be improve crude blending and debottleneck or decrease the utilizations of docks and increase the export market. So in addition to trying to grow the third party business from the $10 million a year, certainly the parent company sees opportunities to use this facility to benefit both the MLP and the parent company.

Theresa Chen

Understood. And would you mind just generally commenting on what you're seeing in the third party acquisition market currently in terms of assets up for sale, bid, ask spreads as such?

Erik Young

I think, Theresa, this is the type of acquisition that we have been talking about since we went public, something that is within the geographic footprint of one of the parent company's refineries. It's taken a while and fortunately for us, we have put ourselves in a position to be able to capitalize on these types of transactions. Difficult to comment on particular assets that may be for sale but we think as we go forward, we are essentially in full position and have line of sight on a few other similar-type transactions that PBF Logistics may be able to take advantage of as companies like plains and I think this was really an if you talk to the plains folks, it's probably a win-win for both of us. This is an asset that PBF Logistics should own because of the proximity to the PBF Energy system, while at the same time helping diversify the PBF Logistics customer base and for plains that was non-core.

We think there are MLPs who will have other non-core assets, not necessarily large assets but for a business like PBF Logistics that has not only a $100 million of EBITDA on a run-rate basis to add an incremental 15 is meaningful, especially in this market when we can get a transaction agreed upon at essentially a seven times EBITDA multiple. For us, I think as we go forward we'll continue to see opportunities like this and hopefully we'll be able to get them across the goal line.

Operator

[Operator Instructions]. We can go next to Praneeth Satish with Wells Fargo.

Praneeth Satish

Just a couple more questions on the plains East Coast terminals acquisition. I guess, one, can you just comment on the nature of the contracts? Is it 100% take or pay? Is there a throughput component? And then also if possible the duration of the contracts?

Tom Nimbley

I think, Praneeth, it's a very traditional third party product terminal so you're going to have a variety of different contracts. Some are more storage-based, others are more throughput in nature. PBF will be signing up two similar market-based contracts probably with longer tenures than what are currently in there today. We have had some customers or we will have customers once we complete the acquisition that have been in the terminal for many years at this point. So I think for us, this is the next step in the evolution of PBF Logistics and really targeting that third party revenue.

Praneeth Satish

And then I guess just broadly speaking, could you provide any color on the credit quality of the third party customers that are signing up for capacity at the terminals?

Erik Young

We don't have any apps concerns about credit quality around any of the third party customers. We cannot share details about who else is in the terminal but ultimately we don't have any issues with customer quality. And in fact I think our view is longer term we will try to increase the number of third party customers that are in that terminal.

Praneeth Satish

And then just last question for me, do you have, I guess, a time line? Sounds like the terminals on the third party side, $10 million of EBITDA and the goal is to get it to 15 million of EBITDA through the synergy opportunities. I guess is there a time line for how long that will take to achieve?

Tom Nimbley

We think that we should be able to be at that run-rate by the end of this year.

Operator

[Operator Instructions]. And we can take that question from [indiscernible].

Unidentified Analyst

Just on the follow-up for the terminal asset newly acquired from Plain, when you give their EBITDA guidance is the butane blending a big part of your guidance this year? How should we think about the butane blending or the commodity exposure?

Tom Nimbley

Our view is this is very much third party terminal operation, Butane, we can't get into all of the different components of how revenue is derived. But we would not say that the $15 million is driven by a large component of butane blending, no.

Operator

It does appear we have no further questions. I will return the floor to Tom Nimbley for closing remarks.

Tom Nimbley

Thank you very much for your attendance today and your interest in the company. Everybody have a good day.

Operator

This does conclude today's program. Thanks for your participation. You may now disconnect. Have a great day.

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