PBF Logistics' (PBFX) CEO Tom Nimbley on Q1 2016 Results - Earnings Call Transcript

| About: PBF Logistics (PBFX)

Call Start: 11:00

Call End: 11:20

PBF Logistics LP (NYSE:PBFX)

Q1 2016 Earnings Conference Call

April 28, 2016 11:00 AM ET

Executives

Colin Murray - IR

Tom Nimbley - CEO

Erik Young - SVP & CFO

Analysts

Justin Jenkins - Raymond James Limited

Bhavesh Lodaya - Credit Suisse

Praneeth Satish - Wells Fargo Securities, LLC

Operator

Good day, everyone, and welcome to the PBF Logistics First Quarter 2016 Earnings Conference Call and Webcast. At this time all participants have been placed in a listen-only mode and the floor will be open for your questions following managements’ prepared remarks. [Operator Instructions]

It is now my pleasure to turn the conference floor over to Colin Murray, Investor Relations. Sir, you may begin.

Colin Murray

Thank you, Zak. Good morning and welcome to PBF Logistics first quarter 2016 earnings conference call. With me today are Tom Nimbley, our CEO; Erik Young, our CFO; and several other members of our -- the partnership senior management team. If you like a copy of our earnings release, it is available 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 Erik will cover in more detail shortly, we are pleased with our first quarter financial results. Our assets operated well, and throughput rates can be found in our earnings release.

We are pleased to announce an increase to the partnership’s quarterly distribution to $0.42 per unit per quarter. This represents a compound annual growth rate of approximately 21% since our IPO, and a 40% increase to our minimum quarterly distribution. The successful execution of our disciplined growth strategy is a building block for PBF Logistics' continued expansion and drives support for increased distributions.

With that in mind I would like to provide a brief update on our previously announced acquisition of the East Coast Terminals from Plains All American. We are pleased to announce that we expect that transaction to close tomorrow.

As we mentioned previously, these new assets are strategic to the partnership and we believe the transaction represents an important step in the development of PBF Logistics. In addition to diversifying the sources of the Partnership’s revenue, we expect that the terminals will provide additional opportunities through synergies with our sponsor, PBF Energy. Due to the close proximity of the East Coast Terminals to PBF Energy’s Paulsboro and Delaware City refineries, our assets should provide the refineries with added capability and flexibility in feedstock sourcing and product distribution.

The East Coast Terminals deal represents PBF Logistics’ first third-party acquisition and is precisely the type of transaction that PBF Logistics will continue to pursue, opportunities to diversify the partnership’s revenue and leverage synergies with our sponsor. Upon closing this transaction we will have established that PBF Logistics is a legitimate buyer of third party assets and has the ability to independently fund transactions even in a turbulent market.

Subsequent to the end of the first quarter we closed an underwritten offering of common units, which provided approximately $53 million in gross proceeds. There was strong demand in the market and the underwriter elected to exercise in full its option to purchase additional units. In total the partnership issued an additional 2.875 million shares of common units. Overall, given market conditions, we are pleased with the offering and the additional liquidity it provided.

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

Erik Young

Thank you, Tom. This morning we reported first quarter net income to the partnership of $19.1 million, or $0.53 per common limited partner unit and we generated EBITDA of approximately $28 million. We had $21.4 million of cash available for distribution, which represents a quarterly coverage ratio of approximately 1.3 times.

Revenue for the quarter was $36.5 million and total costs and expenses were $10.2 million, including operating and maintenance expenses, G&A and depreciation and amortization. Interest expense and deferred financing costs were approximately $7.2 million in total.

We continue to focus on maintaining a conservative balance sheet, especially in the current market environment and are pleased to report that we ended the quarter with approximately $330 million in liquidity, including $29.3 million of cash and access to approximately $300 million under our revolving credit facility. As a result, our net debt to EBITDA ratio was approximately 3 times on an annualized basis.

I’d like to follow-up on Tom’s commentary regarding our pending acquisition. Based on a total transaction value of $105 million, which includes a $5 million capital investment the partnership expects the East Coast Terminals to generate approximately $15 million of pro forma annual EBITDA, which results in an implied acquisition multiple of approximately 7 times EBITDA.

Following the acquisition we expect annual run rate EBITDA of approximately $10 million through the end of 2016. Given the recent turmoil in the MLP market, we believe that executing transactions at reasonable multiples is essential. We expect to finance the transaction using a combination of cash on hand, borrowings from the partnership’s senior secured revolving credit facility and proceeds from our recent offering of common units. Our long-term objective is to maintain our net debt to EBITDA ratio between 3 and 4 times.

The East Coast Terminals acquisition is the first step in diversifying the PBF Logistics customers base and we will continue to look for strategic acquisitions where we can replicate our disciplined approach to growth. We continue to believe that this can only be accomplished by not overextending ourselves, maintaining a strong balance sheet and accessing the capital markets on an opportunistic basis.

Operator, we’ve concluded our opening remarks, and now we’ll open the call for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And I’ll take our first question from Justin Jenkins, with Raymond James. Please go ahead.

Justin Jenkins

Hey, good morning guys. Appreciate all the color this morning. I guess just the first one from me on maybe the approach to additional third-party acquisitions, just an update maybe on what you’re seeing in terms of M&A potential? And then maybe if you could speak to if we think maybe we’re right here in the sense that you’d prefer additional third-party stuff as opposed to dropdowns in the near term to maybe keep that backlog of EBITDA at PBF in the back pocket, so to speak.

Tom Nimbley

I’ll make a comment, then Erik can fill in some things. We clearly are very pleased with this acquisition. It’s been a goal to get a third-party acquisition into the logistics company. And as I said in my remarks, frankly we want to continue to diversify and continue to pursue those. That doesn’t mean we won’t do dropdowns, but Erik can comment on that.

And in terms of what we see the parent company, as the parent company grows and diversifies into different regions, PADD 3 with Chalmette and prospectively PADD 5 in Torrance, the opportunities to acquire third-party logistics assets, synergistic benefits from those assets is clear. So we would expect that we would in fact have success in growing beyond this first acquisition with third-party facilities.

Erik Young

Just to follow-up, I think the easiest way to think about it is that we essentially run a parallel path with both third-party potential opportunities. We’ve got a fairly robust business or corporate development program now that we’ve put in place over the past 18 months and at the same time we control timing around dropdown assets. And most of those dropdown assets are essentially cost centers that have to be converted to profit centers. So there is a bit of back office work on the accounting side that we have to undergo before we actually drop anything down.

Assume that we’re running a parallel path; again we can control timing of dropdowns. The third-party acquisition timing is something that’s clearly dictated by the market and by having a willing seller on the other side of the table. So I think, to Tom’s point, third-party acquisitions are kind of first priority and at the same time we’ll continue to push forward on completing dropdowns as we go. But ultimately if we’re successful on the third-party side we assume that that EBITDA backlog will continue to grow up at the parent company on top of the $280 million that we’ve outlined for investors.

Justin Jenkins

Okay, that's helpful. And I guess my follow-up, can you just give us a sense maybe on the pros and cons of completing the equity deal earlier this month, just how you think about the incremental flexibility from a financial perspective and increased unit float for investors and how that maybe weighs against cost of capital?

Erik Young

I think from our perspective the feedback that we’ve gotten in meeting with the investment community is that the size of the MLP and ultimately liquidity were two issues that people had why certain larger investors maybe had held back in terms of coming into the equity. And the two kind of feed on themselves.

As we continue to grow the overall size of the MLP we assume that the liquidity will increase. PBF parent, PBF Energy still owns just shy of 50% of the entity. And I think as we go forward we would like to continue to issue third-party equity. We feel like we had a tremendous transaction in the market with pricing at ultimately at an 8% discount. That’s pretty attractive given what has gone on in the MLP equity capital markets over the past 12 or 18 months.

So I think collectively the company feels very happy with the transaction. It was a small transaction, only raising $53 million, but it addressed lots of the needs that we had in order to get this transaction done and also it essentially relieved a $50 million investment that I think the parent would have committed equity to the transaction but ultimately that wouldn’t have addressed the lack of liquidity.

Justin Jenkins

Appreciate the color, guys. I'll leave it there. Thanks.

Operator

And we’ll take your next question from Bhavesh Lodaya, with Credit Suisse. Please go ahead.

Bhavesh Lodaya

Hi, good morning guys and congrats on the equity deal and especially to do in how the stock has performed since then. If I remember correctly the annual rate escalators for Delaware Rail City Terminal and the DCR West Rack became effective in 1Q. If you could comment on where those rates have moved and how we should expect them going ahead?

Erik Young

They’re all PPI-linked escalators and de-escalators and ultimately the de-escalation clause can never go below the original run rate in the CEC. So ultimately there was a small decrease on the Loop Track at Delaware City, but ultimately it’s more or less in line with what we had from the outset. So I think for the Delaware Rail Terminal it was $2.014.

Bhavesh Lodaya

Okay. And the products pipeline and the truck rack follow a second quarter schedule, right?

Erik Young

Yes. The truck rack is a little over $1 per barrel in terms of MVC and then ultimately we’ve got -- it's more or less $0.55 for the Delaware pipeline and for the truck rack it’s about $0.462.

Bhavesh Lodaya

Okay. And then if I look at your operating expenses and G&A and realizing that the operating expense trend tends to go lower with lower volumes while the revenues, obviously, have been protected by the MVCs, does the G&A behave the same way because that’s been trending lower, as well this quarter?

Erik Young

Well, I think if we're comparing Q4 of 2015 to Q1 of 2016 we did have approximately $1 million of excess comp expense as a result of management changes last year that hit the G&A line. So I think otherwise the OpEx side of things yes, has been trending lower simply based on actual throughput, but the G&A side should be relatively straightforward. We would estimate it about $3.5 million, $3.7 million per quarter.

Bhavesh Lodaya

Okay. And then finally like previously you had mentioned that you remain comfortable with the credit quality of the third-party customers any changes to that comment? And also, if you could remind us on the EBITDA split between your parent PBF and the third parties by the end of this year.

Erik Young

No change in terms of credit quality. It has only continued to improve from our perspective. And then in terms of -- assume the $10 million of run rate EBITDA parent company is a very small portion of that. And then once the connections are all put in place, so once PBF will just expend the $5 million of additional CapEx that run rate should go to about $15 million per year and PBF will represent approximately one third of the $15 million.

Bhavesh Lodaya

And the rest of the EBITDA is all PBF, is that correct?

Erik Young

So $10 million third party and $5 million of PBF.

Bhavesh Lodaya

Sorry, I meant the existing operations as well.

Erik Young

The existing operations, PBF is a very small portion of the $10 million.

Bhavesh Lodaya

Okay, thank you for that.

Operator

[Operator Instructions] We’ll take your next question from Praneeth Satish, with Wells Fargo. Please go ahead.

Praneeth Satish

Yes, good morning. Just two quick questions for me. I guess first, one of the push backs we get on the story is the rail exposure and the outlook for these assets once the MVC contracts expire in four or five years. And, I mean I know a lot of it, obviously will depend on the state of the oil markets later this decade. But I’m just wondering if you could broadly speak about your strategy here for dealing with this long-term risk. Could you swap out the rail assets for something in the dropdown inventory pipeline assets or is the goal to diversify further through third-party acquisitions? Just curious about your thoughts here.

Tom Nimbley

Kind of all of the above, but with a base tenet of a year ago, 18 months ago, we would not have forecast the crude export ban being lifted and the arteries that have been overbuilt in the MLP space, which has rather dramatically changed the landscape for movement of oil in the U.S. And by corollary, I would tell you there is not much I could do to forecast what it’s going to look like five years down the road. We do want the option. We will continue to keep the option to move by rail.

Candidly, I believe that heavy crude by rail out of Canada at some point is almost certainly going to come back. Frankly if you look at what’s going on with the Saudis, basically the Motiva split looking to move some of their crude into assets that currently are running a basket of crudes, may in fact put some pressure on the crude transport from Canada on the heavy side.

We are running 40,000 barrels a day of Bakken by rail. Nobody else is because straight up on sweet crude you can’t make it work, but because it has carrying power with the heavy crude that we’re running in Delaware City it actually does work for us. So we’re going to keep the option open. But at the same time we’re looking at everything you said. We certainly want to diversify, that’s been a goal. We’re doing that, diversify away from rail; diversify away from just one region. And we will continue to do that. And we think we’ll have opportunities there.

And at the same time we’re going to look at everything. If indeed there is no rail five years down the road or something like that, what are we going to do strategically to figure out how to handle that situation? But we’re a long ways from making that decision now.

Praneeth Satish

Fair, enough. And then just last question, I’m not sure you can answer it, but just wondering pro forma for the Plains acquisition if you could give us a sense of how much of PBFX’s cash flow is from MVC or take-or-pay contracts.

Erik Young

Well, we’re assuming the $15 million that relates to pro forma EBITDA for our Plains transaction and add that to the nominal guidance that we provided of 95 to 100 on an annualized basis. The 95 to 100 is all almost exclusively related to MVC and then the incremental $15 million, there will be the $5 million coming from parent company, a portion of that related to longer term contracts and a portion of the $10 million of run rate EBITDA that Plains has today relates to MVC. So assume it’s probably $5 million to $7 million that would not be related to MVC contracts on a total basis of nominally 110 to 115.

Praneeth Satish

Got it. Thank you.

Operator

And at this time I’d like to hand it back over to Tom Nimbley for final remarks.

Tom Nimbley

Well, thank you very much for being on the call. I want to reemphasize how excited we are to be closing the transaction tomorrow and welcome the good people who are working in the East Coast Terminals for Plains into the PBF family. I would say, as both Erik and I mentioned this is in fact the strategy and the model that we intend to pursue and with the parent company’s success in growing you will see opportunities for the MLP to grow alongside with it. So everybody have a nice day, and thanks for being on the call.

Operator

Thank you. This does conclude today's conference. You may now disconnect, and have a wonderful day.

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