Transmontaigne Partners L.P. (NYSE:TLP)
Q2 2016 Earnings Conference Call
August 09, 2016 12:00 PM ET
Fred Boutin - CEO
Rob Fuller - CFO
Selman Akyol - Stifel
Shneur Gershuni - UBS
Good day, everyone and welcome to the TransMontaigne Partners Second Quarter Earnings Call. Today's conference is being recorded.
And at this time, it is my pleasure to turn the call over to Fred Boutin, Chief Executive Officer. Please go ahead, sir.
Thank you, Lisa. I'd like to welcome everyone to the TransMontaigne Partners earnings call for our quarter ended June 30, 2016. Joining me on the call today is Rob Fuller, our Chief Financial Officer; and as always, Greg Pound, our Chief Operating Officer will be joining us during the Q&A session.
I'd like to remind you that statements made during this call that might be considered expectations or predictions should be considered forward-looking statements that are covered by the Safe Harbor provisions of the Securities Litigation Reform Act. Important factors that could cause our actual results to differ materially from these forward-looking statements are disclosed in the company's SEC filings including the Risk Factors section of our annual report on Form 10-K, which may be accessed on the SEC’s website or TransMontaigne's website. We undertake no obligation to update any forward-looking statements.
Finally, on the call today, we will be referring to certain non-GAAP financial measures. For a reconciliation of these to the most directly comparable GAAP financial measure, please refer to the partnership's earnings release or to our website.
I'm happy to report that for the second quarter, we had strong results across our business. Distributable cash flow for the second quarter totaled $18.1 million compared to $16.7 million in the second quarter of last year. We had quarterly EBITDA of $23.1 million, up from $21.6 million in the second quarter of last year. Net earnings of $10.3 million compared to $12.2 million for the second quarter of last year.
For the first six months of 2016, revenue, EBITDA and distributable cash flow were at record-high levels as our strong second quarter built on record first quarter results. For the June quarter, we raised our distribution from $0.68 to $0.69 per limited partner unit. Our distributable cash flow for the quarter was 1.34 times the total distributions we paid. We believe that our three consecutive quarterly distribution increases reflect the strength and stability of our business, our strong balance sheet and our potential for future growth.
Earlier this year, an affiliate of ArcLight Capital Partners completed their purchase of our General Partner from NGL Energy Partners. ArcLight is a highly experienced energy sponsor and has already proven to be a strategic partner for TransMontaigne. For instance, in April, they purchased all of the TLP common units previously owned by NGL.
In addition to the excellent operating results and exciting ownership changes that have taken place this year, our base business continues to evidence its fundamental value. In our Frontera Brownsville 50-50 joint venture with PEMEX, we were successful in recontracting two significant contracts. In April, we recontracted 475,000 barrels of existing refined product storage capacity. And effective July 1, we recontracted 365,000 barrels of naphtha capacity. Both agreements were at rates higher than the previous agreements. We continue to believe that Brownsville is a very valuable asset, given the access that it provides to Mexico's energy markets.
We've also been successful in entering into new storage contracts at our terminal locations in Florida. Effective July 4, we entered into a new storage contract with a major oil company for 100,000 barrels of commingled capacity at our Port Everglades terminal in South Florida. Also, over the last few months, we have executed new, short and medium-term agreements for approximately 500,000 barrels of capacity at our Port Manatee terminal on the Gulf Coast of Florida. As a result of this progress, our Gulf Coast terminals are essentially 100% contracted.
Finally, last week, we were able to recontract at higher rates a major contract in our River system. The new agreement, which was signed with the existing customer, extends the maturity of our contracted capacity on the River system for an additional five years and is expected to generate additional minimum throughput revenue of more than $1.6 million per year.
Over the last three years or so, we have successfully contracted or recontracted a significant majority of our capacity to third-party businesses, growing our base of cash flows, extending the duration of our contracts and diversifying our customer base. Our existing asset base continues to provide some high-return opportunities. For example, we recently entered into a terminaling agreement that supports the construction of 176,000 barrels of new storage capacity in our Frontera Brownsville joint venture. We expect the total cost of this buildout to be approximately $5.3 million.
Construction of our 2 million barrels of new storage capacity in Collins, Mississippi is progressing on schedule. We expect the various tanks to begin going into service and producing revenue in the fourth quarter of this year and extending through the second quarter of next year. The first phase of our Collins expansion is fully contracted, expected to cost approximately $75 million and generate a return in the high-teens. Considering the size of TransMontaigne, a $75 million project with a return in the high-teens can be very accretive.
Last October, we purchased 83 acres of land adjacent to our Collins terminal for a potential second phase of expansion, and we have begun the permitting process for approximately 5 million barrels of additional capacity and discussions we’re having with potential customers are going very well.
We are progressing our South Texas pipeline project with Magellan. If completed, the project would include the construction of a 150-mile, 16-inch pipeline capable of transporting 150,000 barrels a day of gasoline, diesel fuel, propane and/or condensate from Magellan's Corpus Christi terminal to TransMontaigne's Brownsville terminal in order to meet market demand in Brownsville and other South Texas markets or for ultimate delivery to Mexico via truck, rail or connections to pipelines owned by TransMontaigne and third parties.
I'll now turn the call over to Rob who will review our financial results.
Thanks, Fred. As Fred mentioned earlier, we reported record revenue, consolidated EBITDA and distributable cash flow for the first six months of 2016, increasing by 9%, 10% and 7%, respectively, over the first half of the prior year. Our consolidated EBITDA for the 2016 second quarter was $23.1 million, which is $1.5 million more than the $21.6 million reported in the second quarter of last year. While our distributable cash flow was $18.1 million, $1.4 million higher than the $16.7 million recorded in the prior year’s second quarter.
Second quarter net earnings of $10.3 million was $1.9 million lower than the $12.2 million reported in the second quarter of 2016, mainly related to a prior year one-time gain at our Bostco joint venture, resulting from a customer of Bostco buying out its remaining contract obligation. Our share of this one-time gain in the prior year was approximately $3.4 million.
On a per-unit basis, we reported net earnings of $0.50 per limited partner units for the second quarter of 2016 compared to $0.64 per limited partner for the second quarter 2015. Second quarter results were driven by strong revenue growth. Revenue for the second quarter of 2016 was $41.1 million as compared to $37 million for the year-ago second quarter, representing a $4.1 million or 11% increase year-over-year. This increase was primarily attributable to an increase in revenue at the Gulf Coast terminal of $1.4 million, the River terminals of $2 million and the Southeast terminals of $800,000.
The Gulf Coast revenue increase of $1.4 million was driven by a new terminaling services agreement at one of our Florida facilities that was not in place for all the prior year second quarter and incremental revenue related to the purchase of the Port Everglades hydrant system earlier this year. We purchased the hydrant system from NGL in January, just prior to their sale of our General Partner to ArcLight. The hydrant system is a strategic asset for us and serves as a critical source of fueling to the crew ship industry in South Florida. The system is backed by an agreement with one of our existing terminal customers with the remaining contract life of three years, allowing us to extend the range of services we provide to this customer.
For our River terminals, the $2 million increase in revenue was primarily due to a $1.7 million one-time settlement payment related to property damage caused by one of our customers.
At our Southeast terminals, the revenue increase of $800,000 was attributable to a new 5-year agreement that we entered into with a third-party customer for approximately 2.7 million barrels of existing capacity at our Collins/Purvis Mississippi bulk storage terminal. This agreement commenced on January 1 of this year and replaces the previous agreement we had with the third-party customer for this tankage and included a sizable increase to the minimum throughput fees. The new agreement is anticipated to generate additional minimum throughput revenue in excess of $4 million annually.
Direct operating cost for the second quarter came in at $17.7 million versus $15.9 million in the prior year. The $1.8 million increase is primarily related to the timing of repairs and maintenance work performed across the system. We anticipate our repairs and maintenance spend to be more ratable in the 2016 quarters as compared to the prior year in which we had spent 20% of the total spend in the second quarter and 41% of the total prior year repairs and maintenance spend in the first half of the year. In addition to the increase in direct operating costs, non-cash items impacting the changes in net income year-over-year for the second quarter included a $300,000 increase in the amount of unrealized losses on our interest rate swap agreements and a $600,000 increase in depreciation expense.
From a liquidity perspective, we had outstanding borrowings of approximately $268 million on our credit facility at the end of the second quarter, leaving $132 million in additional borrowing capacity on our revolver.
For the second half of the year, we have remaining growth CapEx requirements of approximately $60 million for our approved growth projects, which primarily includes the 2 million barrel expansion at our Collins terminal. For the second quarter, we funded all of our spending requirements on our revolver, and given our strong balance sheet position, we anticipate that we will fund the majority of our remaining growth CapEx needs for the next year with revolver availability, and to a lesser extent, with any excess cash flow.
For the period ended June 30, 2016, trailing 12-month EBITDA as measured by our revolving credit facility was approximately $93.9 million, leading to a healthy leverage ratio of 2.85 times. Included in our earnings material issued this morning is our computation of distributable cash flow. As mentioned earlier in this call, we generated $18.1 million of distributable cash flow in the second quarter of 2016.
We have previously announced that we paid, yesterday, on August 8, to unit holders of record on July 29 a $0.69 per unit distribution, representing a total distribution of $13.4 million. This represents distribution coverage ratio of approximately 1.34 times and a distribution cushion of approximately $4.6 million. This latest distribution represents a 1.5% increase over the previous quarter and marks the third consecutive quarterly increase in our distribution. We are proud of our ability to increase our distribution for now the third consecutive quarter and remain committed to distribution growth over the long term.
That concludes our prepared remarks. Lisa, we're available for any questions that folks may have now.
Thank you, sir. [Operator Instructions] Our first question comes from Selman Akyol with Stifel.
Thank you. Good afternoon. So a couple of quick ones for me, if I may. First of all, if I take a look at Bostco and Frontera from Q1, looks like Bostco trended down while Frontera -- it was up reasonably nice. So I get Frontera, but I was wondering what's going on with Bostco?
BOSTCO is -- Selman, it's being pretty ratable. There was a couple of charges at year-end that they had to take, and those were in -- resulted in some of the first quarter decreases there. And then there was another charge or an asset write-off, a small one that they took this second quarter also.
Okay. And then in terms of Frontera, I guess, with you guys recontracting more in July, we could expect those distributions to continue upward as well?
The distributions from Frontera Brownsville, yes, that should go up.
Okay. And then you talked about a terminaling agreement for $176,000 at, I think, Brownsville. How long was that going to be for?
2 to 3 or 5 years, Selman. I can't remember.
And then if we were just to look at your capacity across -- capacity utilization across the entire system, where is that running at right now?
Well, the only place we have any meaningful available capacity is River. So Florida is booked up. Brownsville -- we have -- I think we have 160,000 barrels in Brownsville, but I really expect that will get contracted more or less just between customers. And the Southeast is fully contracted. Midwest is fully contracted. So it's -- I think there is maybe 700,000 barrels or so in the River that is uncontracted. So rent [indiscernible] pretty full.
Got you. And then I guess the last one for me is, I think Howard Energy had been proposing a pipe as well down to Mexico. Is there -- do you have any comments on that, just what you and Magellan are considering that's impacting?
I don't really want to comment on their pipeline. But I will say that I think that our pipeline makes the most sense for PEMEX, which is likely the big customer, due to the fact that PEMEX already owns the M-B pipeline which originates out of tankage in our terminal in Brownsville and moves product today over to Cadereyta. So it -- I think logic would say that it would be a better move for PEMEX to take capacity on our line from Corpus to Brownsville and then use their own line to move products from Brownsville to Cadereyta. But there is a lot of change going on, as you're well aware, in Mexico and a lot of rules being written, lot of things influx. So we're working hard to get firm commitments from counter-parties to support that pipeline.
Got it. All right. That is it for me. Thanks
[Operator Instructions] Our next question comes from Shneur Gershuni with UBS.
All right. Good morning, guys. Just a couple of quick follow-up from Selman's questions here. First, you sort of gave a nice outline of the project development that you're embarking on at this stage right now. Is there a sort of -- I don't know if the right word is shadow backlog. But are there other opportunities that you're evaluating that could potentially extend this growth thesis beyond 2017?
Sure. I mean, there are conversations that we have on a regular basis with various customers at various locations around our existing assets. So we're always looking to work with our customers to increase capacity, increase functionality, improve our system and grow our business. So sure, that's going on all the time. I think the 176,000-barrel tank at Brownsville's a good example. Once we get to the point where we don't have any tankage left, well, that doesn't mean we're going to stop. We're just -- we might have to build a tank. We also have a few tanks that are out-of-service tanks or would need significant amounts of work so we don't consider them active tanks today. But in a lot of cases, it'd be less expensive to bring one of those tanks back into service than it would be to build a brand-new tank. So there's always a lot of those discussions going on.
Would you say that there's -- I mean it sort of seems like some of the CapEx that you're focusing on now is sort of related to some pent-up demand due to limited opportunities under the previous two GPs. Is that effectively taken care of with what you've got or do you feel that there's a sense that there's more percolating?
Well, I think the change in GP is definitely very helpful. And it's great to have a GP that is not also customer, which has always been the case in the past. So I do think that our existing customers are more excited about working with us as an independent company than one that's beholden to a major customer. But I think the tone of the conversations with the customers generally is just a lot better than it used to be. And I'd also want to mention that, I didn't talk a lot about it in my comments, I hope that by the next earnings call, we'll be able to say a whole lot more about the second phase at Collins.
But we are having very meaningful discussions with customers there. And so we're hopeful that we're going to be able to contract a significant amount of the 5 million barrel potential there. So that will remain to be seen. But that is clearly the low-hanging fruit. And getting back to your question that is tied to the previous ownership that we had, where we just were not able because of the relationship, we were not able to meet that demand and now we can. So that is such a potentially accretive and valuable project to us, so that's a big focus.
Okay. And when you think about your General Partner being ArcLight now, when we sort of think about their assets, I think they've got these Gulf assets, pyramid and so forth. Are any of those assets at all something that you think are interesting or would be -- would fit well in the partnership, assuming that they had wanted to monetize and potentially sell? Is it something you can characterize in terms of an EBITDA potential that could come from upstairs to downstairs, if assuming the GP was interested in selling it?
No. I'm not prepared to talk about EBITDAs at all. I mean there are a lot of terminals in those assets. And so sure, I think they probably fit. But that is really going to be a decision that ArcLight will make at the appropriate time. And charge from ArcLight today is across a few of our business as we know it and to grow it. And if those drop-downs -- if those end up being drop-downs, great. But that's not something that we're spending a lot of time worrying about at TransMontaigne at the moment.
Great. Thank you very much guys.
[Operator Instructions] And there are no further questions. So that does conclude our question-and-answer session for today's presentation. Thank you for your participation, and you may now disconnect.
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