VTTI Energy Partners LP (NYSE:VTTI)
Q2 2016 Results Earnings Conference Call
August 09, 2016, 10:00 AM ET
Rob Abbott - CFO
Rob Nijst - CEO
Andy Bird - JPMorgan
Praneeth Satish - Wells Fargo Securities
Lin Shen - HITE Hedge Asset Management
Good day, ladies and gentlemen. Welcome to the VTTI Energy Partners Second Quarter 2016 Earnings Conference Call. During today's slide presentation, all parties will be in listen-only mode. Following the conclusion of the slide presentation, the conference will be open for a question-and-answer session.
At this time, I will turn the call over to Rob Abbott, Chief Financial Officer of VTTI. Please go ahead, sir.
Good day and thank you all for joining the VTTI Energy Partners Q2 2016 earnings call. Please note that the press release announcing our financial results and related slides are available on our website at vttienergypartners.com.
I would like to also remind you that certain declarations made by management during the conference call will include the use of statements that are forward looking in nature and will not be based on historical facts. Accordingly, we direct you to the risks and uncertainties disclosure included in the Company's latest filings with the SEC.
With that, I'll introduce Rob Nijst, our Chief Executive Officer.
Thanks, and welcome everyone to our earnings call for the second quarter of 2016. On Slide 3, we have our usual slide, reiterating why we believe VTTI is a truly differentiated Company, that provides cash flow stability with long-term, take or pay contracts with no direct commodity price exposure and no material volume risk.
Turning to Slide 4, we have a summary of the dropdown transaction and related equity raise that was announced yesterday and priced overnight. The transaction structure of acquiring additional slices of VTTI Operating was in line with our stated strategy and our first dropdown of 6.6% completed last year.
Under the anticipated transaction, the MLP will acquire 8.4% of VTTI MLP BV or VTTI Operating, taking the increased ownership to 51% of VTTI Operating. The transaction is 100% equity financed, having overnight raised $101 million of equity at $19.30, a 6.8% discount to the closing price of $20.71.
The public transaction was approaching two times oversubscribed. VTTI BV also participated in the transaction, taking 1.3 million units of the 5.25 million total units issued at the same price as the units issued to the public. The enterprise value of the transaction was $140 million, which including pro-rata net debt at the VTTI Operating level implies an easy adjusted EBITDA multiple for the last 12 months of 8.3 times.
On page 5, you can see our updated VTTI Group asset base to give you a sense of the scale of our dropdown inventory remaining following our second dropdown transaction pro forma, the announced dropdown, the 18 million barrels of storage capacity in the MLP.
In addition to these, the 17.5 million barrels in the remaining 49% of VTTI Operating, and we have another 18.5 million barrels of gross capacity held at VTTI BV level. So, the total remaining dropdown inventory is 36 million barrels compared to the current 18 million barrels of VTTI Energy Partners, i.e., two times the existing asset base. As you know, we have a right of first offer on all these assets.
Now to slide number 6 and our corporate and operating review for the quarter. We have maintained our distribution growth rates from the last quarter which, as stated previously, places us firmly in the top quartile of our MLP peers. As discussed, the dropdown transaction and related equity raise has not been announced. The dropdown transaction is signed and expected to complete on the September 1.
Please note, as Rob will discuss later, we have revised our presentation of non-GAAP financial measures and will continue to present in this revised format going forward. This affects comparability of our historic earnings releases.
In terms of operating highlights, we gained, experienced and accelerated excellent operating performance in the quarter, with contracted utilization levels remaining close to maximum operational capacity and the supportive market environment. Maintenance CapEx has returned to a typical run rate level having been at the lower level in the first quarter due to the phasing of spending.
Next, we turn to Slide 7 and our growth agenda. As noted previously, the expansion project at VTTI BV in Fujairah has been commissioned and was constructed on time and on budget. We are now collecting revenue there. The Cape Town project is well underway and currently on track for commissioning next year.
I will now hand you over to our CFO, Rob Abbott to take you through the financial results for the quarter.
Thanks Rob. I would just like to start by reiterating that the presentation of our non-GAAP financial measures has changed following recent guidance issued to the market in Q2. I'll return to this in more detail later.
Adjusted EBITDA for Q2 was $47.4 million, benefiting from a continued strong revenue performance due to high utilization levels. We also raised our distributions this quarter by 3.1% to approximately $0.32 per unit and increased in line with the prior quarter. Net debt levels were also relatively stable with a current ratio of 2.8 times EBITDA, which is below our target threshold of 3 times to 3.5 times.
Now I'll turn to the financials in more detail on Slide 8. On the left hand side of page 8, we show the quarterly impact of the revised presentation of our non-GAAP financial measures. As you can see, there is limited impact on historical adjusted EBITDA numbers with the exception of Q1 and Q2 2015. For those quarters, you will recall, we received $5.5 million per quarter of non-recurring other revenue at our Rotterdam terminal. This is purely a presentational change, these receipts are now listed below the adjusted EBITDA line before distributable cash flow.
As you can see on the right, there is no impact on our historical distributable cash flow and coverage ratio, which are as disclosed previously. Over coverage ratio has been on average 1.15 times versus our target level of 1.10 times; and in Q2, the coverage ratio dropped to 0.95 times due to the timing of our second dropdown.
Now, this Q3 dropdown will allow us to resume a historically healthy and sustainable coverage ratio although the economic benefit will obviously only be felt from transaction closing anticipated on the September 1. For more details on these revisions, please see the appendix.
In terms of headline numbers on page 9, adjusted EBITDA, as mentioned, was $47.4 million, a reduction of $3 million versus the prior quarter largely due to a strong additional revenue performance in Q1. Interest was $0.5 million lower than the last quarter but it's higher than in previous years. This is due to the impact of the MLP and ATB affiliate loans combined with the ongoing cost of the interest rate swaps that were put in place for the RCF at the time of the IPO. We consider this level to be the run rate going forward in the medium term.
Cash tax continues to be zero, although we do expect to have limited cash tax costs payable by the end of 2016 as anticipated. Maintenance CapEx in Q2 returned to a run rate level in line with our guidance of $25 million to $27 million for the year, Q1 having been lower due to the saving of spend.
Post NCI, the distributable cash flow was $12.8 million, giving a coverage ratio of 0.95 times versus our stated target of 1.10 times.
On slide number 10, you can see an update in our balance sheet hedging position. Our external net debt was approximately $535 million, comprising our RCF and USPP outstanding balances net of cash. Our implied gearing level was 2.8 times the Q2 adjusted EBITDA on an annualized basis.
As disclosed in our last earnings call, in Q2, we expanded our FX hedging program to address the one remaining material non-U.S. dollar exposure in the MLP group being the Malaysian Ringgit costs we incur locally in our Johor ATB terminal. This was done with an aging profile in line with our existing U.S. dollar, euro-FX hedge, i.e., running at approximately 90% coverage at mid-2019 and 50% thereafter till the end of 2020.
With that, I'll turn back to Rob Nijst to talk about the Company outlook.
Thanks. Turning to our final slide on page number 10, we set out our views on the market and the prospects for the business going forward. As discussed on previous calls, we believe that regional product imbalances and product demand growth will continue to drive the increasing requirement for storage outside North America. As you can see, VTTI's operating performance and outlook has remained strong, despite recent commodity price fluctuations.
In terms of acquisitions, we are working closely on a number of live situations and anticipate announcing one or two growth transactions by the end of 2016. Given our strong and supportive sponsor, healthy balance sheet and current liquidity position, we have significant flexibility to achieve accretive growth. In the near term, our primary source of growth at the MLP level will continue to be derived from further dropdowns of equity in VTTI Operating, in line with the dropdown just announced.
With that, we'll turn to the question-and-answer session and the first question. Operator?
[Operator Instructions] Our first question comes from Jeremy Tonet of JPMorgan. Please go ahead.
Hi, good morning. It's actually Andy Bird for Jeremy. Congratulations on the transaction. So the 8.3 times dropdown multiple, obviously very attractive and below the dropdown last year. Is this a good expectation going forward?
I think it just depends on the market valuation and cost of capital, and the reason we show to reduce the valuation following a last dropdown is obviously because the general downturn in pricing and hence, cost of capital for the whole industry. So it really depends on the outlook for the future and how our unit prices perform going forward.
Okay. So lot of flexibility to basically just achieve desired accretion and its flexible depending on cost of capital?
Okay. And then in terms of size, I think the 8.4% slice was bigger than the 6.6% one year ago. Is the size going to continue to grow as well or is that fluid like the multiple?
No, the general intention is that the size will continue to grow, because obviously we're back-solving so that we can pay the growing distribution, but the frequency and size of each individual drop will be, to some extent, opportunistic depending on market timing. But if you take it over a long period of time on year-on-year the drops will, in cumulative level, have to keep growing.
Okay. And turning to the distribution, obviously you reiterated today the intent to maintain your position as a top quartile distribution grower. Has your calculus changed at all towards the definition of what top quartile means and what types of benefits that title yields?
I think it's fair to say and indeed the world has certainly changed since we IPOed and the distribution policy of a number of our peers have moved, so the definition of top quartile has changed. As you can see, from a historical pattern, we've seen no reason to materially change our distribution growth profile, and our strategy remains to be top quartile like any other company. Each quarter, we have to review that in the context of our cash flow generation and balance sheet position.
Great. And then on -- I think in the past, an ATM is something that at least had been under consideration and clearly you don't need it. But at this point, are you big enough, you think, to at least file the ATM and maybe pursue that or is it still too early?
I think we'll have to assess that over the next sort of 6 months to 12 months as we see how the liquidity performs. So I think we'll just inform you once we have a more definitive view on that.
Great. And then last question on growth CapEx, more of housekeeping. Of the $35 million that's budgeted for the year, is that the partnership share or is that all of OpCo? And what's that kind of being spent on or focused on?
That's all of OpCo, so that's the gross number for the VTTI Operating, and the bulk of it is incurred at Amsterdam, in our terminal where there is a large scale restructuring program; and you will remember that, that terminal was bought from a third-party, which will allow us to market tanks there at higher rates and add incremental EBITDA.
And that $35 million, is that looking at the outlook for next year, is that similar level of opportunity or is there anything in the pipeline that potentially could knock that number up?
There are things we're looking at in the pipeline that could increase that, but I think until we have certainty on those, then prefer not to comment on specific projects.
Great. Thanks for taking the questions.
Our next question comes from Praneeth Satish of Wells Fargo. Please go ahead.
Hi, just two quick questions from me. I guess one, you kind of touched on it, but were there any, guess, kind of unusual one-time items pushing coverage slightly below one times this quarter? Is this kind of the run rate that we should think about the business can generate in Q3 before you layer on the impact of the dropdown?
I think we suffered a little bit from -- we've had good performance from the additional revenues you saw in Q1, which meant that Q1 was somewhat higher than run rate and we didn't get that same benefit in Q2. The interest costs were higher than they were last year, as you notice if you're looking at on distributable cash flow.
But I think on an adjusted EBITDA level, this is not far-off a sort of normal run rate, although it remains to be seen whether we can benefit from that additional revenue as we received in Q1 in future quarters, and you should also -- it's a period where that's pretty -- there is the seasonality in our performance as well. In Q4, there is an uplift in additional throughput revenue in Q4 that tends to add $3 million or so to revenue and EBITDA.
Got it. And then just to clarify, I think at the end of the prepared remarks, you talked about in the process of evaluating one to two acquisitions by year-end. Are these third-party, are they at the MLP, OpCo or BV level, I guess, just some clarity in terms of where you're looking at these transactions?
Most likely level at the BV level, but it's a combination of organic projects within our existing sites, organic third-party projects, greenfield projects, and brownfield projects, again third-party.
Got it. Thank you.
Our next question comes from Lin Shen of HITE. Please go ahead.
Thank you very much for taking my question. This dropdown was finished 100% equity financed. So, when we think about your debt/EBITDA leverage is also low, how should we think about their financing plan for the next dropdown?
I think -- we like to maintain a conservative balance sheet because it gives us the strategic flexibility to do a debt finance drop, should we need to do one. I think our base case, at least for the next 12 months, is that we will prefer to do equity financed deals, but we maintain that flexibility with a headroom on the debt side to partially or fully finance any dropdown with debt.
So, it really goes back to my earlier comment about the unit price performance. In a strong unit price environment, we will prefer to do equity finance. If we have a feel like we're not in a conducive environment, then we'll use the balance sheet as a sort of backstop facility.
Great. And also for the timing of the dropdown, should we think about the frequency like once a year or how should we think about the timing of the frequent purchase sale dropdown.
I think, given what's happened over the market in the last 18 months or so and the volatility we've seen, I don't think it's logical to stick to too rigid a dropdown cycle or too irregular a dropdown cycle. So I think our strategy, which again is subject to market conditions is that we start to move to more frequent and may be less regular dropdowns to allow us to be more opportunistic around market conditions.
Okay, great. Last one from me. You mentioned that in Q1, the DCF coverage is higher due to some benefits that you don't have in Q2 and it could be seasonal or you don't know regarding the future. So, can you give me a little bit color about what kind of benefit you got in Q1, which is not like regular business income.
Yes. In Q1, there were two or three customers across the portfolio that -- the way they used our tanks, our terminals led to a lot of additional revenue. The example I'll give you is one customer in Amsterdam did a lot of ship-to-ship transfers.
And every time they do that kind of activity, they have to pay us a fee, but the volume, the levels of that activity is very much dependent upon individual customers, how they receive the market in given time and how they react to that market. So it's quite hard for us to predict from one quarter to another, whether or not we're going to see that kind of revenue come through again.
So, in Q1, it came through very strongly; Q2, not so much; Q3, again it's difficult to predict, but what I can say is, Q4, these excess throughput revenues are more, those are more predictable source of income that we have typically seen fairly regularly from year-to-year arriving in Q4.
This concludes our question-and-answer session. I would like to turn the conference back over to Rob Abbott for any closing remarks.
Thank you everybody for joining the call and we look forward to talking to you in the future.
This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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