Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Louie Rubiola - Director, IR

Greg Goff - Chairman and CEO

Phil Anderson - President

Scott Spendlove - Vice President and CFO

Rick Weyen - Vice President of Operations

Analysts

Brian Zarahn - Barclays

TJ Schultz - RBC Capital

Cory Garcia - Raymond James

Sharon Lui - Wells Fargo

Tesoro Logistics (TLLP) Q3 2012 Earnings Call November 6, 2012 8:30 AM ET

Operator

Good day ladies and gentlemen, and welcome to the third quarter 2012 Tesoro Logistics LP earnings conference call. [Operator instructions.] I would now like to turn the conference over to Mr. Louie Rubiola, director of investor relations. Please proceed.

Louie Rubiola

Thank you, operator. Good morning everyone, and welcome to today’s conference call to discuss our third quarter 2012 earnings. Joining me this are Greg Goff, chairman and CEO; Phil Anderson, president; Scott Spendlove, vice president and CFO; and Rick Weyen, vice president of operations.

We issued a press release yesterday announcing our results. That release, along with additional financial and operational information, and reconciliations for non-GAAP financial measures, is available on our website at tesorologistics.com.

Please refer to the forward looking statement in the earnings press release, which says statements made during this call may 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 Greg.

Greg Goff

Thanks, Louie. Good morning and thank you for joining us on the call today. You have our earnings release. Scott and Phil will go over some of the details of results in a moment, but I’d like to start with some recent highlights.

On October 18, we announced a cash distribution for the third quarter of $0.455 per limited partner unit, or $1.82 per unit on an annualized basis. This represents an 11% increase over the quarterly distribution paid in August of this year, and a 30% increase over the last four quarters.

On September 14, we completed the acquisition of the Long Beach Marine Terminal and Los Angeles short-haul pipelines. This transaction was a key step in our growth plan, and highlights our strategy to grow our business through the acquisition and development of Tesoro Corporation’s legacy logistics assets.

Concurrent with the Long Beach transaction, we closed on an eight-year, $350 million debt offering with a coupon of 5. 875%, which was the lowest yield ever for a first-time issuer at that credit rating level. The proceeds were used to fund the acquisition of the Long Beach assets and repay the outstanding balance on our revolving credit facility.

On October 5, we executed our first follow-on equity offering, selling over 4.2 million units in an oversubscribed offering, netting the partnership more than $170 million. Tesoro also reaffirmed its intent to offer the Anacortes unit train facility to TLLP during the fourth quarter and we continue to see TLLP as an integral part of Tesoro’s growth strategy, adding value to the logistics business and driving distribution growth for our unit holders.

With that, I’ll turn the call over to Scott to discuss our results.

Scott Spendlove

Thanks, Greg. Before I get into the numbers, I want to remind everyone that our third quarter financials include historical results at the Long Beach asset. To help investors, we’ve provided additional information that is comparable on a period to period basis, focusing on the results of operations of TLLP assets following their acquisition. For purposes of this call, we’ll focus on the results that include only TLLP’s ownership of the assets and exclude predecessor results.

For the third quarter, we had distributable cash flow of $17.9 million, and EBITDA of $20.3 million, which was in line with prior guidance.

Turning to our segment results, revenues in the crude oil gathering segment were up $4.8 million from the prior quarter. The increase was the result of higher pipeline deliveries driven by the expansion of Tesoro’s Mandan Refinery and higher trucking volumes related to Tesoro’s strategy to move Bakken crude oil to alternative destinations.

Revenues in the terminalling, transportation, and storage segment were up $2.9 million from the prior quarter due to the addition of the Long Beach assets and higher throughputs at existing terminals. Revenues in both segments benefited from the annual increase in contractual rates. The Long Beach assets contributed $1.2 million of EBITDA for the period that TLLP owned the assets during the quarter, before transaction expenses of $600,000.

As a reminder, we expect the Long Beach assets to contribute about $22 million of annual EBITDA. Operating expenses before depreciation were sequentially higher in the quarter by $4 million. This was related primarily to higher contract hauler costs, driven by the higher volumes of trucking during the quarter.

Total capital expenditures in the quarter were $12.1 million. This includes $8.3 million of expansion capital and $3.8 million of maintenance capital, of which $3.1 million was reimbursed by Tesoro.

As Greg mentioned, we issued $350 million in eight-year 5.875% notes. This issuance allowed us to pay off our revolver borrowings of $118 million. Our interest expense is expected to be approximately $5 million per quarter. This leaves our revolver undrawn, with $300 million of available dry powder for future opportunities.

We ended the quarter with $55 million of cash. Since the quarter closed, we completed the follow-on offering, which gave us an additional $170 million of cash.

And with that I’ll turn the call over to Phil to discuss the business and our outlook. Phil?

Phil Anderson

Thanks, Scott. In the third quarter, we took another significant step forward in our strategic growth plan, and we continue to drive opportunities in each phase of our strategy. The organic growth plans and asset optimization delivered higher volumes across the base assets during the quarter.

We saw the first impact of increased demand to move barrels on the high plains system. We had a full quarter benefit from the expansion of Tesoro’s Mandan Refinery, as well as the ramp up in volumes going to the [Rangeland] rail terminal.

We also completed an interconnect project with a third party pipeline at Johnson’s Corner, that we expect to become a major source of new volumes in the future. Our trucking business realized record volumes and the proprietary volumes continue to grow as we take delivery of new company owned trucks.

Turning to the terminalling, transportation, and storage side of the business, our base terminal volumes continue to performance at a record pace. Increasing daily average throughput volumes were up 9,000 barrels per day over the prior quarter.

In Los Angeles, as a result of the revised permit allowing us to throughput more ethanol, and our efforts to optimize the terminal, we’ve captured a significant amount of the incremental volumes that we were expecting to achieve through the physical expansion. As such, we’ve elected not to move forward with the capital project to further expand the terminal in L.A.

The addition of the Long Beach Marine Terminal added approximately 24,000 barrels per day to our terminalling segment reported volumes during the quarter. For the period that we owned the assets, the throughput was approximately 132,000 barrels per day.

Going forward, we expect the Long Beach asset to add about 130,000 barrels per day to our terminalling volumes, and about 20,000 barrels per day to our short haul pipeline volumes going forward.

For the fourth quarter, we expect to generate EBITDA between $27 million and $30 million. We expect total capital spending in the fourth quarter to rise to approximately $17 million. Of that amount, growth capital is expected to be about $10 million as we complete the interconnect between the High Plains pipeline and the Enbridge System later this quarter. We are also progressing on the expansion of our Stockton terminal, which is on track for completion late in the first quarter of 2013.

We expect maintenance spending of approximately $7 million, of which $5 million we expect to be reimbursed. As Greg mentioned, we are working to complete the acquisition of the Anacortes unit train facility in the fourth quarter. We see that facility adding approximately $15 million to $20 million of annual EBITDA and about $500,000 of annual maintenance capital. We expect the transaction costs to total about $500,000 in the fourth quarter.

We also continue to work closely with Tesoro on the integration and planning efforts around the BP transaction. We expect to be offered the assets in a series of transactions, the first of which is expected to be contemporaneous with Tesoro’s closing sometime before mid-2013, subject to regulatory approval.

Later this quarter, we expect to lay out our objectives for 2013 and beyond. We continue to be excited about the opportunities we see across our markets, and in each phase of our strategy. We believe we can continue to deliver industry-leading distribution growth rates for our unit holders.

And with that, thank you again for joining us on our call, and I’ll turn it over to the operator for questions.

Question-and-Answer Session

Operator

[Operator instructions.] And our first question is coming from the line of Brian Zarahn from Barclays.

Brian Zarahn - Barclays

Phil, can you talk a little more about the Johnson’s Corner interconnect you mentioned? And also what are your expectations given the projects that are being completed this year for crude oil pipelines in 2013? What type of volumes are you looking at on your system?

Phil Anderson

Let me answer your second question first, about 2013. Our guidance for next year was that we would achieve 100,000 barrels per day of throughput on the High Plains pipeline. And we’re still comfortable with that number.

The buildup of that was about 70,000 a day going to Mandan and approximately 30,000 a day going into the Rangeland facility and about 10,000 barrels a day going out elsewhere. The mix, we think, might be a little different. But we do see good opportunities to hit the 100,000 and have potential opportunities beyond that.

Johnson’s Corner, which is in sort of the southern area of the Bakken in Dunn County, is an interconnect site where our pipeline as well as two other gathering systems, Arrow and Saddle Butte, all intersect. We completed an interconnect with one of those pipelines this quarter, and anticipate completing an interconnect with the other pipeline early in the first quarter.

We see those as a source of volumes on our system to reach any of the destinations available to us, including Mandan, Rangeland. We will be completing an interconnect with Enbridge during the fourth quarter. So we see new inputs and new output locations coming on to the system here really over the next six months.

Brian Zarahn - Barclays

And are these gathering interconnects, are they included in your 100,000 barrel a day expectation? Or are they incremental to that?

Phil Anderson

They are in that number.

Brian Zarahn - Barclays

In terms of the Anacortes rail facility drop down, can you talk a little bit about what your financing plans will be?

Phil Anderson

Well, as Scott and Greg went over, we ended the quarter with $55 million of cash. That was from the upsized debt offering. And then we did the equity offering for about $170 million of net proceeds. So our expectation right now is that that transaction will be structured 90% cash and 10% equity back to Tesoro. And we’ll fund the cash obviously with the significant cash balance that we have available.

Brian Zarahn - Barclays

And then in terms of the Carson potential drop downs, you mentioned previously about a billion dollar opportunity set. Is that using multiples that you’ve conducted to your previous drop downs at? How do you think about that billion dollars?

Phil Anderson

That’s probably in that same sort of range.

Brian Zarahn - Barclays

And then would you expect, given the proximity to Tesoro’s refinery in Southern California, any organic projects that could come out of the acquisition?

Phil Anderson

You know, we don’t have any specific organic plans at this point, but based on our expectations of the assets, we’ve got some sense that there may be some opportunities to do some organic opportunities around those assets.

Operator

Your next question is coming from the line of TJ Schultz from RBC Capital.

TJ Schultz - RBC Capital

How should we think about the pace of drop downs following the potential BP acquisition? I think you said the first one would happen at the time of the close. But as you look out over the first 12 months there, just how should we think about the pace? Will most of these be in in 2013?

Phil Anderson

No. I think for the BP assets, our view is that all of those assets will come in within the first 12 months of us closing. As we move beyond that, there are still legacy logistics assets at Tesoro. Tesoro continues to look at other organic growth opportunities that would result in some nice drop downs to TLLP in the future.

TJ Schultz - RBC Capital

I guess on the rail volumes at Anacortes, I think on the TSO call you mentioned there’s a learning process on national delivery and some rail restrictions on tracks that would cause a ramp to get to that 50,000 barrel a day. Can you just expand on some of those bottlenecks a little bit more, maybe what needs to be done to alleviate some of those rail restrictions?

Greg Goff

The main thing is just coordination with the railroad to station to trains into the refinery as we bring in the new volumes and all that. So we’re just working through. It’s not something where you have a lot of easy access in that. So it’s just taking us some time. You’re exactly right. We stated we’d be up 40 and going to 50, and it’s just a pure coordination effort to get the railroad in and out. Because it forces us to take a train in about six out of seven days a week, and that’s what we’re experiencing.

TJ Schultz - RBC Capital

Are there any Anacortes contributions included in your fourth quarter EBITDA guidance?

Phil Anderson

There is about $2 million of segment EBITDA in our estimate and then we’re expecting probably $500,000 of transaction expenses. So maybe $1.5 million net.

Operator

Your next question is coming from the line of Cory Garcia from Raymond James.

Cory Garcia - Raymond James

Just sort of circling back to the pure organic project table, and I hesitate to try to front run, I know you guys obviously published some more details into 2013, but it seems like there’s $57 million, sort of this project within your gathering segment. Maybe highlight one or two of those if you could in terms of the bigger, higher-impact projects to sort of keep an eye on in terms of modeling?

Phil Anderson

You know, within that project there’s really a lot of different things going on. We’ve got a certain amount of gathering growth going on. There’s a major interconnect with Enbridge at what we call Ramburg going on. We see that as a growing demand for storage at that location to facilitate trade between the two pipelines as well as the proximity to several rail locations. So some of the growth we’ve got in there is really storage type opportunities where we’ve got demand for incremental tankage and just really providing storage capabilities.

Cory Garcia - Raymond James

And sort of switching focus over to your rail volumes, obviously saw a nice pickup in the third quarter. Just want to get your updated thoughts on how you see that transitioning into the back half of next year. I know you guys have been pretty forward in saying that you expect trucking volumes to sort of plateau and then roll off as gathering in the Bakken sort of catches up. Just curious if you have any more color or thoughts on that and sort of what level you think maybe you could get to in terms of a peak trucking volume.

Phil Anderson

Our expectation around trucking is that it will continue to grow. We’re looking for some incremental growth in trucking as soon as the fourth quarter. That sort of 45,000-50,000 barrel a day rate is probably something that will continue through next year would be our expectation. So that sort of rate is probably built in.

Our major effort there is to really grow our proprietary trucking, which saves us substantially versus the third party side of the business. In terms of the ramp up of volumes going into Rangeland, we see Tesoro’s demand to move barrels into that facility again driven by the rail business and Anacortes as well as to alternate destinations. We think we’ll pick that volume up through the course of next year.

We also have some incremental demand from third parties to move into that facility that we’ll be looking to facilitate as well.

Operator

[Operator instructions.] Your next question is coming from the line of Sharon Lui from Wells Fargo.

Sharon Lui - Wells Fargo

Just wondering if you could maybe touch on potential FTC issues with the BP transaction, how that could impact the Wilmington refinery and the contracts that you have for the recent drop down at Long Beach.

Greg Goff

Maybe to reiterate what we stated last week, that as far as the FTC process, it’s proceeding exactly as we expected. We mentioned last week that at the end of September we received our second request for information which was expected and we are complying with that and moving forward. That just takes some time to do that. But at this stage, as you look at that process, everything is really moving exactly as expected and it’s our intent to complete the transaction just as we stated it sometime in the first part of next year. And other than that, there’s no other impact to the question you asked on the Long Beach assets.

Sharon Lui - Wells Fargo

So the potential sale of Wilmington is not even contemplated at this point in time?

Greg Goff

Well, what we intend to do is close the transaction as we took it out originally. That’s what we’re intending to do.

Sharon Lui - Wells Fargo

And then I guess in the Bakken, given the recent change of ownership for Rangeland, does that impact at all any of your projects up in the Bakken?

Phil Anderson

No, we don’t believe so. Tesoro, our primary customer, has a contract for their usage of that facility, so we’ll continue to focus on delivering the volumes that Tesoro demands. And I think the new ownership will continue to be interested in growing that facility. And that’s something that is ultimately, we believe, complementary to our system.

Sharon Lui - Wells Fargo

And is that a long term contract that TSO has with Rangeland?

Phil Anderson

Yes.

Operator

And at this time I’m showing no further questions in queue. Ladies and gentlemen, Tesoro thanks you for joining the conference call today. They thank you for your participation, and you may now disconnect. Everyone have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Tesoro Logistics' CEO Discusses Q3 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts