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Edited Transcript of TLP earnings conference call or presentation 8-Nov-18 5:00pm GMT

Q3 2018 TransMontaigne Partners LP Earnings Call

DENVER Nov 13, 2018 (Thomson StreetEvents) -- Edited Transcript of TransMontaigne Partners LP earnings conference call or presentation Thursday, November 8, 2018 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Frederick W. Boutin

Transmontaigne Partners L.P. - CEO of TransMontaigne GP L.L.C

* Mark S. Huff

Transmontaigne Partners L.P. - President of TransMontaigne GP L.L.C

* Michael A. Hammell

Transmontaigne Partners L.P. - Executive VP, General Counsel & Secretary of Transmontaigne GP L.L.C

* Robert T. Fuller

Transmontaigne Partners L.P. - Executive VP, CFO & Treasurer of TransMontaigne GP L.L.C

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Conference Call Participants

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* Barrett Auten Blaschke

MUFG Securities Americas Inc., Research Division - Senior Analyst

* Selman Akyol

Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Equity Research

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Presentation

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Operator [1]

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Greetings, and welcome to the TransMontaigne Partners Third Quarter 2018 Financial Results Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host today, Michael Hammell, Executive Vice President. Please proceed.

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Michael A. Hammell, Transmontaigne Partners L.P. - Executive VP, General Counsel & Secretary of Transmontaigne GP L.L.C [2]

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Thank you, and thank you, everyone, for joining us today on the TransMontaigne Partners conference call. I would like to remind all listeners that statements made during this call that include the partnership's 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 in the Risk Factors section of our annual report on Form 10-K, which can be accessed either on the SEC's website or at www.transmontaignepartners.com. We undertake no obligation to update or to revise any of these statements except as may be required by law.

Please be advised that on the call this morning, we may refer to certain non-GAAP financial measures. For a reconciliation of these measures to the most directly comparable GAAP financial measure, please refer to our third quarter earnings release.

Finally, as previously announced, a subsidiary of ArcLight Capital Partners proposed to acquire all of the outstanding publicly-held common units of TransMontaigne Partners. The Conflicts Committee, which is comprised of independent directors of our General Partner, is currently evaluating that proposal. Management will be unable to comment or address any questions on the proposal or the evaluation process during the Q&A portion of this morning's call.

With that, I would now like to turn the call over to Mr. Fred Boutin, Chief Executive Officer of TransMontaigne Partners.

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Frederick W. Boutin, Transmontaigne Partners L.P. - CEO of TransMontaigne GP L.L.C [3]

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Thank you, Michael. Good morning, everyone, and thank you for joining us. Also joining me on the call today is Rob Fuller, our Chief Financial Officer; and Mark Huff, our President and Head of Commercial Operations.

I'm pleased to announce that our business continued to perform extremely well during the third quarter, achieving record levels of revenue, EBITDA and distributable cash flow. We had revenue during the third quarter of $57.2 million, which was $11.7 million or approximately 26% greater than the third quarter of 2017. EBITDA totaled $36.1 million, an increase of $10.7 million or approximately 42% compared to the third quarter of 2017. Growth was primarily driven by our West Coast terminals acquisition, which we completed in December of last year.

This strong performance, combined with our outlook for continued strength, supported increasing our quarterly distribution by $0.01 to $0.805, which represents growth of 1.3% over the previous quarter and 6.6% over the year-ago quarter. And we were able to provide this distribution growth while maintaining a strong distribution coverage ratio of 1.43x. The third quarter's distribution increase was our 12th consecutive quarterly distribution increase. Paying $0.805 for the third quarter was a milestone since TLP has now more than doubled its quarterly distribution per LP unit since our initial public offering in May of 2005.

Since our IPO, we have distributed a total of $32.86 per LP unit, with an overall distribution cushion in excess of 35%. We've been able to provide strong and stable distribution growth because of our strategic assets and our long-term fee-based contracts.

Over the last year, we successfully executed on multiple organic investments and a significant acquisition. As we continue to expand our platform and extend our growth, we expect to further benefit from additional bolt-on opportunities over the short and long term.

During the third quarter, we continued to progress our Phase II buildout at Collins, which is underpinned by a long-term customer contract for the construction of 870,000 barrels of new storage capacity. The project also includes an agreement with Colonial Pipeline for the construction of significant receipt and delivery improvements that will significantly enhance the flexibility we offer to all our customers at Collins.

As of the end of the third quarter, we expensed approximately $13.2 million on this initial Phase II project. In total, we expect to invest approximately $55 million, and we expect the first of these tanks to be in service next month. The rest of the tanks in the manifold improvements should be placed into service during the second quarter of next year.

In Brownsville, our Frontera joint venture with an affiliate of PEMEX declined to exercise its right to participate in portions of our previously announced expansion projects. Accordingly, 100% of these high-return and fully contracted projects will be constructed and owned by TransMontaigne Partners. These projects involve construction of new tankage-related facilities and the conversion of our Diamondback Pipelines from propane to gasoline and diesel.

Our Diamondback Pipelines run from our terminal in Brownsville to the border where they connect with third-party pipelines that continue into Mexico. This will establish a new avenue for customers to move refined products from the U.S. into Mexico. We expect the aggregate cost of these projects to be approximately $55 million, about $5.7 million of which has been spent as of September 30. The work is on schedule and on budget. We expect these projects to come online in phases throughout 2019.

On the West Coast, construction of our fully contracted 125,000-barrel expansion at our Richmond, California terminal is on schedule and on budget. This low-capital, high-return project is a prime example of how we are maximizing our assets with a focus on capital efficiency. And we continue to pursue other similar projects at our West Coast terminals and across our facilities.

I'll now turn the call over to Rob, who will review our financial performance for the third quarter.

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Robert T. Fuller, Transmontaigne Partners L.P. - Executive VP, CFO & Treasurer of TransMontaigne GP L.L.C [4]

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Thank you, Fred. Good morning, everyone. Fred mentioned the record revenue, EBITDA and distributable cash flow levels we achieved during the third quarter of 2018. Driving these record levels was strong growth in revenues, which totaled $57.2 million or an $11.7 million increase as compared to the same period in the prior year. Of this increase, $9.9 million was from our West Coast terminals acquired in December of last year.

For the third quarter, approximately 76% of our revenue was generated from our firmly committed take-or-pay terminaling services contracts, up from approximately 74% in the prior year period. This increase reflects further progression in the quality and durability of our cash flows as we expand our terminal capacity and acquire new terminals under similar contract structures. These contracts are critical to our strategy as they provide for our base of highly-predictable terminaling revenues.

Our contract portfolio also remains attractive from a duration perspective with approximately half of our firmly committed terminaling services revenues for the third quarter generated from contracts with remaining commitments of 3 or more years, adding to the stability and predictability of our cash flow stream. Our terminaling services agreements are take-or-pay contracts. They contain requirements for our customers to make minimum monthly payments to TransMontaigne, usually at the beginning of each month, much like a rental payment. Because of these requirements, we receive and recognize a minimum fixed amount of revenue from the customer, even in the event that the actual throughput volumes are less than the contractual minimum volumes of product during that period.

Historically, more than 70% of our revenues have been generated from these firmly committed take-or-pay sources, with the remaining revenues generated from ratable sources such as pipeline fees, management fees and ancillary fees from base terminaling services.

Direct operating expenses for the third quarter totaled approximately $19.9 million, an increase of approximately $2.2 million over the third quarter of last year. Similar to revenue, this increase was associated with our newly acquired terminals on the West Coast, which incurred approximately $3.5 million of operating expenses for the quarter.

General and administrative expenses totaled approximately $5 million for the quarter, a decrease of approximately $300,000 over the prior year period. Earnings from unconsolidated affiliates, which represents our share of earnings in our BOSTCO and Frontera joint ventures totaled approximately $1.9 million, which is consistent with the prior year's third quarter amounts. A cash distribution we received in the third quarter from our joint venture's operations, was approximately $5 million, representing an increase of approximately $800,000 year-over-year for the third quarter. The increase in cash distributions is primarily attributable to the timing of maintenance spend at BOSTCO.

Interest expense for the third quarter 2018 totaled approximately $8.6 million, an increase of approximately $6 million over the third quarter of last year. The increase is attributable to several factors, including: one, an increase in borrowings associated with our $277 million purchase of the West Coast terminals; two, our inaugural issuance in February of $300 million of 8-year senior notes at a 6 1/8% coupon; and then, three, increases in bank borrowing rates under our revolving credit facility.

For the third quarter of 2018, we reported net earnings of $10.9 million, which was consistent with the prior year period. However, the third quarter 2018 results included a $3.4 million increase in depreciation and amortization expense, which is a noncash charge to earnings.

EBITDA for the third quarter was $36.1 million, representing an increase of approximately 42% compared to the $25.4 million we reported in the third quarter of 2017. Our third quarter 2018 EBITDA was a record for us, beating our previous records for quarterly EBITDA set in the first and second quarters of this year.

Distributable cash flow totaled $24.7 million for the quarter, which is approximately $3.1 million more than the $21.6 million we've reported for the third quarter of 2017. Our solid performance in the third quarter combined with our outlook for continued strength supported an increase in our quarterly distribution by $0.01 to $0.805 per unit. Our third quarter distribution represented total cash distributions of $17.2 million, which compared to total distributable cash flow of $24.7 million, resulted in distribution coverage of approximately 1.43x for the quarter.

For the first 3 quarters of 2018, we have steadily increased the quarterly distribution by $0.035 per unit while maintaining distribution coverage of 1.36x for the year-to-date 2018.

We finished the third quarter of 2018 with approximately $591 million of debt, including $291 million of borrowings on our $850 million revolving credit facility. With bank-approved pro forma amounts for the acquisition of our West Coast terminals and for the Collins Phase IIA construction cost that have been incurred to date, our third quarter leverage was 4.31x, which represented a decrease in leverage from the 4.41x we reported at the end of the second quarter 2018.

As Fred previously disclosed on his call, we currently have several construction growth projects underway, which are underpinned by long-term agreements. We expect to spend approximately $100 million on completing these projects during the fourth quarter this year through the end of 2019. We expect to use retained cash flows from our operations and the capacity on the revolving credit facility to finance these accretive projects. And we do not need to access other forms of capital.

In closing, as previously announced in July of this year, a subsidiary of ArcLight Energy Partners proposed to acquire all of the outstanding publicly-held common units of TransMontaigne Partners. The Conflicts Committee, which is comprised of independent directors of our General Partner, is currently evaluating that proposal. I want to remind you that management will not be able to comment or address any questions on the proposal or the evaluation process during the Q&A portion of this call.

With that, we are now ready to open the call to questions on the partnership's business and results of operations.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Barrett Blaschke with MUFG.

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Barrett Auten Blaschke, MUFG Securities Americas Inc., Research Division - Senior Analyst [2]

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I know you've been sort of slowly walking the distribution growth up at the pace you've kept for a good while now. Is there -- are you getting any pressure to back it off in favor of bringing down leverage at a faster rate? Or is that an issue at this point?

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Frederick W. Boutin, Transmontaigne Partners L.P. - CEO of TransMontaigne GP L.L.C [3]

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That hasn't really been brought up as an issue. So no, we're not getting pressure from anywhere to back off. That does seem to be more the trend in the marketplace to retain more cash. So we did go from $0.015 increase to $0.01, and -- but we've got plenty of capacity to handle the projects that we have in front of us, especially when you consider the cushion that we have and the fact that some of these assets are going to start coming online early next year. So no, no pressure from anywhere on, really, what we do with the distribution. We're just trying to do the right thing.

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Barrett Auten Blaschke, MUFG Securities Americas Inc., Research Division - Senior Analyst [4]

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Also, while I know you can't talk about the offer from ArcLight, obviously, simplification is a trend that has pretty much swept across the space. Where do you guys shake out on the idea of rather than doing something like a full-on buyout, but just, rather than that, just taking out the IDRs?

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Frederick W. Boutin, Transmontaigne Partners L.P. - CEO of TransMontaigne GP L.L.C [5]

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Yes. That's really an issue that would need to be addressed by ArcLight because it's not anything that TransMontaigne could do on its own. And we've got a transaction on the table that's being evaluated, so we're really not going to get into it.

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Operator [6]

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(Operator Instructions) Our next question comes from Selman Akyol with Stifel.

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Selman Akyol, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Equity Research [7]

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In terms of just your refined products project that you're working down on the border, can -- you said it comes out in phases going through 2019. Can you just kind of give some ballparks on what you see coming on when?

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Frederick W. Boutin, Transmontaigne Partners L.P. - CEO of TransMontaigne GP L.L.C [8]

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Sure. Mark, do you want to talk about that?

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Mark S. Huff, Transmontaigne Partners L.P. - President of TransMontaigne GP L.L.C [9]

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Sure. It's actually multiple projects down there that make up the full project. The first comes on in the first quarter. It's tankage and related facilities. The second piece comes on in the August time frame. That's primarily tankage, additional tankage. And the third piece, we expect to come on in the late third quarter, fourth quarter time period. And that's the pipeline conversion part of the project.

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Selman Akyol, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Equity Research [10]

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Can you say how much capital you're dedicating to the tankage?

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Frederick W. Boutin, Transmontaigne Partners L.P. - CEO of TransMontaigne GP L.L.C [11]

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Rob, do we have a breakdown of that?

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Robert T. Fuller, Transmontaigne Partners L.P. - Executive VP, CFO & Treasurer of TransMontaigne GP L.L.C [12]

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Yes. It's right around $40 million on all of the tankage.

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Frederick W. Boutin, Transmontaigne Partners L.P. - CEO of TransMontaigne GP L.L.C [13]

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Yes. The pipeline portion is the remainder.

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Selman Akyol, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Equity Research [14]

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Okay. And then, you talked about take-or-pay, 76% up from 74%, I believe, previously. Can you say how high you expect that to go as you look out?

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Robert T. Fuller, Transmontaigne Partners L.P. - Executive VP, CFO & Treasurer of TransMontaigne GP L.L.C [15]

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Yes. Selman, this is Rob. Right now, we expect it to remain right around that area, I would say, given where we're at in the contracts we foresee in these upcoming growth projects. So historically, we've been around that same number. It has creeped up a little bit over time, which we think is a good thing. It's always nice to have those firmly committed amounts be a large portion of your revenue structure.

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Selman Akyol, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Equity Research [16]

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Got you. And then, the last one from me. I mean, if you just think about a little bit longer term and talk about $100 million being invested this year and next year, but if you look beyond that, are you guys still seeing a number of projects you can go after? And I get where your leverage is, but I mean, are you seeing additional opportunities to continue to invest? And can you just sort of potentially talk broadly about what those are?

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Frederick W. Boutin, Transmontaigne Partners L.P. - CEO of TransMontaigne GP L.L.C [17]

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Yes. Well, we think that there'll be more development in Collins, over time. I mean, we're developing what we have contract for now, but we continue to work with multiple parties on future developments in Collins. And yes it could certainly be more in Brownsville. We think there'll be more in California. So yes, there is more growth that we think we will achieve over time, but it will be over time.

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Operator [18]

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Ladies and gentlemen, there are no further questions in queue at this time. This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.