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Edited Transcript of TLP earnings conference call or presentation 9-Aug-18 2:00pm GMT

Q2 2018 TransMontaigne Partners LP Earnings Call

DENVER Aug 27, 2018 (Thomson StreetEvents) -- Edited Transcript of TransMontaigne Partners LP earnings conference call or presentation Thursday, August 9, 2018 at 2:00:00pm 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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* 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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Good day, and welcome to the Transmontaigne Partners Second Quarter Earnings Call. (Operator Instructions)

I would now like to turn the call over to Mr. Michael Hammell, Executive Vice President, General Counsel and Secretary of Transmontaigne Partners. Please go ahead, sir.

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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 our 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 at www.transmontaignepartners.com. We undertake no obligation to update or revise any of these overlooking 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 second quarter earnings release.

Finally, as previously announced on July 9, 2018, a subsidiary of ArcLight Energy Partners Fund VI proposed to acquire all of the outstanding publicly held common units of Transmontaigne. The Conflicts Committee, which is comprised of the independent directors of the Board of Directors of the General Partner of Transmontaigne, is currently evaluating that proposal. Management will be unable to comment on this proposal or the evaluation process during the Q&A portion of today's call.

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

Our business continued to perform extremely well during the second quarter, achieving a record level of consolidated EBITDA. Revenue for the second quarter of 2018 was $55.3 million, which was $9.9 million or approximately 22% greater than the second quarter of 2017. Consolidated EBITDA totaled $33.8 million, an increase of $5 million or approximately 17% compared to the second quarter of 2017. Growth was primarily driven by our West Coast terminals acquisition, which we completed in December.

This strong quarterly performance, combined with our outlook for continued strength, supported increasing our quarterly distribution by $0.01 to $0.795, which represents growth of 1.3% over the previous quarter and 7.4% over the second quarter of last year. We were able to provide this growth in our distribution while maintaining a conservative distribution coverage ratio of 1.25x. The second quarter's distribution represented our 11th consecutive distribution increase. We were 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 both 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 both the short and long term.

At the recently acquired West Coast terminals, we have already begun construction of a fully contracted 125,000-barrel expansion at the Richmond, California terminal. This is the type of low-capital, high-return project we expected from this transaction and is a prime example of how we're maximizing our assets with a focus on capital efficiency. We continue to pursue other similar projects at our West Coast terminals and across our facilities.

During the second quarter, we continued to progress our Phase II build-out 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 delivery and receipt capabilities, which when completed, will significantly enhance the flexibility we offer to our customers at Collins.

As of the end of the second quarter, we have spent approximately $7.4 million on the Collins Phase IIA project. In total, we expect to invest approximately $55 million on the Phase II build-out at Collins, and we expect it to be in service by the end of the first quarter of next year.

On our first quarter earnings call, we announced that we have entered into long-term customer contracts, supporting significant new growth projects in Brownsville. These projects involve construction of new tankage, related facilities and the conversion of our Diamondback Pipelines from propane to gasoline and diesel.

Our Diamondback Pipeline 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 $60 million, a portion of which may be invested by the Frontera joint venture in which we own 50%, pursuant to rights of first refusal held by the joint venture. We continue to work with our Frontera joint venture partner to determine the extent to which they may participate. We expect these projects to come online in phases throughout 2019.

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

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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 EBITDA level we achieved during the second quarter of 2018, which was $33.8 million. Driving this record level was strong growth in revenues, which totaled $55.3 million or a $9.9 million increase as compared to the same period in the prior year. Of this increase, $9.4 million was from our West Coast terminals, acquired in late December.

In addition, revenues during the second quarter of 2018 include approximately $1 million of additional revenue from our Collins Phase I growth project, which came fully on revenue at points throughout the first half of 2017.

The second quarter revenue at our Brownsville segment was approximately $4.2 million, down from the prior year's second quarter revenue of $5.5 million, which is the result of our recommissioning of the Diamondback Pipeline in Brownsville, Texas that Fred just discussed.

As part of the conversion of the Diamondback from propane to gasoline and diesel service, we suspended operations on the pipeline beginning in the first quarter of this year, which resulted in a decrease to Brownsville's pipeline transportation revenue of approximately $1 million and a decrease in terminaling service revenue of approximately $500,000 from the prior year's second quarter.

We expect to resume operations on the recommissioned lines by the end of 2019. Once completed, the Diamondback and its expanded connectivity through our Brownsville complex will generate a higher base of revenue and cash flow for the partnership.

For the second quarter, approximately 77% of our revenue was generated from our firmly committed take-or-pay terminaling service 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 through either throughput or storage agreement. Our contract portfolio also remains attractive from a duration perspective, with approximately half of our terminaling services revenues for the second quarter generated from contracts with remaining firm commitments of 3 or more years, adding to the stability and predictability of our cash flow stream.

These 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 received and recognized a minimum fixed amount of revenue from the customer even in the event that actual throughput volume are less than the contractual minimum volumes 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 second quarter totaled approximately $19.3 million, an increase of approximately $3.3 million over the second 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.

Earnings from unconsolidated affiliates, which represents our share of earnings in our BOSTCO and Frontera joint ventures, totaled approximately $2.4 million, which is an increase of approximately $300,000 from the prior year's second quarter. The cash distribution we received in the second quarter from our joint ventures' operations was approximately $4 million, representing a decrease of approximately $600,000 year-over-year for the second quarter. The decrease is primarily attributable to increased dredging cost at the BOSTCO ship dock. From a revenue standpoint, both our BOSTCO and Frontera joint ventures were fully contracted throughout 2017 and 2018 and remain fully committed today.

General and administrative expenses totaled approximately $4.6 million for the quarter, an increase of approximately $500,000 over the prior year period, which is primarily attributable to increases in the Omnibus fee that were effective early May 2017 and in mid-May 2018.

As discussed on prior earnings calls, these increases were negotiated and approved by our Conflicts Committee and are intended to better reflect the administrative cost structure of the partnership, following our expansions at Collins in Brownsville and the acquisition of our West Coast terminals. These changes are indicative of our maturation and evolution as a partnership, including an increasing scale of assets, a diversity of geographies in which we operate and an extension of the services we provide to our customers.

Interest expense for the second quarter 2018 totaled approximately $8.3 million, an increase of approximately $5.7 million over the second 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 6.125% coupon; and three, increases in bank borrowing rates under our revolving credit facility, stemming from higher leverage and increases in LIBOR rates, which doubled year-over-year.

Deferred issuance amortization expense for the second quarter of 2018 totaled approximately $1.3 million, representing an increase of approximately $1 million over the prior year's second quarter. Of this increase, approximately $700,000 relates to a onetime write-off of outside accounting and legal services for equity-based financing options that were under consideration in the second half of 2017 as previously disclosed. The remaining increase in deferred issuance amortization expense pertains to the amortization of upfront costs associated with the December 2017 increase to our revolving credit facility and the February 2018 senior notes issuance.

For the second quarter of 2018, we reported net earnings of $9.5 million, a decrease of approximately $5 million over the prior year period. The decrease was driven by increases in interest costs and amortization of deferred financing costs, coupled with a $4.4 million increase in depreciation and amortization expense.

EBITDA for the second quarter was $33.8 million, representing an increase of approximately 17% compared to the $28.8 million we reported in the second quarter of 2017. Our second quarter 2018 EBITDA was a record for us, beating our previous record for quarterly EBITDA set in the first quarter of this year.

Distributable cash flow totaled $21.2 million for the quarter, which is approximately $3.3 million less than the $24.5 million we reported in the second quarter of 2017. The decline is partially driven by timing differences in maintenance CapEx spend.

Maintenance CapEx spend during the second quarter totaled $3.8 million, an increase of approximately $2 million as compared to the prior year. Of this increase, approximately $800,000 is attributable to our acquisition of the West Coast terminals, with the remaining $1.2 million primarily related to timing in our maintenance spend year-over-year.

As Fred mentioned earlier, we increased our quarterly distribution for the quarter ended June 30, 2018, by $0.01 to $0.795 per unit. Our second quarter distribution represented total cash distributions of $16.9 million, which compared to total distributable cash flow of $21.2 million resulted in distribution coverage of approximately 1.25x for the quarter.

We finished the second quarter of 2018 with approximately $586 million of debt, including $286 million of borrowings on our $850 million revolving credit facility.

EBITDA for the trailing 12 months was approximately $133 million, which includes bank-approved pro forma amount for the acquisition of our West Coast terminals and pro forma credit for certain of the Collins Phase IIA construction cost incurred to date. Accordingly, second quarter leverage was 4.4x.

With the use of debt to purchase our West Coast terminals, our leverage ratio is higher than what it has been historically. However, we believe that our business can more than adequately support this somewhat higher leverage amount, given the nature of our operations and stability of our cash flow. Further, we have sufficient capacity under our revolving credit facility to fund our identified construction growth opportunities and do not need to access other forms of capital to finance these accretive projects.

In closing, as previously announced, 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 be unable 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 the line of Selman Akyol with Stifel.

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Selman Akyol, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Equity Research [2]

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First of all, you've mentioned the expansion at the terminals in Richmond, 125,000 barrels. Can you just say what kind of multiple you're going to get on that?

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

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That should be a low-teens return on that, Selman.

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Selman Akyol, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Equity Research [4]

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Okay. And then in your opening comments, you also talked about you continue to have organic growth. Then you look at acquisitions, additional bolt-on opportunities, short and long term. Can you just -- is there anything currently that you're looking at?

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

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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 [6]

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Sure. We're looking at opportunities associated with organic growth at our facilities on the West Coast in South Texas or our Brownsville Facility and primarily at Collins. And we'll continue to do that as focuses for us going forward. It doesn't mean, we don't have opportunities that come up at our other locations, but those are -- that’s our primary focus today.

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

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Right. Are you seeing anything though in the acquisition market at all that interests you?

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Mark S. Huff, Transmontaigne Partners L.P. - President of TransMontaigne GP L.L.C [8]

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We constantly cover that market -- or monitor that market. And yes, there's some stuff out there that's of interest.

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Selman Akyol, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Equity Research [9]

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Okay. Fred, you talked about aggregate cost of $60 million on the expansion down at Brownsville. If you were -- if we assume Frontera JV exercise their portion, what remaining piece of that would be attributable to Transmontaigne in terms of the growth capital?

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Frederick W. Boutin, Transmontaigne Partners L.P. - CEO of TransMontaigne GP L.L.C [10]

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It probably would be $30 million to $35 million, Selman. It's not -- it's a little bit more than half because not everything we're doing down there will be covered by the ROFR that the JV has.

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Selman Akyol, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Equity Research [11]

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Got you. And then last one from me, you talked about revenue being from take-or-pay contracts, 77% this quarter, up from 74% previously. How high do you expect that to reach over the next year or 2 as you look out with your base of business?

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Frederick W. Boutin, Transmontaigne Partners L.P. - CEO of TransMontaigne GP L.L.C [12]

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I would say that we would expect it to stay in the same range kind of over the short term, long term. It's going to move around a little bit, but that's our business model, is firmly committed take-or-pay contracts. And there's always going to be ancillary revenues and management fees and that sort of thing. So we're always going to try to maximize all the sources of revenue, but I think it's going to stay in that same range.

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Operator [13]

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(Operator Instructions) Ladies and gentlemen, we have reached the end of the question-and-answer session. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.