PBF Logistics LP
Q4 2016 Earnings Call Transcript

Published: 16 Feb 2017

[Operator:]

Welcome to the PBF Logistics Fourth Quarter and Full-Year 2016 Earnings Conference Call and Webcast. [Operator Instructions]. Please note, this call is being recorded. It is now my pleasure to turn the floor over to Colin Murray of Investor Relations. Sir, you may begin.

[Colin Murray:]

Thank you., Priscilla. Good morning and welcome to today's call. With me today are Matt Lucey, Executive Vice President; Erik Young, our CFO; and several other members of the partnership's senior management team. If you would like a copy of our earnings release, it is available on our website. Before we begin, I would like to direct your attention to the forward-looking statement disclaimer contained in today's press release. In summary, it outlines that statements in the press release and on this conference call that state the partnership's or management's expectations or predictions of the future are forward-looking statements intended to be covered by the Safe Harbor provisions under federal securities laws. There are many factors that could cause actual results to differ from our expectations, including those we've described in our filings with the SEC. I would also like to highlight the 2017 guidance published in our first investor presentation in January which is available on our website. We provide full year revenue and expense expectations based on our existing asset base. These figures did not include the financial impacts of drop-downs, third-party acquisitions or organic projects such as the crude tank and pipeline projects mentioned in today's news release. The guidance does include the full interests of the Torrance Valley Pipeline Company, of which PBF Logistics LP owns 50%. When looking at our results, the non-controlled interest of the Torrance Valley Pipeline Company are backed out from the partnership's results on the income statement. We will be providing additional guidance information later in this call. For any questions on this presentation, please feel free to contact investor relations following this call. Now I will turn the call over to Matt Lucey.

[Matt Lucey:]

Thanks, Colin. Good morning, everyone and thank you for joining us on today's call. We're pleased to report better-than-consensus fourth quarter results and as outlined in today's public announcement, 2017 has started on a positive note, with the development of two strategic organic projects that will be completed by this fall. Before we cover these projects in more detail, I would like to recap the highlights of a successful 2016 for PBF Logistics. On the M&A front, we completed our first third-party transaction with the acquisition of more than 4 million barrels of storage across four terminals in the Philadelphia and southern New Jersey markets from Plains All American. With the completion of the pipeline connections between the largest of these terminals and our parent's Paulsboro refinery and the expansion of the customer base, we expect these storage assets to contribute approximately $17.5 million of EBITDA in 2017 which represents a pro forma transaction multiple of approximately 6.3 times. We have fully integrated these facilities into our system and look forward to continued growth in this segment. In addition, we acquired a 50% interest in Torrance Valley Pipeline from PBF Energy. This deal represents the fourth drop-down from our parent since our IPO in May 2014 and demonstrates our commitment to accretive growth. Our 50% ownership is expected to generate more than $20 million of EBITDA in 2017. On a combined basis, these acquisitions have grown our revenue base by almost 70%, increased our asset and geographic diversification and have contributed to our double-digit distribution growth rate, solid coverage ratio and strong balance sheet. We're well positioned to continue our strong operating performance and to execute our disciplined growth strategy. Now, I would like to provide some additional color on the two organic projects that were included in today's press release. We're pleased to announce the Chalmette crude tank and the Paulsboro natural gas pipeline organic growth projects. The partnership expects to spend approximately $82 million on these projects and when complete will generate approximately $12 million of EBITDA. We're currently in advanced negotiations with a third party on another transaction which should increase the $12 million of EBITDA growth to $15 million. This represents more than 10% of EBITDA growth to the partnership's guidance for 2017. We hope to announce this third opportunity relatively soon. Importantly, we anticipate that the partnership will be able to fund all three of these transactions without issuing any new partnership units. In regard to the crude tank at Chalmette, our sponsor, PBF Energy, has mentioned the benefits of the 625,000 barrel crude tank for the last several quarters and again today. PBF Energy expects increased efficiency at its marine facilities and subsequent reduction and to merge costs and increased export capability. As such, PBF Energy has committed to long term agreements with PBF Logistics for this strategic asset. The Paulsboro natural gas pipeline will deliver cost advantage Marcellus natural gas to PBF Energy's Paulsboro refinery. The new higher capacity pipeline is replacing an existing pipe. The $53 million investment is Phase 1 of the project and we believe there will be expansion possibilities for PBFX to grow the pipeline beyond the refinery and deliver Marcellus gas to other users in southern New Jersey who have limited options. In closing, we expect 2017 will be another active and productive year at PBF Logistics. With that, I'll turn the call over to Erik.

[Erik Young:]

Thanks, Matt. This morning, we reported fourth quarter net income to the partnership of $24.7 million or $0.57 per common limited partner unit and partnership EBITDA of approximately $36.4 million; as compared to the fourth quarter of 2015, where we generated approximately net income to the partnership of $17.3 million or $0.50 per common limited partner unit and partnership EBITDA of approximately $26.1 million. Revenue for the quarter was $61.7 million which includes $4.6 million of third-party revenue from our East Coast terminals, as compared to $37.3 million for the fourth quarter of 2015. Total revenue for 2016 was $187.3 million, 90% MVC-based, as compared to $142.1 million in revenue for 2015. In the fourth quarter, we generated $27.9 million of cash available for distribution which represents a quarterly coverage ratio of approximately 1.38 times. As Colin mentioned, we have provided guidance for 2017 revenue expectations and I would like to highlight this guidance is based on minimum volume commitments. To the extent the we have higher throughput or lower costs, we would expect some modest improvement to our operating income expectations. Total costs for the fourth quarter were $25 million, including operating and maintenance expenses, G&A and depreciation and amortization. Interest expense and financing costs total approximately $7.9 million. During the year, we spent approximately $2.9 million on maintenance CapEx and $7.4 million on growth. At this point, I would like to update our 2017 growth CapEx which changed as a result of the crude tank and pipeline projects. We expect that our growth in strategic capital for the full year 2017 should increase to approximately $80 million. We ended the year with approximately $231 million in liquidity, including $64 million of cash and approximately $167 million of availability under our revolving credit facility. As a result, our net debt-to-EBITDA ratio was approximately 3.2 times on an annualized basis. We're pleased to announce an increase to the partnership's quarterly distribution, to $0.45 per unit per quarter. This represents our ninth consecutive distribution increase since our IPO and equates to a compound annual growth rate of approximately 18% and a 50% increase to our minimum quarterly distribution. Before turning the call over to questions, I would like to expand on Matt's comments regarding our 2016 initiatives and the two strategic projects. In 2016, we funded the Plains and Torrance Valley Pipeline transactions with a combination of cash-on-hand, borrowings under our acquisition revolver and from the net proceeds of two successful follow-on equity raises. In total, we issued approximately 7.3 primary units which increased our float by over 45%. With respect to the new crude tank at Chalmette and the pipeline in Paulsboro, we expect these projects to cost approximately $82 million which represents a blended transaction multiple of approximately 6.7 times EBITDA. Those organic projects will be underpinned by long term agreements with PBF Energy and 100% of the revenue will be driven by minimum volume commitments. Most importantly, our continued focus on maintaining a conservative balance sheet, combined with coverage in excess of our long term 1.15 times target, allows us to fund 100% of the construction costs using a mix of cash-on-hand plus borrowings under the revolver, without the need for any third-party equity. Following the successful completion of the tank and pipeline projects, we expect our pro forma leverage on an annualized basis to be near the mid-point of our long term 3 to 4 times net debt-to-EBITDA target. Operator, we have concluded our opening remarks and now we will turn the call over for questions.

[Operator:]

[Operator Instructions]. Your first question comes from Shneur Gershuni from UBS. Your line is open.

[Shneur Gershuni:]

A couple of questions here, with the organic projects that you announced today, it seems like a pivot toward using the vehicle, the MLP, as both a growth vehicle organically, as well as a drop vehicle. How should we think about the cadence of drops going forward? Is there a plan to still drop assets at a slower pace, because you are more targeting an EBITDA and DCF growth rate? I was wondering how we should think about that going forward?

[Matt Lucey:]

I don't think there's been a change, necessarily, but I think the Company is going to be opportunistic and the market debt is always evolving. These organic projects were able to be built in accretive, attractive multiples. And quite frankly, I think going forward and maybe an untold story over the last couple of years is I think there will be more organic projects going forward. I think if you find the right ones, it's a unique opportunity for the MLP to invest at reasonable multiples, as opposed to drop-downs and bidding processes, where they are very competitive and attract a higher multiple. So I think in the ever-evolving landscape in the oil and gas business, there's going to be increased opportunities on the organic side and they are very attractive for the MLP. That does not change our strategy on the drop-downs, but as we have always stated, we're going to look at third-party transactions and these organic projects, because drop-downs at the end of the day will be finite to a certain degree.

[Shneur Gershuni:]

Does this change the distribution growth rate going forward?

[Matt Lucey:]

No.

[Shneur Gershuni:]

Okay, so you maintain the same target, okay. Can you remind us what your inventory of EBITDA is at PBF today that could potentially be dropped to PBFX?

[Erik Young:]

There's approximately still $250 million left there. I think ultimately where Matt is going also is, what this does is allows us to continue the distribution growth rate, while at the same time extending that EBITDA backlog. We've talked a lot about third-party transactions, we've talked about growth at the parent Company, but ultimately what this does is this allows us to continue to increase distributions without tapping into that EBITDA backlog.

[Shneur Gershuni:]

A couple of follow-ups, still. You threw out a teaser about potential expansion opportunities. What kind of scale are we thinking about, as we think about back half 2017 or early 2018 CapEx?

[Erik Young:]

I think on the expansion this is probably a multi-year, I don't think it is anything near term. The project isn't it going to be complete until the end of -- call it the fall of 2017. We have a decent amount of work that we still need to complete on the potential project here and then ultimately we think what we're tapping into from a natural gas standpoint on the pipeline would allow for incremental CapEx, but it's a multi-year process at this stage.

[Matt Lucey:]

Yes, I'm sorry I didn't follow the question on the teaser part. But to be clear, to Erik's point, we're going to be completing these projects over the course of the year. The Chalmette tank farm is slated for the fall. The natural gas pipeline should come on before then in the summer. But as I said, it is really Phase 1; bringing Marcellus gas to southern New Jersey is an attractive opportunity for a whole host of potential clients or customers. So as Erik said, that is growth that will be capitalized on over the next coming years.

[Shneur Gershuni:]

And one final question. I'm sure investors are pleased to hear about the ability to put these projects in place without tapping the equity markets. How should we think about your strategy going forward with respect to retained DCF and coverage? When we think about what would be your funding mix for this expansion CapEx, even for some of the drop downs as well, too, can we see less fresh equity going forward? Will retained DCF be a permanent fixture in terms of how you think about your funding model? I was wondering if you could sort of elaborate on that a little bit?

[Erik Young:]

Sure. I think over the past 18 months, we have shown that we have had excess coverage. And as a result, that incremental cash has been used to ultimately fund multiple transactions. A combination of the Plains transaction, the Torrance Valley Pipeline and then subsequently these two organic projects. We do not currently have a long term focus on maintaining 1.38 times coverage, as we saw during the quarter. Our long term target is still 1.15. But when we continue to exceed those expectations, it obviously will reduce burden, both on the debt side as well as potentially equity as we go forward. So what we would say is the long term target is still 1.15, but you should assume that we're going to use that incremental cash or excess cash to fund a combination of third-party transactions, drop-downs from the parent or organic projects like these.

[Shneur Gershuni:]

Right, so there's no intent to actually harvest that coverage down to 1.15? You would rather use it for projects at this stage right now?

[Erik Young:]

I think ultimately the view has been, we do have a couple of contracts that are increasing that coverage, right? So we're below MVC on few contracts where we're generating revenue and we have lower operating expenses. So in lieu of setting the expectation that is going to be 1.15 now and paying all of that cash out, our view is it's much more accretive for the partnership to go out and do transactions to grow the overall EBITDA base.

[Operator:]

I'm showing we have no further questions at this time. I will turn the call back to Matt for closing remarks today.

[Matt Lucey:]

I appreciate everyone's time and look forward to more positive results in the future. Thank you.

[Operator:]

This does conclude today's program. Thank you for your participation, you may disconnect at any time.