PBF Logistics LP
Q2 2015 Earnings Call Transcript

Published: 2 Aug 2015

[Operator:]

Welcome to the PBF Logistics Second Quarter 2015 Earnings Conference Call and Webcast. [Operator Instructions]. It is now my pleasure to turn the floor over to Colin Murray, Investor Relations. Sir, you may begin.

[Colin Murray:]

Thank you, Steve. Good morning and welcome to PBF Logistics' second quarter 2015 earnings conference call. With me today are Tom Nimbley, our CEO, Todd O'Malley, our President, Erik Young, our CFO and several other members of the partnerships' senior management team. If you have not received the earnings release and would like a copy, you can find one on our website at pbflogistics.com. I would also 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. Now I will turn the call over to Todd O'Malley.

[Todd O'Malley:]

Thank you, Colin. Good morning, everyone and thank you for joining us on today's call. After my opening remarks, Erik will review our second quarter financial results in more detail and then we will open up the call for questions, as Colin indicated. It has now been over a year since our initial public offering and we're pleased with the progress that we have made on behalf of the Partnership and the distribution growth delivered to our unit holders. Since the time of the IPO, we have successfully closed three drop-down acquisitions which have increased the MVC-based annualized EBITDA of the Partnership by over 100%, from approximately $47 million at the time of the IPO to approximately $95 million today. These figures do include the most recent drop down of the Delaware City Products Pipeline and Truck Rack which closed during the second quarter. Earlier today, we announced an increase in our quarterly distribution of $0.02 per unit, for a total distribution of $0.37 per unit, per quarter. This increase was directly related to the solid fundamentals of our business which are resulting in growth and earnings and distributable cash flow. The $0.37 per unit distribution is roughly a 6% increase versus the Q1 2015 distribution. Since our IPO in 2014, we have delivered an annual compound growth rate of approximately 18%. We're pleased with how our assets operated during the second quarter. With the addition of the Delaware City Products Pipeline and Truck Rack in mid-May, we have continued to grow and diversify our source of revenues. Our older assets have been well maintained throughout their lifespan and a significant number of the assets owned by PBFX have been in service for three years or less and as a result, have required little maintenance capital. 97.4% of the total revenue in the second quarter was generated from MVCs. We will continue to focus on the safe, reliable and environmentally responsible operation of our assets as we move forward. PBFX's EBITDA is secured by guaranteed volumes and has little exposure to commodity price fluctuations. In fact, when volumes run below MVC, we should actually see a temporary benefit to distributable cash flow as a result of lower variable operating costs. In prior earnings call, we have discussed various ways PBF Logistics can grow distributions. A recent example occurred in June, when our sponsor announced that it had reached an agreement to acquire Chalmette Refining, LLC. This asset consists of the Chalmette refinery and a number of associated logistics assets. This acquisition is expected to close prior to year-end. As a result of this transaction, PBF Energy continues to grow its backlog of MLP-qualifying EBITDA. We're pleased that PBF Energy has entered into an agreement to purchase Chalmette and that our sponsor continues to actively pursue transactions that would increase the Partnerships' growth opportunities through an expansion of the backlog of potential drop-down assets. At PBF Logistics, we continue to actively identify third-party opportunities and participate in acquisition processes as part of our ongoing efforts to grow the Partnership and its distributions. We're also continuously examining potential addition drop-down transactions. With that, I would like to turn the call over to Erik.

[Erik Young:]

Thank you, Todd. This morning, we reported net income to the Partnership of $19.6 million or $0.58 per common limited partner unit, for the second quarter. We generated EBITDA of $26.1 million and had $22.1 million of cash available for distribution. Total revenue was $33.8 million. Total operating costs were $9.3 million, including operating expenses, G&A and D&A. Cash interest expense was approximately $4.6 million and the increase in interest expense is related to the newly issued $350 million of 6-7/8 senior notes due in 2023. Our total G&A expense of approximately $3.3 million includes $530,000 of transaction-related expenses realized in conjunction with the acquisition of the Delaware City Logistics assets and $683,000 of non-cash compensation expense related to the company's long term incentive plan. We ended the quarter with approximately $6.6 million of cash, approximately $305 million of available liquidity and $368 million of net debt. For the third quarter 2015, we expect our revenues to be in line with our minimum volume commitments at all of our facilities. As Todd mentioned a moment ago, we had a couple of notable events take place in the quarter. First, we issued $350 million of senior notes. Second, we closed the acquisition of the Delaware City Products Pipeline and Truck Rack which increased the expected full-year EBITDA of the Partnership by approximately $14.3 million. And third, PBF Energy reached an agreement to acquire the Chalmette refinery and its associated logistics assets. The senior notes issuance was critical in establishing a long term capital structure at PBF Logistics. We used the net proceeds of this offering to fund a portion of the cash consideration of the Delaware City Products Pipeline and Truck Rack acquisition and to repay outstanding indebtedness under our existing revolving credit facility. At quarter end, including the notes offering, our net debt to EBITDA was approximately 3.3X and we expect to maintain this ratio between three times and four times EBITDA over the longer term. With our current leverage and liquidity, we're well positioned to grow the Partnership by pursuing third-party acquisition opportunities organic growth projects and additional drop downs from our sponsor. Finally, we're pleased to announce that the Board of Directors of our General Partner approved a quarterly distribution increase of $0.02, to $0.37 per unit which will be paid on August 31 to unitholders of record as of August 14, 2015. As we continue to acquire assets, whether from our sponsor or through third-party acquisitions, we would expect that our distributions will continue to increase as those assets are integrated. Now I'll turn the call back to Todd for closing remarks.

[Todd O'Malley:]

I would just like to thank everybody for their participation today and go ahead and open it up if we have any questions.

[Operator:]

[Operator Instructions]. Our first question is from Theresa Chen from Barclays. Your line is open.

[Theresa Chen:]

Todd, I wanted to ask a follow up on your comments around the lower variable OpEx. Clearly, this quarter, OpEx was lower than what we've seen the past two quarters. Was that related to the Delaware City Truck Rack throughput being lower and what are your expectations going forward for this year?

[Todd O'Malley:]

Sure, I'll take the first part of the question and then I'll let Erik address the second part in regards to what our expectations are on a go-forward basis. The lower OpEx was actually not due to the Product Truck Rack, but was due in large part to the lower throughput on crude oil volumes through the crude discharge facilities at Delaware City. And Erik, if you want to jump in and address the second part?

[Erik Young:]

I think at this point, Theresa, we're obviously guiding to revenue using our minimum volume commitments and on the OpEx side of things, I think they'll be more in line with what we saw here in the second quarter.

[Theresa Chen:]

In terms of the throughput at the Toledo truck terminal, clearly it was stronger than what we've seen for the past few quarters. Was this an anomaly or is that expected to continue?

[Todd O'Malley:]

I believe that will continue. We have seen an increase in volumes that we've been delivering there, whether it's via rail and ultimately through the Truck Rack or whether it's locally sourced barrels out of the Michigan market and-or locally sourced barrels out of the Utica formation, so we feel pretty good about those volumes going forward.

[Theresa Chen:]

And lastly, on the $30 million of EBITDA associated with the pending Chalmette acquisition, if I remember correctly, when the acquisition was announced, I think, Tom, it was you who mentioned that that number was -- that that number did not include any improvements you would make to the facility. Can you just give us a sense of how much mid-stream EBITDA potential improvements would run there?

[Tom Nimbley:]

Actually, the focus that we've had at the Parent company regarding Chalmette has been on a commercial venue more so and inside the fence line in terms of the quantity unit [indiscernible] so we have not quantified an upside number for mid-stream line LP assets. I would say, however, that since we made the announcement, one of the impacts associated with that announcement is that we have gotten a number of inquiries by other counterparties suggesting opportunities to work together or do some things together on the mid-stream assets and we will be exploring those opportunities which may lead to something, but we can't quantify it now.

[Operator:]

[Operator Instructions]. Our next question is from Praneeth Satish from Wells Fargo. Your line is open.

[Praneeth Satish:]

Just two quick questions from me. I guess just in respect to the total drop down pool remaining at PBF, it's clearly expanded quite a bit over the last few weeks, months. Can you maybe just broadly talk about which assets you would consider dropping down first versus long term? Is there a preference maybe to move the Chalmette, the pipeline assets first before the fuel distributions and chemical businesses? I guess how should we model that?

[Erik Young:]

I think, Praneeth, the easiest way to think about it is we've got one big pool. Go ahead and assume that the front-end assets would probably be things that we included in our guidance of kind of 100 to 150 early on, so with all of the traditional hard assets, whether it's bank farms, marine terminals on the East Coast. The stuff that we increased our drop down backlog with is probably a longer term view and then I think the bigger wild card will just be as the refining company continues to make acquisitions, what assets are available there. It's all really on a case-by-case basis, from our perspective, dropping things into PBF Logistics. All of the funds are relatively fundable. A lot will be determined by when financial statements will be ready and some of that is dependent upon the seller that we're buying assets from.

[Praneeth Satish:]

And then just broadly speaking in terms of distribution policy now, the backlog has increased, but previously I think you had communicated to a potential 15% CAGR or somewhere thereabouts. But clearly you've been growing faster than that -- I think over 20% or 23% year over year in Q2. So I guess has that changed at all? Is there now more confidence that you can grow at a faster pace or will you kind of eventually settle back down to that mid-teens CAGR?

[Erik Young:]

I think it's safe to assume the 15% distribution CAGR at this point. Our view is we would like to -- we're really guiding to kind of a four- or five-year time horizon versus some of our peers that are more in the two- to three-year horizon, so our view is we feel pretty comfortable with 15% over the longer term. You'll notice that we increase distributions typically after we have assets that have been acquired by the Partnership. I think on -- over the past kind of four or five quarters, it's averaged on a CAGR basis at 18%. I think you may start to see that come down to closer to 15% longer term. We've got a long term cap structure now put in place. We didn't have that early on. We were simply using our revolver to fund acquisitions, but I think now we're kind of primed for long term 15% growth.

[Operator:]

And our next question is from Ryan Levine with Citi. Your line is open.

[Ryan Levine:]

I just wanted to follow up on some comments you made on an earlier call around the financing assumptions for drop downs later this year. Are you looking to schedule a drop down in conjunction with the closing of your recently announced acquisition? And given the intention not to raise equity at the sponsor level, should we look for the sizing to be comparable to pay for the acquisition?

[Todd O'Malley:]

I think at this point, we're still evaluating whether or not the parent company will use a combination of cash and debt. The parent company has plenty of liquidity within its own standalone cap structure to complete the Chalmette acquisition. I think we've got some work to do to determine what assets could potentially be dropped down sooner rather than later. So I don't think we have a definitive answer at this point, but I think longer term, one potential view is that the logistics company provides quite a lever for the parent company in the event the parent company sells assets to logistics.

[Ryan Levine:]

Okay. And is there any near-term timeline as to when you'd have more clarity around offering or approaching the sponsor about the next drop down?

[Todd O'Malley:]

I think the biggest guidance that we can give at this point is there's nothing that's currently under way internally with our conflicts committee at the logistics level and as we progress, we'll try to keep the market informed of what we're contemplating, but at this point, we have not made a definitive decision.

[Ryan Levine:]

Okay. And then the last question -- in terms of the opportunity that you spoke about on incremental mid-stream associated with that acquisition, is this a near-term opportunity or is it several years down the line that an opportunity may become available?

[Tom Nimbley:]

Frankly, we're in the early discussion stage just to see what the [indiscernible] is of the various things that have been brought to our attention, so I wouldn't say it's going to be something that we would probably get done in the near term, the near term being defined as in the next six months, but we suspect that it's something that will become available with this after that.

[Operator:]

This does conclude the question-and-answer session of our call. I would like to turn the program back over to Mr. Todd O'Malley for any closing remarks.

[Todd O'Malley:]

Again, we would like to thank everybody for attending the call today and appreciate your support going forward. Have a good day.

[Operator:]

This does conclude today's program. You may now disconnect at any time.