Last month, I sat down with
Bill Mann: OK. First we will start with a basic question. Don, could you define your business and its history and where TransMontaigne fits into the oil and gas value chain?
Don Anderson: OK. Let's start by talking about our two major segments. We have a segment called the pipeline terminals, tug, and barge segment; and we have a segment referred to as our marketing segment.
The pipeline, terminal, tug, and barge segment is a traditional, hard steel gatherer and storer of refined products. We bring it in from the Gulf Coast over common carrier pipelines, store it in our terminals, and those terminals then redeliver that product in tanker truckloads throughout the United States -- predominantly from Brownsville, Texas, all the way to Rensselaer, New York.
That segment has gotten a lot of interest lately since the [master limited partnerships] have become very successful in the crude oil and refined products arena. Those assets qualify under the tax code to be put into master limited partnerships, and their earnings are essentially not taxed at the corporate level and the income is passed on to the investor. The MLPs have become very, very successful throughout this particular space, and hence we're in the process of transforming our terminal pipeline segment into an MLP.
We did an initial IPO of seven of those terminals, predominantly in Florida, last May. Here about a month ago, we put two more terminals from Mobile, Alabama, into the MLP from TransMontaigne, and also the MLP purchased an Oklahoma City terminal on it. TransMontaigne is the general partner of that MLP [Editor's note: The MLP is called TransMontaignePartners
And it also will be the eventual benefactor of what they call the GP interests, or the general partner interests. Once we've reached thresholds that are defined in the partnership agreement, TransMontaigne, Inc., will get a disproportional share of future increases in distributions. Those are generally referred to as the high splits.
The high-splits companies, GPs, have recently started to be IPO'd in their own right, essentially creating two public companies, the GP and the MLP. Kinder Morgan
TransMontaigne has granted the partners an option to purchase the remaining terminals that TransMontaigne owns in three separate tranches and any new terminals that would qualify as MLP-able assets in the future. So our intent is to move our hard steel that qualifies under the tax code into an MLP, and our terminal segment will eventually all be in TransMontaigne Partners.
Fred Boutin: If I can just add a little bit to that. The terminals, pipelines, tugs, and barge segment that owns the terminals -- simplistically, these are large tank farms predominantly where we bring in huge quantities of gasoline, diesel fuel, and break it down from very large quantities into truckload quantities, and so most product comes in by vessel or pipeline and it leaves by tanker truck, and we collect either storage fees and/or throughput fees based on volumes as product moves through those facilities. So these are the hard assets that generate sort of holding revenue.
Bill Mann: Those are what -- the tankers, they have the interconnect with what is called the rack, is that correct?
Fred Boutin: Correct. A rack is sort of like a car going into a gas station and using a pump to fill up the car, only this is much larger and instead of filling up a car, it fills up a tanker truck that holds about 8,000 gallons of product.
Bill Mann: OK, understood. Now for people who are unfamiliar with the relationship, what is the benefit of TransMontaigne putting these assets into the MLP? I understand from a tax basis, but are these the assets that have fairly steady earnings compared to your other assets?
Don Anderson: Right. These assets charge a fee, and that fee does not fluctuate with the changes in commodity prices. They are generally volumetric fees. So as long as the volumes remain somewhat stable, the earnings are very stable, the cash flow is stable, and therefore you can promise and deliver a distribution of that cash flow to the limited partners. They are not involved -- at least our MLP is not involved -- in the commodity price swings, the ups and downs in the value of refined products and bunker fuels.
And the real advantage is because they're so stable and because they're not taxed, the value of those terminals is greater in an MLP than it is in a C-corp. If you thought about it for a second, every asset that qualifies to be in an MLP in the U.S. will eventually be in an MLP because it doesn't have a tax load associated with it. And money always finds the best return. Theoretically, all qualified assets in the petroleum product and crude oil market in the United States, it's my belief, over the next 50 years, will all gravitate to some MLP structure avoiding the tax load. It's like water. It's going to find it eventually. And we have quite a large collection of these assets.
Bill Mann: And yeah, the water will find its own bottom. It reminds me, the structure reminds me a little bit of the real estate investment trusts that have sort of the similar economics.
Don Anderson: Very similar to the REITs, the same logic behind the distribution of the cash flow to the owners of the REITs.
Fred Boutin: Same section of the tax code, it's just a REIT issues a 1099, and with an MLP you get a K1.
Bill Mann: OK, very good. One of the issues that you all have spoken to and that investors struggle with a little bit is the way that accounting principles cause what looks like a huge amount of variability in your reported earnings. For people who are unfamiliar with the business, on what basis do you view whether TransMontaigne's operations are going well, and what should we focus on?
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