UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

 

Commission File Number 001-32505

TRANSMONTAIGNE PARTNERS L.P.

 

1670 Broadway

Suite 3100

Denver, Colorado 80202

(Address, including zip code, of principal executive offices)

(303) 626-8200

(Telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such report), and (2) has been subject to such filing requirements for the past 90 days. Yes  x  No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2) Yes  o  No  x

As of April 24, 2006, there were 3,972,500 shares of the Registrant’s Common Limited Partner Units outstanding.

TABLE OF CONTENTS

 

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including the following:

·       certain statements, including possible or assumed future results of operations, in “Management’s Discussion and Analysis of Financial Condition and Results of Operations;”

·       any statements contained herein or therein regarding the prospects for our business or any of our services;

·       any statements preceded by, followed by or that include the words “may,” “seeks,” “believes,” “expects,” “anticipates,” “intends,” “continues,” “estimates,” “plans,” “targets,” “predicts,” “attempts,” “is scheduled,” or similar expressions; and

·       other statements contained herein or therein regarding matters that are not historical facts.

Our business and results of operations are subject to risks and uncertainties, many of which are beyond our ability to control or predict. Because of these risks and uncertainties, actual results may differ materially from those expressed or implied by forward-looking statements, and investors are cautioned not to place undue reliance on such statements, which speak only as of the date thereof. Important factors that could cause actual results to differ materially from our expectations and may adversely affect our business and results of operations, include, but are not limited to those risk factors set forth in this report under the heading “Item 1A. Risk Factors,” in Part II. Other Information.

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Part I. Financial Information

ITEM 1.                UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The interim unaudited consolidated financial statements of TransMontaigne Partners as of and for the three months ended March 31, 2006, are included herein beginning on the following page. The accompanying unaudited interim consolidated financial statements should be read in conjunction with our consolidated financial statements and related notes for the six months ended December 31, 2005, together with our discussion and analysis of financial condition and results of operations, included in our Transition Report on Form 10-K filed on March 2, 2006.

TransMontaigne Partners is a holding company with the following active wholly-owned subsidiaries during the three months ended March 31, 2006.

·       TransMontaigne Operating GP L.L.C.

·       TransMontaigne Operating Company L.P.

·       Coastal Terminals L.L.C.

·       Razorback L.L.C.

·       TPSI Terminals L.L.C.

We do not have off-balance-sheet arrangements (other than operating leases) or special-purpose entities.

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TransMontaigne Partners L.P. and subsidiaries
Consolidated balance sheets
(In thousands)

 

See accompanying notes to consolidated financial statements.

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TransMontaigne Partners L.P. and subsidiaries
Consolidated statements of operations
(In thousands, except per unit amounts)

 

See accompanying notes to consolidated financial statements.

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TransMontaigne Partners L.P. and subsidiaries
Consolidated statements of partners’ equity
Year ended June 30, 2005, six months ended December 31, 2005 and three months ended March 31, 2006
(In thousands)

 

See accompanying notes to consolidated financial statements.

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TransMontaigne Partners L.P. and subsidiaries
Consolidated statements of cash flows
(In thousands)

 

See accompanying notes to consolidated financial statements.

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TransMontaigne Partners L.P. and subsidiaries
Notes to consolidated financial statements

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Principles of Consolidation and Use of Estimates

The accompanying unaudited consolidated financial statements in this Quarterly Report on Form 10-Q have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, these statements reflect adjustments (consisting only of normal recurring entries), which are, in our opinion, necessary for a fair presentation of the financial results for the interim periods presented. Certain information and notes normally included in annual financial statements have been condensed in or omitted from these interim financial statements pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes for the six months ended December 31, 2005, together with our discussion and analysis of financial condition and results of operations, included in our Transition Report on Form 10-K filed on March 2, 2006.

Our accounting and financial reporting policies conform to accounting principles and practices generally accepted in the United States of America. The accompanying unaudited consolidated financial statements include the accounts of TransMontaigne Partners L.P., a Delaware limited partnership (“Partners”), and its majority-owned subsidiaries. The accompanying consolidated financial statements include the assets, liabilities and results of operations of certain terminal and pipeline operations of TransMontaigne Inc. that were contributed to us at the closing of our initial public offering on May 27, 2005. Specifically, the TransMontaigne Inc. terminal and pipeline operations that were contributed to us are composed of seven Florida terminals, including terminals located in Tampa, Port Manatee, Fisher Island, Port Everglades (North), Port Everglades (South), Cape Canaveral, and Jacksonville; and the Razorback Pipeline system, including the terminals located at Mt. Vernon, Missouri and Rogers, Arkansas. On February 28, 2003, TransMontaigne Inc. acquired the Port Manatee, Fisher Island, Port Everglades (North), Cape Canaveral and Jacksonville terminal operations from an affiliate of El Paso Corporation. The consolidated financial statements also include the assets, liabilities and results of operations of these terminals and pipelines prior to their contribution by TransMontaigne Inc. to us. The consolidated financial statements also include the assets, liabilities and results of operations of the Mobile terminal that was contributed to us by TransMontaigne Inc. (see Note 3 of Notes to consolidated financial statements). This acquisition was accounted for as a transaction among entities under common control and, accordingly, prior periods have been restated to include the activity of the Mobile terminal since the date it was acquired by TransMontaigne Inc. (August 1, 2005). The contribution of the Mobile terminals’ assets and liabilities has been recorded at TransMontaigne Inc.’s carryover basis. All significant inter-company accounts and transactions have been eliminated in the preparation of the accompanying consolidated financial statements.

The preparation of financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The following estimates, in our opinion, are subjective in nature, require the exercise of judgment, and involve complex analysis: allowance for doubtful accounts; accrued asset retirement obligations; and accrued environmental obligations. Changes in these estimates and assumptions will occur as a result of the passage of time and the occurrence of future events. Actual results could differ from these estimates.

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(b) Nature of business

TransMontaigne Partners L.P. (“Partners”) was formed in 2005 as a Delaware master limited partnership initially to own and operate refined petroleum products terminaling and pipeline assets. We conduct our operations in the United States primarily along the U.S. Gulf Coast and in the Midwest. We provide integrated terminaling, storage, pipeline and related services for companies engaged in the distribution and marketing of refined petroleum products and crude oil, including TransMontaigne Inc.

(c) Change in year end

We adopted a December 31 year end for financial and tax reporting purposes effective December 31, 2005. We previously maintained a June 30 year end for financial and tax reporting purposes.

(d) Basis of presentation

The accompanying consolidated financial statements include allocated general and administrative charges from TransMontaigne Inc. for indirect corporate overhead to cover costs of functions such as legal, accounting, treasury, engineering, environmental safety, information technology, and other corporate services (see Note 2 of Notes to consolidated financial statements). The allocated general and administrative charges were $0.8 million and $0.7 million for the three months ended March 31, 2006 and 2005, respectively. The accompanying consolidated financial statements also include allocated insurance charges from TransMontaigne Inc. for insurance premiums to cover costs of insuring activities such as property casualty, pollution, automobile, directors and officers’ liability, and other insurable risks. The allocated insurance charges were $0.3 million and $0.3 million for the three months ended March 31, 2006 and 2005, respectively. Management believes that the allocated general and administrative charges and insurance charges are representative of the costs and expenses incurred by TransMontaigne Inc. for managing Partners’ operations.

(e) Accounting for terminal and pipeline operations

In connection with our terminal and pipeline operations, we utilize the accrual method of accounting for revenue and expenses. We generate revenues in our terminal and pipeline operations from throughput fees, storage fees, transportation fees, and fees from other ancillary services. Throughput revenue is recognized when the product is delivered to the customer; storage revenue is recognized ratably over the term of the storage contract; transportation revenue is recognized when the product has been delivered to the customer at the specified delivery location; and ancillary service revenue is recognized as the services are performed.

(f) Environmental obligations

At March 31, 2006 and December 31, 2005, we have accrued environmental obligations of approximately $625,000, and $625,000, respectively, representing our best estimate of our remediation obligations (see Note 8 of Notes to consolidated financial statements). The accrued environmental obligations at March 31, 2006 and December 31, 2005, represent amounts assumed in connection with the acquisition of the Oklahoma City terminal facility (see Note 3 of Notes to consolidated financial statements). Changes in our estimates and assumptions may occur as a result of the passage of time and the occurrence of future events.

TransMontaigne Inc. has indemnified us through May 2010 against certain potential environmental claims, losses and expenses associated with the operation of the initially-contributed assets and occurring before May 27, 2005, up to a maximum liability not to exceed $15 million for this indemnification obligation (see Note 2 of Notes to consolidated financial statements).

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(g)  Asset retirement obligations

At March 31, 2006 and December 31, 2005, we have accrued asset retirement obligations of approximately $0.2 million and $0.2 million, respectively, representing our best estimate of our retirement obligations (see Note 8 of Notes to consolidated financial statements). Asset retirement obligations are legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development or normal use of the asset. The accrued asset retirement obligations at March 31, 2006 and December 31, 2005 represent costs we would incur in the future if we were to close certain terminals and pipelines due to certain state-imposed obligations to close aboveground storage tanks upon abandoning the operations of the related tanks and regulations to safely abandon Federally regulated pipelines. Changes in our estimates and assumptions may occur as a result of the passage of time and the occurrence of future events.

In March 2005, the FASB issued FASB Interpretation No. 47 (“FIN 47”), “Accounting for Conditional Asset Retirement Obligations—an interpretation of SFAS 143,” which requires companies to recognize a liability for the fair value of a legal obligation to perform asset-retirement activities that are conditional on a future event, if the amount can be reasonably estimated. We adopted the requirements of FIN 47 on January 1, 2006. The adoption of FIN 47 did not have a significant impact on our consolidated financial statements.

(h) Equity-based compensation

For periods ending prior to July 1, 2005, we accounted for our equity-based compensation awards using the intrinsic value method pursuant to APB Opinion No. 25, Accounting for Stock Issued to Employees.

Effective July 1, 2005, we adopted the provisions of Statement of Financial Accounting Standards No. 123 (R), Share-Based Payment. The adoption of this Statement did not have an impact on our consolidated financial statements, except for the elimination of deferred equity-based compensation from partners’ equity.

This Statement requires us to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide service in exchange for the award. We are required to estimate the number of equity instruments that are expected to vest in measuring the total compensation cost to be recognized over the related service period. For awards granted prior to July 1, 2005, we are required to measure compensation cost for the portion of outstanding awards for which the requisite service has not yet been rendered (i.e., the unvested portion of the award as of July 1, 2005). The compensation cost for these awards is based on their relative grant-date fair values.

Compensation cost is recognized over the service period on a straight-line basis.

(i) Income taxes

No provision for income taxes has been reflected in the accompanying consolidated financial statements because Partners is treated as a partnership for federal and state income taxes. As a partnership, all income, gains, losses, expenses, deductions and tax credits generated by Partners flow through to the unitholders of the partnership.

(j) Net earnings per limited partners’ unit

Net earnings per limited partners’ unit are computed by dividing net earnings allocable to limited partners by the weighted average number of limited partnership units outstanding during the period. Net earnings allocable to limited partners are net of two percent of the earnings allocable to the general

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partner. Basic and diluted net earnings per limited partners’ unit are the same because we currently have no dilutive securities outstanding.

For the three months ended March 31, 2006, we excluded 58,000 restricted phantom units from the computation of diluted net earnings per limited partners’ unit because the unamortized deferred compensation exceeded the average quoted market price of our common units for the period.

(k) Reclassifications

Certain amounts in the prior period have been reclassified to conform to the current period’s presentation. Net earnings and partners’ equity have not been affected by these reclassifications.

(2) TRANSACTIONS WITH TRANSMONTAIGNE INC.

Omnibus Agreement.   Under our omnibus agreement with TransMontaigne Inc., we pay TransMontaigne Inc. an administrative fee for the provision of various general and administrative services for our benefit with respect to our assets. At March 31, 2006, the annual administrative fee payable to TransMontaigne Inc. was approximately $3.3 million. If we acquire or construct additional assets, TransMontaigne Inc. will propose a revised administrative fee covering the provision of services for such additional assets. If the conflicts committee of our general partner agrees to the revised administrative fee, TransMontaigne Inc. will provide services for the additional assets pursuant to the agreement. The administrative fee includes expenses incurred by TransMontaigne Inc. to perform centralized corporate functions, such as legal, accounting, treasury, insurance administration and claims processing, health, safety and environmental, information technology, human resources, credit, payroll, taxes and engineering and other corporate services, to the extent such services are not outsourced by TransMontaigne Inc.

The omnibus agreement further provides that we pay TransMontaigne Inc. an insurance reimbursement for premiums on insurance policies covering our assets. At March 31, 2006 the annual insurance reimbursement payable to TransMontaigne Inc. was approximately $1.0 million. We also reimburse TransMontaigne Inc. for direct operating costs and expenses that TransMontaigne Inc. incurs on our behalf, such as salaries of operational personnel performing services on-site at our terminals and pipeline and the cost of their employee benefits, including 401(k) and health insurance benefits.

Under the omnibus agreement, TransMontaigne Inc. has agreed to indemnify us through May 27, 2010 against certain potential environmental claims, losses and expenses associated with the operation of the initially contributed assets and occurring before May 27, 2005. TransMontaigne Inc.’s maximum liability for this indemnification obligation is $15 million. TransMontaigne Inc. has no obligation to indemnify us for losses until such aggregate losses exceed $250,000. TransMontaigne Inc. has no indemnification obligations with respect to environmental claims made as a result of additions to or modifications of environmental laws promulgated after May 27, 2005. We have agreed to indemnify TransMontaigne Inc. against environmental liabilities related to our assets, to the extent these liabilities are not subject to TransMontaigne Inc.’s indemnification obligations.

Terminaling Services Agreement—Florida Terminals and Razorback Pipeline System.   We have a terminaling and transportation services agreement with TransMontaigne Inc. that will expire on December 31, 2011. Under this agreement, TransMontaigne Inc. agreed to transport on the Razorback Pipeline and throughput at our Florida, Missouri and Arkansas terminals a volume of refined products that will, at the fee and tariff schedule contained in the agreement, result in minimum revenues to us of $5 million per calendar quarter. If TransMontaigne Inc. fails to meet its minimum revenue commitment in any quarter, it must pay us the amount of any shortfall within 15 days following receipt of an invoice from us. A shortfall payment may be applied as a credit in the following four quarters after TransMontaigne Inc.’s minimum obligations are met. In exchange for TransMontaigne Inc.’s minimum revenue commitment, we agreed to provide TransMontaigne Inc. approximately 2.0 million barrels of light

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oil storage capacity and approximately 1.4 million barrels of heavy oil storage capacity at certain of our Florida terminals.

In the event of a force majeure event that renders performance impossible with respect to an asset for at least 30 days, TransMontaigne Inc.’s obligations would be temporarily suspended with respect to that asset. If a force majeure event continues for 30 days or more and results in a diminution in the storage capacity we make available to TransMontaigne Inc., TransMontaigne Inc.’s minimum revenue commitment would be reduced proportionately for the duration of the force majeure event. If such a force majeure event continues for twelve consecutive months or more, either party has the right to terminate the entire terminaling services agreement.

After the initial term, the terminaling services agreement will automatically renew for subsequent one-year periods, subject to either party’s right to terminate with six months’ notice. TransMontaigne Inc.’s obligations under the terminaling services agreement will not terminate if TransMontaigne Inc. no longer owns our general partner. TransMontaigne Inc. may assign the terminaling services agreement only with the consent of the conflicts committee of our general partner. Upon termination of the agreement, TransMontaigne Inc. has a right of first refusal to enter into a new terminaling services agreement with us, provided it pays no less than 105% of the fees offered by the third party.

Under the terminaling services agreement, we are responsible for all refined product losses in excess of 0.10% of the refined product we receive from TransMontaigne Inc. at our terminals. We are entitled to all product gains, including 0.10% of the refined product we receive from TransMontaigne Inc. at our terminals.

Terminaling Services Agreement—Oklahoma City Terminal.   We have a revenue support agreement with TransMontaigne Inc. that provides that in the event any current third-party terminaling agreement should expire, TransMontaigne Inc. agrees to enter into a terminaling services agreement for a term commencing one year after the effective date of the date of acquisition of the Oklahoma City terminal and ending on November 1, 2012. The terminaling services agreement will provide that TransMontaigne Inc. agrees to throughput such volume of refined product as may be required to guarantee minimum revenues of $0.8 million per year. If TransMontaigne Inc. fails to meet its minimum revenue commitment in any year, it must pay us the amount of any shortfall within 15 days following receipt of an invoice from us. In exchange for TransMontaigne Inc.’s minimum revenue commitment, we agreed to provide TransMontaigne Inc. approximately 152,000 barrels of light oil storage capacity at our Oklahoma City terminal. TransMontaigne Inc.’s minimum revenue commitment currently is not in effect because a major oil company currently is under contract for the utilization of the light oil storage capacity at the terminal.

Terminaling Services Agreement—Mobile Terminal.   We have a terminaling and transportation services agreement with TransMontaigne Inc. that will expire on December 31, 2012. Under this agreement, TransMontaigne Inc. agreed to throughput at our Mobile terminal a volume of refined products that will, at the fee and tariff schedule contained in the agreement, result in minimum revenues to us of  $2.6 million per year. If TransMontaigne Inc. fails to meet its minimum revenue commitment in any year, it must pay us the amount of any shortfall within 15 days following receipt of an invoice from us. A shortfall payment may be applied as a credit in the following year after TransMontaigne Inc.’s minimum obligations are met. In exchange for TransMontaigne Inc.’s minimum revenue commitment, we agreed to provide TransMontaigne Inc. approximately 46,000 barrels of light oil storage capacity and approximately 65,000 barrels of heavy oil storage capacity at the terminal.

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(3) ACQUISITIONS

Effective October 31, 2005, we purchased a refined product terminal with approximately 160,000 barrels of aggregate storage capacity in Oklahoma City, Oklahoma from Magellan Pipeline Company, L.P. for approximately $1.9 million. The Oklahoma City terminal currently provides integrated terminaling services to a major oil company. The accompanying consolidated financial statements include the results of operations of the Oklahoma City terminal from October 31, 2005. The adjusted purchase price was allocated to the assets and liabilities acquired based upon the estimated fair value of the assets and liabilities as of the acquisition date. The adjusted purchase price was allocated as follows (in thousands):

 

Acquisition-related liabilities include assumed environmental obligations of approximately $625,000 and accrued property taxes of approximately $10,000.

Effective January 1, 2006, we acquired a refined product terminal with approximately 230,000 barrels of aggregate storage capacity in Mobile, Alabama from TransMontaigne Inc. for approximately $17.9 million. The Mobile terminal currently provides integrated terminaling services to TransMontaigne Inc., a major oil company, a crude oil marketing company and a petro-chemical company. The contribution of the Mobile terminal by TransMontaigne Inc. to us has been recorded at carryover basis in a manner similar to a reorganization of entities under common control. As such, prior periods have been restated to include the assets, liabilities, and results of operations of the Mobile terminal from August 1, 2005, the date of acquisition by TransMontaigne Inc. from Radcliff/Economy Marine Services, Inc. The results of operations of the Mobile terminal for periods prior to their actual contribution to us have been allocated to our predecessor entity TransMontaigne Partners (Predecessor). The consideration we paid to TransMontaigne Inc. in excess of the carryover basis of the net assets contributed has been reflected in the accompanying consolidated balance sheet and changes in partners’ equity as a reduction of partners’ equity—subordinated units.

At December 31, 2005, the basis of the assets and liabilities of the Mobile terminal are as follows:

 

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The results of operations previously reported by us and the combined amounts with the Mobile terminal as if the Mobile terminal had been contributed to us at the date of its acquisition (August 1, 2005) by TransMontaigne Inc. are as follows:

 

(4) CONCENTRATION OF CREDIT RISK AND TRADE ACCOUNTS RECEIVABLE

Our primary market areas are located along the U.S. Gulf Coast and in the Midwest. We have a concentration of trade receivable balances due from companies engaged in the distribution and marketing of refined products and crude oil, and the United States government. These concentrations of customers may affect our overall credit risk in that the customers may be similarly affected by changes in economic, regulatory or other factors. Our customers’ historical and future credit positions are analyzed prior to extending credit. We manage our exposure to credit risk through credit analysis, credit approvals, credit limits and monitoring procedures, and for certain transactions we may request letters of credit, prepayments or guarantees. We maintain allowances for potentially uncollectible accounts receivable.

Trade accounts receivable, net consists of the following (in thousands):

 

TransMontaigne Inc. accounted for approximately 70% and 67% of our total revenues for the three months ended March 31, 2006 and 2005, respectively. Marathon Petroleum Company LLC (“Marathon”) and the previous asphalt storage customers accounted for 17% and 23% of our total revenues for the three months ended March 31, 2006 and 2005, respectively. During February 2006, Marathon entered into a new five-year terminaling services agreement for asphalt storage capacity that replaces our previous customer, Gulf Atlantic Refining & Marketing, LP. In April 2005, Trigeant EP, Ltd. assigned its terminaling services contract with us to Gulf Atlantic Refining & Marketing, LP.

(5) PREPAID EXPENSES AND OTHER

Prepaid expenses and other are as follows (in thousands):

 

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(6) PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment, net is as follows (in thousands):

 

(7) OTHER ASSETS

Other assets, net are as follows (in thousands):

 

Acquired intangible represents the right to use the Coastal Fuels trade name through February 28, 2008. The cost of the acquired intangible is being amortized on a straight-line basis over five years.

Deferred debt issuance costs are amortized using the interest method over the term of the credit facility (see Note 9 of Notes to consolidated financial statements).

(8) OTHER ACCRUED LIABILITIES

Other accrued liabilities are as follows (in thousands):

 

(9) LONG-TERM DEBT

On May 9, 2005, we entered into a $75 million senior secured credit facility. At March 31, 2006 and December 31, 2005, our outstanding borrowings under the credit facility were approximately $45.5 million and $28.0 million, respectively. The credit facility provides for a maximum borrowing line of credit equal to the lesser of (i) $75 million and (ii) four times Consolidated EBITDA (as defined; $86.9 million at March 31, 2006). Borrowings under the credit facility bear interest (at our option) based on a base rate

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plus an applicable margin, or LIBOR plus an applicable margin; the applicable margins are a function of the total leverage ratio (as defined). Interest on loans under the credit facility is due and payable periodically, based on the applicable interest rate and related interest period, generally one, two or three months. The weighted average interest rate on borrowings under our credit facility was 5.9% during the three months ended March 31, 2006. In addition, we pay a commitment fee ranging from 0.375% to 0.50% per annum on the total amount of the unused commitments. Borrowings under the credit facility are secured by a lien on our assets, including cash, accounts receivable, inventory, general intangibles, investment property, contract rights and real property, except for our real property located in Florida. The terms of the credit facility include covenants that restrict our ability to make cash distributions and acquisitions. The principal balance of loans and any accrued and unpaid interest will be due and payable in full on the maturity date, May 9, 2010.

The credit facility also contains customary representations and warranties (including those relating to organization and authorization, compliance with laws, absence of defaults, material agreements and litigation) and customary events of default (including those relating to monetary defaults, covenant defaults, cross defaults and bankruptcy events). The primary financial covenants contained in the credit facility are a total leverage ratio test (not to exceed four times) and an interest coverage ratio test (not to be less than three times). At March 31, 2006, we were in compliance with the financial covenants contained in the credit facility.

On March 27, 2006, TransMontaigne Inc. announced that it had entered into a merger agreement with SemGroup, L.P. pursuant to which SemGroup, L.P. would acquire all of the outstanding capital stock of TransMontaigne Inc. We are not a party to that merger agreement. If TransMontaigne Inc. is acquired by a third party, the completion of such transaction would constitute a “change in control” under the credit facility and, therefore, would require a waiver from the lenders. Alternatively, the third party acquirer of TransMontaigne Inc. may elect to provide us with an alternative credit facility. In the merger agreement with TransMontaigne Inc., SemGroup, L.P. has agreed that the parties will not close the transaction unless either a waiver has been received from the lenders or comparable financing has been made available to us.

(10) LONG-TERM INCENTIVE PLAN

TransMontaigne GP L.L.C. (“TransMontaigne GP”) is our general partner and manages our operations and activities. TransMontaigne Services Inc. is a wholly-owned subsidiary of TransMontaigne Inc. and is the sole member of TransMontaigne GP. TransMontaigne Services Inc. adopted a long-term incentive plan for its employees and consultants and non-employee directors of our general partner. The long-term incentive plan currently permits the grant of awards covering an aggregate of 345,895 units, which amount will automatically increase on an annual basis by 2% of the total outstanding common and subordinated units at the end of the preceding fiscal year. Ownership in the awards is subject to forfeiture until the vesting date, but recipients have distribution and voting rights from the date of grant. The plan is administered by the compensation committee of the board of directors of our general partner. On January 19, 2006, we announced a program for the repurchase of outstanding common units for purposes of making subsequent grants of restricted units to key employees and non-employee directors of our general partner. As of March 31, 2006, we have repurchased approximately 8,200 common units pursuant to the program.

On March 31, 2006, TransMontaigne Services Inc. granted 58,000 restricted phantom units to its key employees and executive officers, and non-employee directors of our general partner. On May 27, 2005, TransMontaigne Services Inc. granted 120,000 restricted common units to its key employees and executive officers, and non-employee directors of our general partner. We recognized deferred equity-based compensation of approximately $1.7 million and $2.6 million associated with the March 2006 and May 2005 grants, respectively, which are being amortized to income over the four-year vesting period.

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Amortization of deferred equity-based compensation of approximately $0.2 million and $nil is included in direct general and administrative expense for the three months ended March 31, 2006 and 2005, respectively.

Distributions paid to holders of restricted common units and restricted phantom units are treated as compensation expense for financial reporting purposes. Included in direct general and administrative expenses for the three months ended March 31, 2006 and 2005, is approximately $48,000 and $nil, respectively, of compensation expense related to distributions paid to holders of restricted units.

(11) COMMITMENTS AND CONTINGENCIES

Operating Leases.   We lease property and equipment under non-cancelable operating leases that extend through April 2021. At March 31, 2006, future minimum lease payments under these non-cancelable operating leases are as follows (in thousands):

 

Rental expense under operating leases was approximately $80,000 and $70,000 for the three months ended March 31, 2006 and 2005, respectively.

(12) BUSINESS SEGMENTS

We provide integrated terminaling, storage, pipeline and related services to companies engaged in the distribution and marketing of refined petroleum products and crude oil. Our chief operating decision maker is TransMontaigne GP’s Chief Executive Officer (“CEO”). TransMontaigne GP’s CEO reviews the financial performance of our business segments using disaggregated financial information about “margins” for purposes of making operating decisions and assessing financial performance. “Margins” are composed of revenues less direct operating costs and expenses. Accordingly, we present “margins” for each of our two business segments: (i) U.S. Gulf Coast terminals and (ii) Midwest terminals and pipeline.

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The financial performance of our business segments is as follows (in thousands):

 

Supplemental information about our business segments is summarized below (in thousands):

 

 

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ITEM 2.                MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of the results of operations and financial condition should be read in conjunction with the accompanying unaudited consolidated financial statements.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

A summary of the significant accounting policies that we have adopted and followed in the preparation of our consolidated financial statements is detailed in our consolidated financial statements for the six months ended December 31, 2005, included in our Transition Report on Form 10-K filed on March 2, 2006 (see Note 1 of Notes to the consolidated financial statements). Certain of these accounting policies require the use of estimates. The following estimates, in our opinion, are subjective in nature, require the exercise of judgment, and involve complex analysis: allowance for doubtful accounts; accrued asset retirement obligations; and accrued environmental obligations. These estimates are based on our knowledge and understanding of current conditions and actions we may take in the future. Changes in these estimates will occur as a result of the passage of time and the occurrence of future events. Subsequent changes in these estimates may have a significant impact on our financial condition and results of operations.

SIGNIFICANT DEVELOPMENTS DURING THE THREE MONTHS ENDED MARCH 31, 2006

Effective January 1, 2006, we acquired a refined product terminal in Mobile, Alabama from TransMontaigne Inc. in exchange for approximately $17.9 million.

On January 19, 2006, we announced a distribution of $0.40 per unit payable on February 8, 2006 to unitholders of record on January 31, 2006.

On January 19, 2006, we announced a program for the repurchase, from time to time, of outstanding common units of the Partnership for purposes of making subsequent grants of restricted units under the Partnership’s Long-Term Incentive Plan to key employees and executive officers of TransMontaigne Services Inc. and the non-employee directors of our general partner. The Partnership anticipates repurchasing annually up to approximately $1.2 million of aggregate market value of its outstanding common units for this purpose. However, there is no guarantee as to the exact number of units or dollar amount that will be repurchased, and the purchases may be discontinued at any time.

On February 20, 2006, we entered into a new five-year terminaling services agreement with Marathon Petroleum Company LLC (“Marathon”) regarding approximately 1.0 million barrels of asphalt storage capacity throughout our Florida facilities. The terminaling services agreement with Gulf Atlantic Operations LLC (“Gulf Atlantic”) for the utilization of this asphalt storage capacity has been amended to allow for cancellations coinciding with the effective dates within the terminaling services agreement with Marathon. Effective May 1, 2006, our terminaling services agreement with Gulf Atlantic expired. The change from Gulf Atlantic to Marathon is not expected to have a material impact on our results of operations or cash flows.

On March 27, 2006, TransMontaigne Inc. announced that it had entered into a merger agreement with SemGroup, L.P. pursuant to which SemGroup, L.P. would acquire all of the outstanding capital stock of TransMontaigne Inc. We are not a party to that merger agreement and cannot be certain when such transaction, or any other transaction that might involve the acquisition of TransMontaigne Inc. will close, or if it will close at all. If TransMontaigne Inc. were acquired by a third party, such third party also would control our operations. We currently cannot predict whether or in what manner any third party that acquires control of our general partner would change our operations, if at all.

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SUBSEQUENT EVENTS

On April 19, 2006, we announced a distribution of $0.43 per unit payable on May 9, 2006 to unitholders of record on April 28, 2006.

RESULTS OF OPERATIONS—THREE MONTHS ENDED MARCH 31, 2006 AND 2005

In reviewing our historical results of operations, you should be aware that the historical results of operations of TransMontaigne Inc.’s terminals and pipeline prior to being contributed to us are reflected in the accompanying financial statements as being attributable to our predecessor entity “TransMontaigne Partners (Predecessor).” The contribution of certain TransMontaigne Inc. terminal and pipeline operations to us was recorded for financial reporting purposes at carryover basis in a manner similar to a reorganization of entities under common control.

The following selected historical financial statement measures are derived from our unaudited interim financial statements for the three months ended March 31, 2006 and 2005 (in thousands):

 

Revenues.   The revenues for the three months ended March 31, 2006 and 2005, were approximately $12.1 million and $9.7 million, respectively. Effective October 31, 2005, we acquired the Oklahoma City terminal from Magellan Pipeline Company, L.P. for approximately $1.9 million and on January 1, 2006 we acquired the Mobile terminal from TransMontaigne Inc. for approximately $17.9 million. For the three months ended March 31, 2006, the Oklahoma City terminal contributed approximately $0.3 million in revenues and the Mobile terminal contributed approximately $0.8 million in revenues. Our revenues are as follows (in thousands):

 

Throughput and additive injection fees, net.   Terminal throughput and additive injection fees, net were approximately $6.4 million and $2.9 million for the three months ended March 31, 2006 and 2005, respectively. The increase of approximately $3.5 million in throughput and additive injection fees, net for 2006 as compared to 2005 was due principally to the conversion of the fees charged on heavy oil volumes to a throughput agreement and the acquisition of the Oklahoma City and Mobile terminals. For the three months ended March 31, 2006 and 2005, we delivered approximately 109,200 barrels and 94,500 barrels per day of light oil throughput volumes, respectively, at our terminals.

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The terminaling services agreement with TransMontaigne Inc. converted the fees charged on heavy oil volumes from a storage agreement to a throughput agreement effective June 1, 2005. The throughput fees charged on heavy oil volumes were approximately $2.0 million for the three months ended March 31, 2006. For the three months ended March 31, 2006 and 2005, we delivered approximately 37,400 barrels and 41,200 barrels per day, respectively, of heavy oil volumes for TransMontaigne Inc. at our terminals.

Included in the throughput and additive injection fees, net for the three months ended March 31, 2006 and 2005, are fees charged to TransMontaigne Inc. of approximately $5.9 million and $2.9 million, respectively.

Terminaling storage fees.   Terminaling storage fees were approximately $2.5 million and $4.8 million for the three months ended March 31, 2006 and 2005, respectively. The decrease of approximately $2.3 million in terminaling storage fees for 2006 as compared to 2005 was due principally to the conversion of the fees charged on heavy oil volumes from a storage agreement to a throughput agreement.

Included in the terminaling storage fees for the three months ended March 31, 2006 and 2005 are fees charged to TransMontaigne Inc. of approximately $nil and $2.5 million, respectively, for the storage of heavy oil volumes.

Pipeline transportation fees.   For the three months ended March 31, 2006 and 2005, we earned pipeline transportation fees of approximately $0.6 million and $0.5 million, respectively. For the three months ended March 31, 2006 and 2005, we averaged approximately 13,200 barrels and 11,900 barrels per day of transported product on the Razorback Pipeline.

Included in pipeline transportation fees for the three months ended March 31, 2006 and 2005, are fees charged to TransMontaigne Inc. of approximately $0.6 million and $0.5 million, respectively.

Management fees and reimbursed costs.   We manage and operate for a major oil company certain tank capacity at our Port Everglades (South) terminal and receive a reimbursement of costs. Effective May 27, 2005, we manage and operate on behalf of TransMontaigne Inc. certain tank capacity owned by a utility and receive a management fee from TransMontaigne Inc. For the three months ended March 31, 2006 and 2005, management fees and reimbursed costs were approximately $309,000 and $30,000, respectively.

Included in management fees and reimbursed costs for the three months ended March 31, 2006 and 2005, are fees charged to TransMontaigne Inc. of approximately $0.3 million and $nil, respectively.

Other revenue.   For the three months ended March 31, 2006 and 2005, other revenue was approximately $2.3 million and $1.4 million, respectively. The increase of approximately $0.9 million in other revenue for 2006 as compared to 2005 was due principally to an increase at the Florida facilities and the acquisition of the Oklahoma City and Mobile terminals.

Included in other revenue for the three months ended March 31, 2006 and 2005, are fees charged to TransMontaigne Inc. of approximately $1.7 million and $0.6 million, respectively.

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Direct operating costs and expenses.   For the three months ended March 31, 2006 and 2005, the direct operating costs and expenses of our operations were approximately $4.7 million and $4.1 million, respectively. For the three months ended March 31, 2006, the Oklahoma City terminal contributed approximately $0.1 million in direct operating costs and expenses and the Mobile terminal contributed approximately $0.3 million in direct operating costs and expenses. The direct operating costs and expenses of our operations are as follows (in thousands):

 

The increase of approximately $0.6 million in direct operating costs and expenses for 2006 as compared to 2005 was due principally to an increase at the Florida facilities and the acquisition of the Oklahoma City and Mobile terminals.

Costs and expenses.   Direct general and administrative expenses for the three months ended March 31, 2006, were approximately $1.1 million, compared to approximately $nil for the three months ended March 31, 2005. Direct general and administrative expenses are as follows (in thousands):

 

The accompanying consolidated financial statements include allocated general and administrative charges from TransMontaigne Inc. for allocations of indirect corporate overhead to cover costs of centralized corporate functions such as legal, accounting, treasury, insurance administration and claims processing, health, safety and environmental, information technology, human resources, credit, payroll, taxes, engineering and other corporate services. The allocated general and administrative expenses were approximately $0.8 million and $0.7 million for the three months ended March 31, 2006 and 2005, respectively.

The accompanying consolidated financial statements also include allocated insurance charges from TransMontaigne Inc. for allocations of insurance premiums to cover costs of insuring activities such as property casualty, pollution, automobile, directors and officers, and other insurable risks. The allocated

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insurance expenses are presented in the accompanying consolidated statements of operations as follows (in thousands):

 

Depreciation and amortization expense for the three months ended March 31, 2006 and 2005, was $1.9 million and $1.5 million, respectively. The increase of approximately $0.4 million in depreciation and amortization expense for 2006 as compared to 2005 was due principally to depreciation and amortization expense on current year additions to property, plant, and equipment and the acquisition of the Oklahoma City and Mobile terminals.

Interest expense was approximately $0.7 million and $nil for the three months ended March 31, 2006 and 2005, respectively, related to borrowings and commitment fees under our senior secured credit facility.

LIQUIDITY AND CAPITAL RESOURCES

Our primary liquidity needs are to fund our distributions to our unitholders, capital expenditures and our working capital requirements. Currently, our principal sources of funds to meet our liquidity needs are cash generated by operations, borrowings under our credit facility and debt and equity offerings.

Capital expenditures, excluding acquisitions, for the three months ended March 31, 2006, were approximately $0.8 million for terminal and pipeline facilities and assets to support these facilities. Future capital expenditures will depend on numerous factors, including the availability, economics and cost of appropriate acquisitions which we identify and evaluate; the economics, cost and required regulatory approvals with respect to the expansion and enhancement of existing systems and facilities; customer demand for the services we provide; local, state and federal governmental regulations; environmental compliance requirements; and the availability of debt financing and equity capital on acceptable terms.

Senior Secured Credit Facility.   On May 9, 2005, we entered into a $75 million senior secured credit facility. The credit facility provides for a maximum borrowing line of credit equal to the lesser of (i) $75 million and (ii) four times Consolidated EBITDA (as defined; $86.9 million at March 31, 2006). Borrowings under the credit facility bear interest (at our option) based on a base rate plus an applicable margin, or LIBOR plus an applicable margin; the applicable margins are a function of the total leverage ratio (as defined). Interest on loans under the credit facility will be due and payable periodically, based on the applicable interest rate and related interest period, generally either one, two or three months. In addition, we will pay a commitment fee ranging from 0.375% to 0.50% per annum on the total amount of the unused commitments. Borrowings under the credit facility are secured by a lien on our assets, including cash, accounts receivable, inventory, general intangibles, investment property, contract rights and real property, except for our real property located in Florida. The terms of the credit facility include covenants that restrict our ability to make cash distributions and acquisitions. We may make distributions of cash to the extent of our “available cash” as defined in our partnership agreement. We may make acquisitions meeting the definition of “permitted acquisitions” which include: acquisitions in which the consideration paid for such acquisition, together with the consideration paid for other acquisitions in the same fiscal year, does not exceed $15,000,000; acquisitions that arise from the exercise of options under the omnibus agreement with TransMontaigne Inc. provided that any cash consideration is not obtained from borrowings under the credit facility; and acquisitions in which we have (1) provided the agent prior written documentation in form and substance reasonably satisfactory to the agent demonstrating our pro forma

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compliance with all financial and other covenants contained herein after giving effect to such acquisition and (2) satisfied all other conditions precedent to such acquisition which the agent may reasonably require in connection therewith. The principal balance of loans and any accrued and unpaid interest will be due and payable in full on the maturity date, May 9, 2010.

The credit facility also contains customary representations and warranties (including those relating to corporate organization and authorization, compliance with laws, absence of defaults, material agreements and litigation) and customary events of default (including those relating to monetary defaults, covenant defaults, cross defaults and bankruptcy events). The primary financial covenants contained in the credit facility are a total leverage ratio test (not to exceed four times) and an interest coverage ratio test (not to be less than three times). These financial covenants are based on a defined financial performance measure within the credit facility known as “Consolidated EBITDA.”

On March 27, 2006, TransMontaigne Inc. announced that it had entered into a merger agreement with SemGroup, L.P. pursuant to which SemGroup, L.P. would acquire all of the outstanding capital stock of TransMontaigne Inc. We are not a party to that merger agreement. If TransMontaigne Inc. is acquired by a third party, the completion of such transaction would constitute a “change in control” under the credit facility and, therefore, would require a waiver from the lenders. Alternatively, the third party acquirer of TransMontaigne Inc. may elect to provide us with an alternative credit facility. In the merger agreement with TransMontaigne Inc., SemGroup, L.P. has agreed that the parties will not close the transaction unless either a waiver has been received from the lenders or comparable financing has been made available to us.

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For the periods prior to our initial public offering on May 27, 2005, the credit facility stipulates our Consolidated EBITDA at approximately $3.7 million per quarter and consolidated interest expense at approximately $0.4 million per quarter. Those assumptions are reflected in the following calculation of the “total leverage ratio” and “interest coverage ratio” contained in the credit facility.

 

If we were to fail either financial performance covenant, or any other covenant contained in the credit facility, we would seek a waiver from our lenders under such facility. If we were unable to obtain a waiver from our lenders and the default remained uncured after any applicable grace period, we would be in breach of the credit facility, and the lenders would be entitled to declare all outstanding borrowings immediately due and payable.

We believe that our future cash expected to be provided by operating activities, available borrowing capacity under our credit facility, and our relationship with institutional lenders and equity investors should enable us to meet our planned capital and liquidity requirements through at least the maturity date of our credit facility (May 2010).

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ITEM 3.                QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

The information contained in Item 3 updates, and should be read in conjunction with, information set forth in Part II, Item 7A in our Transition Report on Form 10-K for the six months ended December 31, 2005, in addition to the interim unaudited consolidated financial statements, accompanying notes and management’s discussion and analysis of financial condition and results of operations presented in Items 1 and 2 of this Quarterly Report on Form 10-Q. There are no material changes in the market risks faced by us from those reported in our Transition Report on Form 10-K for the six months ended December 31, 2005.

Market risk is the risk of loss arising from adverse changes in market rates and prices. The principal market risk to which we are exposed is interest rate risk associated with borrowings under our senior secured credit facility. Borrowings under our senior secured credit facility will bear interest at a variable rate based on LIBOR or the lender’s base rate. We currently do not manage our exposure to interest rates, but we may in the future. At March 31, 2006, we had outstanding borrowings of $45.5 million under our senior secured credit facility. Based on the outstanding balance of our variable-interest-rate debt at March 31, 2006, and assuming market interest rates increase or decrease by 100 basis points, the potential annual increase or decrease in interest expense is approximately $0.5 million.

We generally do not purchase or market products that we handle or transport and, therefore, we do not have material direct exposure to changes in commodity prices, except for the value of product gains and losses arising from our terminaling services agreements with our customers. We do not use derivative commodity instruments to manage the commodity risk associated with the product we may own at any given time. Generally, to the extent we are entitled to retain product pursuant to terminaling services agreements with our customers, we sell the product to TransMontaigne Inc. As a result, we do not have a material direct exposure to commodity price fluctuations.

ITEM 4.                CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit to the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified by the Commission’s rules and forms, and that information is accumulated and communicated to our management, including our principal executive and principal financial officers (whom we refer to as our Certifying Officers), as appropriate to allow timely decisions regarding required disclosure. Our management evaluated, with the participation of our Certifying Officers, the effectiveness of our disclosure controls and procedures as of March 31, 2006, pursuant to Rule 13a-15(b) under the Exchange Act. Based upon that evaluation, our Certifying Officers concluded that, as of March 31, 2006, our disclosure controls and procedures were effective.

There were no changes in our internal control over financial reporting that occurred during the fiscal quarter ended March 31, 2006 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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