NuStar Energy LP (NS) 2012 Q3 法說會逐字稿

Good morning, my name is Marley and I will be your conference operator today.

At this time, I would like to welcome everyone to the NuStar Energy LP and NuStar GP Holdings LLC Third-Quarter 2012 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. (Operator instructions)

I would now like to turn the call over to Chris Russell, Vice President of Investor Relations. Sir, you may begin your conference

Thank you, Marley. Good morning, and welcome to our conference call to discuss NuStar Energy LP and NuStar GP Holdings LLC's Third Quarter of 2012 Earnings Call.

With me today is Curt Anastasio, CEO and President of NuStar Energy LP and NuStar GP Holdings LLC; Steve Blank, our CFO; and other members of our management team.

Before we get started, we would like to remind you that during the course of this call NuStar management will make statements about our current views concerning the future performance of NuStar that are forward-looking statements within the meaning of federal securities laws.

These statements are subject to the various uncertainties and assumptions described in our filings with the Securities and Exchange Commission and will not be updated to conform to actual results or revised expectations.

During the course of this call, we will also make reference to certain non-GAAP financial measures. Our non-GAAP financial measures should not be considered as alternatives to GAAP measures. Reconciliations of these non-GAAP financial measures to US GAAP may be found either in our earnings press release or on our website.

Now let me turn the call over to Curt.

Good morning and thanks for joining us today.

During the third quarter, results in our pipeline transportation and storage segments continue to improve over last year, as both segments benefited from additional EBITDA being generated as a result of the capital we've invested in internal growth projects the last couple of years.

However, the asphalt and fuels marketing segment reported negative EBITDA of $14 million during the quarter, down from the $31 million of EBITDA earned in the third quarter last year. The segment continued to be negatively impacted by the large Brent to WTI and LLS to WTI spreads, as well as continued weak demand for asphalt.

While asphalt did generate $2 million of EBITDA during the quarter, the results were $7 million lower than the third quarter of last year. Lower gross margins, as a result of our asphalt refineries buying the majority of their crude oil based on Brent-related market prices and continued weak asphalt demand, were the main drivers for the decrease in EBITDA.

As you are probably aware, on September 28th, we closed on the sale of a 50% interest in our asphalt operations and deconsolidated asphalt from NuStar's financial statements going forward. That transaction was the first step of our plan to change the strategic direction of NuStar by shifting away from the margin-based portion of our business to fee-based storage and pipelines.

The San Antonio refinery lost $8 million in EBITDA during the quarter, lower than the $4 million of EBITDA earned in the third quarter of 2011. Again, wide LLS to WTI spreads negatively impacted the refinery's crude costs during the quarter. Losses were also incurred on hedges that remained in place on some of the refinery's production.

Our fuels marketing operations lost $9 million of EBITDA during the quarter, lower than the $19 million generated last year. A principal reason for the loss was we decided this quarter to reduce the scope of the bunkering business by exiting two markets, Los Angeles and Portland, where results had been weak and liquidating the related inventory.

In addition, our heavy fuel oil operations recognized a loss due to some timing differences on the Company's hedge fuel oil inventories which will be recouped as the related physical sales are realized.

This inventory is 100% hedged, so the loss again is only a timing difference. We expect our remaining bunker businesses and heavy fuel businesses to continue to be good, profitable businesses for us for the rest of 2012 and beyond.

As I mentioned earlier, results in both our pipeline transportation and storage segments continue to improve. In the first week of July, our transportation segment began benefiting from the connections of our Corpus Christi to Three Rivers, Texas, 16 inch crude oil pipeline to a pipeline constructed by TexStar Midstream Services.

These two interconnected pipeline systems are transporting Eagle Ford shale region crude oil from Frio County in South Texas to Corpus Christi.

Primarily as a result of the completion of this project, crude oil pipeline throughputs were 16% or 50,000 barrels a day higher than in the third quarter of 2011. That is why the transportation segment's throughputs were 6% higher compared to last year's third-quarter, even though refined product throughputs were close to flat.

Those increased throughputs, plus higher pipeline tariffs, as a result of the 2012 FERC tariff increases, contributed to transportation segment EBITDA increasing to $56 million, $5 million higher than third-quarter of 2011.

Storage segment third-quarter EBITDA of $74 million was $3 million higher than the third quarter of last year. The third quarter of 2011 completion of a storage expansion project, plus the April 2012 completion of the unit train project, both at our St. James, Louisiana, terminal facility, as well as higher storage rates on new and existing storage contracts, all had positive impacts on the segment's EBITDA.

With regard to third-quarter corporate expenses, G&A expenses were $25 million, $7 million higher than last year. Third-quarter 2011's G&A expenses benefited from a lower compensation expense.

In conjunction with the closing of the asphalt JV transaction, we recognized a loss of about $22 million, primarily associated with the sale of inventory of the asphalt operation, which is included in other income and expense in our third-quarter financial tables.

Interest expense for the quarter was $25 million, up $3 million from last year. Increased debt levels for the majority of the quarter required to fund the internal growth program, higher borrowing costs associated with a new credit facility that closed in May, and reduced savings from fixed to floating interest rate swaps were the main reasons for the increase.

In September, we received $344 million in proceeds by issuing about 7.1 million common units of NuStar Energy. Those equity proceeds, and the proceeds received upon closing the asphalt joint venture transaction, were used for working capital purposes and to reduce outstanding borrowings under our revolver.

As of September 30th, 2012, our debt balance was $2 billion, down almost $500 million from September 30th, 2011. And our debt to EBITDA ratio was 4.3 times.

With regard to our third-quarter distribution, NuStar Energy's board of directors declared our distribution of $1.095 per unit. That distribution will be paid on November 14th.

The board of NuStar GP Holdings declared a third-quarter distribution of $0.545 per unit, which is $0.05 per unit or 10% higher than the third quarter of 2011 distribution.

Increased cash flow, as a result of NuStar Energy's equity issuance in September, allowed NuStar GP Holdings to increase the third quarter distribution. The GP Holdings distribution will be paid on November 16th.

As we move into the fourth quarter, our storage and transportation segments should benefit from the startup of two more internal growth projects. Earlier this month, we completed construction on a 55 mile, 12 inch pipeline that will transport Eagle Ford crude to the Corpus Christi area.

This is the fourth project we've completed in the Eagle Ford shale in the last 18 months, giving us now the ability to transport approximately 300,000 barrels per day of Eagle Ford crude to the US Gulf Coast.

We also expect to complete a 1 million barrel expansion project at our St. Eustatius terminal later this quarter. This will expand the storage capacity of St. Eustatius to close to 14 million barrels.

Fourth-quarter EBITDA in the transportation segment should be higher than the $56 million earned in the fourth quarter last year. The increase is mainly a result of increased throughputs from our internal growth projects in the Eagle Ford shale.

Storage segment EBITDA for the fourth quarter should be comparable to the fourth quarter of 2011. The EBITDA benefit from the 1 million barrel St. Eustatius expansion project should be offset by increased maintenance expense we're taking at some of our terminals during the quarter.

Effective September 28th, the asphalt operations were deconsolidated from NuStar's financial statements. Future earnings results from the JV will be recorded within equity and earnings from joint ventures on the income statement.

We expect total EBITDA for asphalt and fuels marketing to be positive in the fourth quarter. Our fuels marketing operations EBITDA should be higher than last year's fourth-quarter, while the San Antonio refinery's fourth-quarter 2012 EBITDA should be close to break even.

In terms of guidance for fourth-quarter corporate expenses, G&A expenses are expected in the range of $29 million to $30 million, depreciation and amortization around $42 million to $43 million, and interest expense $23 million to $24 million.

2012 full-year reliability capital should be $45 million to $50 million, while our strategic capital should be around $400 million.

In the coming weeks, we're going to be providing more details on 2013 and 2014. For today's call, we're saying that 2013's strategic capital will be at least in the $225 million to $250 million range. However, we continue to pursue and have identified new strategic growth projects that are not included in this strategic capital spending guidance, as well as acquisition opportunities. If those projects were to come to fruition, our guidance for 2013 would increase significantly.

On the pipeline transportation side of our business, we're pursuing addition projects in the Eagle Ford shale region and other shale areas where our pipelines are located.

Last week, we launched a 30 day open season to assess shipper interests for the transport of crude oil from the Niobrara shale near Platteville and Watkins, Colorado, to Wichita Falls, Texas.

This project, called the Niobrara Falls Project, could include the construction of two new crude oil gathering pipelines. In addition, two of NuStar's existing pipelines could also be utilized in the project. The 30 day open season will end on November 15th.

We also continue to pursue additional opportunities in the Eagle Ford that we should be able to publicly announce within the next few weeks.

We continue to pursue storage expansion opportunities in both St. James and St. Eustatius.

So, based on today's low case strategic capital spending guidance for 2012 and 2013, we expect transportation segment EBITDA to be $10 million to $20 million higher in 2012 than in 2011 and then to increase another $40 million to $60 million in 2013.

Storage segment EBITDA is expected to be $20 million to $30 million higher in 2012 when compared to 2011. In 2013, in this low case, we expect storage segment EBITDA to be comparable to the amount earned in 2012.

2012 EBITDA for asphalt and fuels marketing is expected to generate $10 million to $30 million of negative EBITDA for the year after excluding the $266 million non-cash asset impairment recorded in the second quarter to write down the value of the Company's asphalt refineries and other intangible assets including good will.

In 2013, we expect EBITDA from asphalt and fuels marketing to be $40 million to $60 million higher than it was in 2012.

So at this time, let me turn it over to the operator so we can open up the call for Q&A.

(Operator instructions) We'll pause for just a moment to compile the Q&A roster.

Brian Zarahn, Barclays.

I appreciate the update on 2013 guidance. Just a little curious on the storage segment, it seems like the guidance has come down a little bit from last quarter's comments. Can you talk a little bit about that as more related to CapEx in the segment?

Basically the biggest item in that change is we've taken a fairly conservative approach to forecasting a profit sharing formula that we have on our unit train facility at St. James where we make more money if the WTI LLS spread is above a certain level.

We've just not forecasted any benefit for that since it's hard to predict. But that was worth about $17 million to us in 2012. And then we had a couple of projects just delayed into later in the year that removed some of that EBITDA. But the main portion was the WTI LLS spread.

And then I'm curious on your Niobrara Falls Project, how do you view the competitive landscape given today's announcement of a competing expansion moving forward and there's also a rail capacity coming on line?

We were certainly aware of that competing project. But this one's very different. It gets barrels down to the Gulf Coast instead of just to Cushing.

Our responses we've been very pleased with. We've got strong interest in the responses so far just a week into the open season. So, it's moving along very well.

Given the project, as it moves ahead, will utilize quite a bit of existing pipe. Is your sort of 6 to 8 times EBITDA multiple for your average projects could potentially be on the lower end of that multiple range?

That's kind of what we look at in terms of our projects is something in that 6 to 8, 4 to 8 I think.

Should be on the lower end of that.

And last one for me, what was total CapEx in the third quarter?

Total for the third quarter was $109 million.

$109.7 looks like.

Cory Garcia, Raymond James.

Just had a quick question regarding the San Antonio refinery. Could you clear up how much and really sort of quantify the hedging losses in the quarter? Trying to get what a, sort of a real run rate would be for that refinery.

The hedging loss was $8.9 million during the quarter.

So it was essentially break even in the quarter is a way to look at it on an EBITDA basis?

Yes.

Then moving to your storage segment. Would you be able to provide any color on the rates that you're expecting from storage capacity coming up for renewal by year-end? And then also looking into sort of the 2013 timeframe, how much of your existing capacity will actually be up for renewal as well?

So, we just had a little problem on the question, but I think you said storage rates anticipated on the storage that's coming up for renewal by year-end, correct?

Yes, sir.

Okay.

We're not seeing any drastic change in the rates. I'll tell you that we have about, I think about a third of our storage contracts, 34%, 35%, are due for renewal in the next year. And then another 35%, roughly another 35%, in the one to three year category and then about 20% in three to five and still another 10% or 15% just beyond five years.

So, we've got a lot of long-dated contracts out there. But the near-term stuff we're seeing renew pretty much at the levels they were originally contracted at.

[Lynn Shenn, HITE]

It's actually James Jampel from HITE. Did I hear you say that the G&A expense in the fourth quarter is actually going to be higher than it was in the third quarter?

No, what I was doing was comparing third-quarter 2011 to third-quarter 2012 and I said it was about $7 million higher. And that mainly resulted from, we had, in third-quarter 2011, we had a sharper decline in our stock price than we experienced in third-quarter 2012.

So, therefore you get compensation expense results in the variance that I (inaudible). That was the principle reason (technical difficulty).

That was pretty much the bulk of it there.

The stock price move, but Chris has some ---

We did guide G&A costs to be up in the $29 million to $30 million range in the fourth quarter and a good chunk of that is that we did benefit in the third quarter, again, on the compensation expense from the unit price coming down. So, we're not forecasting that (multiple speakers).

It's all stock price (inaudible).

Distribution coverage was 0.68 for the quarter and I'm wondering given what you've told us about, at least [orally], what you think about 2013, when can we expect distribution coverage to get near one again?

We don't have any plans to reduce the distribution at all. We just went through all of this with the board. That's absolutely what we're going to be covering, when I allude to sort of a strategic press conference a few weeks from now, that is certainly one of the items that will be covered in detail for 2013 and 2014.

What you'll see from that is there's, we increase coverage as time goes by. We'll have more detail on that.

Do you think by, coverage will be one in 2013?

I'm going to wait to cover that in detail with you in that call that I just alluded to. There's nothing in that you'll see that leads to any reduction in the distribution. In fact, we're restoring the health in the coverage so that we can begin to look at distribution increases.

We're going to cover all the detail, the underlying assumptions behind that within the next few weeks.

I missed the second to last sentence you said.

All I'm saying is what you'll see as part of that call is that we increase the distribution, the distribution coverage is healthier as time goes by and that we begin to look at distribution increases over the course of the period I'm going to cover in that call.

And we'll cover all the underlying assumptions and how we get there.

(Operator instructions)

Ross Payne, Wells Fargo.

Steve, quick question for the EBITDA. Assuming that number it does not add back $21 million in non-cash inventory items and the market-to-market of 6.5, is that correct?

Yeah well, certainly for purposes of our debt to EBITDA calculation.

Okay, but just trying to get to an EBITDA number, a cash EBITDA number, I need to add those back?

Again, for purposes of calculating [that] EBITDA in our financial covenant with our bank group, those would be excluded from EBITDA. Yeah, you would add them back.

Okay. Great.

And we were at 4.28 times at the end of the quarter.

Selman Akyol, Stifel Nicholaus.

A couple quick questions, a follow up on the storage in terms of your outlook for 2013 and again, I appreciate the color. I think you said storage rates were looking to be flat sort of for your planning for next year or in line with where they are. Just thinking back to 3, 6 months ago, wouldn't we have been expecting to see modest increases on the storage rates? Has that basically flattened or just weakened out in comparison to where we were maybe 6 months ago?

I think it's a regional question. We have some markets where we will expect to see some nominal increases. And some markets, mostly in Europe where storage rates are a little bit softer. So, there's kind of a mix of the two, but I think overall we'll see rates comparable to where they were this year.

And then the second one, again as we look to 2013 and again appreciate the initial guidance of the $40 million to $60 million at the fuels and asphalt. Is there any way just to dissect that in terms of what you think the JV is going to throw off, as opposed to what the marketing and refinery is going to throw off?

Well, for the JV, we've just completed our budget for NuStar Energy. We're going to have our first board meeting for the asphalt JV next week and we'll be reviewing that budget with our partners on Wednesday at the first board meeting.

But we've assumed in our budget, no cash coming out of the joint venture. So, we'll pick up equity and earnings or equity and loss below the line on NuStar's earnings, but we've assumed no cash distribution because we think demand will continue to be weak next year and we're still, in that business, going to be affected by the WTI-Brent differential.

And as you probably heard, I just gave 2013 guidance on EBITDA from the asphalt and fuels marketing segment to be $40 million to $60 million higher than it was in 2012. So, based on what Steve just said, asphalt compared to the rest of it, it's really the rest of it that's generating the $40 million to $60 million higher, which is the fuel oils to bunker and the crude oil trading.

Thank you. That's very helpful and that's what I was looking for.

Andrew Ebersole, National Life.

I was hoping you could repeat again your EBITDA forecasts for both the storage segment and the transportation segment for 2013.

What we said on the storage was that in 2013 we expect the storage segment EBITDA to be comparable to the amount earned in 2012, and that's what Danny's been saying.

But in the pipelines, we expected a substantial increase. We expect the transportation segment EBITDA to increase another $40 million to $60 million in 2013 compared to 2012. And that's that with, again I emphasize and as I know we're being a little cute on this call about this, that's sort of the low case to changing capital expenditure guidance.

So, if you listen to what I'm saying, we have an eminent announcement here. We're planning to talk a lot more, and obviously a big portion of that is going to be on shale opportunities and it's mainly going to be in the pipeline. So, there is the potential for substantial upside on the pipeline business when you talk about the next two years.

There's nothing in there for the Colorado shale play for our capital.

No.

Or EBITDA for next year.

Right.

But there may well be. We're waiting for this open season to conclude and better form our thoughts.

Regarding the storage business, I'm looking at my notes. Am I right that during the second quarter, after your second-quarter call, you guys had indicated that your storage segment would be up $30 million to $50 million from 2013?

A big part of that is what Danny said about, we've taken out now the assumptions of the benefit at St. James of the spreads, the crude oil spreads that Danny was talking about. That could add substantial, and based on current crude prices, it would add substantially to the storage segment.

But we don't control that. That's a market matter outside of our control. So, we decided to take that benefit out. And that [one was worth] at least $17 million that that for a partial year that we took out.

So, most of that guidance changed because we decided to take out the benefit of that spread which we, it's a benefit that we share with our partner on the unit train, EOG. And we expect to get it as of today, but we took it out for forecasting because we don't control it.

So that would mean that it's still kind of a $10 million to $30 million differential from your original forecast and with fees essentially flat. Can you just provide a little more color as to the difference in your forecast now versus three months ago?

Well, again, it's almost $20 million just because we're taking this conservative approach on the WTI LLS profit sharing on the unit train. And then there's another $10 million in just some, several different projects that were just delayed, the startup was delayed from, at some point in 2013 to a later date, towards the back of the year.

(Operator instructions)

John Harzich, Aviva Investors.

I just want to confirm that you're still targeting 4 times leverage by year-end 2013.

Did you say 4 times? (multiple speakers) Yeah, I think that's fine.

(Operator instructions)

Ross Payne, Wells Fargo.

Just a follow up to that, if you guys do achieve your 4.0, Steve, any expectations on when and how you might get back into being fully IG?

That's something we're going to work hard on, Ross, starting with in December right at the same time of your conference up there in New York. We schedule visits with the rating agencies to share the budget and our strategic plan with them.

By then we'll know more about the Colorado shale play and some of these Eagle Ford projects which are going to factor in real big in terms of our capital spend over the next couple of years, which obviously is a concern of rating agencies, how much capital we spend, but we think these are terrific projects that we fully embrace doing them.

And we'll just have to have a discussion with all three of the agencies and see. But leverage was pretty manageable next year (inaudible) this year as I mentioned. In September, we were at 4.28. We'll probably be about 4.5 at the end of this year because we'll be spending a fair amount of capital in the fourth quarter. But then it will be coming down next year as EBITDA starts getting generated.

We should have a pretty good pick up in EBITDA next year, but much better in 2014 when all the projects come on board.

(Operator instructions)

And at this time, there are no further questions.

Thank you, operator. Once again I'd like to thank everyone for joining us on the call today. If anyone has any additional questions, please feel free to contact NuStar Investor Relations. Thanks and have a good day.

And that concludes today's conference call. You may now disconnect.