NuStar Energy LP (NS) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First Quarter 2018 NuStar Energy L.P. and NuStar GP Holdings, LLC Earnings Conference Call. (Operator Instructions) As a reminder, this call is being recorded.

I would now like to introduce your host for today's conference, Mr. Chris Russell, Treasurer and Vice President, Investor Relations. Please go ahead, sir.

Thank you, [Christie]. Good morning, everyone, and welcome to today's call. On the call today are Brad Barron, NuStar Energy L.P. and NuStar GP Holdings, LLC's President and CEO; and Tom Shoaf, Executive Vice President and CFO, along with other members of our management team.

Before we get started, we'd 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. These statements are subject to the various risks, uncertainties and assumptions described in our filings with the Securities and Exchange Commission. Actual results may differ materially from those described in the forward-looking statements.

During the course of this call, we will also make reference to certain non-GAAP financial measures. These non-GAAP financial measures should not be considered as alternatives to GAAP measures. Reconciliations of certain of these non-GAAP financial measures to U.S. GAAP may be found in our earnings press release with additional reconciliations located on the Financials page of the Investors sections of our websites at nustarenergy.com and nustargpholdings.com. Now I'm going to turn the call over to Brad Barron.

Good morning. Thank you joining us today. Have a lot of good news to share with you. To those of you who listened in February, you know that our last earnings call laid out a path forward to financial health and growth, as well as adjustments to our 2018 forecast. On our call today, I'm going to start by talking about our progress on our execution of the comprehensive plan we laid out. Then, before I turn it over to Tom for an overview of our quarterly results, and update on our view of 2018, I'll take you to several pieces of good news about our business, including some new growth projects, a small but immediately accretive bolt-on acquisition with a major customer in our Central East system, and update on our view on our Permian system 1 year after acquisition, and last, some encouraging developments at our St. Eustatius facility. Of all that as a preview, let's get started.

During most recent earnings call, we laid out a comprehensive staged approach to best position NuStar for long-term financial strength and sustainable growth, which include simplifying our structure, restoring our coverage, lowering our leverage and minimizing our need to access the equity capital markets. Since then we made substantial progress on our simplification. In mid-March, we filed a joint Form S-4 preliminary proxy statement to seek NSH unitholder approval and issue NS units to effectuate the simplification. We're in the process of responding to SEC comments to the Form S-4, and we expect to be positioned to schedule our unitholder vote and close by the end second quarter. We're happy with the progress we've made on the simplification, but we know that operating and developing our business in our diverse asset base is just as important and we are proud to report good news that demonstrates we're doing just that.

First, on projects and acquisitions. We're pleased to announce that we will be expanding on our existing pipeline assets in South Texas, as well as our terminal in Nuevo Laredo, Mexico, with projects to supply refined products to growing markets in Mexico. For those of you who have followed NuStar over the years, you know that, since Mexico's energy reforms began, we've been excited about the new opportunities those reforms present for us. Since then, we worked to position NuStar to take advantage of these opportunities by utilizing our existing assets in South Texas and Mexico to supply products to Mexico market. I'm happy to say, we have accomplished just that.

I am pleased to announce that we have signed several long-term T&D agreements with strong, creditworthy customers to support a series of healthy-return capital projects to connect to third-party rail facilities in Corpus Christi, expand certain South Texas products pipeline systems and expand our Nuevo Laredo terminal. We expect to benefit from incremental revenue from these projects starting as soon as late 2018. We believe that Mexico market presents significant opportunities for future growth and I'm proud of our team's perseverance and creativity in developing these projects. We believe we'll establish NuStar as one of the primary logistics providers for this burgeoning market.

On the acquisition front, in mid-April, we closed on an immediately accretive, $38 million acquisition of CHS' Council Bluffs system, consisting of a 227-mile pipeline and 18 storage tanks at a very attractive multiple. This bolt-on system enhances our existing Central East System by increasing our overall system flexibility and allowing expansion into new markets, while at the same time enhancing our role as a key logistics provider to CHS.

It's hard to believe, but next week, we will mark our first anniversary as owner of the Permian system. And we're happy to report that growth in the Permian Basin continues to exceed expectations. The Permian Basin overall has continued to outpace all of the U.S. shale play and growth, development and efficiency. There are now 453 rigs in the Permian, up over 30% from 342 when we acquired the system last May, and our Permian System has consistently outpaced overall growth in the basin. Since last May, our system throughput is up 117%, 250,000 barrels per day with May nominations coming in at 275,000 barrels per day, significantly higher than the overall growth in the Permian volumes of 33% during the same period. Based on our producers' projections, we expect to exit 2018 between approximately 360,000 barrels to 300,000 barrels per day. I'm also happy to report strong interest for our open season, for second capacity expansion on our Permian Crude System, which will increase our total system capacity by approximately 70,000 barrels per day to 460,000 barrels per day. We expect this project to be completed by the end of July 2018. As you can see while one year end, we remain extremely bullish on the Permian Basin in general and our Permian Crude System in particular. In addition to the Mexico's power projects and our Permian system, we are working on additional opportunities to expand utilization of our existing assets, notably our first-class terminal in dock in Corpus Christi and our unit train and dock facilities in St. James.

Moving on to some encouraging developments in St. Eustatius, in our last call, we told you we have reduced our expectations for PDVSA's utilization of the terminal in 2018 due to a significant reduction in activity at the terminal in late 2017 and early 2018. I'm happy to report Q1 saw an uptick in PDVSA's activity, which is reflected in our first quarter results and we are continuing to benefit from that activity. As the year progresses, we are hopeful this trend will continue. I think this offers a good segue to steal from [Tom's] thunder on our 2018 expectations. In part because of this uptick, we are up -- we are raising our adjusted EBITDA expectations for this year by $20 million. I believe our results demonstrate both the soundness of our plan to reposition NuStar and how hard all of our employees are working to operate our assets and develop our business. In fact, you may notice that EBITDA in all of our business segments, storage, pipeline and fuels marketing are up quarter-over-quarter, underscoring the continuing strength of our base business.

With that, I'll turn the call over to Thomas Shoaf, NuStar's Executive Vice President and CFO, to discuss our results and projections.

Thanks, Brad, and good morning, everyone. Turning to overall first quarter 2018 results, we generated net income of $126 million and EBITDA of $250 million, up significantly from the first quarter of 2017, mostly due to the contributions from our Permian Crude System acquisition and a $79 million gain associated with our January 2018 receipt of hurricane-related insurance proceeds. We have received $100 million of insurance proceeds related to 2017 hurricane damage at our St. Eustatius terminal. We received $12.5 million in the fourth quarter of 2017 and the remaining $87.5 million in January 2018. We expect these proceeds to fully cover the cost of repairing the damage -- property damage, as well as most of our lost revenue over $5 million insurance deductible. While the gain was reflected in our first quarter net income and EBITDA, it is important to note that the gain will only be recognized in DCF as the proceeds are spent over the next couple of years to repair the damage caused from the hurricane. Our DCF available to common limited partners was $92 million and our distribution coverage ratio to the common limited partners for the first quarter was 1.64x.

The first quarter 2018 EBITDA in our Pipeline segment was $94 million, up $6 million from the first quarter of 2017, largely due to contributions from our Permian Crude System that were partially offset by the negative impact of longer than usual winter season on our ammonia pipeline throughputs. First quarter 2018 EBITDA in our Storage segment was $90 million, $4 million higher than the first quarter of 2017. Increased storage rates at our St. Eustatius terminal, as a result of the terminal enhancements we made to the facility last year and a contract early termination payment from a storage customer replaced at our Linden terminal will partially offset by decrease in revenues at our St. James terminal facility.

Since our fourth quarter earnings call, as Brad said, we saw encouraging uptick in PDVSA's [income] vessel activity and inventory balances at St. Eustatius terminal. And we were recognized short -- able to recognize short storage revenue owed to us under the contract from PDVSA in the first quarter.

On March 31 debt balance was $3.7 billion while our debt to EBITDA ratio was 5.1x, below our credit agreement covenant threshold of 5.5x. On March 28, we amended our 5-year revolving credit amendment -- agreement, which among other things sets our covenant threshold at 5.25x for the remainder of 2018. On April 24, NuStar Energy declared the first quarter Series A preferred unit distribution of $53.125 per unit, the first quarter Series B preferred unit distribution of $47.657 per unit, and the first quarter Series C preferred unit distribution of $56.25 per unit, all 3 of which will be paid on June 15.

As we anticipated -- on April 24, NuStar Energy declared a first quarter common unit distribution of $0.60 per unit, which will be paid on May 14. In addition, NuStar GP Holdings or NSH declared first quarter distribution of $0.33 per unit, which will be paid on May 16. The NSH distribution was calculated assuming that NSH unitholders are expected to receive 0.55 units NS for each NSH unit they own after the closing of the upcoming simplification transaction.

Turning to our 2018 projections, we now expect NuStar's 2018 EBITDA to be in the range of $700 million to $750 million, which includes the $79 million gain associated with the cash received of hurricane-related insurance proceeds I mentioned earlier. However, if you exclude the gain, we expect our 2018 adjusted EBITDA to be higher by approximately $20 million and in the range of $620 million to $670 million. We increased our guidance primarily to reflect the contribution from PDVSA-related storage revenues at our St. Eustatius terminal along with incremental EBITDA related to the Pipeline and Terminal acquisition from CHS, partly offset by lower pipeline revenue projections for the year as a rollout of change in accounting standards for revenue recognition and some softness in our storage segment due to continued backwardation in the forward pricing curve.

With regard to 2018 capital spending, we continue to plan to spend $360 million to $390 million on strategic and other capital, with approximately $190 million relating to the Permian Crude System. Our 2018 spending guidance also includes about $50 million of spending associated with the new strategic projects to supply refined products to Mexico that Brad mentioned earlier. Another $120 million is expected to be spent in 2019 to get these projects completed in the back half of 2019. These projects are expected to generate EBITDA multiples in the range of 5x to 7x and I'm very excited about these projects. While we have added the Mexico supply projects to our 2018 plan, we have not increased our total strategic capital spending for the year. This is just one example of how we are strategically managing our spending. As always, we are developing good projects to generate strong returns now and in the future, but we are focused on ensuring we spent only within our means.

Regarding our reliability capital spending for 2018, we continue to expect to spend $80 million to $100 million, of which approximately $35 million related to hurricane repair spending at St. Eustatius, which is paid with insurance proceeds. Based on these projections, we now expect our coverage ratio for 2018 to be in the range of 1.2x to 1.3x and we are still targeting a coverage ratio in the range of 1.3x to 1.4x in 2019. We expect our debt to EBITDA ratio to be around 4.7x by the end of 2018 and in the 4.0x to 4.3x range by the end of 2019.

And with that, I'll turn it over -- call back over to Brad for his closing remarks.

Thank you, Tom. On our last call, we set out in detail our stepped, comprehensive plan to strategically position the company for sustainable future growth, strength, flexibility and unitholder value. And as we have described, we are executing on our plan to simplify our structure, reduce our leverage, and maximize our ability to fund our future growth. At the same time, our employees have continued to work hard, operate safely and efficiently to provide world-class service and develop projects to drive growth and provide logistical solutions at competitive rates. We're making progress and we believe that all we've accomplished this quarter, up in every segment, quarter-over-quarter, demonstrates that NuStar is on the path of financial strength and flexibility and growth. We're excited about our future and after hearing all our good news, we hope our investors are too.

With that, we'll open up the call for Q&A.

(Operator Instructions) And our first question comes from the line of Jeremy Tonet of JPMorgan.

This is Bill on for Jeremy. What was the Navigator EBITDA during the quarter and can you refresh us on the CapEx needed to hit the targets outlined at the acquisition?

The Permian EBITDA was $12 million for the quarter and the capital to hit the targets stand about $500 million in total over the next -- 2017 and 2020.

And then, what was the amount for the Linden termination payment that you mentioned?

$6 million.

We really can't get into too many specifics on that, because this is customer specific, but the deal, as a whole, was a net -- on a net present value basis better for us than leaving them where they were. We were able to lease -- re-lease the tanks to another party.

And then can you share more detail on the projects to Mexico and will those all go into service at the end of 2018? As you mentioned, some of the revenue will come on then or would they be more staggered?

A little more staggered than that. There's some interim service that we'll provide at the end of 2018, but the projects -- the full effect of the projects will occur starting in mid-2019 through the end of 2019. Our customers are going to come out with their more specific announcements, probably pretty soon. And we're going to wait and let them do that. But I think, given the $180 million in capital that Tom shared with you, the 5x to 7x EBITDA multiple that he shared with you and of course mentioned that they are all supported by long-term take or pay agreements with these customers, I think we'll help you model that.

One thing I want to emphasize about that capital spend, there is about $50 million of that in 2018 and we've lowered our overall capital spend to accommodate those projects, so this does not increase our capital spend in 2018.

Our next question is from Theresa Chen of Barclays.

Just to clarify on the Permian Gathering System, what was the run rate for the quarter and where is it currently now?

We're at 250,000 barrels a day right now, that's been about the last week of activity.

The run rate for the quarter [crease] was about 210.

We've got nominations in May of 275.

On the St. Eustatius facility, I understand that you saw an uptick in activity and revenue was booked. I was just curious to know if the customer actually paid the cash or were you able to monetize some of the inventory?

No, we don't get into details. We don't want to get into deep details about each of our customers as [Danny] said on the Linden thing. What I can tell you is that our customers are current and we value the relationship.

On the CHS acquisition -- so in terms of the accretive multiple, can give a range of what that was and if the $38 million is included in your strategic CapEx or is it --

Yes, the $38 million is not included in the strategic CapEx and the range of multiple on that was about -- it was a very attractive multiple, I don't know that we will only give out the exact multiple, but it was very attractive.

In terms of year ETE cash fit that came out in your S-4, Can you talk about your thought process on that and maybe why you didn't consider at least having conversation just in the context of fiduciary responsibility and such.

So with regard to the ETE letter and the details of that are fully disclosed in our S-4 and if you can understand, we have an ongoing and active merger agreement and active S-4 and so I would direct you to the S-4 for details about any of that and we'd like to keep the focus of this call in this quarter and the outlook for 2018.

Theresa, this is Tom. On the CHS acquisition, I think we're expecting 2018 EBITDA contribution of about $5.6 million, and on an annualized basis, that would be about $8 million of EBITDA…

And actually, if I can flip another one in there, for your funding needs this year, how -- what are you seeing in the press market today?

Well, I mean the press market is there, right. And so we'll continue to work on our financing plan that we laid out last quarter. The common equity markets are still challenged. We're considering [negotiating] securities in the second quarter in the public and/or the private markets to help us recharge debt leverage targets by the end of the year. So we're seeing that they are there.

Our next question is from Shneur Gershuni of UBS.

Just wanted to confirm a couple of things here. First, the CapEx range, has it changed to $300 million to $500 million that you put out at the beginning of the year with respect to some of the new projects, which you've laid out there, are we within the range?

We're still within that range there. The $360 million or $390 million we talked about today, that's the same guidance range that's from the -- on the fourth quarter call as well.

So everything incremental now today was kind of contemplated just not specifically outlined, is that the way to think about it?

No. What we've done is, we've adjusted our overall capital spending to make room for these particular projects.

And then secondly, if I may have missed this, but did you say that you are at 5.25x leverage metrics with respect to your covenant compliance?

No, I didn't say. We were at 5.1x and we're allowed 5.5x this quarter.

In calculating that number with the insurance proceeds, would that count in EBITDA in terms of how we would calculate that on a go-forward basis?

No. The insurance proceeds don't count.

And is there anything that -- obviously, there is a difference in how banks calculate compliance with leverage covenants versus how we will look at it from a GAAP perspective. Can you walk us through some of the difference and adjustments that we would be thinking about?

On the debt side (inaudible) issuance that is excluded, that's treated with equity [under] the bank facility. That's the big thing on the debt side and then on the EBITDA side, we get material project adjustments for any large material projects we spent money of over $25 million and we also get to pro forma the EBITDA for any large acquisitions or any acquisitions we make for that matter. So we're still pro-forming an EBITDA for the Permian acquisition, small amount and will be pro-forming EBITDA on the CHS acquisition.

So putting that together there -- and that you've got a little bit of room at 5.1x versus 5.5x, do you feel comfortable, especially given Q1 performance that the distribution cut was adequate that was announced last quarter?

Yes, we factored all of this in determining the right distribution and so, yes -- I would say, yes. I mean, we -- like I said, we've got a financing plan where we plan to execute on, and with all that, we plan to lower our leverage this year from where it is currently.

Our next question is from Ryan Levine of Citi.

Which South Texas project system is NuStar planning on expanding? Is it only the 8-inch Laredo line at this point or is that also the Mont Belvieu to Corpus line that was in Oxy dispute?

The Mont Belvieu to Corpus line isn't part of this spread. Several of our pipeline certainly that Laredo pipeline is one of them, but we've got several more coming out of Corpus heading that way that are being expanded as well.

Is it also at South of the border or only in the U.S.?

We only have only one pipeline involved in this project that crosses the border. That's a pipeline that crosses from Laredo to Nuevo Laredo, that will be expanded and then we're also expanding the terminal in the way Laredo adding storage and truck rack capabilities there.

Is there seems to be any political risks with the election coming up, especially with these projects?

We don't believe so and our contracts cover that.

And then on financing front --

Just a moment, one point -- our projects here are backed by long-term throughput and efficiency agreements.

So in change in administration won't impact that. Is what you say?

Right.

And then on financing plan, the $400 million target -- if the EBITDA is going up by $20 million, part of which is the recent acquisition, does that reduce your capital needs by directionally $100 million or is the $400 million target still appropriate?

I think we've given a range out there that we're targeting. And so I don't think it necessarily decreases what we're looking for in our financing plan. So I think we're still on target with what we have said.

And for the St. Eustatius PDVSA contract, you highlighted $20 million increase in EBITDA for 2018, is the whole $20 million associated with the St. Eustatius or is that only about $15 million and that the acquisitions also [accompanied]?

The $20 million is various different items, Ryan. Part of that is the St. Eustatius one we talked about, part of it is the CHS -- (inaudible) and CHS acquisition and there are some offsets going the other way, we've got some weakness in the storage market that we're taking into account going forward and we also had some impacts from revenue recognition accounting adjustments.

And my last question, on the financing plan, is there any potential to monetize less core assets or is that no longer on the table?

I mean, yes, there is the potential of that, sure.

Our next question is from Robert Balsamo of B Riley FBR.

Congrats on a strong quarter. Just a couple quick questions, a lot has been answered already. To elaborate on Shneur's question on CapEx, so I understand the CapEx is not changing, some of the stuff is basically being prioritized, but those projects that were pulled out of '18, were those canceled or pushed to 2019, they still on the table for future investment?

Some are still on the table. I wouldn't say we canceled anything. We just prioritized our continued development.

And then just kind of a modeling question. When I'm looking at the Pipeline segment and revenue per barrel -- average revenue per barrel for the quarter, looks like it's dipped down a little bit with higher volumes. How do we think about those revenues -- those margins moving forward? Just a good run rate or is it --

Robert, I don't know. Let's us take that one offline. I'm not sure -- I'm trying to think out loud here. Let's take that one offline.

Our next question is from Michael Blum of Wells Fargo.

Can you -- really can you expand a little bit, you've mentioned in the Storage segment seeing a little weakness due to backwardation. Can you just talk about maybe the magnitude of that and in terms of the rate structure, how that works in terms of when contracts roll over, how real-time do those tariffs adjust based on the shape of the curve?

Yes. So, first of all, as is always the case in Storage, it is very regional. We have some regions that have been really completely unaffected. Specifically in the U.K. we haven't seen a significant softening or really any softening of rates there, plus we have some new project going online beginning of this year, so we're seeing EBITDA increase in the U.K. We are seeing the same thing on the West Coast, no deterioration of pricing, some small, but very good projects coming online throughout the year. So we're seeing increases in the EBITDA there as well. But we see -- where we've seen really the bulk of the headwinds is in on the East Coast, specifically at our Linden terminal. We had a couple of contracts up for renewal early this year. And then also at St. James, we had a contract come up at the end of the first quarter and rates are different there today. But it has been, for the most part, kind of limited to those areas, but the renewals in the effects of that backwardation is fully baked into the guidance that we've given.

So, Michael, you asked how responsive this is to the shape of the curve, I think you have to look at how your renewals are spread out over time. So ours are about 1/3 within a year, another 1/3 that's 1 to 3 years and the remainder are greater than 3 years. So it doesn't respond -- the entire segment doesn't respond immediately either up or down.

And even in that 1/3, say that's in the first year, not all of them are impacted by market structure.

(Operator Instructions) Our next question is from Selman Akyol of Stifel.

Just one quick one. Can you guys talk a little bit about re-contracting how that's going in St. Eustatius and in the Eagle Ford in particular?

Well, at St. Eustatius, we're always talking to potential customers about coming into the terminal. I think our -- we really don't want to re-contract there. We think that we've been able to whether what's been going on in Venezuela with PDVSA and certainly their rates justify a little additional handholding that we do with them. So while we're talking to new customers about coming into the terminal, we prefer to continue to work with PDVSA at St. Eustatius. As far as Eagle Ford goes, we are having success and re-contracting the first part of commitments that is up for renewal in August of this year. We've got about 45% of our overall Eagle Ford commitments coming up this year, another 20% in summer of next year, about 10% in the summer of '20, and then another roughly 25% out in 2023. But these that are coming up for renewal in August of this year, we are having success in re-contracting those volumes albeit at different rates than the initial open seasons given the capacity that's available in South Texas.

And then just kind of going back to your comments on Eustatius, I mean, it sounds like a different tone than what it was last quarter. Would you say you are more optimistic in relationship to PDVSA now?

I would say -- yes, I would say, we are much more optimistic is -- as I think Tom alluded to, when we were -- the end of 2017 and early 2018, we have seen some volumes drop off and we're concerned about that. And -- but after the end of the year, as we got into the first quarter a bit in 2018, we saw those volumes really ramping up and willingness of PDVSA to work with us to continue that business.

And that does conclude our Q&A session for today. I would like to turn the call back over to Mr. Chris Russell for any further remarks.

Thank you, [Christie]. I would like to thank everybody for joining us on the call today. If anybody has any additional questions, please feel free to reach out at NuStar's Investor Relations Department. Thank you and have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program and you may all disconnect. Everyone, have a great day.