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Valero Energy Partners LP (NYSE:VLP)

Q4 2013 Earnings Conference Call

March 7, 2014 11:00 AM ET

Executives

John Locke - Executive Director, IR

Joe Gorder - Director and CEO

Donna Titzman - Director, SVP, CFO and Treasurer

Rich Lashway - Director, President and COO

Analysts

Jeremy Tonet - J.P. Morgan

Brian Zarahn - Barclays Capital

TJ Schultz - RBC Capital Markets

Operator

Welcome to the Valero Energy Partners’ Fourth Quarter 2013 Earnings Results Conference Call. My name is Christine, and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

I will now turn the call over to John Locke, Executive Director of Investor Relations. You may begin.

John Locke

Thank you, Christine. Good morning everyone and welcome to Valero Energy Partners’ inaugural earnings conference call for the fourth quarter of 2013. We thank you for joining us and appreciate your interest in the Partnership. With me today are, Joe Gorder our CEO; Rich Lashway, our President and COO; Donna Titzman, our CFO and Treasurer and several other members of the Partnership’s senior management team.

If you have not received the earnings release and would like a copy, you can find one on our website at valeroenergypartners.com, also attached to the earnings release are tables that provide additional financial information on our business. If you have any questions after reviewing these tables, please feel free to contact me after the call.

Now I would like to direct your attention to the forward-looking statement disclaimer contained in the press release. In summary, it says that statements in the press release and on this conference call that state the Partnership’s or management's expectations or predictions of the future are forward-looking statements intended to be covered by the Safe Harbor provisions under federal securities laws. There are many factors that could cause actual results to differ from our expectations, including those we've described in our filings with the SEC.

And now without further delay, I will turn it over to Joe.

Joe Gorder

Well, thanks John and good morning everyone. As you recall, we closed our initial public offering on December 16, and we’re very pleased with the interest that we received from investors. A large team of people worked very hard on this deal and it was a success because of their effort. With core values inherited from our sponsor Valero Energy Corporation we’re eager to demonstrate our commitment to safety, to our communities and to our unitholders.

As a reminder the primary objectives of Valero Energy Partners are to maintain safe and reliable operations, generate stable fee-based cash flows and to grow distributions to our partners. We’re a traditional, logistics MLP supported by long-term contracts. We provide transportation and terminaling services for which we charge a fee and we require minimum quarterly volume commitments from our customers. We intend to operate and grow our business around these core strategies and strengths.

While we’re pleased with the IPO, we’re equally excited about the future of the Partnership. We’re fortunate to be sponsored by the world’s largest independent refining company. Our sponsor is a substantial and growing inventory of logistics assets which provide clear growth potential to our partners. The Partnership is Valero’s primary vehicle to expand its transportation and logistics asset base.

Given the dynamic nature of the North American natural resource advantages and the critical role of logistics assets play for Valero, we believe that we have a significant opportunity to create value for our unitholders and also for our sponsors. On the topic of growth, we have been evaluating acquisition opportunities available through our sponsor. We can’t share details on specific dropdown acquisitions as the negotiations are ongoing. However, we’re confident that we’ll have details to share with you in the third quarter of 2014.

With that, I’d like to turn it over to Donna, who’ll discuss the fourth quarter 2013 results.

Donna Titzman

Thank you, Joe. Let me start by pointing out that the tables in the release include the results of our predecessors through December 15, 2013. The release also includes a reconciliation of a sub period, which is the periods following the close of the IPO on December 16th and ending on December 31 to the full fourth quarter results for 2013. Please be advised that predecessor activity when combined with Partnership results is not necessarily reflective of future performance.

As noted in the release we had revenues of 24.6 million for the quarter, revenues were driven primarily by total pipeline throughput of 601,000 barrels per day and total terminal throughput of 189,000 barrels per day, sub period EBITDA was 2.6 million. Distributable cash flow was 2.6 million in the sub period. The total cash distribution was 2.2 million, resulting in a coverage ratio of 1.19. While we target a total annual coverage ratio of 1.1, we may experience slight changes on a quarterly basis due to the seasonality of our spending as discussed in our prospectus.

Turing to the balance sheet, at the end of the year we had 375 million of cash and cash equivalent on-hand, primarily related to the net IPO proceeds. We have no debt beyond 4.1 million of capital leases. Our 300 million revolvers remain available and undrawn, so in total, we have over 650 million of available liquidity to fund growth.

Additionally on January 20, 2014 the Board of Directors of our general partner approved the first distribution of the Partnership which was paid on February 12th. This distribution of $0.037 per unit corresponded to the minimum quarterly distribution of $0.2125 per unit or $0.85 per unit annually. In closing we operated well and achieved expected results for our first quarter of operations following our offering.

Operator, we have concluded our opening remarks. We will now open the call to questions.

Questions-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) And our first question is from Jeremy Tonet of J.P. Morgan. Please go ahead.

Jeremy Tonet - J.P. Morgan

Good morning.

Joe Gorder

Good morning Jeremy.

Jeremy Tonet - J.P. Morgan

Just wanted to check on operating expenses it looked like there was a little bit of an uptick 4Q ’13 versus 4Q ’12 of a 1.5 million. Is that something that just kind of a lumpy from time-to-time or is this kind of a one-time item here?

Rich Lashway

No, I think it really relates to when maintenance work is being done in large part. So it’s -- if you want to say lumpy it’s just when the maintenance work occurs.

Jeremy Tonet - J.P. Morgan

Okay, great, that’s helpful. Thank you. So some of your peers have completed recent dropdowns that may have exceeded market expectations and so with that backdrop could you kind of remind us of your general philosophy regarding potential dropdowns and distribution growth over the long-term?

Joe Gorder

Yes you bet Jeremy. This is Joe. Well, as you remember on the road-show we talked about growth rates that we are going to be in the 20% to 22% to 25% annual rate and we would continue to have that be our focus. And then, as far as timing on drops we’re still anticipating that we’ll execute the first dropdown transaction some time at the beginning part of the second half of the year.

Jeremy Tonet - J.P. Morgan

Great, that’s helpful. Thank you very much.

Operator

Thank you. Our next question is from Brian Zarahn of Barclays. Please go ahead.

Brian Zarahn - Barclays Capital

Good morning.

Joe Gorder

Good morning Brian.

Rich Lashway

Hi Brian.

Brian Zarahn - Barclays Capital

I apologize for my voice. In terms of just following up on the dropdowns I appreciate the color in terms of timing. How should we think about potential size relative to some of your immediate peer’s announcements recently?

Joe Gorder

Well, I would say that we saw and I understand this, anyway, we saw that ConocoPhillips or Phillips dropped a very large somewhat discrete asset that had significant cash flows. And I also understand that they have an announcement they’re going to do with their distribution policy as a result. But on the other hand Marathon continues to drop percentage interest in a larger entity. I think what you’ll see from us is, we’ll drop a couple of assets that will be very discrete in their nature and the intention of those assets would be to diversify further the risk we have associated with being tied to one system. We’re not intending right now to drop a significantly larger transaction than we would need to provide the growth that we’ve provided the guidance on.

Brian Zarahn - Barclays Capital

Okay, I appreciate the color on that. And final one from me, pipeline volumes were a little bit higher than I expected. Was that more on the crude or refined product side?

Joe Gorder

I am sorry, yes that would be on the crude side.

Brian Zarahn - Barclays Capital

Would you expect to that portfolio levels to be sustainable or is this more of a above average quarter?

Joe Gorder

We’re expecting that that’s for the go forward period that’s probably sustainable.

Brian Zarahn - Barclays Capital

Thank you.

Operator

Thank you. And our next question is from TJ Schultz of RBC Capital. Please go ahead.

TJ Schultz - RBC Capital Markets

Hi. Good morning. I guess at the corp. level so logistics spending, I think in the last presentation accounts for about 45% of the 1.5 billion or so growth investments in 2014. So of that allocation, can you provide any high level breakdown in spending maybe between railcars and then loading facilities versus some of the dock spending and pipes and barges?

Joe Gorder

Yes, so what I have is that of that what we shared on the road-show that’s 1.4 about 900,000 -- 900 million was associated with the rail strategy that the lever has. And then the next tranche was about 400 million that was associated with the crude, or not crude, but tanks and pipelines. And then the balance was associated with dock projects that we had for exporting capacities that was…

TJ Schultz - RBC Capital Markets

Okay, but -- alright. And so by and large the vast majority of that capital spending would qualify for MLP jobs, is that correct?

Joe Gorder

Yes.

Rich Lashway

Yes.

TJ Schultz - RBC Capital Markets

Okay. And then on maintenance CapEx what are you looking for in 2014. I think at the time of the IPO there was a higher initial spend and then moderating. So just curious if we captured some of that initial spend here pre-IPO and then maintenance CapEx moderates through ’14 and if there is still some elevated level here in the first quarter?

Joe Gorder

Mark or Donna, do you?

Donna Titzman

So the maintenance CapEx is -- will be a little bit higher in the first quarter but it will moderate throughout the rest of ’14 if it happens.

Joe Gorder

TJ I think it’s still in line with the guidance, overall guidance that was laid out. There was that prefunding sort of reconciliation that happened, but beyond that I think it’s still in line with the guidance.

TJ Schultz - RBC Capital Markets

Okay, thanks.

Joe Gorder

Thank you.

Operator

Thank you. We have no further questions. I will now turn the call back over to John.

John Locke

Great, well, thank you all for joining on the call today. We certainly appreciate your interest in the Partnership. This concludes our call.

Operator

Thank you. And, thank you ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may now disconnect.

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