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NuStar Energy L.P. (NYSE:NS)

Q1 2014 Results Earnings Conference Call

April 23, 2014 10:00 AM ET

Executives

Chris Russell - Treasurer and Vice President, IR

Brad Barron - President and CEO

Tom Shoaf - Executive Vice President and CFO

Analysts

Steve Sherowski - Goldman Sachs

Brian Zarahn - Barclays

Mark Reichman - Simmons

Jeremey Tonet - J.P. Morgan

Connie Hsu - Morningstar

Cory Garcia - Raymond James

Michael Blum - Wells Fargo

Selman Akyol - Stifel

Operator

Good morning. My name is Tracey, and I will be your conference operator today. At this time, I would like to welcome everyone to the NuStar Energy L.P. and NuStar GP Holdings, LLC First Quarter 2014 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)

Thank you. Mr. Chris Russell, you may begin your conference.

Chris Russell

Thanks, Tracey. Good morning, everyone and welcome to today’s call. On the call today are NuStar Energy L.P. and NuStar GP Holdings, LLC’s President and CEO, Brad Barron; Executive Vice President and CFO, Tom Shoaf; and 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 within the meaning of the 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. These non-GAAP financial measures should not be considered as alternatives to GAAP measures. Reconciliation of these non-GAAP financial measures to U.S. GAAP maybe found either in our earnings press release or on our website.

Now let me turn the call over to Brad.

Brad Barron

Good morning and thanks for joining us today. The first quarter was a great quarter for NuStar. As we closed out 2013 and moved into 2014, we continued to focus on the strategic redirection of the company away from the volatility of margin based businesses and toward our more stable fee based pipeline and storage businesses. We also have a renewed focus on returning to a one-to-one coverage ratio. I’m happy to report that during the first quarter we made meaningful progress on both of these fronts.

On our last earnings call, we announced that we had taken significant steps in completing the strategic redirection of the company by signing an agreement to sell our remaining 50% interests in the asphalt JV to our partner Lindsay Goldberg. I’m pleased to say that during the quarter, we closed the transaction.

This means that our earnings will no longer be burdened by the volatility and losses associated with that business and that our exposure to the asphalt business from a credit perspective has been greatly reduced. The divestiture of the asphalt business has freed us up to focus on our number one goal for 2014 returning to one-to-one coverage ratio.

At the start of the year, I made it clear to our employees that we have the opportunity and the ability to return to full coverage. And I asked them to focus on that goal. I’m happy to say that we’ve accomplished a lot on that front.

In early February, we announced that we’d signed a long-term agreement with Occidental Petroleum to transport NGLs on our currently idled 200 mile 12-inch pipeline between Mont Belvieu and Corpus Christi, Texas.

This pipeline has already began generating distributable cash flow and is expected to be placed in full service in the second quarter of 2015, at which time it is expected to generate incremental annual EBITDA of approximately $23 million.

In mid February, we completed the construction of a new dock at our Corpus Christi North Beach terminal. More than triple the facility’s dock capacity. In fact, we recently loaded out 700,000 barrels across our docks in Corpus Christi in a single 24-hour period.

This additional dock loading capacity will allow NuStar to handle all the new volume associated with Phase 1 and Phase 2 of the South Texas crude oil pipeline expansion project, as well as any additional volume shipped on our pipeline systems to Corpus Christi for years to come.

Then in early March, we announced we have signed a long-term storage agreement for light crude oil storage at St. Eustatius and another agreement for crude oil storage at our Point Tupper terminal.

Effective March 1st, we began leasing 5 million barrels tankage at St. Eustatius that had been idle since the end of November 2013. At Point Tupper, one of our current customers renewed a lease for 3 million barrels tankage. The new agreement will go into effect on August 1st, a day aft the current contract expires. Tom Shoaf, NuStar’s Executive Vice President and CFO is going to cover the first quarter results in more details. But I wanted to point out a few highlights.

The first quarter of 2014 was one of the best in NuStar’s history. NuStar’s first quarter EPU, EBITDA and distributable cash flow were all higher than last year results and the great news is that we expect our full year earnings to exceed last year’s earnings as well.

Our distributable cash flow from continuing operations available to limited partners cover the distribution to the limited partners by 0.91 times. Our highest first quarter coverage ratio since the first quarter of 2009 and for the second consecutive quarter, our highest quarterly coverage ratio is the third quarter of 2011.

Our EPU for the first quarter was $0.36 per unit, which is our highest quarterly EPU since third quarter of 2011. However, if you exclude the losses associated with 50% interest in the asphalt joint venture, our EPU would have been $0.46 per unit. In addition, DCF from continuing operation available to limited partners for the quarter was $1 per unit, higher than our guidance range of 85% to 95% per unit.

As you can see, these first quarter results were the strongest we’ve seen in several years. I’m extremely proud of what we’ve been able to accomplish in such a short time and I can say with confidence that we are on track for returning to a one times coverage ratio in 2014.

Now let me turn the call over to Tom for some additional detail on our first quarter results.

Tom Shoaf

Thanks, Brad, and good morning, everyone. As you probably saw in this morning’s press release, EPU for the first quarter was $0.36 per unit. DCF from continuing operations available to the limited partners for the quarter was $1 per unit and as Brad just mentioned, higher than our guidance range with $0.85 to $0.95 per unit due to higher than expected throughputs of our pipeline segment and stronger than expected gross margins in our bunker and heavy fields operations within our fuels marketing segment.

EBITDA in our pipeline segment increased to $71 million, $15 million higher than the first quarter 2013. As we expected, our pipeline segment continued to benefit from increased throughput volume as a result of the completion of several projects in the Eagle Ford Shale over the past several months.

Throughputs on our Eagle Ford crude oil pipeline system increased from about 155,000 barrels per day in the first quarter of 2013 to around 180,000 barrels per day in the first quarter of 2014. This 16% increase in throughputs coupled with the higher tariffs on our Eagle Ford pipelines were a major driver for the segment’s improved performance and a 10% in total pipeline segment revenue.

While Eagle Ford throughputs were up 15%, total throughputs in the pipeline segment were up only 1%. The increased Eagle Ford throughputs were mostly offset by lower crude oil and refined products pipeline throughputs on some of the other systems due to a customer’s refinery turnarounds.

Our fuels marketing segment earned $10 million of EBITDA during the quarter, significantly higher than the $2 million of negative EBITDA generated in last year’s first quarter. Higher gross margins and lower operating expenses in our bunkering and heavy fuels trading operations were the main drivers for the segment strong performance.

In our storage segment, throughput volume and throughput revenues were up due to increased activity at the Corpus Christi North Beach terminal and our other crude storage facilities. Our Corpus North Beach terminal benefited from the increased Eagle Ford crude volumes shipped on the pipeline system in the first quarter.

Our crude storage facility throughputs were negatively impacted by three refinery turnarounds in the first quarter 2013. These facilities were only impacted by minimal turnaround activity in the first quarter of 2014.

While storage throughput revenues were up, our storage lease revenues were down compared to last year’s first quarter. Reduced LLS to WTI profit sharing benefits at our St. James terminal, 5 million barrels of idle tankage at St. Eustatius during January and February of this year, and reduced demand for storage at some of our terminals mostly on the west coast contributed to lower storage lease revenues.

For the first quarter, storage segment generated $67 million of EBITDA, down $10 million from last year. Equity and earnings and joint ventures were negative $4 million for the quarter versus the negative $11 million recognized in the first quarter of 2013. Our 50% share of asphalt joint venture generated losses of $8 million in January and February of 2014 while our 50% interest in the Linden, New Jersey storage terminal earned $4 million during the first quarter, 2014.

NuStar’s G&A expenses were $21 million, $6 million less than the first quarter of 2013. Lower compensation related costs contributed to the reduced expenses. Our net interest expense was $33 million, up $3 million from last year’s first quarter. This increase was mainly due to higher borrowing costs associated with the January ‘13 issuance of around $400 million of junior subordinated notes and the August 2013 issuance of $300 million of senior notes. NuStar’s year end debt balance was $2.7 billion, while our debt-to-EBITDA ratio was 4.4 times.

In regard to the first quarter 2014 distributions, NuStar Energy’s Board of Directors declared a distribution of $1.095 per unit and the distribution will be paid on May 12. NuStar GP Holdings Board declared a first quarter distribution of $0.545 per unit which will be paid on May 15.

Now, let me spend a few minutes talking about our projections for the second quarter of 2014. Similar to the first quarter, we expect our second quarter EPU, EBITDA and DCF results to exceed the results from the same quarter last year.

At the segment level, second quarter EBITDA results in the pipeline segment are projected to be higher than last year’s second quarter, as well as the first quarter of 2014. Continued increases and throughputs in the Eagle Ford shale particularly as a result of the projected mid May completion of Phase 1 of the South Texas crude oil pipeline expansion and reduced turnaround activity at our customers’ refineries should contribute to higher EBITDA.

Our storage segment EBITDA should be lower than the second quarter of 2013 primarily due to reduced LLS to WTI profit sharing benefits at our St. James Terminal, a comparable to the first quarter of 2014. Results in our fuels marketing segment should be higher than the second quarter of last year but lower than the first quarter of 2014.

Our bunker operations are expected to continue to perform better than last year but results are not expected to be as strong as the first quarter due to the reduced sales volume. First quarter bunker sales volumes benefited from seasonal increased demand associated with the cruise line business in St. Eustatius and also from higher margins in Texas City.

During the second quarter, we expect G&A expenses to be in the range of $24 million to $25 million, depreciation and amortization expense around $45 million to $46 million and interest expense in the range of $32 million to $33 million. Based on these projections, second quarter earnings per unit should be $0.35 to $0.45 per unit while distributable cash flow from continuing operations per limited partner unit should be in the range of $0.85 to $0.95 per unit.

Our segment EBITDA guidance for the full year 2014 remains unchanged. We expect our pipeline segment EBITDA to be $40 million to $60 million, higher than 2013. Our storage segment EBITDA to be comparable to 2013 storage segment adjusted EBITDA.

2014 EBITDA results in our fuels marketing segment are expected to be in the range of $10 million to $30 million. We now expect our 2014 strategic capital spending to be in the range of $350 million to $370 million, down slightly primarily as a result of scope changes and cost efficiencies on our projects.

Our full year 2014 reliability capital spending guidance remains unchanged and is projected to be in the range of $35 million to $45 million.

Brad, we turn it over to the Q&A, but before, do you have any additional comments you want to make?

Brad Barron

Thank you, Tom. As I said earlier, we have a lot of great news. I’m happy to say that the market has taken notice with both NS and NSH units closing at their highest levels in two years yesterday.

I’m extremely proud of what we’ve been able to accomplish in such a short time. Our first quarter results are the strongest we’ve seen in several years and I can say with confidence that we are on track to return to one times coverage ratio in 2014.

So, at this time, let’s turn over to operator, who can open it up to Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question is from Steve Sherowski with Goldman Sachs.

Steve Sherowski - Goldman Sachs

Hi. Good morning. Just a couple of quick questions. Over the next 12 months, how much of your storage assets are re-contracting or up for renewal?

Brad Barron

About 23%, I think you said.

Tom Shoaf

About 23%, Steve.

Steve Sherowski - Goldman Sachs

23% over the next several months. Okay, great. And I guess just looking out a little bit longer term, what’s in the pipeline for projects beyond your current slate of Eagle Ford projects? I mean, just generally what’s the strategy, what are you thinking, is it more focused on additional Eagle Ford midstream infrastructure build out or are you looking in different areas?

Brad Barron

We’re looking all around. We actually have -- we have quite a few projections slated to finish up in the Eagle Ford. We’re also looking at some of our flagship facilities for investment in Point Tupper, St. Eustatius, St. James, those kind of projects.

Steve Sherowski - Goldman Sachs

Got you. Okay. That’s it for me. Thank you.

Operator

Your next question comes from Brian Zarahn with Barclays.

Brian Zarahn - Barclays

Good morning.

Brad Barron

Good morning.

Brian Zarahn - Barclays

On the re-contracting of St. Eustatius and Point Tupper, can you talk about how those new storage rates compare to the previous rates?

Brad Barron

They were comparable.

Brian Zarahn - Barclays

And then what about duration?

Brad Barron

St. Eustatius was five years and Tupper three.

Brian Zarahn - Barclays

And then you’re saying St. James terminal, you mentioned the narrow LLS spreads impacted the profit sharing. What about on the volume side? Are you seeing lower volumes as well?

Brad Barron

Slightly lower volumes. We’ve got, that’s in the first quarter and we’re expecting and have forecasted similar first quarter volumes throughout the rest of this year. But those are slightly lower than what we saw on average last year, but again that’s dependent on what happens with that spread over the rest of the year.

Brian Zarahn - Barclays

And then, can you talk to me about other opportunities you’re looking at on the rail side. I know you’re looking on the west coast. Any update on that?

Brad Barron

Yeah, we’re working through a permit process on the west coast. It’s still in early stages of development. But other than the west coast, we’re working at early stages of development on the rail project up into Point Tupper and also bringing some Canadian crude down into our St. James facility, which right now is pretty much all Bakken coming into St. James.

Brian Zarahn - Barclays

Would you have to spend some CapEx at St. James to handle heavy crude?

Brad Barron

It’s probably going to be little bit. It will be diluted. So we won’t have to add heat, but we will need some additional tankage there to bring that in.

Brian Zarahn - Barclays

Okay. And just last one for me on financing, your 2014 CapEx, do you still expect to use your revolver?

Brad Barron

Right now that’s the current plan, yes.

Brian Zarahn - Barclays

Thank you.

Operator

Your next question is from Mark Reichman with Simmons.

Mark Reichman - Simmons

Good morning. With regard to the refined products pipeline volumes as well as the crude oil pipeline volumes, it looks like both were up modestly compared to the prior year period but down sequentially. And so I was just wondering if you could provide some color in terms of your expectations for year-end run rates for both refined products volumes as well as crude oil pipeline volumes taking into account the South Texas crude oil expansions?

Brad Barron

Generally speaking, pipeline throughputs would be up just based on Eagle Ford alone. I think in the first quarter that was dealt with some refinery turnaround activity, which affects us both on the crude and products side given the refineries that were in turnaround. But going forward for the rest of the year, we should see increased year-on-year and quarter-on-quarter volumes.

Mark Reichman - Simmons

Where would you expect it to end at year end? Can you provide that level of guidance?

Brad Barron

On total throughputs?

Mark Reichman - Simmons

Right, refined products, barrels per day, throughputs for refined products as well as the crude oil pipeline?

Brad Barron

We’re looking at -- it’s hard to say but we do expect it to be higher than what we saw in the first quarter.

Tom Shoaf

We’ll be at a higher level at the end of the year. This year, of course marking our last year but we haven’t given any detailed guidance on the volumes.

Mark Reichman - Simmons

Okay. And then also with the new dock at the partnerships North Beach terminal, I was hoping you could provide a little guidance in terms of your volumes as well as expansion possibilities and just addressing the port itself. I mean, are there any constraints? Just a little color on the activity there in Corpus?

Brad Barron

We’ve been moving close to 200,000 barrels a day, just under that in the first quarter. We should be above 200,000 barrels a day of Eagle Ford in the second quarter. And that will continue to rise up to above 250,000 barrels a day we expect by the end of this year. Next year, we should-- when our expansion is complete, we should see volumes up in north of 300,000 barrels a day. This system is capable of handling that with no problem. I think, Brad mentioned early in his comments that we had, we moved over 700,000 barrels in one 24-hour period over our docks in Corpus. So that will not be a constraint to the system.

Tom Shoaf

And one thing we like about the port of Corpus also is, it doesn’t have the same congestion that you have in Houston. So, if something happens in the port of Houston, that whole thing can be shut down and Corpus doesn’t seem to have the same kind of limitations.

Mark Reichman - Simmons

That seems great. Thank you very much.

Operator

Your next question is from Jeremey Tonet with J.P. Morgan.

Jeremey Tonet - J.P. Morgan

Good morning.

Brad Barron

Good morning.

Jeremey Tonet - J.P. Morgan

I wanted to follow-up with a couple of questions. It looks like G&A has been coming down and it seems like part of that might have been related to LTIP. I’m just wondering, how much room there is for -- there is there for continued savings as far as maybe rationalizing some of the G&A expense?

Tom Shoaf

I think what we said in the past is that, kind of what you’re seeing right now is basically pretty much the run rate going forward. I mean, we have had some cost cutting that we’ve done and we got through that. So, we don’t see a lot more downside to the G&A expense. It’s probably a good run rate of what you’re seeing right now. On G&A, we’ve given guidance out there for the second quarter. We just gave it around $24 million. So that’s kind of what we can expect to see.

Jeremey Tonet - J.P. Morgan

Okay. And then as far as your project backlog is concerned for things that might be on the drawing board. Do you see more opportunities for repurposing underutilized assets, some of that low-hanging fruit that’s brought really low multiples on some of your current projects?

Brad Barron

Yeah, we’re always looking for projects like that. The Houston 12 is a prime example of taking idled asset and turn that into an EBITDA generator. Those are in terms of prioritizing projects. Those are always going to be at the top of the list.

Jeremey Tonet - J.P. Morgan

Got you. And then I was just wondering if you could provide any incremental color on Eagle Ford Phase 2 filling up?

Brad Barron

We’re still working on contracting the remaining balance of that open season which is about -- we’ve got 10 of the 60,000 barrels a day available already booked up. But we are very close in signing some additional contracts for that space and are still very, very encouraged that we’re going to get all of that, all the gas filled up.

Jeremey Tonet - J.P. Morgan

That’s very helpful. Thank you very much.

Operator

Your next question comes from Connie Hsu, Morningstar.

Connie Hsu - Morningstar

Hi. Good morning, everyone.

Brad Barron

Good morning.

Connie Hsu - Morningstar

I was wondering if you could share your thoughts on the potential of crude exports from the U.S. and as well as, if crude exports were to happen, can you talk about the benefits or potential growth opportunities for your systems?

Tom Shoaf

I don’t think anybody knows what’s going to happen with crude exports. I mean, it is piling up on the Gulf Coast. I think everybody knows that. At some point, it’s going to start costing jobs. There will be pressure on Congress to do something about it, but I can’t say for sure what’s going to happen there. In terms of opportunities, the more crude that’s exported, the more crude is going to flow down our pipelines, and there’s opportunities for us either way.

Brad Barron

We’re starting to see more and more announcements and at least talk of splitter projects, which would or could be used to process the crude and then export it as a different product. But we’re not currently -- we don’t currently have any plans to build a splitter ourselves, but we are talking to several customers about supplying plan splitters with our pipeline volumes.

Connie Hsu - Morningstar

Okay, great. Thank you.

Operator

(Operator Instructions) Your next question is from Cory Garcia with Raymond James.

Cory Garcia - Raymond James

Good morning, guys. I appreciate some of the thoughts surrounding Point Tupper. I’m just kind of curious and I know it might still be in the early stages, but any updated thoughts on the LPG opportunities out there, or is it really more of a crude theme that you guys will be looking to play?

Brad Barron

We’re working both. I think from where I stand today, it looks like the crude’s moving a little bit faster, but we’re still working both. And I think both are potentially doable.

Cory Garcia - Raymond James

Okay. Got it. And turning to the Occi pipeline, you had mentioned that you’re already recognizing some DCF ahead of next year’s start-up. Is there any sort of guidance that you guys could provide when that starts coming through the model, and how we should sort of be looking at that over the next I guess 12 months?

Tom Shoaf

Cory, it’s going to be in the $5 million to $10 million range. We actually are going to start recognizing the DCF in the second quarter. So if you take the midpoint to the next quarter, I guess for the rest of this year. And then EBITDA will kick in probably in the second quarter of next year. And we said $23 million a year in EBITDA.

Cory Garcia - Raymond James

Perfect. Thank you so much.

Operator

Your next question is from Michael Blum with Wells Fargo.

Michael Blum - Wells Fargo

Hi. Good morning, everybody. Just one quick follow-up for me. Can you talk a little bit, you had a pretty nice year-over-year increase in the fuels marking business? Could you just talk a little bit more about what’s going on there, what’s changed in that market for you, and just how you see that playing out for the rest of the year?

Brad Barron

Well, the first quarter was a good quarter in terms of just volume and margin, but certainly we’re still feeling the impact of some optimization efforts that we announced last year, improving our cost structure. We signed a new supply agreement, which removed a lot of the working capital off of our books and so forth. And that’s still paying dividends as well.

Michael Blum - Wells Fargo

Okay. Any thoughts on how that may play out for the rest of this year?

Tom Shoaf

Well, we’ve given guidance of $10 million to $30 million in that segment. And as Chris mentioned, we put 10 million in the first quarter. We’re not seeing that as a quarterly run rate. It’s a very good start, but we’re still sticking with our $10 million to $30 million guidance.

Michael Blum - Wells Fargo

Okay. Great. Thank you very much.

Operator

Your next question comes from Selman Akyol with Stifel.

Selman Akyol - Stifel

Thank you. Good morning.

Brad Barron

Good morning.

Selman Akyol - Stifel

Just going back to the Occidental contract. In terms of just how much the pipeline is going to be utilized by then, how much is still left to be contracted on that?

Brad Barron

We’ve got about two-thirds of the pipeline contracted. And the 23 million is based on the contracted volume. So we still have upside on that line if we can get some additional shippers in.

Selman Akyol - Stifel

All right. And then just thinking in terms of -- you’ve got the pipeline running down to Corpus Christi. Clearly, you got a dock there as well. Should we expect for you guys to pursue exports on NGLs from there?

Brad Barron

While our customers certainly are, we don’t have any plans to get into that market ourselves. But I think you will see some additional volumes on that line forth going or export or into Mexico.

Selman Akyol - Stifel

All right. And then last question if I could just ask for a little clarification on G&A because I guess I’ve heard two things. Your guidance for the second quarter is $24 million and then I also heard that we have a good run rate here coming out of the first quarter around closer to $21 million?

Tom Shoaf

No, I think I said that the guidance of $24 million. That’s what I meant to say. The guidance of $24 million is a better run rate going forward.

Selman Akyol - Stifel

Okay, great. Thank you so much.

Operator

There are no further questions at this time. I turn the call back over to the presenters.

Chris Russell

Thank you, Tracey. We once again like to thank everybody for joining us on the call today. If anybody has any further questions, please call NuStar’s Investor Relations Department. Thank you very much.

Operator

Thank you for joining, ladies and gentlemen. This concludes today’s conference call. You may now disconnect.

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