NuStar GP Holdings' (NSH) CEO Brad Barron on Q2 2014 Results - Earnings Call Transcript

Jul.25.14 | About: NuStar GP (NSH)

NuStar GP Holdings, LLC (NYSE:NSH)

Q2 2014 Earnings Conference Call

July 25, 2014 10:00 AM ET

Executives

Chris Russell - Assistant Treasurer

Brad Barron - President, CEO

Tom Shoaf - CFO, EVP

Danny Oliver - SVP, Business and Corporate Development

Analysts

Steve Sherowski - Goldman Sachs

Jeremy Tonet - JPMorgan

Brian Zarahn - Barclays

Brian Lasky - Morgan Stanley

Cory Garcia - Raymond James

Mohit Bhardwaj - Citigroup

Matt Niblack - HITE Hedge Asset Management

Selman Akyol - Stifel Nicolaus

John Edwards - Credit Suisse

Operator

Good morning. My name is Chris, and I will be your conference operator today. At this time, I would like to welcome everyone to our Second Quarter Earnings 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. Chris Russell, Treasurer and Vice President of Investor Relations with NuStar Energy, you may begin your conference.

Chris Russell

Thank you. 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'll 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 these non-GAAP financial measures to U.S. GAAP may be found either in our earnings press release or on our Web site.

Now, let me turn the call over to Brad.

Brad Barron

Thanks Chris. Good morning and thanks for joining us today.

I'm happy to report and as a result of our ongoing strategic redirection, our second quarter strong quarters are the strongest we reported in quite some time. For the first time since the third quarter of 2011, we have covered our quarterly distribution and our coverage ratio for the quarter was 1.1x. In addition, we fully covered the distribution for the six months ended June 30, 2014.

Higher than expected throughput volumes in our pipeline and storage segments as well as some maintenance expenses and reliability capital spending has slipped to the back half of 2014 caused our earnings per unit and distributable cash flow in operations to exceed our initial second quarter expectations. Throughputs were higher than we anticipated primarily as a result of stronger than expected crude activity on our Eagle Ford system. Our newly constructed dock in Corpus Christi have become operational back in February, the completion of our Phase I of our South Texas crude oil pipeline expansion in May and increased volumes on our Pawnee to Oakville line that we completed in the third quarter of last year all contributed to the increased throughputs during the quarter.

These higher than expected throughputs, obviously had a positive impact on the pipeline segment, but they also benefited our storage segment results via the increased volumes at our Corpus Christi, North Beach terminal.

As I mentioned before, at the beginning of the year, I made it clear to our employees that we have the opportunity and the ability to return to full distribution coverage in 2014 and I asked them to focus on that goal. And with these exceptional second quarter results and year-to-date results, we are well-positioned to cover our distribution for the full year 2014.

While we are pleased with our results to-date and the outlook for the remainder of the year, we continue to work diligently on identifying and developing the next set of internal growth projects that will allow us to continue to increase our earnings and cash flows into 2015 and beyond.

We continue to explore additional growth opportunities in Eagle Ford shale as well as opportunities in other shale regions that could be synergistic with our existing assets. In addition, we are currently working on developing projects at several of our terminal facilities. These projects include new tank construction and railcar offloading projects. Hopefully over the next couple of months, we will be able to share some additional details on these projects.

Now, I'm going to turn the call over to Tom Shoaf, NuStar CFO, he can provide you some additional details on the second quarter results.

Tom Shoaf

Thanks Brad and good morning everyone.

This morning we announced that EPU for the second quarter was $0.56 per unit higher than the $0.28 per unit earned in the second quarter of 2013 and exceeding our guidance range of $0.35 to $0.45 per unit. In addition, DCF from continuing operations available to limited partners for this quarter was $1.20 per unit and again, higher than the $0.73 per unit generated in the second quarter of 2013 and our guidance range of $0.85 to $0.95 per unit.

As Brad mentioned earlier, the main drivers for our improved results was strong throughput volumes in our pipeline and storage segments as well as maintenance and expenses and reliability capital that slipped into the back half of 2014.

EBITDA in our pipeline segment increased to $80 million, $12 million higher than the second quarter of 2013. Overall, we experienced a 17% increase in our total throughput and a 21% increase in total revenues for the pipeline segment. Throughputs on all of our crude oil pipeline system increased 22% to 427,000 barrels per day as the segment continued to benefit from increased Eagle Ford throughput and decreased turnaround activity at one of our customers refineries.

Throughputs on our Eagle Ford crude oil pipeline systems increased 24% from about 175,000 barrels per day in the second quarter of 2013 to around 218,000 barrels per day in the second quarter of 2014 primarily due to the May completion of Phase I of our South Texas crude oil pipeline expansion, which added approximately 35,000 barrels per day of capacity to the system and also the third quarter 2013 completion of our Pawnee to Oakville line.

Throughputs on our refined products pipeline increased 13% to 521,000 barrels per day also due to increased turnaround activity at one of our customers' refineries and increased pipeline throughputs on our ammonia pipeline due to more favorable weather conditions.

For the second quarter, the storage segment generated $76 million of EBITDA up $5 million from last year. Throughput volumes increased 10%, while throughput revenues were up 17% due to increased activity at our Corpus Christi North Beach terminal, which continues to benefit from the increased Eagle Ford crude volume shipped on our pipeline system.

Storage lease revenues were down slightly compared to last year's second quarter due to reduced demand for West Coast storage and the narrowing of the LLS to WTI spread, which impacted both our profit sharing benefits and unit train demand at our St. James terminal.

Our fuel oils marketing segment earned $5 million of EBITDA during the quarter slightly higher than the $3 million of EBITDA generated in last year's second quarter. Higher gross margins and lower operating expenses in our bunkering operations were the main drivers for the segment's improvement.

Equity and earnings and joint ventures were $3 million for the quarter versus the negative $10 million recognized in the second quarter of 2013. Equity and earnings and joint ventures now relates only to our 50% interest in the Linden, New Jersey storage terminal. If you recall, we divested our 50% share of the asphalt joint venture back in February of 2014, which accounted for the majority of our negative equity and earnings and joint ventures in the second quarter of 2013.

NuStar's G&A expenses were $23 million or $3 million higher than the second quarter of 2013 primarily due to the accounting for compensation related cost as a result of higher average unit performance.

Our interest expense, net of interest income was $33 million up $4 million from last year's second quarter. This increase was mainly due to the higher borrowing cost associated with the August 2013 issuance of 300 million of senior notes. NuStar's year end debt balance was $2.7 billion or debt to EBITDA ratio was at 4x.

In regard to second quarter 2014 distributions, NuStar Energy's Board of Directors declared a distribution of a $1.095 per unit and the distribution will be paid on August 11. NuStar GP Holdings Board declared a second quarter distribution a $0.545 per unit, which will be paid on August 14.

Now, let me spend a few minutes talking about our projections for the third quarter of 2014. Our third quarter EPU EBITDA and DCF result should exceed the results in the same quarter last year. At the segment level, third quarter EBITDA results in the pipeline and storage segments are projected to be higher than last year's third quarter. Continued increases and throughputs in the Eagle Ford shale as a result of the May completion of Phase I of the South Texas crude oil pipeline expansion should contribute to higher EBITDA in our pipeline segment as well as increased storage segment throughput revenue as a result of Corpus Christi, North Beach terminal.

Results in our fuels marketing segment should be higher than the third quarter of last year due to stronger performance from our bunkering operations. During the third quarter, we expect G&A expenses to be in the range of $26 million to $27 million, depreciation and amortization expense around $46 million to $47 million and interest expense in the range of $32 million to $33 million.

Based on these projections, third quarter earnings per unit should be $0.55 to $0.65 per unit, while distributable cash flow from continuing operations per limited partner unit should be in the range of $1.05 to $1.15 per unit.

With regard to segment EBITDA guidance for the full year 2014, we expect to continue our pipeline segment EBITDA to be around $40 million to $60 million higher than 2013. And our storage segment EBITDA to be comparable with 2013 storage segment adjusted EBITDA.

2014 EBITDA results in our fuels marketing segment are now expected to be in the range of $20 million to $30 million. Our 2014 strategic capital spending has been updated to reflect the deferral of spending from some of our key growth projects into 2015 and is now expected to be in a range of $330 million to $350 million.

Our 2014 reliability capital spending guidance is still projected to be in the range of $35 million to $45 million although based on actual expenditures to-date; we anticipate our full year spending will be at the lower end of that range.

Our quarterly coverage ratios for the remainder of the year should be at lower levels than those reported in the second quarter. However, let me reiterate, we remain on track to cover the distribution for the full year 2014.

Now, I will turn it back over to Brad.

Brad Barron

Thanks Tom.

Let me just add, as most of you know we had a lot of great news over the past couple of quarters. And I'm extremely pleased that the market has taken notice both NS and NSH units recently closing some of their highest levels in our history.

Our employees have taken to heart the message from management that attaining a one-time cover is our number one priority. With their hard work and dedication, we as a company are working to make that a reality.

Let me turn it back over to Chris. And operator, we can open it up for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Steve Sherowski [Goldman Sachs]. Your line is open.

Steve Sherowski - Goldman Sachs

Hi, good morning. With all this talk about condensate exports and just given your strong position in the Eagle Ford and also at least in my view that you have the most condensate ready export facility at your Corpus Christi dock. Would you just mind talking a little bit about potential opportunities going forward and how you could leverage this existing strong position that you have?

Brad Barron

Sure. Danny Oliver, he is our Senior Vice President of Business Development. Danny, do you want to…

Danny Oliver

Sure. We are actually working a couple of specific opportunities in that regard. We are pleased that we decided from the very beginning to design a segregated system so that we can handle several different segregations of crude oil in our system. The projects we are working through now are just to add basically another segregation for, let's call it, processed crude. And we are working some specific projects with customers to do that. It will take a little bit of time because we will need to add some extra storage to keep all of that segregated but moving forward as quick as we can.

Steve Sherowski - Goldman Sachs

Okay. Thanks for that. And then just jumping over to your storage segment it looks like your OpEx came down at least relative to the previous quarters. How sustainable is that going forward and how should we be thinking about that over the next several quarters?

Tom Shoaf

I think it will pick back up Steve as we go through the last half of the year. As Brad mentioned some projects just got pushed backed into the last half of the year. And I think it will probably – I think the historical levels probably more reasonable level going forward.

Steve Sherowski - Goldman Sachs

For your storage segment operating expenses?

Tom Shoaf

Yes.

Steve Sherowski - Goldman Sachs

And a final quick question, there has been increased chatter out there about the potential to reexamine of the Niobrara project. Would you mind just talking about that and just what your plans are for that pipeline?

Brad Barron

Sure. As you are aware we were involved in an open season for project around two years ago – about two years ago and at that time the Niobrara was just not far enough long and development to generate sufficient interest. We have revived a project and we are working on that diligently up. We hope that's one of the projects we hope about at least by the next earnings call we hope to have a lot more to talk about. But it is still in the development stage.

Steve Sherowski - Goldman Sachs

That's great. That's it for me. Thank you.

Operator

Your next question comes from the line of Jeremy Tonet [JPMorgan]. Your line is open.

Jeremy Tonet - JPMorgan

Congratulations on a very strong quarter.

Brad Barron

Thank you.

Jeremy Tonet - JPMorgan

I was just wondering, if you could remind us of any seasonality in the fuels business, it seems like you are tracking towards the top-end of that guidance so far. So just wondering if there is anything you see in the back half of the year that make you think it might not be as strong as the first half of the year.

Tom Shoaf

The most seasonal piece of that business is our butane blending operations which – the majority of that occurs in the fourth quarter. But, it's a pretty – that's probably the most reliable piece of that segment. Everything else is pretty much – there is not a lot of seasonality to it on the bunkering.

Jeremy Tonet - JPMorgan

Okay.

Tom Shoaf

There is probably not a lot of upside or downside to the guidance that we put out there from a seasonality standpoint.

Jeremy Tonet - JPMorgan

Got you. Thank you. And I wanted to follow up on the process condensate, potential opportunities that you guys are speaking about and I was just wondering if you might be able to talk a little bit on what type of CapEx spend or what type of profit this could generate. And is it up – is there a chance this could be pretty – more sizable going forward as far as the opportunities here?

Tom Shoaf

I think it's a significant opportunity, I mean capital – we've got the system – the pipelines in place there maybe some expansions, but it's mostly just adding some storage for an extra segregation, which won't be that significant relative to the opportunity I don't think.

Jeremy Tonet - JPMorgan

Okay, great. And then as far as…

Tom Shoaf

Comment on the profitability in…

Jeremy Tonet - JPMorgan

That makes sense fair enough. And then as far as South Texas Phase II, I was just wondering if you could might be able to update us as far as customer interest there and filling up all the capacity that you have coming on line?

Tom Shoaf

We have strong interest on that. We signed a portion of that second phase already. I think we are very close to our negotiation as to signing up the remaining balance of that expansion and we are still anticipating that coming into service about second quarter of next year.

So between now and then, I think you will see us in the third quarter ramp up – continue to ramp up on volumes until we get near or at our current capacity. And then we will have the next step change will be when that second phase goes into service next year.

Jeremy Tonet - JPMorgan

Okay. And then pivoting over to the storage side, I was just wondering if you had any thoughts as far as other expansion opportunities with the terminals out there, specifically Vancouver as well, if you see any opportunities there?

Tom Shoaf

We do, we see – we are work in a couple of opportunities both on the East Coat actually up in Canada at our Tupper facility and in Vancouver for some crude by rail projects. We are working them very, very hard they are real opportunities, but again in the development stage so not a lot we can say in terms of detail.

Jeremy Tonet - JPMorgan

Okay. That's helpful. And then last one for me just wondering about the maintenance CapEx just wondering what's driving the variance that you see now versus original plan is it just timing, or is there something else in play?

Tom Shoaf

Just timing.

Jeremy Tonet - JPMorgan

That does it for me. Thank you very much.

Operator

Your next question comes from the line of Brian Zarahn [Barclays]. Your line is open.

Brian Zarahn - Barclays

Good morning.

Brad Barron

Good morning.

Brian Zarahn - Barclays

In the storage business, is that by lease revenues down year-over-year they are up from the first quarter, how should we think about the – is that a reasonable run rate. I know you there was some re-contracting in the first quarter, but in the second quarter a reasonable run rate for the storage lease revenues?

Chris Russell

Hi, Brian. This is Chris Russell. Yes, I think it is – I mean it's down year-over-year largely due to the fact we had the profit sharing benefit in the second quarter of last year same change we didn't have much of that all in the second quarter this year. Yes, I think your run rate going forward should be pretty good. But, second quarter this year -- pretty consistent with the second quarter this year, I should say.

Brian Zarahn - Barclays

And then also on volumes in the storage segment approximately how much of the throughput was from Corpus Christi?

Tom Shoaf

Of the total throughput or the increase?

Brian Zarahn - Barclays

Total throughput.

Brad Barron

It should be close to just under 200,000 barrels I believe.

Brian Zarahn - Barclays

Okay.

Brad Barron

Sure.

Brian Zarahn - Barclays

That's helpful. And then on the – just on the T&D payments and the DCF reconciliation, is there additional adjustments you expect for the remainder of the year, is it more of a second quarter event?

Tom Shoaf

For the T&D that goes on each quarter. The reservation fee goes on each quarter for the rest of the year. The T&D, it will just depend on the volume that the customers go through the facility, right, I mean, we expect them or forecasting that they will meet the minimum throughput…

Brian Zarahn - Barclays

Of the $4 million is that primarily T&D payments?

Tom Shoaf

Yes. The $4 million, it's the reservation fee with the OXY and T&D payments.

Brian Zarahn - Barclays

Okay.

Tom Shoaf

And then your question on the Corpus, Brian, it's actually a 150,000 barrels a day.

Brian Zarahn - Barclays

150,000, okay. Thank you. And then on – you made great progress in covering your distribution, and you see no good visibility for the remainder of the year, how do you think about potential distribution growth medium and longer term?

Brad Barron

We always said as – like I said, our number one priority is covering the distribution for this year. So once we have achieved that and then probably our second quarter already after that is securing the distribution going forward. So I would like to see several quarters of covering the distribution before you even begin to look at increasing it.

Brian Zarahn – Barclays

Thanks for the color.

Brad Barron

Thank you.

Operator

Your next question comes from the line of Brian Lasky [Morgan Stanley]. Your line is open.

Brian Lasky - Morgan Stanley

Hi, good morning. I was wondering if you can just provide a quick update on the 12 inch line, if you have made any progress contracting the remaining portion.

Brad Barron

Nothing new contracted. We are working some – with some customers on doing just that but nothing completed yet. It's just a reminder we got about two-thirds of that line guaranteed with our base customer. So that remaining one-third we are pursuing as quickly as we can.

Brian Lasky - Morgan Stanley

And then this quarter your storage and pipeline obviously came in a little bit above where you guys expect to get, you kind of maintained your full year guidance, is that just kind of conservatism, is it more kind of some of the transitory stuff you guys mentioned before is there some other type of offset that we should be thinking about there?

Brad Barron

No, I mean, yes, it was a little bit higher, I mean as we said before, we had some throughputs – higher throughputs coming from Eagle Ford which helped out the second quarter. And then we had some cost that just slipped into the back half of the year. So I think it's just really a lot of it is timing and all that. So I think that's why we are keeping our full year guidance where it is right now. I don't think we are trying to be overly conservative, but I think we just have some timing dips there that are kind of moving around quarter-to-quarter.

Brian Lasky - Morgan Stanley

Got it. Thank you.

Operator

Your next question comes from the line of Cory Garcia [Raymond James]. Your line is open.

Cory Garcia - Raymond James

Good morning, fellows, I appreciate the incremental color. Quick question I guess on the push out that have seen in the organic CapEx budget. Is it fair to say that it's really more of a – sort of a redefining or maybe sort of reengineering of your 2015 projects? Or is it maybe some actual growing pains within the Eagle Ford that you guys are seeing. Just any color you guys will be able to provide would be helpful?

Brad Barron

It's none of that. I mean it's absolutely just the timing of getting things done. The work schedules and things like that. So there is really no change in what we are doing or how we are doing, it is just basically just the ability to get things done and in the timing of those projects.

Cory Garcia - Raymond James

Got you. And when do you guys expect to sort of announce a better view on what 2015 budget could look like.

Brad Barron

We typically do that after the third quarter call.

Cory Garcia - Raymond James

Got you. Appreciate it. Great quarter guys.

Brad Barron

Thanks.

Tom Shoaf

Thanks.

Operator

Your next question comes from the line of Mohit Bhardwaj [Citigroup]. Your line is open.

Mohit Bhardwaj - Citigroup

Yes. Hi. Thanks for taking my question. This is Mohit Bhardwaj from Citigroup. Brad, I had a question on St. James, so, if as you see the volumes are dropping over there and as you also mentioned the profit sharing is not visible once LLSPI below $7. Your facility is contracted till 2016, but then at the same time some of the pipeline solutions from Bakken into St. James will also come along. So how are you thinking about their project going forward and what're your expectations are, do you going to maintain that $50 million to $60 million in EBITDA that you generate from that facility right now?

Brad Barron

We are working other projects there with other shale plays. We are starting to see more crude come into that facility from the Permian which has offset a little bit of some of the declines we have seen coming out of the Bakken. But the Bakken is sensitive to that WTI LLS spread and it's been coming back lately. So we don't forecast any of that profit sharing. But, if it comes back it helps both volumes by rail and also on the profit sharing if it's high enough.

But we are currently working some significant projects in another shale play that would be directed at St. James. Again, it's very early in the stages of development, so we can't discus a lot of details. But, I think St. James is and continues to be a hub location that's advantageous for a lot of these shale plays.

Mohit Bhardwaj - Citigroup

Thanks for that. And just on Eagle Ford, you mentioned some of the throughputs were higher than what you were expecting and I think the number that you guys have provided before for Eagle Ford was 220,000 barrels per day for the second quarter. Do you have a revised number what the actual throughput was?

Danny Oliver

Brad said 218 in his remarks, so – Tom did sorry. Again, it was right around that 220 number in the second quarter.

Mohit Bhardwaj - Citigroup

Great. I appreciate the color guys. Thank you.

Operator

Your next question comes from the line of Matt Niblack [HITE Hedge Asset Management]. Your line is open.

Matt Niblack - HITE Hedge Asset Management

My questions were answered. Thank you.

Operator

(Operator Instructions) Your next question comes from the line of Selman Akyol [Stifel Nicolaus]. Your line is open.

Selman Akyol - Stifel Nicolaus

Thank you. Congratulations on a nice quarter.

Brad Barron

Thank you.

Selman Akyol - Stifel Nicolaus

I just have one quick question. On the G&A line, I guess in the first quarter closer to $21 million, $22 million, now $23 million, and if I heard your guidance correctly, $26 million to $27 million going into the third quarter. Can you just talk a little bit about what's going on there and why we are seeing it continue to grow?

Tom Shoaf

Yes. There are a couple of things going on there. One is, we have a service agreement with the asphalt JV that we spun off. We sold the last 50% of that as we said earlier in our comments. And there is a service agreement there. And now, we are not providing those services to them. So you are going to see a drop. We were getting revenue from them on that services agreement. We are no longer providing those. So you can see a decline from that. That's driving that.

And then, it's also just some of our expenses are based on unit price, and as the unit price goes up so does the expense. So that's also a driver for that.

Selman Akyol - Stifel Nicolaus

All right. Thank you very much.

Tom Shoaf

You're welcome.

Operator

Your next question comes from the line of John Edwards [Credit Suisse]. Your line is open.

John Edwards - Credit Suisse

Yes. Good morning everybody. Nice quarter. Just in light of the fact you are pushing some growth projects into 2015, I'm wondering if you could talk a little bit about the backlog of opportunities you are looking at. Are they kind of holding stable, rising, falling off a bit, maybe if you could comment on that, it would be great.

Tom Shoaf

Let me clarify something, the growth projects are not being pushed out. Some of the spending – so the spending profile straddles 2014 and 2015. So some of – more of the spending is going to occur in 2015 than in 2014. And we originally expected but the growth projects are still on track. We will get that out of the way.

In terms of other opportunities, we are looking at over $1 billion set of opportunities. And that's higher than it's been in our history and we are going to continue add into that pipeline and evaluating opportunities at an increase pace.

John Edwards - Credit Suisse

Okay. And then I mean any kind of sense for potential timing on that? I mean is that over, say, a three-year period, five-year period any kind of additional color there would be helpful.

Tom Shoaf

I know the way that really works. At any given time you have between $1 billion and $2 billion worth of opportunities you are looking at. Obviously, not all of those come to fruition. We've historically spent around $300 million a year in strategic CapEx. And our plan is to spend more than that. And that's every year going forward in history. So I think what you can expect to see is that number to increase. How much is going to increase? I can't tell you with precision at this time. But, it will be higher in the future.

John Edwards - Credit Suisse

Okay, great. All right. Thank you.

Operator

There are no further questions at this time. I return the call to the presenters.

Brad Barron

Thank you, operator. We once again would like to thank everybody for joining us on the call today. If anybody has any additional questions please feel free to call the Investor Relations group of NuStar. Thank you.

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