K-Sea Transportation: Wall Street Analyst Forum Presentation Transcript

Feb.13.07 | About: K-Sea Transportation (KSP)
TRANSCRIPT SPONSOR
Click to enlarge

K-Sea Transportation Partners L.P. (NYSE:KSP)

Wall Street Analyst Forum

February 13, 2007 9:10 am ET

Executives

Gerry Scott - President of Wall Street Analyst Forum

Tim Casey - President and CEO

James Dowling - Chairman

John Nicola - CFO

Presentation

Gerry Scott

Good morning. I'm the President of Wall Street Analyst Forum. I'll be the host for this morning's oil and gas program. Before I introduce the first company, I'd just like to review a couple of very brief administrative, sort of, details.

First, we have a change in format. We used to have breakout sessions following each 40-minute presentation/Q&A. And this is the first time in 18 years, I guess, we haven't. And this has been replaced by a new one-on-one meeting format. It's also been replaced by a luncheon program -- a dedicated luncheon program between the companies and attending analysts and portfolio managers.

We saw a little bit of a conflict with the breakout sessions and the group meetings, and we decided to change our format and a couple of other brokerage conferences have done the same thing. We prefer to follow the suit.

Another -- so there is a luncheon program. I guess the bottomline would be with the companies and the analysts and there is nothing else happening during that period of time, no breakout sessions, no group meetings, and it's really good -- it's really a breakout session on to itself. We've replaced the old format we had.

Secondly, we're doing something in this conference that we hadn't done before, and we're actually the first analyst conference to ever have done this. But we've structured a relationship with SeekingAlpha.com, which many of the institutional investors probably know better than the companies. But they, from our view and from the finance magazines and some others, have become the number one institutional investor online community.

And they are actually doing a transcript of these presentations, including the Q&A session, making it web searchable on Yahoo Finance, Google Finance, AOL Finance, on SeekingAlpha.com -- their website as well -- same day as the conference.

And although the webcast is very important, the ability to go through a transcript in maybe five minutes and get anything you want instead of hanging around for a webcast of 40 minutes, we think, is a great way to reach a lot of serious institutional investors who won't sit around to do anything. My wife can't get me to sit around for 40 minutes to focus on one thing. But I think if you can go through a transcript -- maybe, just go to the Q&A session and get anything you want in seven or eight minutes, may be more efficient.

And the companies all the time say how can we get more people to attend our webcast. I think the answer is you can incrementally maybe get some gains, but you maybe have to look at the problem differently. And we think the transcripts in web searchable, which was different in the '70s, when you really started a conference in the '70s, you did a transcript and you'd mail them. People, you know, in the '80s even. And then it became outdated. And now that the web searchability is out there, it's very different. So if you put in this company's ticker symbol on Yahoo Finance, you'll see their transcript there in about eight or nine hours or 12 hours or six hours, whatever long it takes.

In any case, I'd like to introduce the first company in this morning's program, K-Sea Transportation Partners. And they're a limited partnership and that has its own special meaning, as I'm sure the Company will talk about all of that. They're the largest coastwise tank barge operator measured by barrel-carrying capacity in the United States. KSP is organized as a Master Limited Partnership and distributes its available cash as defined as dividends to its unit holders.

The Company provides refined petroleum products, transportation, and distribution and logistic services in the US domestic marine transportation business. With a fleet of 63 tank vessels and 44 tugboats, KSP serves a wide range of customers, including major oil companies, oil traders and refiners.

Without any further introduction from me, I'd like to introduce Tim Casey, President and CEO; James Dowling, Chairman of the Company, and John Nicola is here, Chief Financial Officer.

TRANSCRIPT SPONSOR

The Wall Street Analyst Forum, a leading conference host for public corporations to address analysts/portfolio managers and professional investors, sponsors four annual conferences in NYC for large, mid and small-cap companies. Seeking Alpha readers may attend Wall Street Analyst Forum conferences free of charge if you pre-register. See the full conference schedule and attendance information.

Read all Wall Street Analyst Forum conference presentation transcripts here.

To sponsor an investor conference presentation transcript please contact us.

Click to enlarge

James Dowling

Good morning everyone. Thank you for coming. I'm Jim Dowling, and I'm the Chairman of K-Sea. And my role here today is really quite simple. I'm going to introduce the major speakers, participate in the Q&A, which I would encourage everyone to get involved with.

And then, as I'm sure, you're aware, I have to give you the cautionary statements that every company is required to do. This presentation contains forward-looking statements, which include any statements that are not historical facts, and statements involve risks and uncertainties. All the factors are detailed in the Company's annual report on Form 10-K and other filings with the SEC. We would clearly encourage you to refer to all of these filings to get all of the details on the risks and uncertainties.

And without any further ado, let me introduce Tim Casey, who is the President and Chief Executive Officer.

Tim Casey

Good morning everyone. And thank you, Jim, for that introduction. First, I'd like to thank the Wall Street Analyst Forum for bringing together analysts and investors and giving K-Sea the opportunity to get their message out about what we see as a very exciting future.

K-Sea has been a publicly traded Master Limited Partnership for over three years now. In that time, we've built the largest fleet of coastwise tank vessels in the US by acquiring new operations and building new modern tonnage.

Demand for our equipment remained strong, and we continued to develop new customers by always improving liability, efficiency and safety. This has translated into a track record of increasing distribution growth to our unit holders. As Jim said earlier, please refer to our SEC documents and read the cautionary statement.

Marine transportation by coastwise barge is one of many components in the petroleum distribution chain. Water transportation system through carriers really is not possible or practical for pipelines to reach. Similar to pipelines, K-Sea moves refined petroleum products from refineries and storage terminals to tanks and facilities where they're either used for its final use or moved to its final destination by truck.

We move gasoline for your cars, jet fuels for airplanes, eating oil for homes, and residual fuel for power plants to produce electricity. In essence, we move anything that comes out of a refinery. Our fleet is a tool that we use to deliver these products and the area we invest our capital.

K-Sea's fleet is composed of 61 tank barges, 44 tugboats, and 2 small tankers, with a total fleet capacity of 3.4 million barrels. This makes us the largest operator of coastwise tank barges in the US. Our tank barges range from 3,000 barrels up to 165,000 barrels and can move every type of petroleum products, from gasoline for your cars to heavy residual fuel for power plants and some specialty cargos such as ethanol.

We operate in all the major coastwise regions throughout the US, including the Great Lakes, East Coast, Gulf Coast, West Coast and Alaska. Over the last three years, we've also found some smaller opportunities in (inaudible) market that allows us to use either our current assets or new assets to that work in MLP model. We expect to be able to continue to find some of these small offline or other type accretive deals.

The size and diversity of our fleet allows us to provide our customer with a very unique service. All of our new barges we build is what we call articulated tug barge units, or ATBs, increasing the reliability, efficiency and safety compared to conventional tug barge operations. An ATB is where a tug is connected to the back of the barge by mechanical system allowing the unit to operate very similarly to a ship. Currently we have 14 ATBs in our fleet and 8 of the barges under construction will all be -- will be built as ATBs. And we are working on plans to convert two of our conventionally tugs and barges to ATBs.

After we complete our building program in early 2008, 80% of our fleet will be double-hauled. We are looking to increase the size of our new building program based on specific projects we are pursing with several different customers.

In April 1999, we started K-Sea by acquiring Ekof Marine Corp. and a management buyout with Jeffries Capital Partners. By the end of 1999, we also doubled the size of the company by purchasing our competitors, North Eastern Fleet. In 2004, we purchased a company in Norfolk. In 2005, we purchased a unit on the Great Lakes and Sea Coast, which operates on the West Coast and Alaska.

During that time we purchased and build several individual tugs and barges to meet our customer’s needs and improve the quality of our fleet. From 1999 to today, we have more than tripled our capacity while total industry capacity has declined. We expect to be able to continue this trend.

Our customers are some of the largest energy companies in the world. We have been providing our services to BP for over 32 years, ChevronTexaco for over 17 years, and ExxonMobil for over 9 years. Because of our growth and professional approach to service, we have been able to maintain and expand our relationship with all the major oil companies. We have a high quality fleet that our customers depend on for their transportation needs.

Here are some of the typical jobs that demonstrate the flexibility of our fleet. We can move 125,000 barrels of gasoline to upstate New York for ExxonMobil or move 8,000 barrels of residual fuel to Con Edison facility right here in Manhattan or move 70,000 barrels of split load of diesel and gasoline from Puget Sound to Portland for ConocoPhillips.

Our fleet mix a very important part of our commitment to aspire customers with the service that they require. We are continually reviewing our assets and looking for opportunities to enhance our flexibility and improve our utilization.

As I mentioned earlier, we have grown our fleets continually since we started K-Sea in 1999. With our new building program, our run on the fleet will continue to grow through 2009.

The Oil Pollution Act of 1990, or what we call OPA 90, requires offshore we moved on our nation's waters to be done on double hull vessels. There is a phase-out scheduled for single hull vessels based on the size and the age that goes into effect until the end of 2014. None of K-Sea's vessels phase-out until the end of 2014.

Since we started our replacement process early, we are far ahead of the most of the industry. Our careful staged approach to replacing vessels has allowed us to grow our market share, while providing new and old customers with modern double hull equipment. At the end of our current building program, the fleet will be 80% double hull.

Most of our senior management has over 20 years of experience in the industry. The majority of the management team started their careers working on vessels. We've shown a history of building the fleet, acquiring and integrating companies, while continuing to improve customer relations. This management team has proven its ability to expand the company and stay focused on providing increasing returns to our unitholders.

I'm going to turn the presentation over to John Nicola, our Chief Financial Officer, to go over some financial highlights. John?

John Nicola

Thanks, Tim, and good morning, everybody. There was a technical difficulty here. There was a standby. Thanks again, Tim. My name is John Nicola. I'm the Chief Financial Officer of the company. And I've got just three slides what I'd like to illustrate a few of the aspects of K-Sea's finances.

The first slide is number 10. It's called Consistent Cash Flow Generation. It shows the trend in our EBITDA over the last seven years. The significant increases over the past few years, of course, result from our acquisition and fleet expansion program, and haven't achieved despite recurrence of the occasional unseasonably warm winter and sharp fluctuations in oil prices. Our results have continued to maintain a strong trend despite these factors.

One comment that we can -- that we make, it used to be that an unseasonably warm winter in the Northeast would have a little bit more of an impact on us. This year, in particular, subsequent to our acquisition of Sea Coast, the warmer winter keeps a longer earnings season in Alaska and in the Pacific Northwest, which offsets that and is a benefit of our vibrating operations.

I’ll also point out that The Street consensus of EBITDA for 2007 should be achieved with only partial contributions from four new build vessels to be delivered this year. Two have already been delivered, two more remain.

Future years will benefit from the contributions of another new build vessels to be delivered during fiscal 2008 and fiscal 2009. And Tim and I will both go into that a little bit further as we move along.

Slide 11 illustrates our distribution growth, itself explanatory since we went public in 2004. Our distributions on a quarterly basis have been increased $0.50 per unit up to $0.66, a 32% increase. I think it’s important to mention that our Board increases distributions only when an improvement in distributable cash flow is considered to be permanent. And that’s just when it’s expected.

Our distributions are managed consistent with a more or less 50-50 debt to equity capital structure over the long term, a healthy distribution cushion of at least 1 to 1 -- 1.1 to 1, excuse me. And we’re 1.23 to 1 so far this year.

And we used to access to capital markets, especially our revolving credit facility just for a short-term and working capital purposes only and manage our interest rate exposure by fixing rates on approximately half of our debt.

The final slide number 12 illustrates the total return that we delivered to unitholders since our IPO. In January ‘04, we went public at $23.50 a share. Price about a week ago was $39.87. In the meantime, we’ve made distributions of $60.82, which counting reinvestment of dividend, gives the unitholders -- original unitholders a total return of about 108% over that three-year period.

It’s also important to note that these distributions, 6.82% have been tax-shielded by over 90% in each of our first three taxable years, which is ‘04, ‘05 and ‘06. So the 108% compares favorably to a taxable -- comparable taxable return.

Okay. Tim, thank you.

Tim Casey

Thank you, John. This mix chart is probably the most important chart we’re going to show. The chart slide shows in the upper left corner here the box of our acquisitions that we have completed. With exception to the -- and have included most of the contribution we've seen in 2006. The bottom two acquisitions that we did in, they are kind of only about 75% of their contribution that we see in 2006.

The next box down shows the other acquisitions that we've made. And in 2006, we only saw partial contributions from those acquisitions. And most importantly, you see on the right side, this is our new building programs and these are all the assets that we have in our new building program where it seem zero contribution from those assets. So we expect to see those contributions as they come online and as their process -- as we get them operating efficiently.

We also expect to be able to expand our new building program. We are working with many customers to put to work other asset in other asset classes that are similar tank barges in the business. And we expect to be able to continue our building program. We expect we will continue our building program.

Now, in conclusion of our presentation today, we're very happy with K-Sea's current market positions. Industry is supplying demand from the manuals seems to be token our favor and future vessel retirements because of the Oil Pollution Act of 1990 should keep in that way for a while.

We continue to improve our asset-based through our new buildings and acquisitions. Our focus on quality operations continues to bring us more opportunities. About 80% of our fleet is contracted to BlueChip customers with an average contract wipe of three years.

We're improving track record of increasing distributions and we expect this continue. Thanks for you time today. I hope you enjoyed the presentations. And we'd be happy to answer any of your questions.

Question-and-Answer-Session

Unidentified Audience Member

What are pricing…

Tim Casey

Excuse me.

Unidentified Audience Member

The pricing for your contract, what escalation (inaudible).

Tim Casey

Okay. He is asking about pricing for our contracts, for our vessels. Our vessels worked on three different types of contracts. There are contracts of affreightment, where we're just moving the barrel for the customer or a time charters, where the customers is paying a daily rate to use our vessel, or what we call consecutive voice charter where the customer is required to load our barge every time we come to present it to load.

In all of our contract areas, most of our contracting is moving towards time charters because of the favorable position we are in regarding the supply of vessels in the market. Most of our contracts seem to be moving more towards time charter, which normally extent those links of the charter and link the time that the customer is willing to commit. And we are seeing -- we have price increases and annual exploration in all of our contracts.

Unidentified Audience Member

[question inaudible - mic inaccessible]

Tim Casey

Well, the day rigs varied based on the size of the vessels. And we have vessels from 3000 barrels up to 165,000 barrels. But I think you can see that our average daily have rates have increased significantly over the last several years.

James Dowling

Right. If you look at our, you know, our SEC filings and MD&A, we break our business into local and coastwise. Local rates and its primarily based on size of the vessel, the local trade we considered to be vessels of 40,000 barrels and lower.

And those rates, if you look in the MD&A have ranged between 5,000 to 6,000 over the last several years. And these are all quoted in the MD&A. The coastwise rates have gone roughly between 10,000 and 12,000 per day and they are higher because coastwise vessels are larger and larger vessels generally command a larger day rate.

Unidentified Audience Member

[question inaudible - mic inaccessible]

Tim Casey

No. The trends been growing but you have to realize when you’re looking at our ADR, is that the size of the vessel determines the rates. So it’s a two form look at it. Some of our vessels are 80,000 and our larger barge class, it starts from 40,000 barrels up to 165,000 barrels. So we may add 5,000 to 80,000 barrel barges, which might affect the ADR rates.

Basically, we do not segregate by specific vessel type the rates only by the two that John mentioned. As a generalization, as you look at all rate experienced for the last three fiscal year and earlier because of the data we provided in our IPO prospectus. Probably, as a rule of thumb, probably at the average increasing rates about half is due to the market strengthening and about half is due to the average size of our vessels increasing.

John Nicola

Rates has strengthened over the last three years, yes.

Unidentified Audience Member

[question inaudible - mic inaccessible]

Tim Casey

In the smaller vessels versus the larger vessels.

Unidentified Audience Member

[question inaudible - mic inaccessible]

Tim Casey

The margin is actually very good in both areas but seems in the smaller vessels, we seem to get a little better margin.

Unidentified Audience Member

[question inaudible - mic inaccessible]

Tim Casey

Thus -- historically, it was a larger vessel because of the Oil Pollution Act of 1990. We required larger vessels in the market to replace first with double hulls. So we concentrated on replacing our larger vessels first and expanding that market. Now, we are in the process, you’ll see we have several 28,000 barrel barges that are under construction. Because we are seeing better margin in that market, WE are expanding more in that market.

Unidentified Audience Member

[question inaudible - mic inaccessible]

Tim Casey

Repeat the question.

James Dowling

He is asking who we are taking market share from?

Some of the market share comes from just the major oil companies that vesting out their assets. Their own marine assets but the majority of the market share is coming from local competitors that are mainly privately held companies, here in the north east and on the west coast.

Unidentified Audience Member

[question inaudible - mic inaccessible]

James Dowling

It’s really more effective who has the ability to build equipment and who has the access to capital to build the equipment. And we just happen to have the access to capital to build the equipment, which allows us to come in and take the market share.

Unidentified Audience Member

[question inaudible - mic inaccessible]

James Dowling

The lead times. He is asking where are new builds of the inbuilt and what’s the lead time?

The majority of our new build more majority of our building program is done as a shipyard called Bollinger shipyard, which we’ve been at for the last five years. In the lead time on a building project, if you are starting a brand new vessel from scratch is at least 24 months because it has to be designed and then the construction period is about 14 months.

Our vessels, we are building the same vessels over-and-over-and-over again. So lead time on our vessels is about 14 months. We are also building out on the west coast and a smaller shipyard called [Zidel].

Tim Casey

If I can add to that also the combination of open I&D, where vessels phase-out, single hole vessels phase-out in a long lead time as you suggest in building new ones have worked together to keep supply demand in the niche flat-to-tight.

And we expect that to stay more or less the same until the phase-out period and in 2015. But that’s been an important aspect of the supply demand dynamic. And also, as Tim mentioned, the niche is characterized by smaller, privately held -- lot of smaller, privately held companies some of which have succession issues, some of which don't have the access to capital that we have. And that's one of the main reason we've been taking market share over the last several years.

Unidentified Audience Member

[question inaudible - mic inaccessible]

James Dowling

Got it. Are some of these smaller companies that we were referring to acquisition targets? And of course, they are.

Unidentified Audience Member

[question inaudible - mic inaccessible]

James Dowling

He is asking about the existing single hull fleet, if some of them can be retrofitted or do they just go on -- are they just scrapped?

We -- you have to look at each individual asset. In our fleet, we have -- since we've replaced the majority of our larger barges, in the large barge fleet we decided to retrofit one of our large barges instead of having it retired. So yes, they can't be retrofitted. In our smaller fleet we have three or barges that we're investigating the possibility of retrofitting instead of building to replace.

Tim Casey

We actually had four of the larger vessels phase-out between 2002 and 2004 and we were able to sell them into Canada for use in alternative transportation. So there weren't -- we haven't seen any turn to razorblades yet.

James Dowling

I will say all of our projections anticipate no residual value out of those vessels.

Unidentified Audience Member

What are the volume trends?

James Dowling

Excuse me.

Unidentified Audience Member

The volume trends?

James Dowling

Actually the growth in demand for our services -- we believe that the demand for our services is driven by the demand for petroleum products in the United States. The energy -- the Department of Energy predicts that the growth in demand is somewhere between 1% and 1.5% a year. We absolutely see that on our vessels.

A lot of the pipelines are full and a lot of that additional demand for petroleum products is being moved over to marine transportation because it is so hard and it takes such a long time to build the new products pipeline into the Northeast or into the areas that we operate.

If there's no more question, I'd like to thank everyone for attending today and we look forward to talking to some of you in the breakout meeting.

TRANSCRIPT SPONSOR

The Wall Street Analyst Forum, a leading conference host for public corporations to address analysts/portfolio managers and professional investors, sponsors four annual conferences in NYC for large, mid and small-cap companies. Seeking Alpha readers may attend Wall Street Analyst Forum conferences free of charge if you pre-register. See the full conference schedule and attendance information.

Read all Wall Street Analyst Forum conference presentation transcripts here.

To sponsor an investor conference presentation transcript please contact us.

Click to enlarge

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!