Valero Energy Partners (VLP) Q4 2015 Results - Earnings Call Transcript

| About: Valero Energy (VLP)

Valero Energy Partners LP (NYSE:VLP)

Q4 2015 Results Earnings Conference Call

February 04, 2016 03:00 PM ET

Executives

John Locke - Vice President, IR

Rich Lashway - President and COO

Donna Titzman - CFO and Treasurer

Analysts

Brian Zarahn - Barclays

TJ Schultz - RBC Capital Markets

Andy Burd - JPMorgan

Tristan Richardson - Suntrust

Ryan Levine - Citigroup

Michael Blum - Wells Fargo

Kristina Kazarian - Deutsche Bank

Operator

Welcome to the Valero Energy Partners Reports 2015 Fourth Quarter Earnings Conference Call. My name is Vanessa, and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. And later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

And I will now turn the call over to Mr. John Locke, Vice President of Investor Relations. Sir, you may begin.

John Locke

Thank you, Vanessa. Good afternoon, and welcome to Valero Energy Partners’ earnings conference call for the fourth quarter of 2015. We thank you for joining us and appreciate your interest in the Partnership. With me today are Rich Lashway, our President and Chief Operating Officer; Donna Titzman, our Chief Financial Officer and Treasurer; Jay Browning, our General Counsel; Mark Schmeltekopf, Our Controller, and several 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 information on our business and reconciliations for non-GAAP financial measures. If you have any questions after reviewing the tables, please feel free to contact me or Karen Ngo, 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. Many factors could cause actual results to differ from our expectations, including those we’ve described in our filings with the SEC.

Now, I’ll turn the call over to Rich for a few opening remarks.

Rich Lashway

Thanks John, and good afternoon, everyone. The fourth and all of last year were excellent for VLP. For the year, we operated extremely well and we achieved outstanding health and safety performance. We acquired over $1 billion of assets from our sponsor Valero Energy and grew distributions at an annual rate of 27%. In November of last year, the Partnership successfully completed its first equity offering subsequent to its IPO, despite the choppy markets.

We also expanded our revolving credit facility from $300 million to $750 million. The increased trade facility and proceeds generated from the offering further strengthened the Partnership’s balance sheet. We finished the quarter with a peer leading coverage ratio of 2.33 times that positions us well to achieve our 25% annual distribution growth plan for 2016 and 2017. With financial flexibility and the continued strong support of our sponsor, we intend to grow our stable fee-based long-term contract business, primarily with dropdown asset. These assets are high quality, support Valero’s operations and do not change the risk profile of the Partnership.

Now, I’ll turn the call over to Donna to discuss our fourth quarter and full year 2015 financial results.

Donna Titzman

Thank you, Rich. As noted in the release, fourth quarter 2015 operating revenues were $79 million compared to $34 million for the fourth quarter of 2014, an increase of 132%. For 2015, operating revenues were $244 million compared to $129 million for 2014, an increase of 89%. Fourth quarter 2015 EBITDA was $57 million and distributable cash flow was $53 million. The total distribution declared for the fourth quarter of 2015 was $23 million resulting in a coverage ratio of 2.33 times.

For 2015, EBITDA was $171 million and distributable cash flow was $162 million. Coverage ratio for 2015 was 2.06 times. Pipeline throughput volume in the fourth quarter of 2015 was 907,000 barrels per day and terminal throughput volume was 1.8 million barrels per day.

Capital expenditures attributable to the Partnership in the fourth quarter of 2015 were $5 million, consisting of $3 million for expansion and $2 million for maintenance. 2015, capital expenditures attributable to the Partnership were $8 million consisting of $4 million for expansion and $4 million for maintenance. For 2016, we expect the Partnership’s capital expenditures excluding potential dropdown to be approximately $16 million of which $11 million is allocated to maintenance and $5 million is allocated to expansion.

Turning to the balance sheet. We ended the fourth quarter of 2015 with $81 million of cash and cash equivalents. We had $656 million of total liquidity, which includes $575 million available on the recently expanded revolver. We had $546 million of debt, including $1 million of capital leases. Our debt-to-EBITDA ratio calculated in accordance with our debt covenants was 2.5 times.

In November of last year, we successfully completed a 4.25 million unit equity offering that generated a $197 million of growth proceeds. We used a $185 million of the proceeds to pay down a subordinated loan with our Partners. Last week, the Board of Directors of our general partner approved an increase in our cash distribution for the fourth quarter of 2015 to $0.32 per unit. The distribution is payable on February 11th to unitholders of record as of today.

In closing, we have maintained a strong financial position for VLP. Our low leverage affords us flexibility to fund future growth with quality asset from our sponsor that do not change the risk profile of the Partnership. We believe our peer leading coverage ratio positions us very well to deliver 25% annual distribution growth for 2016 and 2017.

Operator, we have concluded our opening remarks. And we’ll now open the call to questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] We have our first question from Brian Zarahn with Barclays.

Brian Zarahn

Good afternoon. A solid quarter, I just had a question on pipeline volumes, anything -- any additional color you can provide on the change sequentially, year-over-year?

Rich Lashway

The color I can provide -- this is Rich speaking, that you’re going to see depending on the performance of the refinery, you’re going to see some up and down on the volumes, both the crude and the product side. So, there is nothing structurally difference with the exception of the volumes that you look at, at Lucas. So, when we did the IPO, we knew we had another project at the refinery that would be coming on line. So, when we set our minimum volume commitments and our tiered structure, when the new dock came on line, I think it was the first half of 2014, you would see a decrease in the volumes but not a substantial impact to the revenues. And to counter that impact, we’ve just commissioned our -- we had a small growth project down in Port Arthur, to connect the Seaway pipeline into the Lucas terminal. So, you should see some additional volumes coming in through there and generating additional revenues.

So that’s really structurally the only thing that’s changed. The other stuff would just be noise that you see quarter-to-quarter.

Brian Zarahn

I appreciate the color on the pipeline volumes. Just turning to dropdowns, is it still a reasonable assumption that 2016 will be similar to 2015 level?

Rich Lashway

That’s the message that we’ve been sharing with everybody. At the Energy call last week, Mike talked about still targeting a $1 billion of dropdowns knowing that the markets are little volatile or choppy. And we’ll just stick to our strategy of $1 billion dropdown but keep an eye on the market as we go.

Brian Zarahn

In terms of the cadence, would it also be reasonable to have it structured, somewhere last year with two transactions rather than just one large one?

Rich Lashway

Yes, I don’t know, there was given any guidance there. We’re just preparing the dropdowns and just keeping an eye on the markets here.

Brian Zarahn

And then on -- obviously you have a good inventory that provides a lot of run way for your high growth expectations. But these -- do you view this current market -- or how do you view this current market environment as an opportunity to add to your dropdown inventory?

Rich Lashway

There has been a huge pull back in the market. So, your eyes get real big. But again, at the LP level, we’re still not of a size to go out, if you’re talking about doing M&A. But, we are still very-very interested in keeping an eye on the market. Valero hasn’t reached the size again where we can do a transaction on our own. So, we’d have to work in tandem with Valero and then probably look at dropping something down from an acquisition to the LP. But as we said before, we’ve remained committed to the dropdown strategy of growing through dropdowns, and we’re keeping eye on the M&A market. But it’s got be good for Valero and good for Valero LP. And we said that we’re not going to do step-outs that would change the growth profile or the risk profile of VLP.

Brian Zarahn

And then, any update on your progress towards your investment grade credit rating?

Donna Titzman

So, our goal is still to be investment grade. And we will get that rating once we are ready to issue public debt. And again, not to repeat ourselves, the markets have been quite choppy for MLPs lately. So, we are monitoring situation and trying to find an appropriate time to do that.

Brian Zarahn

And last one from me on maintenance CapEx guidance for this year. Does that incorporate dropdowns or does that exclude dropdowns?

Rich Lashway

That excludes dropdowns, that’s for our existing asset base.

Operator

Our next question comes from TJ Schultz with RBC Capital Markets.

TJ Schultz

So, you did the equity in November. As we look at the dropdowns this year, just how should we think about the debt and equity funding mix or maybe if you could just say where you would target debt leverage to be by the end of this year?

Donna Titzman

So, we’re still managing in that debt to EBITDA range of 3, 3.5 times and no more than 3.5 on a long-term sustained basis.

TJ Schultz

And then, I guess just a follow-up on the pipeline volume question. When was the Seaway connection into Lucas complete? And then, the commentary I think was that you were able to keep revenue intact despite the lower volumes. If you could just expand on that a little bit more. I don’t think I fully understood that answer. Thanks.

Rich Lashway

So, just to repeat the answer here. So, when we did the IPO, we knew that we had another project for the refinery to build another terminal to offload the crude. So, when we valued this and we set our minimum volume commitments, it was with the knowledge that this other dock was going to come on line. So, we have our minimum volume commitment but we knew we were doing in excess of that. And so, we have a tiered structure so that when the volume shifted from Lucas to Thai dock, [ph] it would not be a big financial impact because you’re going to be in the high tier, if you will. And so, we baked that in at the IPO. Subsequent to the IPO, and I am going to tell you it was really just completed really within the last week, the connection into the Seaway pipeline whereby Lucas now can receive barrels from MarketLink and also from Seaway, which is the Canadian barrels into the Port Arthur area. So, we will see those volumes ramp up as that volume grows. But the connection was just recently made. And so, the way it’s set up is that the fee that we charge on the minimum volume commitment, will increase a bit to reflect the capital that’s invested in. And I’ll tell you roughly about $1 million improvement on annual basis.

Operator

Our next question comes from Jeremy Tonet with JPMorgan.

Andy Burd

It’s actually Andy here for Jeremy, congratulations on another strong quarter. Regarding the parent company expansion at the Corpus refinery, is it fair to assume that that will increase throughputs and cash flows through that terminal that VLP owns in the first quarter? And was that impact, if any, baked into the $75 million of EBITDA that you quoted at the time of the dropdown?

Rich Lashway

That was all baked in at the time of the dropdown.

Andy Burd

Okay, and…

Rich Lashway

We knew that that was coming on line and it was baked in.

Andy Burd

And I guess a logical follow-up is the Houston alky project that was just approved at the parent company. Do you expect any material contribution to cash flows at the Houston terminal once that’s online?

Rich Lashway

I haven’t looked at that.

John Locke

Andy that was just approved; it’s a long way out. I think that’s something that we would take a look at. Obviously, it would be a contributor to the refinery’s EBITDA generation. And so we would just take a look at that.

Rich Lashway

Yes, I just don’t know the net balance of product, so….

Andy Burd

Okay. But if on -- net-net if there was an increase of throughput in or out potential there for the terminal to capture some additional throughputs?

Rich Lashway

That’s correct.

Andy Burd

And I guess the final question is regarding growth CapEx. Clearly, you’ve stated multiple times in the past that you are too small to initiate those projects. Is there a magic number that you have in mind or will it really just -- you’ll know when the project comes about because it’s associated with your existing infrastructure or it’s the right size, or I guess just kind of a -- as we look forward when there might be some organic growth within the Partnership of materiality?

Rich Lashway

Right now, it’s small $10 million, $15 million stuff that we’re doing. I mean, it’s almost you know when you know because you look at the project, you look at the incubation time and how immediate are the cash flows. So, you cannot fit all that in within a certain timeframe then it makes sense. So, it’s not a drain on your cash flow. So, it is really how long does it to take to complete the project.

Andy Burd

That makes sense.

Rich Lashway

Right now, it’s a bit early.

Andy Burd

And then final question on M&A. I think some of your peers, we’ve seen opportunistically take advantage of cheap prices for crude by lowering terminals or certain upstream assets that helped the parent refiner source crude. Is that something that you are more actively looking at now that there are some certainly depressed multiples for those assets?

Rich Lashway

I wouldn’t say more actively, I mean, we’re always actively looking at strategic opportunities. And with the big pullback, I think you’re seeing some better pricing. So, yes, we’re looking at either participating in some new projects or buying into a project that has strategic value to Valero’s refinery. So, I think there is bit more opportunity today than there had been in the past.

Operator

Thank you. Our next question comes from Tristan Richardson with Suntrust.

Tristan Richardson

Just curious, Rich, on the distribution growth guidance for ‘16. Is that dependent on what you’ve generally targeted for dropdowns this year?

Rich Lashway

No. We set a strategy at the IPO and we’re executing on that. And the dropdowns are something that really gets driven by Valero.

Tristan Richardson

That makes sense. Because it does seem given your coverage, you have some flexibility to grow the distribution whether or not the market allows transactions or not but I was just checking to see if you thought about it at the same way.

Rich Lashway

Yes.

Tristan Richardson

And then I guess secondly, on the Diamond Pipeline acquisition at Energy. I’m curious, is there still more work left to go on that project or is that largely complete?

Rich Lashway

There is work that needs to continue. I mean, we’ve done a lot of work. Construction has not started. We’re looking at a second half of 2017 for an in-service date.

Tristan Richardson

Go ahead, sorry.

Rich Lashway

This is just a long-lead project. But going well.

Tristan Richardson

Okay, great. And then I guess, presumably this could be included in the dropdown inventory, and is it just generally the plan to develop it upstairs at Energy?

Rich Lashway

That’s the plan. Yes.

Operator

Thank you. Our next question comes from Ryan Levine with Citigroup.

Ryan Levine

A couple of questions around the McKee expansion; curious to how that impacted volumes for the quarter and your outlook for ‘16, both on crude and refined project side?

Rich Lashway

So, McKee expansion, those incremental barrels are coming in on third-party assets. So, from an LP perspective, we won’t benefit from that. And from a product standpoint, we only have the interest in the McKee to El Paso line, a third interest in that. And that line has that capacity. So, it really doesn’t appear that there is an opportunity to benefit at the LP level from the expansion.

Ryan Levine

And then there was talk on the Energy call around potentially sourcing crude seaborne in -- just generally, I was curious if that impacted your Corpus Christi assets and if that has any impact to your terminal assets?

Rich Lashway

So, if you think about it, it’s kind of closed system. So whether or not those barrels come in by pipe through the terminal or come in waterborne across the docks through the facility, we’d be the net beneficiary. So, it wouldn’t have an adverse impact on the LP whether it’s pipe or waterborne.

Ryan Levine

And then switching gears to financing assumptions, you extended the revolver here. Are you seeing a tightening on the term market for VLP?

Donna Titzman

We really haven’t attempted to access that market. I mean obviously we were able to raise the revolver capacity from 300 to 750 that was a well-received transaction. And so, I really don’t have an answer for you on a term loan [ph] basis because we haven’t attempted that.

Ryan Levine

But near term dropdowns aren’t contingent on the debt financing market that you feel at comfortable in funding them, both with your revolver and cash on hand and potentially public or sponsor equity?

Donna Titzman

We’re really not going to talk about any particular financing plans or the drops. But yes, we still like have -- we have cash, we have liquidity today and we think we have access to the capital markets, you may not like the way they look right now. So, we’re going to be patient and we’re just going to monitor the progress of those markets.

Operator

Our next question comes from Michael Blum with Wells Fargo.

Michael Blum

Hi, thanks. My questions were addressed. Thank you.

Operator

Our next question comes from Kristina Kazarian with Deutsche Bank.

Kristina Kazarian

Donna, just asking a follow-up on the next drop, would you guys -- I mean you have a lot of revolver capacity, not to hit the whole target you guys have there. But would you consider debt financing in the next drop in its entirety or does the drop needs to be associated with an equity component?

Donna Titzman

So again, I won’t give you any particular financing plans here. But we do have 2.5 times debt to EBITDA, so there is obviously room there and we have liquidity on our balance sheet today. And as far as equity to the sponsor; that’s the Valero decision, very drop dependent. So, we won’t have any guidance for you there.

Kristina Kazarian

And Rich, you said earlier in your comments, growth based primarily on dropdown assets. Should I be reading into anything there?

Rich Lashway

Other than we’re targeting $1 billion for 2016 that Mike mentioned on his -- on the Valero Energy call. But there was no hidden agenda in there.

Kristina Kazarian

So, nothing beyond drop, not just primarily meaning there could be something else as well.

Rich Lashway

I guess that just leaves it open.

Kristina Kazarian

And then recently we saw one of your peers’ terminal distribution guidance. Can you guys talk about like the same city of your current guidance number and how stressed the capital markets would need to be in order for you guys to may be paused or trench the growth rate or pause on the dropdown plan?

Donna Titzman

Our distribution growth target is still the 25%. And I think we have noted a few times, we can deliver that growth without any additional drops in 2016.

Kristina Kazarian

And then on the latter point of doing drops in ‘16, if the markets aren’t friendly as you guys alluded to many times, they’re very choppy; would you maybe think about pushing that off or how do I -- what is the thought process there?

Donna Titzman

It’s a little early in a year to change our plan. We’re sticking with our $1 billion. And as the year progresses, we will again watch the markets and will make changes to that if we felt it’s necessary. But not in that position right now.

Kristina Kazarian

Is there like a implicit cost number that we should be thinking about on the debt or equity side that would be too high or just some way to frame it for us?

Donna Titzman

No, we don’t have anything like that to provide you right now.

Operator

Thank you. We have no further questions. At this time, I would like to turn the call back over to Mr. Locke for closing remarks.

John Locke

Great. Thanks Vanessa. Well, we appreciate everyone joining us today. Please contact me or Karen Ngo, if you have any additional questions.

Operator

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

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