NuStar GP Holdings, LLC Management Discusses Q3 2012 Results - Earnings Call Transcript

Oct.25.12 | About: NuStar GP (NSH)

NuStar GP Holdings, LLC (NYSE:NSH)

Q3 2012 Earnings Call

October 25, 2012 10:00 am ET

Executives

Chris Russell - Vice President of Investor Relations

Curtis V. Anastasio - Chief Executive Officer, President, Director, Chief Executive Officer of NuStar GP LLC and President of NuStar GP LLC

Daniel S. Oliver - Senior Vice President of Marketing & Business Development - NuStar GP LLC

Steven A. Blank - Chief Financial Officer, Executive Vice President and Treasurer

Analysts

Brian J. Zarahn - Barclays Capital, Research Division

Cory J. Garcia - Raymond James & Associates, Inc., Research Division

James Jampel

S. Ross Payne - Wells Fargo Securities, LLC, Research Division

Selman Akyol - Stifel, Nicolaus & Co., Inc., Research Division

Andrew Ebersole

John Harzich - Aviva Investors Global Services Limited

Operator

Good morning. My name is Marley, 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, Third Quarter 2012 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Chris Russell, Vice President of Investor Relations. Sir, you may begin your conference.

Chris Russell

Thank you, Marley. Good morning, and welcome to our conference call to discuss NuStar Energy L.P. and NuStar GP Holdings, LLC's Third Quarter 2012 Earnings Results. With me today is Curt Anastasio, CEO and President of NuStar Energy L.P. and NuStar GP Holdings, LLC; Steve Blank, our CFO; and other members of our management team.

Before we get started, we would like to remind you that during the course of the 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. Our 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 website. Now let me turn the call over to Curt.

Curtis V. Anastasio

Good morning, and thanks for joining us today. During the third quarter, results in our pipeline transportation and storage segments continued to improve over last year as both segments benefited from additional EBITDA being generated as a result of the capital we've invested in internal growth projects the last couple of years. However, the asphalt and fuels marketing segment reported negative EBITDA of $14 million during the quarter, down from the $31 million of EBITDA earned in the third quarter last year. The segment continued to be negatively impacted by the large Brent to WTI and LLS to WTI spreads as well as continued weak demand for asphalt. While asphalt did generate $2 million of EBITDA during the quarter, the results were $7 million lower than the third quarter of last year. Lower gross margins, as a result of our asphalt refineries buying the majority of their crude oil based on Brent-related market prices and continued weak asphalt demand, were the main drivers for the decrease in EBITDA.

As you are probably aware, on September 28, we closed on the sale of a 50% interest in our asphalt operations and deconsolidated asphalt from NuStar's financial statements going forward. That transaction was the first step of our plan to change the strategic direction of NuStar by shifting away from the margin-based portion of our business to fee-based storage and pipeline. The San Antonio Refinery lost $8 million in EBITDA during the quarter, lower than the $4 million of EBITDA earned in the third quarter of 2011. Again wide LLS to WTI spreads negatively impacted the refinery's crude cost during the quarter. Losses were also incurred on hedges that remained in place on some of the refinery's production.

Our fuels marketing operations lost $9 million of EBITDA during the quarter, lower than the $19 million generated last year. A principal reason for the loss was we decided this quarter to reduce the scope of bunkering business by exiting 2 markets, Los Angeles and Portland, where results had been weak, and liquidating the related inventory.

In addition, our heavy fuel oil operations recognized a loss due to some timing differences on the company's hedged fuel oil inventories, which will be recouped as the related physical sales are realized. This inventory is 100% hedged, so the loss again is only a timing difference. We expect our remaining bunker businesses and heavy fuel businesses to continue to be good, profitable businesses for us for the rest of 2012 and beyond.

As I mentioned earlier, results in both our pipeline transportation and storage segments continued to improve. In the first week of July, our transportation segment began benefiting from the connection of our Corpus Christi to Three Rivers, Texas, 16-inch crude oil pipeline to a pipeline constructed by TexStar Midstream Services. These 2 interconnected pipeline systems are transporting Eagle Ford Shale region crude oil from Frio County in South Texas to Corpus Christi. Primarily as a result of the completion of this project, crude oil pipeline throughputs were 16% or 50,000 barrels a day higher than in the third quarter of 2011. That is why the transportation segment's throughputs were 6% higher compared to last year's third quarter even though refined product throughputs were close to flat.

Those increased throughputs, plus higher pipeline tariffs as a result of the 2012 FERC tariff increases, contributed to transportation segment EBITDA increasing to $56 million, $5 million higher than third quarter of 2011. Storage segment third quarter EBITDA of $74 million was $3 million higher than the third quarter of last year. The third quarter 2011 completion of a storage expansion project, plus the April 2012 completion of the unit train project, both at our St. James, Louisiana, terminal facility, as well as higher storage rates on new and existing storage contracts, all had positive impacts on the segment's EBITDA.

With regard to third quarter corporate expenses, G&A expenses were $25 million, $7 million higher than last year. Third quarter 2011 G&A expenses benefited from a lower compensation expense. In conjunction with the closing of the asphalt JV transaction, we recognized a loss of about $22 million primarily associated with the sale of inventory of the asphalt operations, which is included in other income and expense in our third quarter financial tables.

Interest expense for the quarter was $25 million, up $3 million from last year. Increased debt levels for the majority of the quarter prior to funding [indiscernible] program, higher borrowing costs associated with a new credit facility that closed in May and reduced savings from fixed to floating-rate interest rate swaps were the main reasons for the increase.

In September, we received $344 million in proceeds by issuing about 7.1 million common units of NuStar Energy. Those equity proceeds and the proceeds received upon closing the asphalt joint venture transaction were used for working capital purposes and to reduce outstanding borrowings under our revolver. As of September 30, 2012, our debt balance was $2 billion, down almost $500 million from September 30, 2011, and our debt-to-EBITDA ratio was 4.3x.

With regard to our third quarter distribution, NuStar Energy's Board of Directors declared our distribution of $1.095 per unit. That distribution will be paid on November 14. The Board of NuStar GP Holdings declared a third quarter distribution of $0.545 per unit, which is $0.05 per unit or 10% higher than the third quarter of 2011 distribution. Increased cash flows as a result of NuStar Energy's equity issuance in September allowed NuStar GP Holdings to increase the third quarter distribution. The GP holdings distribution will be paid on November 16.

As we move into the fourth quarter, our storage and transportation segments should benefit from the startup of 2 more internal growth projects. Earlier this month, we completed construction on a 55-mile, 12-inch pipeline that will transport Eagle Ford crude to the Corpus Christi area. This is the fourth project we've completed in the Eagle Ford Shale in the last 18 months, giving us now the ability to transport approximately 300,000 barrels per day of Eagle Ford crude to the U.S. Gulf Coast. We also expect to complete a 1 million barrel expansion project at our St. Eustatius terminal later this quarter. This will expand the storage capacity of St. Eustatius to close to 14 million barrels.

Fourth quarter EBITDA in the transportation segment should be higher than the $56 million earned in the fourth quarter last year. The increase is mainly a result of increased throughputs from our internal growth projects in the Eagle Ford Shale. Storage segment EBITDA for the fourth quarter should be comparable to fourth quarter of 2011. The EBITDA benefit from the 1 million barrel St. Eustatius expansion project should be offset by increased maintenance expense we're taking at some of our terminals during the quarter.

Effective September 28, the asphalt operations were deconsolidated from NuStar's financial statements. Future earnings results from the JV will be recorded within equity and earnings from joint ventures on the income statement. We expect total EBITDA for asphalt and fuels marketing to be positive in the fourth quarter. Our fuels marketing operations' EBITDA should be higher than last year's fourth quarter, while the San Antonio Refinery's fourth quarter 2012 EBITDA should be close to breakeven.

In terms of guidance for fourth quarter corporate expenses, G&A expenses are expected in the range of $29 million to $30 million; depreciation and amortization around $42 million to $43 million; and interest expense of $23 million to $24 million. 2012 full year reliability capital should be $45 million to $50 million, while our strategic capital should be around $400 million.

In the coming weeks, we're going to be providing more details on 2013 and 2014. For today's call, we're saying that 2013 strategic capital will be at least in the $225 million to $250 million range. However, we continue to pursue and have identified new strategic growth projects that are not included in this strategic capital spending guidance, as well as acquisition opportunities. If those projects were to come to fruition, our guidance for 2013 would increase significantly. On the pipeline transportation side of our business, we're pursuing additional projects in the Eagle Ford Shale region and other shale areas where our pipelines are located.

Last week, we launched a 30-day open season to assess shipper interest for the transport of crude oil from the Niobrara Shale near Platteville in Watkins, Colorado to Wichita Falls, Texas. This project, called the Niobrara Falls Project, could include the construction of 2 new crude oil gathering pipelines. In addition, 2 of NuStar's existing pipelines could also be utilized in the project. The 30-day open season will end on November 15. We also continue to pursue additional opportunities in the Eagle Ford that we should be able to publicly announce within the next few weeks. We continue to pursue storage expansion opportunities at both St. James and St. Eustatius.

So based on today's low-case strategic capital spending guidance for 2012 and 2013, we expect transportation segment EBITDA to be $10 million to $20 million higher in 2012 than in 2011, and then to increase another $40 million to $60 million in 2013. Storage segment EBITDA is expected to be $20 million to $30 million higher in 2012 when compared to 2011. In 2013, in this low case, we expect storage segment EBITDA to be comparable to the amount earned in 2012. 2012 EBITDA for asphalt and fuels marketing is expected to generate $10 million to $30 million of negative EBITDA for the year after excluding the $266 million noncash asset impairment recorded in the second quarter to write down the value of the company's asphalt refineries and other intangible assets, including goodwill.

In 2013, we expect EBITDA from asphalt and fuels marketing to be $40 million to $60 million higher than it was in 2012. So at this time, let me turn it over to the operator, so we can open up the call to Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Brian Zarahn with Barclays.

Brian J. Zarahn - Barclays Capital, Research Division

Appreciate the update on 2013 guidance. Just a little curious on the storage segment. It seems like the guidance has come down a little bit from last quarter's comments. Can you talk a little about that as correlated to CapEx in the segment?

Daniel S. Oliver

Yes. Brian, this is Daniel Oliver. Basically, the biggest item in that change is we've taken a fairly conservative approach to forecasting profit-sharing formula that we have on our unit train facility at St. James, where we make more money if the WTI-LLS spread is above a certain level. We've just not forecasted any benefit for that since it's hard to predict. But that was worth about $17 million to us in 2012. And then we had a couple of projects just delayed into later in the year that remove some of that EBITDA. But the main portion was the WTI-LLS spread.

Brian J. Zarahn - Barclays Capital, Research Division

Okay. That's helpful. And then I'm curious on your Niobrara Falls Project. How do you view the competitive landscape, given today's announcement of a competing expansion moving forward and there's also rail capacity coming online?

Daniel S. Oliver

Yes. We were certainly aware of that competing project. But this one's very different. It gets barrels down to the Gulf Coast instead of just to Cushing. Our responses, we've been very pleased with. We've got...

Curtis V. Anastasio

I'd say strong interest.

Daniel S. Oliver

Strong interest in the responses so far just a week into the open season. So it's moving along very well.

Brian J. Zarahn - Barclays Capital, Research Division

But given the project, if it moves ahead, will utilize quite a bit of existing pipe, I mean, is your service 6x to 8x EBITDA multiple for your average projects? Could it potentially be on the lower end of that multiple range?

Daniel S. Oliver

Yes. That's kind of what we look at in terms of projects. It's something in that 6x to 8x...

Unknown Executive

4x to 8x.

Daniel S. Oliver

4x to 8x, I think.

Unknown Executive

It should be on the lower end of that.

Daniel S. Oliver

Yes, it should be.

Brian J. Zarahn - Barclays Capital, Research Division

And last one for me, what was total CapEx in the third quarter?

Daniel S. Oliver

Total for the third quarter was $109 million.

Steven A. Blank

$109.7 million, it looks like.

Operator

And your next question comes from Cory Garcia with Raymond James.

Cory J. Garcia - Raymond James & Associates, Inc., Research Division

Just had a quick question regarding the San Antonio Refinery. Could you clear up how much and really sort of quantify the hedging losses in the quarter? Trying to get what sort of a real run rate would be for that refinery.

Daniel S. Oliver

The hedging loss was $8.9 million during the quarter.

Cory J. Garcia - Raymond James & Associates, Inc., Research Division

Okay. $8.9 million. So it was essentially breakeven in the quarter is the way to look at it on an EBITDA basis?

Daniel S. Oliver

Yes.

Cory J. Garcia - Raymond James & Associates, Inc., Research Division

Okay. Perfect. And then moving to your storage segment. Would you be able to provide any color on the rates that you're expecting from storage capacity coming up for renewal by year end? And then also looking into sort of the 2013 timeframe, how much of your existing capacity will actually be up for renewal as well?

Curtis V. Anastasio

Sorry, we had just a little problem on the question. But I think you said storage rates anticipated on storage that's coming up for renewal by year end, correct?

Cory J. Garcia - Raymond James & Associates, Inc., Research Division

Yes.

Daniel S. Oliver

We're not seeing any drastic change in the rates. I'll tell you that we have about -- I think about 1/3 of our storage contracts, 34%, 35%, are due for renewal in the next year. And then another 35% roughly -- we've got another 35% in the 1- to 3-year category, and then about 20% in 3 to 5 and still another 10% or 15% beyond 5 years. So we've got a lot of long-dated contracts out there. But the near-term stuff we're seeing renew pretty much at the levels they were originally contracted at.

Operator

Your next question comes from Lin Shen with HITE.

James Jampel

It's actually James Jampel from HITE. Did I hear you say that the G&A expense in the fourth quarter is actually going to be higher than it was in the third quarter?

Curtis V. Anastasio

No. What I was doing is comparing third quarter 2011 to third quarter 2012, and I said it was about $7 million higher. And that mainly resulted from -- we had a -- in the third quarter of 2011, we had a sharper decline in our stock price than we had experienced third quarter of 2012. So therefore, unit compensation expense results in the variance of that result. That was the principal reason in [indiscernible].

Unknown Executive

Yes. That was pretty much of the bulk of it there.

Curtis V. Anastasio

Just stock price moving. Chris has some...

Chris Russell

Yes. We did guide G&A cost to be up in the $29 million to $30 million range in the fourth quarter. And a good chunk of that is we did benefit in the third quarter again on the compensation expense from the unit price coming down. But we're not forecasting that [indiscernible] .

Curtis V. Anastasio

Much of the [indiscernible] is in that projection in the fourth quarter, yes. So it's all stock price [indiscernible], really.

James Jampel

I see. And the distribution coverage was $0.68 for the quarter. And I'm wondering, given what you've told us about what -- at least orally, what you think about 2013, I mean, when can we expect distribution coverage to get near $1 again?

Curtis V. Anastasio

Well, that's what we're -- we don't have any plans to reduce the distribution at all. We just went through all of this with the board. And that's part -- I absolutely -- what we're going to be covering, when I allude to a sort of a strategic press conference a few weeks from now, that is certainly one of the items that will be covered in detail for 2013 and 2014. That what you'll see from that is there's -- we increase coverage as time goes by. So we'll have more detail on that.

James Jampel

Do you think coverage will be $1 in 2013?

Curtis V. Anastasio

I'm going to wait for that call. But Steve, did you want to say something? I'm going to wait for -- to cover that in detail with you in that call that I just alluded to. There's nothing in that, you'll see, that leads to any reduction in the distribution. In fact, we're restoring the health of the storage so that we can begin to look at distribution increases. We're going to cover all the detail on the underlying assumptions behind that within the next few weeks.

James Jampel

Wait, I missed the second to the last sentence you said.

Curtis V. Anastasio

No, all I'm saying is what you'll see as part of that call is that we increase the distribution. [indiscernible] distribution coverage healthier as time goes by, and that we begin to look at distribution increases over the course of the period I'm going to cover in that call. And we'll cover all the underlying assumptions and how we get there.

Operator

[Operator Instructions] Your next question comes from Ross Payne with Wells Fargo.

S. Ross Payne - Wells Fargo Securities, LLC, Research Division

Steve, quick question for the EBITDA. Assuming that number, it does not add back $21 million in noncash inventory items and the mark-to-market of 6.5, is that correct?

Steven A. Blank

Yes. Well, certainly for purposes of our debt to EBITDA calculation, yes.

S. Ross Payne - Wells Fargo Securities, LLC, Research Division

Okay. But just trying to get to an EBITDA number, a cash EBITDA number, I need to add those back?

Steven A. Blank

Well, that's what I would -- again for purposes of calculating debt-to-EBITDA in our financial covenant with our bank group, those would be excluded from EBITDA. I mean, yes, you would add them back. And then we were at 4.28x at the end of the quarter.

Operator

Your next question comes from Selman Akyol with Stifel, Nicolaus.

Selman Akyol - Stifel, Nicolaus & Co., Inc., Research Division

A couple of questions, follow-up on the storage in terms of your outlook for 2013 -- and again, I appreciate the color. I think you said storage rates are looking to be flat sort of for your planning for next year or in line with where they are. Just thinking back to 3, 6 months ago, wouldn't we have been expecting to see modest increases on the storage rates? Is that basically flat and they're just weakened out in comparison to where we were maybe 6 months ago?

Daniel S. Oliver

I think it's a regional question. We have some markets, where we will expect to see some nominal increases, and some markets, mostly in Europe, where storage rates are a little bit softer. So there's kind of a mix of the 2. But I think overall, we'll see rates comparable to where they were this year.

Selman Akyol - Stifel, Nicolaus & Co., Inc., Research Division

All right. And then the second one, and again as we look to 2013, and again appreciate the initial guidance of the $40 million to $60 million at the fuels and asphalt, is there any way just to dissect that in terms of what you think the JV is going to throw off as opposed to what the marketing and refinery is going to throw off?

Steven A. Blank

Well, the JV, we've just completed our budget for NuStar Energy. We're going to have our first board meeting for the asphalt JV next week. And we'll be reviewing that budget with our partners on Wednesday at the first board meeting. But we've assumed in our budget no cash coming out of the joint venture. So we'll pick up equity in earnings or equity in loss below the line on NuStar's earnings. But we've assumed no cash distribution because we think demand will continue to be weak next year. And we're still, in that business, going to be affected by the WTI-Brent differential.

Curtis V. Anastasio

And as you probably heard, I just gave 2013 guidance on EBITDA from the asphalt and fuels marketing segment to be $40 million to $60 million higher than it was in 2012. So based on what Steve just said, the asphalt, compared to the rest of it, it's really the rest of it that's generating the $40 million to $60 million higher, which is the fuel oil, it's the bunker and the crude oil trading.

Operator

Your next question comes from Andrew Ebersole with National Life.

Andrew Ebersole

I was hoping you could repeat again your EBITDA forecast for both the storage segment and the transportation segment for 2013.

Curtis V. Anastasio

Yes. Well, we said, on the storage was that in 2013, we expect the storage segment EBITDA to be comparable to the amount earned in 2012. And that's what Danny's been saying. But in the pipelines, we expected a rather substantial increase. We expect the transportation segment EBITDA to increase another $40 million to $60 million in 2013 compared to 2012. And that's with -- again I emphasize and I know we're being a little cute on this call about this. That's sort of the low-case strategic capital expenditures guidance. So if you listen to what I'm saying, we have an imminent announcement here. We're planning to talk a lot more. And obviously, it's got -- a big portion of that is going to be on shale opportunities and it's mainly going to be in the pipeline. So there is the potential for substantial upside on the pipeline business when you talk about the next 2 years.

Steven A. Blank

Yes. There's nothing in there for the Colorado shale play for our capital or EBITDA for the next year. But there may well be, we'll wait for this open season to conclude and better form our thoughts.

Andrew Ebersole

I see. Now regarding the storage business, I'm looking at my notes. And am I right in that during the second quarter, after your second quarter call, you guys had indicated that your storage segment would be up $30 million to $50 million from 2012?

Curtis V. Anastasio

Yes. A big part of that is what Danny said about we've taken out now the assumption of the benefit at St. James of the spread, the crude oil spread that Danny was talking about. That could add substantial -- and in fact, based on current crude prices, it would add substantially to the storage segment. But we don't control that. That's a market that are outside of our control, so we decided to take that benefit out. And that's worth [ph] at least $17 million...

Unknown Executive

For a partial year.

Curtis V. Anastasio

Took out for a partial year that we took out. So most of that guidance changed because we've decided to take out the benefit of that spread, which we -- it's a benefit that we share with our partner on the unit train, EOG. And we [indiscernible] as of today, but we took it out for forecasting because we don't control it.

Andrew Ebersole

Okay. So that would mean it's still kind of a $10 million to $30 million differential from the original forecast and with fees essentially flat, can you just provide a little more color as to the difference in your forecast now versus 3 months ago?

Daniel S. Oliver

Well, again, it's almost $20 million just because we're taking this conservative approach on the WTI-LLS profit-sharing on the unit train. And then there's another $10 million and just some several different projects that were just delayed. The startup was delayed from -- at some point in 2013 to a later date, towards the back of the year.

Operator

[Operator Instructions] Your next question comes from the line of John Harzich with Aviva Investors.

John Harzich - Aviva Investors Global Services Limited

I just want to confirm that you're still targeting 4x leverage by year-end 2013.

Steven A. Blank

It would be -- did you say 4x?

Curtis V. Anastasio

4x by '13.

Steven A. Blank

By the end of '13. Yes, I think that's fine.

Operator

[Operator Instructions] And your next question comes from the line of Ross Payne with Wells Fargo.

S. Ross Payne - Wells Fargo Securities, LLC, Research Division

Yes. Just a follow-up to that. If you guys do achieve your 4.0x, Steve, any expectations on when and how you might get back into being fully IG?

Steven A. Blank

That's something we're going to work hard on, Ross. Starting with in December, right at the same time of your conference up there in New York, we've scheduled visits with the rating agencies to share the budget and our strategic plan with them. By then, we'll know more about the Colorado shale play and some of these Eagle Ford projects, which are going to factor in real big in terms of our capital spend over the next couple of years, which obviously is a concern of rating agencies, how much capital we spend. But we think these are terrific projects, so we fully embrace doing them. And we'll just have to have a discussion with all 3 of the agencies and see. But leverage is pretty manageable next year and the budget this year, as I mentioned -- or in September, we were at 4.28x. We'll probably be about 4.5x at the end of this year because we'll be spending a fair amount of capital in the fourth quarter. But then it will be coming down next year as EBITDA starts getting generated. We should have a pretty good pickup in EBITDA next year but much better in 2014, when all the projects come onboard.

Operator

[Operator Instructions] And at this time, there are no further questions.

Chris Russell

Thank you, operator. Once again, I'd like to thank everyone for joining us on the call today. If anyone has any additional questions, please feel free to contact NuStar Investor Relations. Thanks, and have a good day.

Operator

And that concludes today's conference call. You may now disconnect.

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