Valero Energy Partners LP (NYSE:VLP) Q2 2016 Earnings Conference Call August 4, 2016 3:00 PM ET
John Locke - Vice President, Investor Relations
Joe Gorder - Chairman and Chief Executive Officer
Donna Titzman - Director, Senior Vice President, Chief Financial Officer & Treasurer
Jeremy Tonet - JPMorgan
Kristina Kazarian - Deutsche Bank Securities, Inc.
Tristan Richardson - SunTrust Robinson Humphrey
Welcome to the Valero Energy Partners Reports 2016 Second Quarter Earnings Results Conference Call. My name is Vanessa, and I’ll 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.
I will now turn the call over to Mr. John Locke, Investor Relations. Sir, you may begin.
Thanks, Vanessa. Good afternoon and welcome to Valero Energy Partners earnings conference call for the second quarter of 2016. We thank you for joining us and appreciate your interest in the Partnership.
With me today are Joe Gorder, Chairman and Chief Executive Officer of our General Partner; Donna Titzman, our Chief Financial Officer and Treasurer; Mark Schmeltekopf, our Controller; Jay Browning, our General Counsel; Rodney Reese, Vice President of Pipelines & Terminals; and several members of the partnership’s senior management team. Rich Lashway, our President and Chief Operating Officer is unable to join us today due to a loss in the family.
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 financial 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 Karen Ngo or me after the call.
Now, I’d like to direct your attention to the forward-looking statement disclaimer contained in the press release. In summary, it says that statements in this 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 Joe.
Well, thanks very much, John. I’d like to just take a moment to highlight a few of our accomplishments for the quarter. First, we continue to operate our assets safely and reliably. We also successfully integrated the McKee Terminal into our portfolio, and finally on July 21, we announced the distribution increase of 7.4% for the quarter.
Now, while the commodity markets came under pressure in the quarter, we performed very well and maintained our focus on growing the Partnership through dropdown transactions from our sponsor.
As we look ahead, we remain focused on delivering solid operational execution and on delivering our targeted 25% annual distribution growth through 2017. The Partnership continues to grow and we’re spending more time evaluating growth opportunities that may be strategic to third parties and Valero in line with our stated interest to extend the supply chain around our refineries.
So with that, I’ll turn the call over to Donna to discuss our second quarter results.
Thank you, Joe. As noted in the release, second quarter 2016 operating revenues were $88 million compared to $60 million for the second quarter of 2015, an increased of 46%. Second quarter 2016 net income attributable to partners was $49 million and EBITDA was $64 million.
Net cash provided by operating activities and distributable cash flow were both $59 million. The total distribution declared to the second quarter of 2016 was $29 million, which resulted in a coverage ratio of over 2 times.
Pipeline throughput volume in the second quarter of 2016 was 851,000 barrels per day and terminal throughput volume was 2.1 million barrels per day. Capital expenditures attributable to the Partnership in the second quarter of 2016 was $3 million, consisting of $1.5 million for expansion and $1.5 million for maintenance.
We expect the Partnership’s capital expenditures, excluding potential dropdown to be approximately $19 million, of which $8 million is allocated to expansion and a $11 million is allocated to maintenance.
On the balance sheet, we ended the second quarter of 2016 with $67 million of cash and cash equivalents. We had $503 million of total liquidity, which includes $436 million available on the revolver. We had $684 million of debt and our debt to EBITDA ratio calculated in accordance with our debt covenants was 2.7 times.
Also, as Joe mentioned, in July, the Board of Directors of our General Partner approved a 7.4% increase in our cash distribution to $0.365 per unit for the second quarter of 2016. The distribution is payable on August 9, to unitholders of record as of August 1.
In summary, VLP is positioned very well. Our 2 time coverage ratio and our low leverage provide flexibility for growing the Partnership, while still delivering 25% annual distribution growth for 2016 and 2017.
As we have said before, to achieve this target for 2016 and 2017, we do not need to execute any drop nor do we need to access the capital markets. With solid operations, a strong and inflexible balance sheet, and our sponsor’s commitment to our long-term growth strategy, we are in great shape.
Operator, we have concluded our opening remarks, and we’ll now open the call to questions.
And thank you. We will now begin the question-and-answer session. [Operator Instructions] And we have our first question from Jeremy Tonet with JPMorgan.
VLO recently made an acquisition, the other half of the parkway pipeline. I was wondering if you would be in a position to kind of share anymore details to that particular transaction and/or maybe just kind of your plans going forward as far as if this could make sense to move into VLP?
Yes, Jeremy, you saw the release from Valero and you’re right that is a good acquisition for o. The way we think about a VLP is really it’s just another asset that goes into the hopper of potential droppable EBITDA. Due to the non-disclosure agreements that both parties have, we really can’t share any other details at this time.
Gotcha, great. Thanks for that. I’m just – thinking about dropdowns in general at this point, just wondering if you could share any updated thoughts on the philosophy as far as when it would make sense to do it going forward. Granted, you guys have a great balance sheet with leverage being so low, and you’re in such good position that you don’t need to do anything to hit your growth target. But just wondering if levering up a little bit more would make sense or just any updated thoughts there would be great?
Yes, so just regarding as you might have heard on Valero’s earning call last week, we really had no change in the strategy for dropdown. This year we’re continuing with our guidance of $500 million to $750 million. But you are correct. We do not have to anything this year or next to maintain that – our guidance on the distribution growth itself, so we’re solid there.
Great, thanks. And then just one last one, I think we’ve seen some of your peers kind of partner up become JVs with other midstream players that don’t enjoy quite as strong balance sheet as you guys. Where you could get in on the projects and that could add to organic growth potentially at the VLP level. Just wondering if this is the type of opportunity that would be interest to you, and do you see any opportunities to do stuff like that entering into JVs for projects under development?
Jeremy, this is Joe. And I would say the broad answer to that is yes. And I think I mentioned it on the VLO earnings call that we are looking at opportunities to do some different JVs. I mean the diamond pipeline is just kind of a classic case where we were able to get somebody who was a very good, solid partner and executes well and partner up with them on a material project. So that is the kind of transaction that we are working on and will continue to look at going forward.
Great, that’s very helpful. That’s it from me, thanks.
Thank you. Our next question comes from Kristina Kazarian with Deutsche Bank.
Hey guys. Good afternoon.
Hey, Joe, since we have you here today, maybe I’d love to get your thoughts on some of the best midstream opportunities over the next couple years around VLO’s assets and how you think about different types of projects that could help improve assets at the refining level as well.
All right, and that’s the fair question. And so without being specific what I would tell you is it in general what we’re focused on is extending the supply chain. And we’d like to do it both going into the plants and then moving out of the plants. And this may even take Valero to looking at terminalling and some more international markets.
But those opportunities usually take a long time to develop. And what we’ve done as an entity here is just made the decision that we were going to be disciplined as we went through the capital development, capital project development process, and maintained our gated process. And not really talk about specifics on projects until we got to the point where they were far enough through that gated process that we knew we were going to execute the projects.
We really think that’s the best thing for us. The other issue here is to some extent there’s a competitive situation going on in a lot of these cases and we’d just rather not tip our hand until we knew we were ready to go. So I know that’s not what you wanted to hear, but that’s the honest answer.
No, it’s very fair. A follow on to that would be if I think about the assets versus when you first came in as CEO, that is how do I think about the opportunity set for midstream assets to improve parent assets, like is it the same magnitude? Have you captured most of what you were hoping to do?
I would say what we’ve done, we certainly have. And then if you look at the way we look at these projects, a lot of these originate with the desire for Valero Energy to do something in particular, let’s just say it’s a – we want to move into a market and we need to build a pipe and get some terminalling assets. That’s what triggers the look at a particular project.
And then what we’ll do is go through the business case for that project, then if we can build it and let’s look at a 12% rate of return for VLP if we dropped it to VLP, and that makes sense and then energy can still earn a decent return on the project by paying VLP a 12% return, it’s usually a go. So it might be a little different than some other people look at it, but we always kind of start with Valero Energy and then back into it to make a good project for VLP.
Perfect, that’s helpful. Just a quick one for Donna, Donna, I know parent on their call talked about how the debt markets were looking a bit more open, and I think they were referencing the midstream debt markets. Can you just talk about maybe desire or willingness to cap them I know even though you might not need to?
So I would agree that the debt markets have improved certainly from the beginning of the year when the energy industry was under fire. So and again, we maintain what we’ve been saying all along, we will tap the debt markets when we have a need to do so. And so, currently, what we’re looking at in the dropdown guidance we’ve provided, we can meet that guidance without accessing the capital markets. So we are able to finance that without accessing the capital markets.
But as was noted on the Valero call, we continue to watch the markets and keep an eye on it.
Perfect. Thanks, guys.
And thank you. Our next question comes from Tristan Richardson with SunTrust.
Tristan, are you there?
Or perhaps you’re muted, your line is now open. Please go ahead.
Apologies. Afternoon, guys. Please give our best to Rich.
Certainly do that.
Joe, I know you mentioned on the VLO call just in the lower earnings environment at VLO you think about cash generating capabilities at the parent and how drops fit into that. Obviously, on the VLP story is very well understood that you don’t need to do drops to get to the growth rates that you’ve communicated. How do you think about drops in the context of the VLO portfolio?
Well, we’ve got that significant portfolio of assets that we can drop. And the great thing about where we sit with both companies right now is, we’re in a good place financially. I mean, Donna and Mike have us with leverage ratios that provide a lot of flexibility at Valero Energy, we’ve got a lot of cash.
And so dropping isn’t something that we need to do to provide free cash flow for Valero’s operations. And so we then say, okay, that being the case then let’s just go ahead and do what’s right relative to VLP. And I think, Donna spoke to our review of the capital markets today. I think we mentioned on the energy call, I don’t know, if we’re dealing with a new normal, or if we’re just dealing with a weaker market today.
And so having the flexibility to do the transactions, we’re planning to do with what we have today is just a great situation to find yourself in. And then not having the sponsor need cash is another real blessing for us. So anyway, we continue to look at it exactly the same way we have. We don’t feel a sense of desperation here by any stretch. We feel like we can be very patient, and we’ve got VLP well-positioned to meet our targets.
That’s great. That was it from me. Joe, glad to have you on. Thanks very much.
And thank you. We now have a follow-up question from Jeremy Tonet with JPMorgan.
Hey, thanks for taking another question here. Just want to touch on the outlook for VLO over the back-half of the year. It feels like – it seems like there is some turnarounds coming up. And I know VLP is well insulated with highly contracted volumes. But just wondering for the small portion that isn’t take or pay, could that create any kind of noise that we should be aware of in the back-half of the year for VLP?
Yes, Jeremy this is John. At the Valero level, we did disclose the Port Arthur turnaround, because it is big. It’s one that happens once every five years. It is coming up in the third quarter. So, and you mentioned that the contracts are send in such a way that they anticipate some level turnarounds you may see a blip here or there. But I think the way the volumes will roll through that ultimately any sort of deficiencies would get made up on the back-end with credits?
That’s helpful. Thank you very much.
And thank you. We have no further questions at this time. I will now turn the call back over to Mr. John Locke for closing remarks.
Okay. Thanks, Vanessa. We appreciate everyone for joining us today. Please contact Karen Ngo or me if you have any additional questions. Thanks.
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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