NuStar Energy L.P. (NYSE:NS) Q3 2022 Earnings Conference Call November 3, 2022 10:00 AM ET
Company Participants
Pam Schmidt – Vice President of Investor Relations
Brad Barron – President & Chief Executive Officer
Tom Shoaf – Executive Vice President & Chief Financial Officer
Danny Oliver – Executive Vice President, Business Development & Engineering
Conference Call Participants
Theresa Chen – Barclays
Gabriel Moreen – Mizuho Group
Michael Blum – Wells Fargo
Operator
Ladies and gentlemen, thank you for standing by and welcome to the Q3 2022 NuStar Energy Earnings Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions]
I would now like to turn the call over to your host Pam Schmidt, Vice President of Investor Relations. You may begin.
Pam Schmidt
Good morning and welcome to today’s call. On the call today are NuStar Energy L.P.’s Chairman and CEO, Brad Barron; and our Executive Vice President and CFO, Tom Shoaf, as well as other members of our management team.
Before we get started, we would like to remind you that during the course of this call, NuStar management will make statements about our current views concerning the future performance of NuStar that are forward-looking statements. These statements are subject to the various risks, uncertainties, and assumptions described in our filings with the Securities and Exchange Commission. Actual results may differ materially from those described in the forward-looking statements.
During the course of this call, we will also refer to certain non-GAAP financial measures. These non-GAAP financial measures should not be considered as alternatives to GAAP measures. Reconciliations of certain of these non-GAAP financial measures to US GAAP may be found in our earnings press release and if applicable additional reconciliations may be located on the Financials page of the Investors section of our website at nustarenergy.com.
With that, I will turn the call over to Brad.
Brad Barron
Good morning. Thank you all for joining us today. I’m pleased to report that we once again delivered a quarter of solid results. After taking into account the impact of our sale of the Eastern US terminal facilities in late 2021 and our sale of Point Tupper in April, we generated 6% higher EBITDA in third quarter 2022 than adjusted EBITDA in third quarter 2021.
Our pipeline segment EBITDA was up in the third quarter, thanks in large part to the continued strong performance of our Permian Crude System. We’re happy to report that our Permian Systems volumes hit another high in the third quarter, ending in a record-breaking average of 580,000 barrels per day. That’s up 15% over the same quarter last year and up 11% over second quarter of 2022.
The steady strong volume growth we’ve seen in 2022 is a testament to our producers and the quality and strength of our acreage. We now expect to exit 2022 around 600,000 barrels per day, which is about 15% above our 2021 exit.
Moving on from the Permian to our refined products pipeline systems. Even though a planned turnaround at the customer refinery reduced our third quarter volumes compared to third quarter of 2021, our volumes continue to track at pre-pandemic levels, reflecting the strength of our assets and the stability of demand in the markets we serve across the Mid-Continent and throughout Texas.
Our Northern Mexico refined product system also continued to perform well, with third quarter throughput up 26% over the same quarter last year. And our Valley refined products pipeline throughputs were also up. The third quarter 2020 throughput, 14% above third quarter of 2021.
Moving on to our West Coast renewable fuels network. Our West Coast region’s contribution to revenue continues to grow in 2022 from two more renewable fuels projects we brought into service at the end of last quarter. These projects increased our renewable diesel storage capacity and augmented our ethanol transportation logistics capabilities at our Stockton, California facility.
Those projects should further solidify the significant role that NuStar plays in facilitating California’s transition to low-carbon renewable fuels, where we already handled 5% of the state’s biodiesel, 9% of the ethanol, 19% of renewable diesel and 77% of all of the sustainable aviation fuel sold in the state.
Moving on to our Corpus Christi Crude System. Our throughputs averaged over 341,000 barrels per day in the third quarter. That’s above our MVCs for that system and we’re encouraged by the continued growth in October, as our average volumes rose to almost 390,000 barrels per day for the month.
And with that, I’ll turn the call over to Tom for some more details on our results.
Tom Shoaf
Thanks Brad, and good morning everyone. As Brad mentioned, on an apples-to-apples basis comparing the third quarter 2022 EBITDA, with the adjusted EBITDA generated from those same assets in the third quarter of 2021. In other words, excluding the assets we sold in 2021 and earlier this year, our third quarter EBITDA was up $9 million. Our third quarter 2022 DCF available to common limited partners was $93 million and our distribution coverage ratio to the common limited partners was 2.12 times.
Turning to our segments. In the third quarter 2022 our Pipeline segment generated $155 million of EBITDA, up $10 million or 7% over 3Q 2021 adjusted EBITDA of $145 million, largely from the strong performance of our Permian crude system, as Brad described earlier. Higher contributions from our Permian Crude System were partially offset by a turnaround at one of our customers’ refineries in our Central West system and lower volumes on our ammonia system due to a planned maintenance program.
Turning next to our storage segment. Our EBITDA for 3Q 2022 was $41 million, which is about $10 million lower than 3Q 2021 adjusted EBITDA excluding divested assets. That decrease was due to customer transitions and required tank maintenance at our St. James terminal and an amendment and extension of our customer contract at Corpus Christi North Beach terminal.
Our West Coast region’s revenue continued to grow up 20% over 3Q 2021. And for the Fuels Marketing segment EBITDA was $9 million, up $8 million from 3Q 2021 largely due to strong margins. I’m also pleased to report on our continued progress in reducing our debt and building our financial strength and flexibility.
At the end of the third quarter 2022, our total debt balance was $3.1 billion and by continuing to pay down our revolving credit facility balance last quarter, we increased our facility availability to $993 million, the facility’s $1 billion capacity. Thanks to the progress we have made in reducing our debt balance, our interest expense in 3Q 2022 was $1 million lower than 3Q 2021 despite higher interest rates on our variable rate debt.
We ended the third quarter 2022 with a debt-to-EBITDA ratio of 3.79 times, which has substantially improved compared to 3Q 2021 when our metric was just above four times and also improved from last quarter’s 3.93 times. For the full year 2022, we expect to generate adjusted EBITDA in the range of $700 million to $730 million.
Moving to strategic capital. We now plan to spend $105 million to $125 million in 2022. We expect to allocate almost $60 million to growing our Permian system and plan to spend about $10 million to expand our West Coast renewable fuels network.
Turning to reliability capital. We now expect to spend between $30 million and $40 million on reliability in 2022.
Now I’ll turn the call back over to Brad.
Brad Barron
Thanks Tom. This time last year, as the world economy was rebounding strongly from 2020 lows, we are expecting 2022 to bring some inflation, some price volatility and some continued supply chain challenges. Directionally, we are right on each of those points. But instead of some inflation and some volatility, we’ve seen all both hit record levels in 2022, and I’ll see interest rates increase sharply, as the Fed has attempted to put the brakes on rising prices.
While the global economy and financial markets have had a bumpy ride this year, 2022’s outsized volatility has served to highlight the stability and strength of NuStar’s business.
This year, we’ve continued to safely and reliably store and transport essential energy, energy that fuels our travel, moves our food to supermarkets, increased crop yields in our nation’s breadbasket and has transformed in a ubiquitous plastic that makes modern life possible. We have continued to generate stable solid results.
We’ve also been executing on the optimization initiative we told you about earlier this year, focusing on paying down debt, high-grading our capital spending and scrubbing every dollar of CapEx and expense.
In August, we told you we had identified almost $60 million in reductions across 2022 and 2023. And I’m happy to report that total is now up to almost $100 million. We have successfully reduced our full year 2022 capital spending and expenses by over $40 million and our total 2023 spending expenses by over $50 million.
Thanks to our optimization initiatives, we’ve been able to mitigate the impact of 2022’s historic inflation and to maximize our free cash flows. And we’ve also significantly improved our debt ratio over the course of the year as Tom mentioned.
Because of the meaningful progress we’ve made we’re now positioned to accelerate our time frame for addressing the Series D preferred. As we talked about earlier this year we had originally intended on starting on the Series D, in July of 2023 when those became redeemable and then wrapping that up in the 2025, 2026 timeframe.
We’re now in discussions with the holders to repurchase as much as one-third of the Series D by the end of this year and we plan to redeem another third in 2023 and complete the redemption in 2024 several years ahead of schedule.
This redemption is another important step in our ongoing optimization which will meaningfully increase our free cash flow over the next few years. And while we now plan to move up our schedule we’re targeting holding our debt metric down around four times.
Before we turn to questions, I can’t close without mentioning Bill Greehey. As we announced last week after a long and incredibly distinguished career Bill has stepped down as NewStar’s Chairman of the Board. I really do not have the words to adequately convey the profound gratitude and affection that we all have for him.
Bill is truly a pioneer and a legend in the energy industry as well as in the San Antonio community and the communities all across the globe where Valero and NuStar have operated under his leadership.
I’ve had the privilege of working for Bill for over 20 years, and I’m deeply grateful for the opportunity to learn from him and bear witness to his vision values and leadership. He’s truly a great man.
Here at NuStar, we’re thankful to be able to carry forward the strong corporate culture Bill established. Because of Bill we have an ethical culture that prioritizes safety environmental responsibility fiscal stewardship and giving back to our communities.
We’re committed to working hard to demonstrate our gratitude to Bill, by nourishing the corporate culture he built and by generating long-term stable value for all of our unitholders.
And with that, I’ll open up the call to Q&A.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question comes from Theresa Chen with Barclays. Your line is open.
Theresa Chen
Good morning. Thank you for taking my questions and congratulations Brad on stepping into the Chairman role. I wanted to first touch on your growth in the Permian. Really strong result this quarter and strong look to the exit rate for the year.
Curious to hear, what you are seeing across your footprint given the public comments about moderation in growth from certain producers in the area? And I would love to hear what you’re hearing on the ground from your customers?
Danny Oliver
Yes. Theresa, this is Danny Oliver. We continue to see really what we’ve seen for the last couple of years, still very active private. The public is being holding back a little bit more and being a little bit more disciplined. But a lot of this growth we’ve seen still coming from the private sector.
Theresa Chen
Got it. And then turning to your refined products assets. Clearly there’s been a lot of volatility in the macro data as far as domestic demand goes. And within your own results, there’s some apples to oranges comparisons given the divestitures of assets as well as customer turnaround activity. I’d be curious to hear the latest on what you’re seeing as far as demand by region?
Danny Oliver
Yes, we continue to see across our system refined product demand at or above pre-pandemic levels. And I’ve spoken with some of our large refinery marketer customers who see the same thing across their footprint, which is wider than ours. So it looks to us like demand is very healthy.
Theresa Chen
Great. And lastly on the Series D preferred retirement, great to see that you’re accelerating the time line. And just as a matter of modeling and housekeeping, when we think about the face value and the prepayment penalty schedule for the first three years, are we looking at about a cash outflow of roughly $246 million in the fourth quarter of this year?
Tom Shoaf
Yes. We’re still in negotiations with the holders of that and the discussions on premiums and whatnot. So we’ll have more detail I think as we get a bit closer to that here in the fourth quarter.
Theresa Chen
Thank you very much.
Operator
One moment for our next question. Our next question comes from Gabriel Moreen Mizuho Group. Your line is open.
Gabriel Moreen
Hey, good morning, guys. Quick question for me just maybe a two-parter on the storage outlook. Can you just talk maybe a little bit in terms of the storage results this quarter? How much was the new rates on the new contract at Corpus versus I guess as base business effects versus that sounds like you had some one-time turnarounds. I’m just kind of curious what your expectations are kind of for 4Q and going forward in the segment relative to what you reported in 3Q?
Danny Oliver
Yes Gabe. This is Danny Oliver again. So I think what we’re seeing is continued growth on the West Coast being offset a bit when you look at it versus the same quarter last year. One on the reset on the Trafigura contract in Corpus, lower MVCs there and slightly lower prices. And then we also had the volumes that you mentioned that were off on the ammonia line due to some planned maintenance – of storage. Okay I’m sorry.
So then it’s St. James. We’re seeing some headwinds at St. James due to the market structure and volatility, but luckily since we’ve sold so many terminal assets in the last couple of years, that’s really the only storage facility we have left that’s susceptible to the market structure influences.
Gabriel Moreen
Thanks, Dan. And then maybe if I could pivot to some of the cost and capital savings. You’re spending the same amount as you were last quarter on West Coast on Permian. So maybe you could just give deeper sense of where some of these cost savings are coming from? And also the outlook for Permian spend next year? Is that going to be similar potentially to this year?
Brad Barron
Yes. So with regard to Permian spend it will be similar to slightly less, probably than we have this year. So the way that Permian’s developed is we now have kind of tentacles all out through our acreage, and the producers are coming in behind those. So that reduces some of the capital cost there but we’re still expecting the volumes to go up. In terms of other focuses for our spending, you’ll see us spend some out on the West Coast.
Yes. So in terms of other savings, talking about capital savings essentially, what we’ve done — one of the things I want to emphasize, is that we are not cutting back on maintenance CapEx. It’s very important that we maintain our assets and they remain safe and reliable. But what we are doing, is high-grading our portfolio of projects. So, things that we might have considered in the past have gone to the cutting room floor and we’ve got plenty of high-quality projects to do.
Gabriel Moreen
Thanks, Brad
Operator
[Operator Instructions] Our next question comes from Michael Blum with Wells Fargo. Your line is open.
Michael Blum
Thanks. Good morning, everybody. I wanted to just ask another question on the preps. I saw your intention on your goal to keep your leverage at 4 times and obviously, below that right now. So, when we look at your ability to fund the prep should we assume that some of that is going to be debt funded. And so therefore, your leverage will pick up a tiny bit higher next year?
Tom Shoaf
Yes, that’s right. We worked real hard to get our leverage down to a point that we have enough headroom to be able to take out the Ds. That’s been the plan all along. And I think — to reiterate, I think that’s a testament to what we’ve been able to achieve over the years in terms of delevering and optimization. And all of those things have played in, to increasing our free cash flow and getting us to a point where we can accelerate that by a couple of years, because before we were thinking we had more of a time frame of 2026 out there. And we even thought at one point, that wasn’t even aggressive. So to be able to move that up, by a couple of years, I think that’s the outcome of all of the work that we’ve put in over the years delevering.
Michael Blum
Great. No, that makes sense. And just wanted to ask kind of a high-level question, it seems at least possible or likely that we’re going to be entering a recession here in the US and abroad. How should we just think about the puts and takes for the business in that environment?
Brad Barron
So, it’s one of the things that I like most about our business is, everybody is going to have some — see some effects, but I think that we’re relatively insulated from some of those things. And given that the United States is simply any way you look at it, it’s structurally short of the products that we need. We’re structurally short of crude globally, even in a recessionary environment and we’re particularly short here of refined products.
You can look at refined products inventories, pretty much in any pad. And even if demand were to come off, you would have demand would be more in the five-year range than where it is now. So right now you see demand above the five-year range and you see supply below the five-year range. So, I won’t say that there’s no impact to us at all, but I would say that our assets are particularly well positioned to handle something like that. Yes. The other thing, that I would mention is, we’re expecting hefty FERC adjustments next year.
Michael Blum
Okay. Great. And just — I think I know the answer to this, but just to confirm it, you would intend to pass through whatever that PPI adjuster ends up coming out at you’ll apply that full rate in 2023?
Brad Barron
Yes.
Michael Blum
Thank you so much.
Brad Barron
Thank you.
Operator
And I’m not showing any further questions at this time. I’d like to turn the call back over to Pam Schmidt.
End of Q&A
Pam Schmidt
Thank you, Kevin. We would once again like to thank everyone, for joining us on the call today. If anyone has additional questions, please feel free to contact NuStar Investor Relations. Thanks again and have a great day.
Operator
Ladies and gentlemen this does conclude today’s presentation. You may now disconnect and have a wonderful day.
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