Q3 2023 NuStar Energy LP Earnings Call
Participants
Bradley C. Barron; President, CEO & Chairman of NuStar GP LLC; NuStar Energy L.P.
Daniel S. Oliver; EVP of Business Development & Engineering at NuStar GP Holdings, LLC; NuStar Energy L.P.
Pam Schmidt; VP of IR; NuStar Energy L.P.
Thomas R. Shoaf; Executive VP & CFO of NuStar GP LLC; NuStar Energy L.P.
Christopher Francis Jeffrey; Associate; Mizuho Securities USA LLC, Research Division
Douglas Baker Irwin; Research Analyst; Citigroup Inc., Research Division
Noah Benjamin Katz; Analyst; JPMorgan Chase & Co, Research Division
Selman Akyol; MD of Equity Research; Stifel, Nicolaus & Company, Incorporated, Research Division
Presentation
Operator
Good day, and thank you for standing by. Welcome to the NuStar Energy LP Third Quarter 2023 Earnings Conference Call. (Operator Instructions) Please be advised today's conference is being recorded.
I would now like to turn the conference over to your speaker today, Pam Schmidt, Vice President of Investor Relations. Please go ahead.
Pam Schmidt
Good morning, and welcome to today's call. On the call today are NuStar Energy LP's Chairman and CEO, Brad Barron; our Executive Vice President and CFO, Tom Shoaf; and our Executive Vice President of Business Development and Engineering, Danny Oliver, 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 U.S. 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.
Bradley C. Barron
Good morning. Thank you all for joining us today here about our solid quarterly results, our progress on our strategic initiatives and our positive outlook for the rest of 2023.
Let's get started with a few highlights of our third quarter. We generated $180 million of total EBITDA in the third quarter, up $2 million compared to the third quarter of '22 EBITDA of $178 million. Our pipeline segment EBITDA was up almost 10% in the third quarter compared to the same period in 2022.
Our refined product systems, along with our ammonia system, continued to generate solid dependable revenue in the third quarter. And total throughputs were up around 7% compared to the same period in 2022, reflecting the strength of these assets and our strong position in the markets we serve in the Mid-Continent and throughout Texas.
Our McKee system performed well with higher revenues and throughputs versus the same period last year, and our Three Rivers refined product system also saw increased revenues and throughputs over 3Q '22. In addition, almost all our pipeline systems benefited from annual rate escalations linked either to the FERC index or the producer price index.
Moving on to our Permian Crude System. Our Permian Crude Systems volumes averaged 523,000 barrels per day, down compared to the same quarter last year, but up versus volumes of 508,000 barrels per day in the second quarter of 2023. As we said on prior calls, our Permian volumes so far in '23 have reflected some producer-specific operational issues and delays. But as some of those issues have been resolved, we've seen October volumes average 533,000 barrels per day, and we now expect our fourth quarter average to be around 540,000 barrels per day. We also expect the system's full year '23 revenue to come in comparable to 2022.
Turning to our fuels marketing segment. After a near record breaking '22, our fuels marketing segment has turned in another strong quarter, generating $8 million of EBITDA in the third quarter of '23, comparable to the segment's strong quarter, third quarter '22 results.
With that, a few observations about 2023 before I turn it over to Tom. Looking to the full year 2023 for our business as a whole, even though macroeconomic uncertainty has persisted so far this year, NuStar expects to generate total adjusted EBITDA of $720 million to $740 million. After spending several years working hard to derisk our business, strengthen our balance sheet and reduce our leverage, we have successfully completed our plan to redeem the Series D preferred about 2 years ahead of our original schedule. Once again, in 2023, we expect to self-fund all of our OpEx, all of our growth capital and our distributions. And we also continue to target finishing the year with a healthy debt-to-EBITDA ratio below 4x.
With that, I'll turn the call over to Tom.
Thomas R. Shoaf
Thanks, Brad, and good morning, everyone. As Brad mentioned, our third quarter 2023 EBITDA of $180 million was up $2 million compared to the third quarter '22 EBITDA of $178 million. Our third quarter 2023 adjusted DCF was $93 million, and our adjusted distribution coverage ratio was 1.84x.
Now turning to our segments. In the third quarter '23, our pipeline segment generated $170 million of EBITDA, up $15 million or around 10% over third quarter '22 EBITDA of $155 million, thanks in a large part to our refined product systems including our McKee System pipelines and our Three River system pipelines as well as annual rate escalations.
Turning next to our storage segment. Our EBITDA for third quarter '23 was $36 million, which is about $5 million lower than the third quarter '22 EBITDA. That decrease was mostly due to an amendment and extension of our customer contract at our Corpus Christi North Beach terminal and customer transitions and required tank maintenance at our St. James terminal, as we've talked about before.
But that was offset by yet another quarter of solid performance from our West Coast region, where due to our West Coast renewable fuel strategy, we handled a large portion of the region's renewable fuels and our renewable fuels logistics network. In the third quarter, thanks to the renewable fuels market leadership we have built over the years, our West Coast region generated 16% higher revenues than in the third quarter of '22.
Our fuels marketing segment, which had a near record breaking year in '22, continued to deliver great results in the third quarter. Fuels Marketing generated $8 million of EBITDA, which is comparable to the segment's strong showing in the third quarter of '22 and driven by strong margins.
I'm also pleased to report on our continued progress in building our financial strength and flexibility. Over the past few years, we have utilized cash flows, proceeds from asset sales and monetization of our corporate real estate to continue to reduce debt balances, which enabled us to repurchase about 2/3 of our Series D preferred units through July of this year.
And in August, we successfully issued common equity raising $222 million net of fees, which we applied towards the redemption of the remaining $8.3 million outstanding Series D preferred in September. We redeemed all the Series D over 1 year ahead of our previously announced target while maintaining our debt-to-EBITDA ratio below 4x.
We ended third quarter '23 with a debt-to-EBITDA ratio of 3.83x with $665 million available on our $1 billion unsecured revolving credit facility, and we believe the elimination of the Series D preferred units from our cap structure gives us the flexibility to focus on strategic investments, such as our organic growth projects related to our renewable fuels and ammonia assets and further delevering. And that strategy has already produced some fruit. After the September redemption of the Series D preferred units, Fitch upgraded our credit rating by 1 notch to BB while S&P Global upgraded their rating outlook from stable to positive.
Moving now to our outlook for '23. As Brad mentioned, for full year, we expect to generate adjusted EBITDA in the range of $720 million to $740 million. We now plan to spend $120 million to $130 million on strategic capital in 2023. We continue to expect spending for our Permian system to be in the range of $35 million to $45 million, and we continue to expect to spend around $25 million to expand our West Coast renewable fuels network as well as around $25 million on projects for our ammonia pipeline.
Turning to reliability capital. We expect to spend between $25 million to $30 million on reliability in 23 million. And even with the acceleration of our Series D redemptions in '23, we're still targeting to finish the year with a healthy debt-to-EBITDA ratio below 4x.
With that, I'll turn the call back over to Brad.
Bradley C. Barron
Thanks, Tom. As you've heard, we had a solid third quarter and we're on track to deliver solid results for 2023. We're also pleased with the outlook and opportunities we see on the horizon for NuStar for 2024 and beyond, especially for the growth potential we see for low-carbon ammonia on our ammonia pipeline system and for future storage and export at our St. James facility.
We told you about our connection to our ammonia system to OCI state-of-the-art ammonia products facility in Iowa, which is on track to be in service in January. We expect this healthy return, low capital project to begin meaningfully increasing utilization on our system.
In addition to that connection, in early 2024, we expect to announce a project for a large global ammonia producer. And we are continuing to advance a number of other promising projects to provide transportation, storage and export for low-carbon ammonia.
Similar to our renewable fuel strategy on the West Coast, where we have built and continue to augment our renewable fuels logistics network that has made us a leader in the region, we expect these low-multiple, high-return, low-carbon ammonia projects will position NuStar as the premier low-carbon ammonia logistics provider in the U.S. and provide a significant platform for strong organic growth over the next half decade. Rest assured, though, we are committed to our core strategic priorities: maximizing our free cash flow, maintaining our healthy debt metric and providing the safest and most reliable transportation and storage of the essential energy that fuels our lives.
With that, I'll open up the call for Q&A.
Question and Answer Session
Operator
(Operator Instructions) Our first question comes from Doug Irwin, Citi.
Douglas Baker Irwin
I just want to start with the balance sheet. You mentioned the Series D paydown kind of allowing for some further delevering and obviously great to see the recent rating agency upgrades. Can you maybe just talk about where you want to see leverage kind of longer term? And as you have these discussions with the rating agencies, is there a certain leverage target that maybe comes up in those discussions as well that you're trying to hit?
Thomas R. Shoaf
Yes, it's a good question. Certainly, we've spent many years on our delevering efforts and very successful. And all that was having the Series D redemption in mind and giving us enough headroom to do that. That's behind us now. But we're not going to stop there. We're going to continuing our delevering efforts. We say we put out there a target of 4x or better, and I think that's where we need to be, certainly, what we're targeting today. So with that, I think we'll continue to work on that and make sure that happens. And so that's really kind of what our target is, I'd say, below 4x.
Douglas Baker Irwin
Okay. Great. That's helpful. And then maybe my second question just on Permian volumes here. Great to see the rebound versus 2Q. It sounds like some of those operational issues are being resolved. And then as we think about the 540,000 barrel a day guidance you gave for the fourth quarter, can you maybe help frame the trajectory kind of into year-end there? Could we maybe still see an exit rate approaching that 570,000 to 600,000 barrel range you've talked about in the past? And kind of what are your expectations kind of into '24?
Daniel S. Oliver
Yes. I think we're going to be -- this is Danny by the way. We're going to be a little short on that exit rate, partly because of the -- we're starting from a lower point with some of the operational issues that we felt throughout the summer. But we're -- like we've mentioned, we expect to average about 540,000 but that exit rate is going to be somewhere between 545,000 to 550,000, most likely.
Operator
Our next question comes from Jeremy Tonet with JPMorgan.
Noah Benjamin Katz
This is Noah on for Jeremy. Just one quick one for me. I wanted to touch on NuStar's interest rate sensitivity. How has NuStar been affected by an increase in interest rates? And does the business have any offsets to handle an increase in rates?
Thomas R. Shoaf
Yes. I mean we have been impacted by increased interest rates. Primarily the lion's share comes from our hybrids, they're floating rate securities. So we have seen the rates climb up on those. And so we have seen our interest expense increase year-over-year. And that is built into all the guidance that we have out there. So we have factored that in.
Offsets, yes, I mean you do have obviously offsets to that in the business itself, primarily some of the other efforts we've done to reduce spending and things like that and capital. So there are offsets. We realize that interest rates have climbed, and we're doing what we can to manage all that and make sure that we continue to do that.
And specifically, the FERC indexing, we got a pretty good benefit from the FERC indexing on our pipeline segments and also in some of our storage assets as well. So definitely offsets to that. So I would say we're overly concerned. We are looking at it. We are monitoring it, and we'll just see what happens with rates going forward.
Operator
Our next question comes from Gabriel Moreen with Mizuho.
Christopher Francis Jeffrey
This is Chris Jeffrey on for Gabe. Maybe just looking at the storage results for the quarter and the release mentioned, customer -- the North Beach contract, customer transitions and St. James tank maintenance. Just curious as you're looking into 4Q, kind of where should we expect that level given those puts and takes? Should we kind of expect it to return to where it was 2Q, 1Q? Or what's kind of the run rate now?
Daniel S. Oliver
I think there might be some slight improvement. Some of that has to do with the reset in our MVC levels in Corpus, and that will continue into Q4. But so far in Q4, we're seeing the volumes actually pick up. So back above MVC levels. So right now, I'm anticipating a better Q4, but we've still got a couple of months left to go.
Christopher Francis Jeffrey
Great. And then maybe just looking at G&A for the quarter as well. There was kind of a modest jump in 3Q, which seems to be typical maybe in 4Q. There's a bit of a lift. I was just curious if that's a timing thing or related to the press takeout. Anything that we should be aware of there.
Thomas R. Shoaf
What line item was that?
Pam Schmidt
G&A.
Christopher Francis Jeffrey
G&A.
Thomas R. Shoaf
Yes, G&A. Yes, we had an increase in G&A this quarter. Some of that is salary-related, comp-related type expenses, which are our normal annual increases and things that we see each year. Another piece of that would be our headquarters rent. You recall that part of the proceeds -- or all of the proceeds that we did when we monetized our headquarter building, we turned that into an operating lease. And so that kind of moves from -- since we were refinancing, that kind of moved into the G&A category. So you'd see an increase due to that as well. And professional fees were up a little bit as well in G&A.
So I think it was just really a combination of those 3 things. And remember, on the headquarters lease, even though that has been reclassified, we actually get a benefit of that because the rate that we're paying on that lease is actually substantially less than what we could do in the bond market staying certainly less than the Series Ds that were out there, and we use those proceeds to redeem the Series D. So even though you have that we'll call it income statement category change where it kind of goes from interest expense or distributions up to this expense, you still have a savings there. It's just a reclassification thing.
Christopher Francis Jeffrey
Got it. And then maybe just to look -- ask the Permian question in a different way. Just kind of how you're thinking of the capital for '24 compared to that 35 to 45 for this year. And is that similarly flexible based on kind of how the volume progresses for the year?
Daniel S. Oliver
We haven't given any guidance yet in 2024, but I think we'll probably have some of that for you on the next call.
Bradley C. Barron
Yes. What I would say is that, as we've said on every call, the capital and the Permian scale is up and down with volume. And so you can expect it to be -- if you have higher volume, we'll see a little bit higher capital for connection. Lower volume, you'll see an offset there, which is beneficial.
Operator
(Operator Instructions) Our next question comes from Selman Akyol with Stifel.
Selman Akyol
Just a couple of quick ones for me. Just you guys talked about fuels marketing having a strong quarter, and I guess I'm just wondering how the outlook is for the fourth quarter going on.
Daniel S. Oliver
So I think there's -- right now, our full year outlook has us just below the near record year last year. I think there's some room for upside in Q4 given our current forecast, but just mostly around how much volume of butane will be able to get into the gasoline pool in the fourth quarter. But still seeing very strong margins in both our bunker marketing business and also butane blending.
Selman Akyol
Got it. Appreciate that. And then I guess in the prepared comments, you guys talked about ammonia and you talked about strong organic growth over the next -- and I had several years written in my notes here. But I'm just kind of curious, you talked about $25 million of investments. And as you look out over the next several years, should we continue to think of investments into that being sort of the smaller chewable? Or as you look out and you see the growth in that business, is there going to be a real large project that's going to require a significant amount of capital?
Daniel S. Oliver
Yes. No, I think the former. We've got a lot of operational leverage to work with, and that spend will be spread out over several years. We've got -- or a few years. We've got the OCI project. As Brad mentioned, we'll go into service in early '24 and that we've already announced. And then the blue and green projects that Brad was referring to, we'll go into service in kind of a '26, '27 time frame. So that spending will be spread out over 2 or 3 years.
Bradley C. Barron
The thing that I would add to Danny's -- this is Brad. The think I would add to Danny's comments is because of the infrastructure that we have in the area, we're really focused on low multiple projects. And so I think we have several good small, low multiple projects and there's other opportunities to play further out as ammonia opportunity develops.
Operator
And I'm not showing any further questions at this time. I'd like to turn the call back over to Pam for any closing remarks.
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.
