Interview with: John J. Nicola, CFO - featuring: their fleet of 63 tank vessels and 44 tugboats that provides refined petroleum products transportation, distribution and logistics services in the U.S. domestic marine transportation market.

K-Sea Transportation Partners LP (KSP-NYSE)

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K-Sea Transportation Partners success comes from their ability to provide efficient and safe tank barge transportation of refined petroleum products to their customers

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Services
Marine Transportation
(KSP-NYSE)


K-Sea Transportation Partners LP

One Tower Center Boulevard, 17th Floor
East Brunswick, NJ 08816-1145
Phone: 732-565-3818

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John J. Nicola
Chief Financial Officer

Interview conducted by:
Lynn Fosse, Senior Editor
CEOCFOinterviews.com
Published - March 1, 2007

BIO:
John J. Nicola has served as K-Sea’s Chief Financial Officer since July 2000.  He is a CPA, and has an MBA from Rutgers Graduate School of Management. His financial management experience began with twelve years of employment at PricewaterhouseCoopers, both in the U.S. and Europe, and continued with senior financial management roles in the mining industry and, for the last fourteen years, in marine transportation. Mr. Nicola is a member of the American Institute of Certified Public Accountants and the Financial Executives Institute.

Company Profile:

K-Sea Transportation Partners is the largest coastwise tank barge operator, measured by barrel-carrying capacity, in the United States. With a fleet of 63 tank vessels and 44 tugboats, K-Sea serves a wide range of customers including major oil companies, oil traders and refiners. The Company is organized as a master limited partnership and distributes its available cash, as defined, as dividends to its unitholders. The Company provides refined petroleum products transportation, distribution and logistics services in the U.S. domestic marine transportation market, and its common units trade on the New York Stock Exchange under the symbol KSP.

The Company has a high-quality, well-maintained fleet, and 68% of their barrel-carrying capacity is double hulled. All but four of the Company’s tank vessels are qualified to transport cargo between U.S. ports under the Jones Act. Since the founding of the predecessor company in 1959, KSP has played an increasingly significant role in the transportation of refined petroleum products in the United States. Since April 1999, when the predecessor company was acquired from its founders by members of its senior management team and investment funds managed by Jefferies Capital Partners, they have more than tripled their barrel-carrying capacity, significantly increased market share, and improved their operating and financial performance. In January 2004, the Company raised almost $100 million by completing its initial public offering of common units representing limited partner interests, and since then has increased their quarterly distribution to unitholders nine times, including the last seven consecutive quarters.

CEOCFO
: Mr. Nicola, will you tell us about your background with K-Sea Transportation?
Mr. Nicola: “I have been with K-Sea Transportation for almost seven years.  Previously, I was with Maersk-Sealand, a large containership company, as CFO of its East Coast and Gulf terminal operations. Prior to that I was in public accounting with Price Waterhouse, in the U.S. and also in Italy, for almost twelve years.”

CEOCFO: Where was K-Sea when you became involved and where are they today?
Mr. Nicola: “K-Sea was created in 1999 from the management buyout of a small, family owned tug-barge company in New York harbor. The company operates tank barges, powered by tugboats, to move refined petroleum products, mostly for major oil companies. The management buyout in 1999 was financed primarily by outside equity investors, who determined that the Company needed to strengthen its financial capabilities if it were to grow and possibly be a candidate for a public offering. By the middle of 2000 K-Sea had a stronger financial team, including our current controller and myself, and by January of 2004 we had grown significantly and made an initial public offering on the New York Stock Exchange.”

CEOCFO: Will you tell us about the industry?
Mr. Nicola: “In the United States refined petroleum products, including gasoline, jet fuel, fuel for power plants, home heating oil, and various others, must be transported from refineries and other points for final distribution to end users. Approximately 60% of the movement of refined petroleum products in this country is done by pipeline, however pipelines do not go everywhere and they cannot carry everything. Consequently, 30% of refined petroleum product movements are done via marine transportation, using tank vessels and tugboats, which move up and down all coasts of the U.S., and also on the inland river system. We fit in primarily in the coastwise trade, and in terms of barrel-carrying capacity, we are the largest coastwise operator of tank barges in the country. We provide services up and down the east and west coasts, the Gulf of Mexico, Alaska, and the Great Lakes.”

CEOCFO: When a company needs to move refined petroleum, why do they come to K-Sea?
Mr. Nicola: “K-Sea has a reputation as one of the most efficient and safety-conscious providers of marine transportation of refined petroleum products.  After the Exxon Valdez oil spill incident in 1989, the major oil companies to a great degree began to exit the marine transportation/distribution business. Since then, most have sold their in-house tank vessel fleets and now outsource marine transportation to specialty companies such as K-Sea. We specialize in the operation of tank vessels and tugboats to move refined petroleum products, and safety is the highest priority in the company. Another result of the Valdez incident was the passage of a law called the Oil Pollution Act of 1990, or OPA ‘90. This required that marine transportation of petroleum products between U.S. ports be done using only double-hulled vessels, and that all single-hulled vessels be retired or retrofitted over a 25-year phase-out period. Between 1990 and 2015, all single-hulled vessels are being replaced with double-hulls, and companies such as K-Sea are raising and spending significant capital to do this.”

CEOCFO: Is there much competition between tugboat and barge companies and if so why are the major oil companies choosing K-Sea Transportation? Is it because you are better, faster, cheaper, and more efficient, or just available?
Mr. Nicola: “In addition to our focus on efficiency and safety, we provide a growing fleet of new double hull equipment with a wide size selection, ranging from 3,000 barrels to 165,000 barrels. Also, our geographic diversity enables us to service the same customer in virtually any area. These are our most important selling points. On the capacity side, OPA ’90 has had a significant impact on the supply of tank vessels, because so much capacity must be phased out and replaced, and has resulted in a more or less balanced supply-demand dynamic.   Meanwhile, the demand in the U.S. for refined petroleum products continues to grow steadily; the US Department of Energy estimates that demand for refined petroleum products in the U.S. increases between 1 to 1% per year. However, the supply of tank vessels for marine transportation has tightened because of OPA ‘90.”

CEOCFO: Can you explain the pricing for your services and if they are affected by supply and demand?
Mr. Nicola: “Prices are controlled by the marketplace, but when supply and demand for tank vessels is balanced to tight, as it is currently, then pricing is impacted accordingly.”

CEOCFO: Other than replacing the single-hull with the double-hull, are you increasing your fleet?
Mr. Nicola: “Much of the industry has been characterized by companies who do not necessarily want to continue in the business in the face of large capital expenditures required to go from single to double-hull vessels. This has resulted in K-Sea making several acquisitions of companies over the past few years. We have also purchased units from other owners and ordered a lot of new vessels for expansion. As a result, our fleet has increased significantly. When K-Sea was created in 1999, we had about 1 million barrels of vessel capacity. Today we have almost 3.5 million barrels. This was accomplished during a period when the total barrels of tank barge capacity has been reduced, mostly because of OPA ‘90. This indicates that we have gained a significant amount of market share. Of course, since we distribute a large portion of our cash flow from operations, acquisitions and vessel new building programs must be financed externally through new debt and equity, requiring constant attention to managing the balance sheet.”

CEOCFO: You certainly have good numbers this quarter; what accounts for you success and how do you continue on the path?
Mr. Nicola: “Our success derives from our ability to provide efficient and safe transportation of refined petroleum products, a portfolio of equipment that our customers need, and most importantly, keeping our customers confident in our ability to perform. We expect to continue providing all of that, and to continue to grow. In addition, we are a public company organized as a Master Limited Partnership, which means that all of our public unitholders are limited partners, and we distribute a large portion of the cash that we generate through a quarterly cash distribution. We went public in January 2004 at $23.50 per unit and initially paid a quarterly distribution of $0.50 per unit, or $2.00 per unit annually. Since then, our quarterly distribution has increased to $0.66 per unit and our unit price is about $39.50 per unit. Our growth from 1 million barrels of capacity to almost 3.5 million barrels has clearly been accompanied by a significant increase in profits and cash flow, and our cash distribution has grown accordingly.”

CEOCFO: Do you contract with the oil companies on your own or is there an intermediary?
Mr. Nicola: “We contract with the oil companies primarily on our own, but occasionally we will use brokers. We have long-term contracts with many of them; in fact at this point, approximately 80% of our revenues, which exceed $200 million a year, are under contracts which on average run between 2 and 4 years.”

CEOCFO: What are your challenges?
Mr. Nicola: “The challenges are to keep things safe and efficient, and to make sure our equipment is well maintained. From a financial point of view the challenge is to continue to manage the financing of our growth program, including communicating our story and plans to investors and other capital providers.”

CEOCFO: Why are you structured as a Master Limited Partnership?
Mr. Nicola: “We went public as a Master Limited Partnership (MLP) because we thought it would be the best structure for us as it would provide a relatively low cost of capital - certainly a plus in a capital intensive business. Our business is stable; rates and revenues also tend to be stable and we generate a significant amount of cash. The MLP is a very tax efficient ownership structure, which avoids double taxation. For example, corporations pay income taxes on their income and then distribute dividends from after-tax profits. Their shareholders must then pay taxes on the dividends, which is the double taxation element.  MLPs, as partnerships, do not pay income taxes. Each year we allocate to each of our unitholders a share of the company’s taxable income, they report these amounts on their own individual tax returns, and income taxes are paid once. This allocation of earnings includes a share of depreciation and other non-cash deductions, so the allocated taxable income is generally significantly less than the cash distributions, resulting in what we call a tax “shield”. In our first three taxable years, from 2004 to 2006, over 90% of our cash distributions have been shielded from current income taxes. Maintenance of this tax shield is also something we pay significant attention to from the finance side. The MLP is a very tax efficient model for the investor.”

CEOCFO: Why should potential investors be interested in K-Sea?
Mr. Nicola: “If you look at the numbers that I mentioned earlier, we went public in 2004 at $23.50 per unit and we now trade at around $39.50. During that time, we have paid almost $7.00 in distributions, a significant portion of which was tax deferred. Therefore, anyone who invested in the original IPO and continued to hold the units over the last three years has more than doubled their money, so that is a good reason for investors to be interested. We are working to continue this growth trend, and have communicated to investors details on our planned asset additions which should help us to continue to grow in fiscal 2008 and 2009.”

CEOCFO: In closing, how do you ensure the safety and do a better job of it than the major oil companies could?
Mr. Nicola: “This is our specialty and we take pride in our capabilities. We hire qualified people, train them constantly, and foster an environment of safety and efficiency. This is what it is all about, and this attitude permeates the entire company.”


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“Our success derives from our ability to provide efficient and safe transportation of refined petroleum products, a portfolio of equipment that our customers need, and most importantly, keeping our customers confident in our ability to perform. We expect to continue providing all of that, and to continue to grow.” - John J. Nicola

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