NuStar Energy LP (NS) 2003 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Valero L.P. second quarter earnings conference call. At this time all participants are in the listen-only mode. My name is Alicia, and I will be your operator. If at any time during the call you require assistance, please key star, followed by zero and an operator will assist you. As a reminder, this conference call is being recorded for replay purposes. I would now like to introduce your host for today’s call, the Director of Investor Relations, Mr. Eric Fisher. Please go ahead, sir.

Thank you, Alicia. Good morning. Welcome to Valero L.P. second quarter 2003 earnings conference call. I’m Eric Fisher, Director of Investor Relations for Valero L.P. I’m joined today by Curt Anastasio, CEO of Valero L.P., and Steve Blank, our CFO.

Before we get started, I would like to direct your attention to the forward-looking statement disclaimer included in the press release. In summary, it says that forward-looking statements contained in the release and conference call are intended to be covered by the provisions of the Securities Litigation Reform Act of 1995. Factors that could cause our actual results to be materially different include those we’ve described in filings that we’ve made at the SEC. With that, I’ll turn it over to Curt.

Good morning, and thank you all for joining us today. I’m going to quickly review the numbers and talk about a few strategic issues, and then open it up for your questions.

For the quarter we reported net income of $17.1 million, or $0.79 per unit, compared to 14.6 million, or $0.76 per unit last year. Year-to-date, net income was 28.8 million, or $1.40 per unit, compared to $24.2 million, or $1.26 per unit for the first six months of 2002.

Distributable cash flow for the quarter was 24.2 million, compared to 18.1 million last year, an increase of 34 percent. All in all this was a very good quarter for the partnership, especially when you consider that three of the six Valero energy refineries we serve experienced unplanned outages. But probably the most exciting news for our unit holders is the fact that as a result of our increased earnings of cash flow, the partnership has declared another $0.5 increase in the quarterly distribution, to $0.75 per unit. That represents that third $0.5 increase in the distribution, since the IPO in April 2001, and more important, reflects that continuing successful growth of the partnership.

Our recent acquisition of Valero Energy’s South Texas pipeline system in feedstock storage assets in March continues to perform well and is exceeding our initial expectations. In fact, for the quarter we estimate these assets contributed 11.4 million to EBITDA, which would be more than $45 million on an annualized basis. That compares favorably to our initial estimate of 44 million in EBITDA, when we were on the road talking about this deal back in March. The contribution from those assets is obviously one of the key factors that allows us to increase the quarterly distribution to $0.75.

This asset contribution from Valero was part of a larger financial restructuring that also included the redemption of 3.8 million L.P. units owned by Valero Energy. Those transactions, as you know, were funded with the issuance of over $475 million of debt and equity and allowed Valero L.P. to become, effectively, de-consolidated from Valero Energy.

After the transaction, Valero Energy’s ownership in Valero L.P. dropped from 74 percent, to 48 percent. The de-consolidation has improved the partnership’s financial flexibility and ability to grow. The common unit price appreciation since then has obviously been a good indication of the success of that deal. Since we closed it on March 18th, Valero L.P.’s unit price is up around $6.75 as of this morning, or around 18 percent increased.

When you look at the income statement variances for the second quarter, compared to last year, the increases in revenue, income and cash flow were all primarily attributable to the acquisition of the assets from Valero Energy, in March. Likewise, most of the increase in OpEx and depreciation for the quarter is also attributable to that acquisition.

As a result of the common unit issuance in March, and the exercise by the underwriters of their over-allotment option in April, the average outstanding units increased to 21.7 million in the second quarter. Interest expense increased to 4.7 million, from 800,000 last year in the second quarter. This is primarily related to the issuance of $250 million of 6.05 percent senior notes in March, to partially fund the acquisition, and the issuance of 100 million of 6.875 percent senior notes in July of ’02, to pay down our revolving credit facility. Partially offsetting the higher interest cost was about $1.3 million of interest income in the quarter, associated with fixed to floating interest rate swaps we put on earlier this year in order to give us more exposure to lower floating interest rates. This puts us at about 50:50, fixed to floating rate debt.

One interesting item to note is that our debt is actually down from March 31st, by about $19 million. That’s due to our payoff of the balance outstanding under our revolving credit facility, but the additional proceeds were received from Lehman Brothers exercising their own re-lotment option in connection with the March common unit offering. As a result of this debt pay-down, our debt to capitalization ratio went from 51.4 percent at March 31st, to 48.6 percent at June 30th.

Turning to operating statistics, you can see on the tables attached to the release, that refined product pipeline and refined product terminal throughput are up, again primarily related to the acquisition of the South Texas pipes and terminals in March. Crude oil pipeline throughputs were down 3 percent, mainly due to Valero Energy’s Ardmore refinery being down early in the second quarter due to a planned maintenance turn-around, which was completed in April and a 10-day unplanned outage at Ardmore in June. You’ll also note that we’re now reporting the volumes associated with the feedstock storage assets we bought in March.

Turning to strategic issues. You may have recently seen the announcement in June that Valero Energy and Valero L.P. entered into a five-year agreement to supply and transport 5,000 barrels per day of propane to Northern Mexico. Valero Energy expects to begin delivering propane in the first quarter of 2004, from two of its refineries, located in Corpus Christi and Three Rivers, Texas.

Valero L.P. will have a five-year throughput agreement with Valero Energy and will be responsible for moving the propane through its refined product pipeline. In addition to using some of its existing refined product pipeline infrastructure, Valero L.P. will invest $20 million to acquire 59 miles of refined product pipeline from Valero Energy, construct approximately 25 miles of new pipe, and build a new propane terminal in Nuevo Laredo, Mexico. The project will be funded through Valero L.P.’s revolving credit facility.

We’re very excited about the opportunity to provide propane to Northern Mexico and to launch Valero L.P.’s first venture into an international market. Once the system is up and running, we would expect it to add between $0.03 and $0.04 of accretion per L.P. unit. Northern Mexico is a growing market for propane and we see a very good likelihood of additional upside to these projections.

In closing, I’d like to say that we remain committed to growing the partnership and are in a great position to do so. We have ample capacity to fund our future growth and our primary goal continues to be increased cash distribution to the unit holders as we make additional acquisitions. In fact, even when you consider the distribution increase this quarter, and the fact that our net income was lower as a result of lower throughput, resulting from unplanned refinery outages at Valero Energy, our distribution coverage ratio after the GP split is still 1.28 times. And if you look at it before the split, it’s 1.39 times. We continue to see many opportunities for growth and look forward to reporting back to you on some of these in the near future. At this time, operator, I’ll open it up for questions and answers.

Ladies and gentlemen, if you would like to ask a question, please key star, one on your touch-tone telephone. If your question has been answered or you wish to withdraw your question, please key star, two. Again, that is star, one to ask your question. One moment while our first question queues up. The first question comes from David Fleischer, with Goldman Sachs. Please go ahead, sir.

Hi. A few things here. Maybe I’ll just ask the first question on your comment that you exceeded expectations – or these acquired assets exceeded expectations, and the one metric you gave, Curt, was that EBITDA was 11.4, versus the 44 million annualized figure. I guess the bigger or the broader question is really what does that mean in terms of exceeding expectations? Is it just that number or can you give us some other metrics? And what if there hadn’t been unplanned outages? Or was it only a normal amount of unplanned outages, what should we be thinking about unplanned outages as part of this type of evaluation? Kind of that as a first question.

Yes. Hi, Dave. The unplanned outages, obviously, adversely impact the crude and feedstock inputs that go into these storage facilities. Now the impact isn’t huge. I wouldn’t expect it to be radically better, going forward, than it is today, as you see in the second quarter. But none the less, there was a negative impact from the unplanned outages, not just at Ardmore, but also in the ones that relate to the storage assets are, as you know, our Benecia and Texas City. Valero had some cat cracker problems at Benecia. In Texas City some other units were down. And they’re just – in fact, in Texas City, there’s some work that’s still being finished up on a resid finer unit there. So, we would expect to see some improvement, but I wouldn’t expect it to be radically better than what you see in our second quarter results.

Yes, David, it’s Steve. Most of the impact in the quarter from the unplanned outages was not on acquisitions that were dropped in March. Because basically, despite there was some drop in throughput, it wasn’t so much on the feedstock side. So, in Texas City and Benecia, we didn’t see much impact. The bigger impact was on the Ardmore line, which is something that was not dropped down in March and there we had about 1.5 million drop in tariff revenue. We haven’t worked the numbers all the way down to an EPU level, but just from revenue, it was about a 1.5 million hit in the second quarter on the Ardmore crude pipeline.

Okay. Second question, and you talked about this last quarter as well. But you mentioned it in this press release and verbally, that you have internal growth opportunities. And I guess I, particularly as you increase the size of the company and the number of refineries that you’re serving here now for Valero, I guess the question, given that you have spare capacity in a lot of these assets, gathering the tankage as well as the throughput of the pipes, I’m wondering as you look at this list of assets in the business, what you think you can do with this, a, with Valero and their plans to grow, but b, with outside, third-party entities? And is there a growth rate you might feel comfortable putting on that from internal sources, is it 2 percent, 3 percent or is it hard for you to give us any number?

Yes, we do have internal growth opportunities that we’re working hard right now, that we plan to present to the Board. I mean, you look at some of our assets, particularly in a state like Texas, where we have so many types of Valero assets in markets, but also where there are potentially third-party connections that could be made to increase utilization of those assets. All of that is in progress right now.

You know, our underlying organic growth, if you just looked at the growth in the markets we’re in, in the US Southwest, is a little better than the national average. I mean, maybe you’re talking about overall average of maybe 2.5 or kind of 3 percent, 3.5 in some of these markets, as opposed to overall petroleum demand increasing maybe a little over 1 percent nationally. So that’s part of it. But we think we can do better than that. But the higher number I’m not prepared to give you until we’ve worked it through and presented it to our Board.

Okay. And then the third question I’ll ask and then let others in, you’ve talked about now wanting to do third-party acquisitions and a lot of companies are talking about wanting to do third-party acquisitions. So, I’m curious as to how you’re viewing the marketplace and your willingness to pay current prices, your ability to compete for assets, and any guidance you can give us on confidence in being able to execute something there – a strategy there, as opposed to the reliance on Valero for assets?

We do have some front of the pipeline, if you will, third-party deals we’re working on right now. I would expect that we would be in the position to conclude and announce at least one of them in the third quarter. The deals we’re looking at will be done on favorable terms. They’ll be immediately accretive. And so, there’s no shortage of opportunities that really are in our fairway, in the sense that they’re not huge step-outs to new lines of business or anything like that. There are plenty of assets of the type that we already operate and that we feel we have the expertise to capture some improvements on. So, just stay tuned. My expectation is you’ll hear from us on this in the third quarter.

Can you frame the size of third-party acquisitions that you’re looking at and working on?

I really can’t do that for you until we get them much closer to done. But there’s really, given the financial position they’re in, we really don’t have much of a size limitation in terms of our ability to fund deals. And so, we’re looking at everything from small to big deals. But that, David, is really the most I’m prepared to do right now.

Okay, thank you.

The next question we have comes from Chris Campbell, with Morgan Stanley. Please go ahead.

Hi, Curt, Steve. How are you guys doing? Good, good. I was calling with a few questions and perhaps most of which you probably can’t comment on. But a little bit to David’s question on the acquisitions. These acquisitions that you’re looking at, what types of tie-in opportunities are they as far as from a cost side or throughput side that you could share with us?

When you say, tie-in, I don’t follow. Can you clarify that?

Oh, in terms of how they tie-into your existing network, either upstream or downstream or are these opportunities that exist along your current system that you’re just in a [multiple speakers].

We’re not confining our look to things that tie-into our existing system.

Okay. So this would be just smaller deals within sort of your same geographic area?

Not necessarily.

Okay. Is it still too early to talk about the projected third-party revenues over the next couple of years? I know you’re doing some work on putting a plan together as to the process of gathering more third-party –

Yes. That’s right. And until we get further along in that and are in a position to present it to the Board, I’m not going to make an announcement about that.

Okay. As far this latest propane deal with Valero, can you comment on any potential with the incremental capital, dollar-wise, that you’re planning to spend?

You’re talking about the Mexico project now?

Yes.

That’s a $20 million project.

Okay. All encompassing, both the acquisition of the pipelines as well as new pipe needed?

Right. The 20 million covers everything.

Okay. And what types of returns on capital or return metrics are you looking at?

Well, if you look back, most of our deals we sort of – what we’re looking for and we kind of factor in a return, because what we’re looking for is immediate accretion that would be meaningful to us, given the amount invested. And so, if you look back at our deals, we’ve had kind of a minimum 12 percent return, but it can go higher, depending on a bunch of things, including our judgement of our assessment of the risk involved and whether we have long-term contractual commitments that we believe are rock solid. So, that can vary, depending on the facts and circumstances of each deal.

Okay. And then forgive me for not taking a detailed look at the press release on this, but is there, in the throughput agreement with Valero, is there a percentage of floor that they’re required to ship, similar to your other throughput agreements?

You’re talking about which deal now?

On the Valero propane deal.

Oh yes, this is actually a 5,000 a day minimum, take or pay. And we honestly think there’s upside in that deal. I think what you’ll see is once we get it done for really minimal investment, we can quickly get that up to maybe 8,000 or 9,000. Because we think the market will demand it and that the production and supply is there. And so, it will be very justifiable for us to enhance the infrastructure slightly to accommodate that higher volume.

So, based on the 5,000 take or pay, what’s the current capacity on the system?

Well, the capacity is much more than that, because we’re building a connecting 8-inch pipe. Now it is a batch operation, so you don’t get the full utilization that you would normally expect from an 8-inch pipe. But the capacity of the system will be well in excess of even that 8 or 9 that we talked about. We do have an opportunity, if we can extend that infrastructure further, to other destinations in Mexico, which where the market demand is there for us to expand the existing system or bolt onto it, that would be kind of a phase two of this project. And that’s what we’re looking at.

Okay, thank you.

The next question we have comes from Kent Green, of Boston American Asset Management. Please go ahead, sir. Mr. Green?

Yes. I had a question about the propane partnership – the new agreement. As we know, some of the gas has not been stripped recently, so would there be a problem with acquiring gas or getting throughput once that’s done? Or do you have a steady source of throughput? And then also, whether there’s any commodity risk in that? I’d assume that there’s not.

Good question. First of all, this is a committed throughput. As I mentioned, it’s a minimum take or pay. The source of the supply is coming from two Valero refineries, Corpus Christi and Three Rivers, and this provides a better net-back for them – this destination to Mexico, than where they’re placing that propane today. So not only are they legally and contractually committed, it also make commercial sense for them to have done this. And Valero L.P. is taking no commodity risk. At no time are we owning the propane or the inventory in the terminal or the pipeline.

Very good. Just a quick follow-up. Now that your ownership – that Valero Entergy’s ownership is less than half, what is the probability of buying other assets, other joint ventures with other particular companies? And do you consider that Valero Energy L.P. has an expertise in refined products? And then is there any independent refiners that you may well acquire assets from and better run and put in tax hedge some of their other pipeline assets or storage assets?

Yes. I mean, our growth strategy encompasses pursuing similar logistical types support for third parties as well as Valero Energy. Some of our best opportunities have been with Valero Energy and may continue to be too. But we are absolutely open and are actively pursuing third-party opportunities of the type you’ve described.

Just a final question. What is the – I assume that Valero Energy is the GP and what is the GP split and where does that start to go up?

Right. Yes, Valero Energy as a subsidiary, which is the general partner. I think our blended split at the moment is what, Steve, about 5 or 6 percent. So, we’re still in the low split in terms of the general partner take of our total distribution.

And what is the next step? At what level? What triggers the next step, revenues?

No, it’s a distribution calculation. Right now, blended, as Curt said, is around 5 percent. But at the 75 cent level that we’re paying, it’s at 25 percent take of that incremental amount. And the next step, which goes to 50 percent, happens when the quarterly distribution is at $0.90.

Very good. That’s all I need. Thank you.

The next question we have comes from Ronald Londe, with A.G. Edwards. Please go ahead.

Thank you. I understand the problems you had with second quarter crude oil pipeline throughput. How are things going now? Do you think in the third quarter you can get to the 360,000 barrel a day level that you did last year?

Yes. Well, actually, I should just point out that our second quarter crude throughput was actually higher than the first quarter. You might remember there was some Valero Energy refineries cuts, some economic run cuts in the first quarter. But be that as it may, yes. I mean, with the end of the unplanned outages that we experienced in the second quarter, we would expect to see some improvement there, because those hopefully will not occur again. So the answer is yes, Ron. We should expect to see improvement in the third quarter.

In the Denver market, which is a very important market for you, have you seen any competitive changes in that market?

Well, you know, what’s impacted us on Denver, in terms of the product pipeline, is really the unusually high refinery throughput rate at the Valero Energy’s Denver refinery. In that little refinery is running now over, I think, 31,000 or 32,000 barrels a day. And so, Valero Energy is producing so much there that that inevitably has an impact on how much you’re going to ship by pipeline from the McKey refinery. So, that refinery is running hard.

There is some other developments though, that affect not just us, but others who have an interest in the Denver market. There have been some lower jet sales, turbine sales at Denver – Colorado Springs airport as well. So what you see is some fall-off of demand in that product. And there are other things happening there that are competitive developments. But that is something we’re looking at.

We do have a plan. We’re developing a plan, I should say, to address the, what we regard as a shortfall in the product pipeline movements to Denver and we are working that. And part of it is – you know, those who follow Valero L.P. don’t see, is the McKey’s refinery throughput on the South Lake products pipeline, which runs to the Dallas/Ft. Worth area. And so we’re talking to Valero about buying in that pipeline into the L.P. And we’ll see if we can get that done here in the third quarter. Hopefully we can. And that helps to mitigate this loss of McKey refinery binds going to Denver, because some of that’s going into the Dallas/Ft. Worth area. And if we bring that into our partnership, you’ll get a fuller picture of where barrels are going out of McKey. So, I hope that’s one of the things we get done the third quarter.

I haven’t really seen any news on the pipeline that was proposed to go from Albuquerque to Salt Lake City. Has there been any movement with regard to that project that started and stopped and started and stopped?

No, you know, that was originally, as you know, a joint sort of Williams-Equilon project and now Shell would be involved, I suppose, in the lower half of that pipeline project to, what they referred to as the Asten Project. Williams, of course, has had a complete change of direction with all the financial turmoil they went through and then the sale of Williams Energy to new owners. And I really think that’s off of their plate and it would be for some other company to probably revive that project. So, I think there was a north end and a south end to that Asten Project. As far as I know, the north end is really off the table at the moment. And we’ll see how that develops. But I think that project is really not moving along at anything like the pace that the original participants thought it would.

I’ll ask this question again this quarter. I guess I ask it every other quarter. Any news on the Longhorn pipeline starting-up?

All we hear is probably what others in the industry are hearing. They’re now talking sometime early next year as a start-up. There’s a re-capitalization going on. There’s potential ownership changes going on. So, I think obviously, I’m not privy to any more information than anybody else about Longhorn. But I think there’s a lot of change right now going on and how they want to reposition and restructure themselves to get that project moving again. And that’s about the sum and substance of what I’ve heard.

Okay, thank you.

The next question comes from Mark Easterbrook, with R.B.C. Capital Markets. Please go ahead, sir.

A lot of my questions have been asked already, but just quickly, any planned refinery outages for the third quarter that you guys know about already?

We do know of one. Texas City has a continued outage there. They’ve got a [indecipherable] finer unit that’s keeping rates cut back a little bit there. Benecia also has some down time associated with a [pider][ph] cracker there. So there’ll be some impact, but we’re hopeful that it won’t be much.

Were those planned or were those unexpected?

Those were unplanned.

And with the distribution [inaudible] real strong – I think you said 1.3 times, any thought of perhaps moving that target down a little bit so that you could increase the distribution some time in the next few quarters?

Yes, well we’ve obviously got room, but our CFO, Steve here, will take a shot at that one.

I’m a cheap skate. No, I think we’ll continue to look at it. When we issued the equity in March, we basically said that we wanted to get the pipes under our operation and the tanks under our operation for some time, that we expected that once we were operating for them a bit, we certainly thought we had room to increase in distribution again [inaudible] this year. So we’re going to continue to take a look at that and we’re well aware of how strong, financially, our coverage ratio is.

Is it safe to assume that your target is still 1.2, 1.3?

We’ve not had a firm target blessed by the Board, because we tend to take a look at it and think through it when we get together with the Board, and kind of consider it with everything else we want to do with the business, whether we’re looking at acquisitions and should we use the money for that. But if we’ve looked at anything, it’s been really let’s have a coverage ratio a bit better than the average. And 1.2 is sort of the number that everybody seems to have in their head.

Also, obviously, we want to make sure that we can grow the distribution in sort of a double-digit fashion. So we’ve been mindful of that. With this latest increase of a nickel, we now have increased the distribution by 25 percent, since our IP of two years ago. It’s at 12.5 percent a year.

And just going back to the question on the unplanned outages, that having been said, we’re still – just to remind you that I stick to the answer I gave to David earlier, that we really don’t expect to see any deterioration in the third, versus the second quarter, even as a result of those continuing unplanned outages.

Okay, thanks.

I have no further questions in the queue. Would you like me to repeat the instructions, sir?

Yes, that would be fine, please.

Ladies and gentlemen, if you wish to ask a question, please key star, one on your touch-tone telephone. If your question has been answered or you wish to withdraw your question, please key star, two. Again, that is star, one. I have no questions in the queue, sir.

Okay, thank you very much. If anyone has any follow-up question, feel free to call. Thanks.

Ladies and gentlemen, thank you for participating in today’s conference. This concludes the program. You may now disconnect. Good day.