NuStar Energy LP (NS) 2003 Q3 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Valero L.P. Third Quarter Earnings Conference. My name is Kate and I'll be your coordinator today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. If at any time during the call you require assistance please key "*" followed by the number "0" and our coordinator will be happy to assist you. I would like to now turn the presentation over to your host Mr. Eric Fisher, Director of Investor Relations. Sir please go ahead.

Thank you, operator good morning, and welcome to Valero L.P.'s Third Quarter 2003 Earnings Conference Call. I'm Eric Fisher, Director of Investor Relations for the LP. I'm joined today by Curt Anastasio, CEO of Valero L.P. and Steve Blank, our CFO as well as other members of the management team. Before we get started, I'd 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 press release on this 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 that we've described in our filings made with the SEC. At this time I'll turn it over to Curt.

Thanks, Eric. Good morning. And thank you all for joining us today. This was another good quarter for Valero L.P. I'll go through the numbers and explanations and a few other items. Our third quarter earnings of $18.5 million, or 82 cents per unit, compared to $13.9 million or 72 cents per unit last year, year-to-date, our net income was $47.4 million, or $2.23 per unit, compared to $38.1 million or $1.98 per unit for the first nine months of 2002. Distributable cash flow for the quarter was $24.1 million compared to $18 million last year, an increase of 34%. You will also note in the release that we declared a quarterly distribution of 75 cents per unit payable November 14.

Our distributable cash flow coverage ratio is over 1.3 times and is one of the strongest among the peer group. The key driver for the much-improved earnings versus the third quarter of 2002 is the acquisitions that we completed since then. The south Texas pipeline system and feed stock storage assets we acquired in March of this year contributed around $10.2 million of EBITDA this quarter.

With the EBITDA contribution of those assets this quarter and during the second quarter, we are right on track for achieving the projected contribution of around $44 million annually to our EBITDA. Our most recent acquisition, the South Lake refined products pipeline, which runs from the McKey refinery in the Texas panhandle to the Dallas/Ft. Worth area is already proving to be a good contributor to earnings. From August 1, the effective date of that acquisition, that pipeline contributed around $1 million to EBITDA.

In addition, two other acquisitions we completed this year, an asphalt terminal in Pittsburgh, California, near San Francisco, purchased from Tellfer oil and a products terminal in Paulsboro, New Jersey near Philadelphia, purchased from Exxon Mobil contributed about $500,000 to EBITDA.

When you look at the income statement variances for the third quarter compared to last year, the increases in revenues, operating expenses, and cash flow were all primarily attributable to these acquisitions. As a result of the issuance in August of about 1.2 million common units, the average outstanding units increased to 22.5 million for the third quarter.

Interest expanse increased to $4.5 million from $1.7 million in last year's third quarter, due to acquisition related financing. However, interest expanse compared to the second quarter of this year declined, around $200,000. The decline is partly due to about $1.6 million of interest income in the quarter, associated with fixed or floating interest rates swaps we put on earlier in the year, in order to give us more exposure to lower floating rate interest. Currently, we are at around 50/50 fixed floating rate debt.

Our debt to capitalization ratio was 45% at September 30th, down from 48.6% at June 30th. The decline was primarily attributable to the common unit offering in August to fund the Paulsboro and South Lake acquisitions. Turning to operations, crude oil throughput volumes were up, versus third quarter last year based on higher throughputs at the McKee and Ardmore, Oklahoma, refineries this quarter. Throughputs in our refined products pipelines terminal and east dock storage assets, were obviously up dramatically due to the acquisitions.

With respect to the refined products pipeline system, Kinder Morgan's rupture of their Tucson to Phoenix pipeline caused refined products to back up in El Paso, Texas and reduced volumes moving south on our McKee to El Paso pipeline. Fortunately, however, by having acquired the South Lake pipeline, we were able to continue to capture the throughput margin on those barrels since product was diverted from the El Paso line to Dallas on our other line, and two other markets we serve out of the McKee refinery. So in the end, the impact of the Kinder Morgan event was very small for us.

The unplanned unit outages at Valero Energies, (inaudible) Texas City and Corpus Christi refineries had a noticeable impact on our storage asset volumes. The estimated impact on volumes was around 40,000 barrels per day.

At present, all of the Valero refineries that we serve are running well. Just a quick update on our DOS lore (ph) Mexico project to provide liquefied petroleum gas to Mexico, construction of the terminal in Mexico and the pipeline are well underway.

We expect to begin transporting propane to Mexico by the end of the first quarter of 2004. In closing, I'd like to say we remain committed to growing this partnership and are in a great position to continue to do so. We have ample capacity to fund our future growth and our primary goal continues to be to increase cash distribution to our unit holders. At this time, I will open it up for Q&A. Operator?

Ladies and gentlemen, if you wish to ask a question at this time, you may do so by keying "* 1" on your touch-tone telephone. If your question has been answered or you wish to with draw it, please key "* 2". Questions will be taken in the order received. Please key "* 1" to begin. And please hold as we pause for the first question. The first question, sir, comes from David Fleischer of Goldman Sachs.

Hello. I wanted to understand a little bit better, what might be the earnings pattern of the South Texas pipeline and storage assets. You earn there $11.4 million in the second quarter and then $10.2 million, I think you said this quarter. Yet you talk about $44 million on a full-year basis.

What is the volume -- what is the variability that you expect there on a quarter-to-quarter basis or is it just, you know, a bit unpredictable in terms of the swings in volumes, but on average you think it's going to be 44? I mean, you indicated that so far, you know, in the last couple quarters, you're on track to meet your objectives there. But help us understand that a little bit better.

Sure. I should say, first of all, we really expect future growth on the South Texas pipeline's assets. You know, for this year as we start up, just as predicted, when we worked out our acquisition economics, we did have some expenses that we needed to upgrade the integrity of some of these assets, some of those did hit in this current quarter.

As a result, when you're working on upgrading and repairing, for example, the Houston 12-inch pipeline from Corpus Christi to Houston, you do have some down time which has some impact on the revenue side of the equation as well. But all of this was expected by us, I think, going forward.

What you'll have is less variability in these assets and also as we start to work on growth opportunities, we'll get -- we'll have more revenue out of these assets than the first year prediction we've made for you. But, Steve, you want to give any more details on the quarter as it relates to South Texas?

Not on the South Texas pipelines but on the crude tanks, which are included in those EBITDA numbers that you just mentioned, David, we had about, I think as Curt said, 44,000 barrels per day lower through-put in the third quarter compared to the second quarter because of an unplanned down time at the Ba Nesha (Ph) refinery where we have tanks, a planned turn around at Corpus Christi, and then we tied in a resid (ph) refinery of Valero energy tied in a unit at their Texas City refinery, which lowered crude through-puts there as well.

So, all of that adds up to quarter -- third quarter to second quarter, 44,000 barrels per day, a lower through-put at about a 20 cents average tariff. That's about $750,000 which would get you pretty much back to the one rate that we had on EBITDA in the second quarter. So those were 3 what I would consider somewhat unusual events. So again, we feel very comfortable with the $44 million of annualized EBITDA that we talked about when we raised the equity in March to buy these assets.

OK, and then, Curt, in your comment, you raised another question by saying that you --this is a first-year number and you have expenses plugged in there, and you have -- expect future growth as well. So, I would be remiss not to ask you about what -- now that you are absorbing these assets, I'd love to get a better sense for what you think you can do with these and what the potential is and then you also mentioned this integration word in your text and just wondering as those get integrated over this next quarter or two or whatever it takes, you know, when we see that kind of benefit from this, is it going to be early next year or is it later next year? And then back to the growth question?

Sure. You know, one of the things we said on the road show about these assets was that the user line, which has been increasing in through-put from 85 to 95 and now it runs at planned rates of about 105,000 barrels a day, that there was potential over the next couple of years to increase that to maybe 130 or 140 a day as we complete the work we're doing now, we improve the integrity.

We do some de-bottlenecking. So on that particular line we had an opportunity. We also think the line that goes to the Rio Grande Valley from Corpus Christi is another one where there's -- because it's a very fast-growing region, there's expansion possibilities there. In fact, we're upgrading an existing -- we're taking the opportunity to upgrade an existing line, not just to make it more reliable and a stronger pipeline, but also to expand its size.

We're going to be laying a larger diameter 10-inch line on the valley line to replace an existing 6-inch line. And that's another one, you know, that's a line that's been increasing in volume. It now runs in the low 20's. We think we'll get it up in the high 20's at least over the next year or so. So -- and then, of course, you've got just the underlying growth in the markets where these assets are. So that gives you kind of order of magnitude where I think we're going to do better than the starting point that we laid out on the road show.

OK. Thank you.

Yes.

Our next question comes from Paul Ferguson.

Good morning.

Paul, are you there?

Yes. My question's been answered. Thanks.

Thank you.

Your next question from Chris Campbell of Morgan Stanley.

Hello. Just wondered if you could recap the impact that the rupture on Kinder Morgan's line had on your ability to move barrels or move product.

Yes, sure. Just -- Steve will come up with the numbers on it, but, you know, essentially what happened initially was because you had a backup of product in El Paso, our through-puts on the ElPaso line dropped from let's say normally something like 40,000 barrels a day, it first dropped down to maybe 25 or 30 but then fairly quickly recouped up into 35 sort of range as we adjusted, and also as Kinder did some temporary fixes on their Arizona pipeline network.

My point on it, though, was the lost through-put revenue on the El Paso line was recouped once we acquired the South Lake products pipeline coming out of the very same plant, the McKey refinery. And that was really one of the business rationales for acquiring that plan, you know, before the Kinder upset, we thought that the -- if we could surround McKee in the event of any incident in any one of these McKey-related markets, you know, we would recoup that by diverting barrels to another market, and that is exactly what happened here, which is why in the end, Kinder really had no impact on us, because of the acquisition of the South Lake Pipeline enabled us to recoup the through-put margins from coming out of McKee just diverting to the Dallas/Ft. Worth market. So, Steve, you've been also looking up some of the -

Well, those volumes that were due east redirected to Dallas because there's enough capacity on and obviously enough demand in Dallas, but enough capacity on South Lake to -

Yes.

-- of that incremental -

Yes. We had the spare capacity required to divert that volume.

Yes, I mean, put another way, Chris, I mean, the McKee refinery owned by Valero energy didn't ratchet back any because of the Kinder issue. We just at VLI moved less barrels by about 11,000 barrels per day -- per day down to ELPaso but moved those barrels either to Amarillo or mostly to South Lake. So we picked up the south lake pipeline on August 1. So that was good and timely because Valero Energy would have produced the barrels anyway and moved them down the south lake line. We just happened to have bought it effective August 1, so we got the benefit of the revenue and the MLD.

OK. Sounds like with two quarters of these assets on your -- under your belt that for the most part they're running as planned. I was just curious on the outlook, and I know you tend to be a little conservative in terms of giving guidance regarding distribution increases. But with the cash from these businesses for the most part, you know, coming in fairly - fairly certain and the covers ratio being pretty healthy and your stated goal of increasing the distribution over time, I was just curious if you could give us some color as to what you're currently reviewing as it pertains to the distribution.

We obviously, as you say, we have plenty of room to do it. And we do evaluate it regularly with our board of directors. Steve, you want to comment further?

I would just mention, obviously, we're declaring a distribution announced today of 75 cents. You know, we've had 25% increase in our distribution since our IPO, a little bit more than two years ago. We certainly have room to increase the distribution, and we'll talk to the board about it when we meet with them next to review the fourth-quarter results and see, you know, what we would like to do in this regard. But we certainly have room to increase it.

Chris, we've been conservative. I don't know if it's conservative raising the distribution 25%, 12.5% a year, but we have done over 400 million of acquisitions this year and raised, you know, 270 million of equity and 250 of debt, and the cash that we're sitting on kind of goes into funding a creative deal. So we've got a mind to kind of doing it in the steady, consistent pattern and we're looking at not just the distribution but how we can use that money to fund CAPEX including acquisitions.

Yes, we regard ourselves and we position ourselves as an aggressive grower of the distribution. And that's what we're going to be going forward. I think we have been and we will be.

OK. I guess as far as the opportunities to acquire more assets, can you just kind of give us a quick overview of the landscape that you're seeing? I know where you're focused on tends to be somewhere in the 20 to $40 million range or maybe even a bit lower at times. But just curious as to what you're seeing in your markets and what opportunities you think -- some the organic prospects you mentioned.

There continue to be plenty of acquisition opportunities in large and small. I wouldn't say we're focused on 20, 30 million, $40 million deals, although there's to lots of those out there. Right now, for example, we have active large and small deals that we're working on right now. We're hoping to get at least one of these done by year-end. We'll see how it unfolds. The next one. But fortunately, right now, there is no shortage at all of opportunities to fund the sort of growth we think we have to have to be a top-end distribution grower.

OK. Final question. Could you give us a quick update on cash on hand and liquidity and those sorts of items?

Turn that over to Steve.

At the end of the quarter at September 30, we had about 16 million in cash on the balance sheet. We have $175 million revolving credit facility, nothing is drawn on that. So we're very liquid.

Okay. And maintenance CAPEX for the year, is it still -

It is about -- I'll tell you in a second. Our estimate reliability CAPEX for the year is $8 million. And we did about 2.7 this quarter.

And total -- and expansion capital?

Expansion capital is going to be about upper $20 millions.

OK. Thank you.

Your next question from Mark Easterbrook of RBC Markets.

Looking out to the fourth quarter, would you assume that the third-quarter results were fairly normalized? There was nothing to the benefit or the detriment of the quarter, and we could take those results to the fourth quarter and then secondly, the last two years, I think the first quarter's been especially weak. I know that's tough to look out ahead right now. But do you see another fall-off like that for the first quarter of '04?

I would say that it's early in the quarter. Typically, as you -- not typically, but as you've mentioned, the first quarter has been a little bit soft from us, that's largely been laid on the back of refinery cutbacks at our customer Valero Energy. So depending on how they manage inventories over year-end and how the crack spreads, refining margins look over the end of the year and into the New Year, that will govern how we will do. But I don't think we have a read right now of how that's going to shape up. Margins just change too quickly.

As Steve said, it's early we, but things are --, but things are running smoothly. They're running well. So we would expect to do well. We don't see any problems coming up right now. I did mention earlier in my remarks, we probably had a little higher expenses with regard to the maintenance work particularly on the eastern line that we did during this quarter. So we'll see how it shakes out. But we're optimistic that things are shaping up very nicely for this quarter.

And then second question, the blackout in the northeast, I know it probably didn't impact you, but did you derive any benefit or detriment because of the blackout in the northeast during the quarter?

I don't think so. It really didn't impact us. What do you think?

I haven't heard a thing. So I'm presuming no.

And last question, will we ever see an EBITDA or a gross margin breakout between all the different segments? Is that something you're working on?

Steve Black Yes, we are working on it.

We are and we'll probably do it with the K. We'll get a better scorecard from you next time around, Mark.

Got it.

On corporate governance or however you classify that item.

All right. That's it. Thanks, guys.

And again, ladies and gentlemen, if you wish to ask a question, it's "*" followed by the number '1'. Your next question comes from David Fleischer of Goldman Sachs.

OK. I'll come back and ask a few others that weren't asked. You've got your debt to cap ratio down to 45%, which by my measure is quite strong. Maybe one question is starting point is where do you really want that to be on average in the future? You know, may be you're a little more used to having lower levels of debt than some other companies out there.

And then secondly, as part of that, you indicated in your comments that there are a lot of assets out there on the acquisition front, no shortage of them, you said, Curt. I have -- others say there are a number of assets out there, but they also say there's a ton of competition for those assets. And you know, many say they're not willing to pay the prices that they think they have to pay to get them.

And so I'd ask you to comment on that front in terms of maybe one never knows what they're going to go for until they go for it. But, you know, what range of EBITDA multiple are you willing to pay for what kind of assets and maybe that other part of question, what kind of assets make a lot of sense to you still? Or are you reaching a little further or are you willing to go a little further to find good non-related type assets?

You want to take the debt to --

I'll take the easy one. On the debt to cap ratio, I think we would be willing to go up to the upper 50's. And you know, as you say, we're quite strong right now, particularly if you look at us on a debt to market cap basis, because our book cap is fairly low because of the historical accounting that we had where we could only drop assets down when we were consolidated with Valero Energy at the book basis that they had.

So I just want to point that out. To my mind, we're even stronger than the 45, which is on a book basis. But I think again we'd be willing to take it up into the upper 50's before we'd get too nervous.

With regard to acquisitions, you know, we have fairly strict criteria on what we're going to spend time and resources on. And we're in a position with the financial condition we're in and the opportunities we have where we can afford it be fairly choosey.

You know, as we always have, we're looking for an acquisition we're looking for something that's immediately accretive to the public investors, that provides stable, low volatility, a low risk cash flow from the asset. We remain focused on the transportation, storage, terminal link of really liquid petroleum liquids, meaning crude oil, feed stocks, you know about our LPG project that we have going.

Refined products, and we think that there's more than enough out there in that category where there is no short or immediate turn need for us to step out to some entirely different aspect category or radically different geography to achieve you know top-end distribution growth for our investors. And we don't think and you've seen what we've paid on assets.

We don't anticipate having to depart radically from the sort of valuations and acquisition multiples that we've already seen to get those. So I mean, I think what you'll see from us in terms of the types of assets we buy and the types of prices we pay and the accretion that we deliver to our investors, we expect to be able to deliver more of the same

So a little over 8 times EBITDA is a number that you're pretty comfortable as is one part of that question. And then the other question back to Steve's response, willing to go into the high 50's, I guess what I'm wondering is, do you like to be stronger in advance of these acquisitions? Do you want to average 50 or - in that type of range and therefore sometimes you've got to be 45? Is that, why it looks like you're almost prefinancing the next acquisition with the last deal that you just did?

Well, I would say with the last deal we did, we did pretty much prefinance. I mean, we weren't certain - we were pretty confident on South Lake. We were pretty confident on the Paulsboro (Ph) deal as well. But -- you know, personally, I like to have a lot of dry powder. I always like to raise money when you sort of least need it.

And so I think we'll be opportunistic if we think the unit price is good, and we have a need, maybe not an immediate need. I think we would tap the equity market much like we did in early August where, you know, we could have debt finance that without really bumping up against the leverage ratio too much. But we're looking at interest rates, too, David, as you do. You know, we are also concerned that in time interest rates could come up and hurt our ability to raise equity.

Now, we think that with the distribution growth rate that we plan on, we are going to be able to offset the increase in the interest rate hit, if you will, to the valuation of the equity. And we're to some extent in a different category than some people who are less aggressive on growing that distribution. But we are mindful of interest rates inevitably going up.

Well, you bring up another good question with your ratio, I guess to about 50 percent fixed, 50 percent floating, and I presume that's where you are, I think you said you were still around there. You know, is -- in this environment, is that a ratio that you intend to stay at? What would make you change that ratio, clearly if you're saying at some point rates go up, which at some point they probably will, you know, how do you anticipate that and move in advance of that to lock in more at what clearly could be a long-term basis very attractive, long-term fixed rates, and how do you view that risk if it were a trade-off?

Well, I think the way I look at it is, we are not a cyclical company. A cyclical company like an R&M company, I think, can stand an even higher, personally, I think they can stand a higher level of floating rate exposure, because when inflation and interest rates move up I'm presuming crack spreads move up, we are not a cyclical company.

As I think has been demonstrated by our consistent profitability and growth in the earnings. You know, our business goes up depending upon the demand for the base products, the gasoline and diesel we're moving through the pipelines. So ordinarily, that would argue for perhaps a little less floating rate exposure. I think that right now at 50/50, we're obviously getting a tremendous benefit, you know, from the swaps we've entered into, given the Fed's comment yesterday, it's unlikely that short-term rates are moving up any time soon.

So, for the foreseeable future, we will continue to benefit from the swaps. And I think we should manage the mix depending upon the opportunities that we see to growth the business. For instance, if we're doing next year some sizable deals, we can optimize the mix by issuing fixed rate debt, if we see that rates are moving up and scale back the 50/50 mix to something maybe 40% floating. I don't know. But I can tell you we're very mindful of how to manage that, but things change as interest rates move on us. But right now we're real comfortable in the 50/50 range.

I hear you, and I don't disagree with that trade-off and you better trade dramatically in the short run, but there is a trade-off even if short rates are to stay low for some time, if you get any bump up in longer-term rates, that's an opportunity lost too that, the right time of making that jump is important.

Well, right now we just don't have any funding needs, which is frustrating, because you know, you look at what's the 10-year treasury export 20 and we can borrow at probably a 160 spread over that, maybe not even that much. I think --you know, so it's a great time to raise money.

Right. OK. Thank you very much.

And again, ladies and gentlemen, if you'd like to ask a question, please key "* 1" now. And at this time, sir, it appears there are no further questions.

Thank you, operator. If anybody has any follow-up calls, feel free to call either Eric Fisher or Lee (inaudible) here. Thanks.

Ladies and gentlemen, this concludes your program for today. You may now disconnect.