NuStar Energy LP (NS) 2003 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Q4 2003 fourth quarter Valero L.P. earnings conference call.

[OPERATOR INSTRUCTIONS]

I would now like to turn the presentation over to your host for today's call Mr. Fisher, director of investor relations for Valero L.P. Please proceed, sir.

Thank you operator. Good afternoon, and welcome to Valero L.P.'s fourth quarter 2003 earnings conference call. I'm Eric Fisher, director of investor relations for Valero L.P. I'm joined today by Curt Anastasio, chief executive officer of Valero L.P., Steve Blank, our chief financial officer and other members of the management team.

Before we get started I'd like to direct your attention to the forward-looking statements disclaimer that's included in the press release. In summary, it says that forward-looking statements contained in the press release and on this conference call are intended to be covered by the provision 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 the filings that we've made with the SEC.

With that I'll turn it over to Curt.

Good afternoon, and thank you all for joining us today for our quarterly earnings conference call. This was really good quarter for the partnership, closing out a year of record earnings and accomplishments.

Our fourth quarter earnings of $18.3 million or 79 cents per unit compared to $14.2 million or 74 cents per unit last year. For the full year, our net income was a record $65.6 million, or $3.02 per unit, compared to $52.3 million or $2.72 per unit last year.

Distributable cash flow for the quarter was $22.1 million compared to $17.9 million last year, an increase of 23%. Our distributable cash flow coverage is at 1.2 times and continues to be one of the strongest among the peer group. This ratio is lower than the third quarter ratio due to higher expenditure in the fourth quarter for reliability capital.

In total, reliability Capex was $5 million in the fourth quarter, as a result of planned repairs and upgrades; primarily on our Corpus Christi to Houston pipeline and software costs incurred for our pipeline and terminal automation projects.

Our year-end debt to capitalization ratio was 44.7%, which is right inline with our peer group. It's also important to note that this is down from 51.4% at the end of the first quarter, after we completed the de consolidation from Valero Energy.

The key driver for the improved earnings in the fourth quarter of 2003 versus the fourth quarter of 2002 was the acquisitions we completed during the year. In fact, all of the key variances, quarter over quarter, are related to the acquisitions during 2003.

The South Texas pipeline system and crude oil storage tanks, which were acquired in March, contributed $7.9 million of operating income. This keeps us right on track for achieving the projected $43 million in annualized EBITDA or 30.6 million in operating income from these assets that we've discussed in March.

The quarter also benefited from the contribution of our other acquisitions completed in 2003 such as the South Lake refined products pipeline acquired August 1st, an asphalt terminal in Pittsburg, California purchased from Telfer Oil and a products terminal in Paulsboro, New Jersey purchased from Exxon Mobil.

If you compare our key financial statistics to the third quarter you'll notice that not much changed other than about a $2 million decline in operating expenses and slightly lower throughput in our crude oil pipelines.

The roughly $2 million decline in operating expense compared to the third quarter was primarily due to lower crude oil pipeline throughput, which resulted in decreased power and chemical costs.

Going forward we expect normalized operating expense to run around $18 million per quarter. Administrative expenses compared to the third quarter were higher by 850,000 due to higher incentive compensation expense and higher unit holder reporting cost as a result of additional equity offerings this year.

However, interest and expense compared to the third quarter of this year declined by about $300,000. We continued to benefit from the fixed to floating interest rate swaps -- we entered into last year.

Currently, we're at about 50/50 fixed versus floating interest rates on approximately $350 million of outstanding debt, and our weighted average interest rate including the effect of the swap is less than 5%.

Looking at throughput volumes for the fourth quarter, volumes were higher in all categories, crude oil and refined product pipelines, refined product terminals, and crude oil storage tanks, compared to the fourth quarter last year. Again, this was due primarily to the acquisitions in 2003.

However, comparing the fourth quarter volumes to the third quarter, crude oil pipeline volumes were down just over 30,000 barrels per day, the majority of which was caused by a nearly 20,000 barrel per day reduction in the Wichita Falls pipeline due to Valero Energy's McKee Texas refinery running at lower rates in the fourth quarter.

For the first quarter, the refinery is back at normal rates so we expect crude oil pipeline volumes to return to planned rate. In the first quarter, Valero Energy has only two maintenance turnarounds plants at the refineries we service, the MTB facility at Corpus Christi and the operation unit at Benicia. Neither of these are expected to have a material impact on our storage tank volumes.

Just a quick update on our Dos Laredos project. If you recall this is a project where Valero L.P. is building a new propane terminal in Nuave Laredo, Mexico and building a connecting pipeline on the U.S. side to deliver propane to Valero Energy from its Corpus Christi and Three Rivers refineries.

I'm pleased to report construction on the propane terminal in Nuevo Laredo is near completion. In connection with this construction Valero Energy and Valero L.P. will enter into or intend to enter into a five year agreement to supply transport 5,000 barrels per day of propane to Northern Mexico. Valero L.P. will have a five-year trouped agreement with Valero Energy and be responsible from moving the propane to return product pipeline and terminals.

We continue to look at acquisition opportunities in the market place and believe we are the best position of our guard group to aggressively pursue these opportunities that they become available.

We have a very low cost to capital relative to our peers with the incentive distributions to the general partner still in the low splits. This allows us to be more competitive on acquisition economics.

At year end $175 million remained available to us under our revolver giving us ample liquidity. On top of our strong credit rating and balance sheet we also have good access to capital markets. We have strong coverage and anticipated further growth in our earnings and cash flow; we're in a great position to build on a record 2003 and to further increase cash distributions to unit holders in 2004.

At this time, I'll open it up for Q&A. Operator?

Thank you sir.

[OPERATOR INSTRUCTIONS]

And our first question comes from Ron Londe from AG Edwards. Please go ahead sir.

Thank you. Curt, maybe you can clarify something for me. In note 1 to the financial statement, you talk about the statement of income for the three months in the year, included $9 million and $28 million of operating income related to acquisition completed during the year. If you subtract that from the operating income, you get kind of same-store-sales down 10% for the quarter, and down 5% for the year-to-year. Is that the right way to look at it, or is there another way to look at that?

Ron, hi, its Steve Blank. The -- yes, I think the operating income contribution from the acquisitions we did that are contained in that footnote. The operating income overall increase was about, I believe, $2.5 million. I would lay the shortfall on, you know, on the same-store sale concept really to the continued problem we have on the McKee to Denver line.

We lost $4 million in revenue in '03 compared to '02. I don't have the operating income aspect on that line handy. But we did drop about $4 million in revenue on that line. As you know, Valero Energy is continuing to run Denver refinery very hard, given the good margins. And we are not shipping much product up that line. OK? So if there's a same-store issue, it's that line.

-- which affects the product pipeline segment. The crude pipeline segment was actually a little bit up, same kind of same store basis.

Yes, again I mean throughput wise; we were up on all four segments if you will that, we report throughput on. But that one product line was the problem.

OK. What are, you know, the operating rates now versus what you might expect? What are you operating at versus capacity, I guess?

You mean like utilization rate?

Yes.

It's crept up some. We were averaging in '02 I think a little below 60%. In '03 we're a little above. But overall it's about 62% utilization rate versus maybe 59 or so in '02. So it's increased a bit.

OK. You know, it looks -- can you give us some idea of what your maintenance capital spending might be for 2004?

Yes, we've got it, Steve, you have it.

Reliability Capex, which was $5 million in the fourth quarter, we anticipate between 3.5 to 4 million in '04 per quarter.

OK, so maybe at 11.5 to 12 million for the full year?

Well, little more than that. If you multiply it by four, you'd be more like 14.

14.

14, yes.

OK.

I'm sorry my math wasn't -- but the number of the 3.50 to 4 is pretty much what we're budgeting.

OK. All right. That's all I have for now.

Thanks Ron.

Thank you. Our next question comes from Kent Green (ph) from Boston American Asset Management. Please go ahead, sir.

Yes, would I please refresh my memory on the general partner splits, when does it go to the next highest split et cetera?

It goes to the next highest split when we're paying 90 cents a quarter or 360 a year. Right now the weighted average percentage taken by the general partner is about 6%, OK?

Then it goes to what 25 at 90 cents?

What we are is -

Are the increment above that, is what I meant.

OK, from everything above 66 cents up until 90 goes at 25% to the GP. Once we hit 90, it goes to 50%.

OK. And is there any thought about putting a cap on that as, you know, as EDP has done?

At the moment, this just isn't an issue for us. Because as we've tried to say, we are among the lowest of the entire MLP universe with the GP take, as Steve said, around 6%. So we're just not facing that issue right now from a capital standpoint.

OK, very good. And then are there -- is there any other assets over at Valero that could be transferred on over, other than you know, and would they -- you obviously pick up mid stream assets if they make any acquisitions at Valero?

The second half of that is, it's an opportunity for us. But maybe the answer is yes, sure there are numerous assets that could be transferred. We've lately really been focused on third party acquisitions, and that's what you've seen us do in '03, after the March deals you saw us do like the Telfer deal and I've mentioned the Exxon Mobil and so forth. That's been our focus now starting off in '04. So yes, we have opportunities both from Valero Energy and also from other companies.

And have you, because your size is getting a little bigger, have you raised, you know, the dollar amounts that you could at least bid on, and what would that be?

Yes, I would say we have -- we have better ability to do larger deals now because of our increased size. We up sized our revolving credit facility during the year to what was it, 120 -- from 120 to 175, and we've had the kind of receptivity we have in the capital markets shows that you know we have a bigger bogey nowadays than we would have had a year ago. So, we can do quite sizable deals.

What theoretical limits, I don't know because you know besides just raising capital, you know we have a valuable currency, and there are ways to structure deals where you know for the right deal we could do a quite sizable deal.

But you know we don't feel any pressure to do that right now, none at all, because we have such good coverage and we have low splits that we have the opportunity not to stretch ourselves to have to do big deals to deliver high accretion and high distribution growth rates to our unit holders.

So, we don't feel the slightest bit of pressure to reach for a big deal in order to have the kind of growth rate and distributable cash flow that we want to deliver to our investors.

Thank you.

Again, our next question comes from Mark Easterbrook from RBC Capital Markets. Please go ahead sir.

Yes, good afternoon. Quick question on the G&A, expense went up a little bit more than I thought and that is related to incentive compensation. Is that just a one-time thing or is that an annual charge that will happen every fourth quarter or so?

Well, Mark, G&A went up because of a couple of things. One was restricted unit and option amortization that that happened in the fourth quarter under the comp program, or the compensation program. In addition, we did have higher charges for our K-1 expense.

As you know, we did two equity issues during the year, which has driven up the expense that we're incurring to prepare the K-1s. And then additionally in New Jersey, where we bought Paulsboro terminal, there is a partner entity level tax, which is I think, we've calculated about $250,000. So those were the three principal drivers on that line item.

So, that's -- they're basically going to be re occurring.

Well, I would say the K-1s and the partner tax, don't know about the units and option, but yes, most likely so.

And then secondly, you guys seem to have a very low interest rate expense.

Yes.

How shall we look at, you know, next year? Are you going to be below this, I think it's 5% or is that going to start to creeping up and mentally there is a function there with interest rates, looking forward what should we be kind of be looking at?

Well, you know, everybody's interest rate forecast is different, I would say. But you know, our own forecast, as rates will start moving up towards the end of the year. We did benefit by about $5 million in '03 from these interest rate swaps that we put into place.

Currently, this quarter, we have a -- about 4% positive carry on those swaps, which is keeping us almost exactly at 5% right now. So as you know, the expectations, Fed is not going to move on rates when they meet, I think they meet tomorrow. So we'll just see. But for now, we don't think we're going to do anything different with our interest rate mix.

And your debt -- if you include the swaps, what percentage is floating versus fixed?

It's roughly 50-50.

OK, thanks.

[OPERATOR INSTRUCTIONS]

And our next question comes from David Maccarone from Goldman Sachs. Please go ahead, sir.

Thank you. I want to ask you what you see is the long-term pay out ratio, and what determines -- what you view that pay out ratio to be in terms of whether it's peer comparisons or some level of coverage support that you'd like to have? And over with what time period would you expect to get there?

Well, let me answer it just maybe in terms of distribution growth. You know, we've had a pretty, I think, strong track record in distribution growth from the IPO to now.

And on an annualized basis, it's been double-digit percentages. And that's how we're measuring ourselves. That's what we want to do going forward and we believe we have the ability to stay in the forefront on that. There was only one MLP as of year-end that had delivered a faster rate of distribution growth than us.

So that's the kind of neighborhood we want to stay in. You know, how you calculate that in terms of pay out, ratio of available cash or whatever, you know that's to me follows from having as your objective being a very aggressive grower of the distribution. But Steve you may want to change the answer.

No.

OK.

Is there an upper or lower boundary to which you get more or less comfortable, whether that's -- your coverage is too strong or starts looking a little weaker where you might pair down that growth target?

Well, you know, I guess if you look at us, you've seen that we've, you know, more or less being hanging around 1.2 times coverage on all the units. OK? We're not locked into that.

We feel we need to take a lot of factors into account to see where that coverage is and we want to be opportunistic enough to change that where it really makes sense for other reasons to do so. But I think it's fair enough to say at this point that we've been pretty comfortable in that neighborhood. Steve.

Yes, not losing sight of the fact that we want to each year you know try to grow that distribution in a leading way.

OK, thank you.

Thank you.

[OPERATOR INSTRUCTIONS]

There are no further questions at this time, sir.

OK, great. Well, thank you all for joining us today on the call and if anyone has a follow up question feel free to give us a call. Thank you.