NuStar Energy LP (NS) 2004 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Valero LP first-quarter 2004 earnings conference call. My name is Carlo and I will be your coordinator for 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 presentation. (OPERATOR INSTRUCTIONS).

I would now like to turn the presentation over to your host for today's call, Mr. Eric Fisher, Director of Investor Relations.

Thank you, Carlo. Good afternoon and welcome to Valero LP's first-quarter 2004 earnings conference call. I'm Eric Fisher, Director of Investor Relations for Valero LP. I'm joined today by Curt Anastasio, CEO of Valero LP, Steve Blank, our CFO, and other members of the management team.

If you've not received the earnings release and would like to get a copy, you may obtain one off of our Web site at ValeroLP.com.

Please note that we have begun providing additional financial information on our business segments in the financial tables that are attached to the earnings release. If after reviewing the attached tables you have additional questions on the information presented there, please feel free to give us a call.

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 the forward-looking statement contained in the press 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 results to be materially different include those we have described in the filings we've made with the SEC. Curt?

Good afternoon and thank you all for joining us today for our quarterly earnings conference call.

This was another excellent quarter for Valero LP, so let me go through the numbers and various explanations and a few other key items.

Our first-quarter earnings of $18.5 million, or 80 cents per unit, compares to 11.8 million, or 60 cents per unit, last year. The primary reason for the higher earnings and throughput volumes in the first quarter of 2004 versus the first quarter of 2003 was the acquisitions we completed during 2003. The most significant acquisitions included the South Texas Pipeline Systems (inaudible) crude oil storage tank assets acquired from Valero Energy in March, 2003, and the Southlake refined product pipeline acquired from Valero in August, 2003.

Distributable cash flow applicable to the limited partners for the quarter was $23.2 million, compared to 14.9 million last year, an increase of over 50 percent.

I'm especially pleased to announce that, as a result of our increase to earnings and cash flow, the Partnership has declared another 5 cent increase in the quarterly distribution to 80 cents per unit. This is the fourth 5 cent increase in the quarterly distribution since the IPO in April, 2001, which represents a 33 percent increase in the distribution rate in just three years. We are now paying an annual distribution of $3.20 per unit.

Even with the distribution increase, our distributable cash flow coverage ratio applicable to limited partners is more than 1.25 times and continues to be one of the strongest among the peer group.

Comparing our key operating and financial statistics to the first quarter of 2003, throughput volumes and operating income were both up significantly. Of a $10.5 million increase in operating income, about 7.3 million was related to the acquisitions and about 1.5 million was related to higher throughputs at our base business. If you recall, last year in the first quarter, downtime at Valero Energy's McKee and Three Rivers refineries caused our throughputs to be lower. The remaining 1.7 million increase in operating income is related to tariffs and fee increases implemented during the quarter.

I'd like to spend just a minute talking about the tariff increases, since they will result in higher revenues, going forward. Given the Partnership's rapid growth over the last few years, we began last fall to evaluate our tariffs and fees, our overall cost structure and other arrangements with our general partner, Valero Energy. As a result of that process, we've made several changes. First, beginning January 1st, we increased the tariffs on several of our lines, which will increase revenues by 1.5 to $2 million per quarter, going forward. Also, you may have seen in our recently filed Form 10-K that we amended the services agreement with General Partner to revise the annual services fee structure. In addition, we made some other changes to how costs are allocated between Valero Energy and Valero LP to more accurately reflect the practical realities of the business relationship.

As a result of the changes to our cost structure with Valero Energy, we expect administrative expense to increase by approximately $1 million per quarter and operating expense to increase by approximately $750,000 per quarter, beginning in the second quarter.

Looking at a few of the other smaller variances for the quarter versus first quarter, 2003, administrative expenses were higher by around $150,000, primarily due to the higher unit holder recording costs as a result of the overall increase in the number of unit holders and higher costs related to compliance with Sarbanes-Oxley internal control reporting requirements.

Interest expense increased by $2.7 million, primarily due to additional borrowings in the first quarter of 2003 to fund the acquisition of Valero Energy's South Texas pipeline systems and crude oil storage takes. In addition, there were $43 million in additional borrowings in the first quarter of 2004 under our revolving credit facility to fund the $28 million acquisition of the Royal Trading asphalt terminal and a portion of the cost is associated with the (indiscernible) Laredo project in south Texas and Mexico.

Our debt to capitalization ratio increased to 47.8 percent in the end of the quarter, compared to 44.7 percent at year-end, 2003 as a result of the $43 million in additional borrowings in the first quarter, as mentioned above. However, our debt to capitalization ratio is still much better than our peer groups' debt to capitalization ratio.

With respect to the interest rate swaps we entered into last year, currently we are at about 50-50 fixed versus floating-rate interest rate exposure on approximately $400 million of outstanding debt. Our weighted average interest rate, including the effect of the swaps, was around 4.5 percent for the first quarter.

Let me just give you a quick update on Dos Laredos and Royal Trading. With respect to the Dos Laredo's pipeline and terminal system in South Texas and Mexico, we're rapidly nearing completion and expect to be operational by June 1st. If you will recall, this is a project where we are building a new propane terminal in Nuevo Laredo, Mexico, and building a connecting pipeline to deliver propane to the terminal from Valero Energy's Corpus Christi and Three Rivers refinery. We expect Dos Laredos to contribute around $4 million of EBITDA annually and expect there could be further upside, since this is a fast-growing market and we have the capacity to deliver additional volume.

Regarding the February 20th acquisition of the asphalt terminals from Royal Trading, we're pleased with the integration of these terminals into our system. Although the contributions income in the first quarter was minimal due to seasonality of this business, we expect these terminals to start contributing to earnings this quarter as demand picks up and the asphalt season begins.

Looking at the second quarter, we do expect to see slightly higher throughput across our systems, given the normal seasonal pick-up in demand and the fact that (indiscernible) refineries we serve are running at normal levels with no major turnarounds planned for the rest of this quarter.

With respect to costs, we anticipate operating expenses will be about $1 million higher per quarter, related to higher bank and specialty costs. These are standard tank inspection costs that everybody in the industry faces and which we anticipated with respect to our recently acquired tank assets.

Going forward, we continue to look at other acquisition opportunities in the marketplace and believe we're well positioned to aggressively pursue those opportunities as they become available. As many of you know, we also announced, during the first quarter, an amendment of our partnership agreement to lower the general partner's incentive distribution rights from 50 percent to 25 percent of any quarterly cash distribution that exceeds 90 cents per unit. That will lower our cost of capital and allow us to compete more aggressively for accretive acquisition opportunities in the future. Currently, the weighted average general partner take is just over 7 percent, one of the lowest in our peer group.

So, in conclusion, with our strong distribution coverage, low cost of capital and excellent financial position, we expect another excellent year in 2004, and we expect to continue to grow.

At this time, I will open it up the Q&A.

(OPERATOR INSTRUCTIONS). David Fleischer with Kayne Anderson Capital.

Curt, you typically have a seasonally weaker first quarter, and yet this quarter was quite strong. I think you said it was like 1.5 million of greater revenue or maybe -- from throughput being stronger this quarter. Is that the full extent of the seasonal benefit out of the total increase, or is it some portion of that? Are there costs that go against that? I am just trying to understand how much of this a stronger quarter seasonally than you normally have versus the other factors you mentioned.

The 1.5 million, as you know, by comparison to the year-earlier quarter, which was negatively impacted by some downtime at the McKee and Three Rivers Texas refineries, so the favorable comparison this time around is attributable to the fact that those refineries, with the strong energy demand and the good refining margins we're seeing and also the good operations that they enjoy, have caused our pipeline throughput to connect it to those two refinery systems to be higher.

So is this actually a more normal quarter with last year's quarter being seasonally weaker, or is it some combination of -- (technical difficulty) -- being stronger and last year being weaker?

I would say it's some combination because the fundamentals in the refining industry are very strong right now, but there also was this downtime at the refineries that causes the comparison to look better as well.

Okay. Then you talked about your coverage ratio being high. I guess the question you have heard before I will throw again at you is, is there a right coverage ratio and is there a timeframe that you intend to get it down there or if you keep increasing at this rate, you know, you keep growing faster than this, you'll never get there perhaps?

(LAUGHTER). Well, you know, we don't have a written-in-stone coverage ratio. You've seen where we have been historically. Historically, we have been hovering around this 1.2 times coverage or so. Again, that's not written in stone. We will be opportunistic where we can to continue to aggressively grow our distribution, but we're very comfortable where we are and our CFO Steve may have a further comment on this subject.

No, I think that's pretty much it. You know, obviously we've got (indiscernible) to interest rates move up, that could that could hit us a little bit, so I think it makes sense to continue to be a bit conservative on the coverage. Yet, at the same time, obviously, we've (inaudible) the distribution I think second only to one other MLP, so we've given a good return.

Really, we have been able to give the best of both worlds right now, the security, the high coverage, and also a high payout.

Let me ask CFO Steve another question then. You've indicated that you're still in the 50 percent fixed to floating ratio. You've been at that for awhile now. I guess the question -- given that interest rates have been low and you benefited a lot from the floating rates, the low floating rates, and now rates started to move up -- and maybe that's the question -- how steep and over what time period, how far do they go? How do you view the world differently now? How might you be thinking about changing that ratio, going forward?

Yes. Well, first of all, we have still got over a 300 basis point positive carry on the swaps, so we are paying about 3 percent under those and receiving about 6.35 percent. So, rates would have to move by over 300 basis points before we felt any pain, if you will. You know, that will probably take some time.

Given that we are 50-50, we are pretty much indifferent, if you will, to the direction of interest rates. We have not taken a position one way or the other, so I think, first of all, I'd like to say that's kind of a conservative posture.

Also, David, I think what we're going to be growing the Company and we're going to be doing deals (sic), and I think we will have the opportunity to, if you will, be very mindful of what that mix should be. If we see rates moving, we would probably just choose to fund a greater percentage of a new deal in the fixed-rate market and then bring the 50 percent down that way. But we are keeping a very close eye on this and obviously continue to monitor it. But so far, the short-term rates, which is what we're paying, haven't -- (technical difficulty) -- really at all.

I understand. Okay, thanks.

Mark Easterbrook with RBC Capital Markets.

Just quickly, the maintenance cap number came down, or seemed to come down significantly, relative to expectations. Any reason for that? What should we be looking for? What kind of numbers should we be looking for in the next few quarters?

I think it's more just timing that anything else on maintenance cap. We spent a lot of money in the fourth quarter on the Houston 12 inch pipeline upgrade and also some of the work we are doing on what we call the Value Line, which links Corpus Christi and Edinburg (ph). Some of the work actually -- we originally thought on the Houston line that we would finish in the first quarter; it's being deferred to the second, so I wouldn't read too much into that -- (multiple speakers).

So for an annualized number for 2004, it should be -- I think it was 12 to 16 million or in that range?

Yes, I wouldn't change that. I wouldn't change that just based on what you see for this quarter. Yes, I think it's closer to 12 than 16.

Then you also took out about $40 million for the Mexican project. Is there any further funding for that?

Well, it's mostly actually for funding that Royal Trading acquisition we did. We did put some of the money towards some of the Dos Laredos costs. On the Mexican project, how much do we have to go, Steve?

We've got about 7 million -- (Multiple Speakers) -- in the second quarter that we've got budgeted. Of the 12 million of CapEx that we had in the first quarter, about 7.5 million was for Dos Laredos. We've got a little less than 7 million to go in the second quarter on that project. You know, it comes on by June 1.

Seven million to go.

I think you said (indiscernible) it should annualize about $4 million in EBITDA?

Yes.

In terms of -- your first quarter this year was pretty good. Do you expect any kind of maintenance downturns in the second quarter?

No, nothing significant.

Ron Londe with A.G. Edwards and Sons.

I'd just like to go over a few things on the segment -- operating segment data. In the crude oil pipeline area, volumes were up like almost 15 percent but revenue was up 12. Is that the long haul versus short haul, or was there a tariff change in there, or what happened?

It's a big thing; it's Wichita Falls. It's a high tariff line. It's a mix of tariffs. I think you had it right. Yes, it won't be a one-to-one direct relationship on overall volume to revenues because tariffs differ.

Okay. Then the operating expense stayed pretty -- was actually down. Was there a reason for that in the quarter?

That's the reclass, actually, where we took the Corpus Christi tank. Now that we have a separate fee for that tank, it's now a lease structure, where before the cost of that tank arm was reimbursed as part of a tariff on a pipeline going up to three Rivers. Because the crude comes into the tank and then just goes up this line to the Three Rivers refinery. Now that we've established a separate lease structure for those tanks and get compensated that way, it's deemed appropriate to put them into the crude oil storage segment. So, we've taken the operating costs out of the crude oil pipeline segment, where it would have been, and now those have gone into the segment below the crude oil storage tank segment.

That's why it jumped 66 percent from 5.8 (ph)?

I'm trying to find your numbers. No, I think you're looking at the refined product pipeline. No, it goes all the way down -- (multiple speakers) -- storage tank, the second thing from the bottom, right before the consolidated -- (multiple speakers).

Right, okay, it goes from 2.7 to 3.4 -- 4.3? Yes, just looking at the refined products pipeline area also, revenues were up 57 percent and throughput was up 47 percent. You know, what was causing that phenomenon? Is that long haul versus short, or was there some other change in there?

We did have more going to Colorado, I know that.

Yes, and we also had, in the first quarter, we had some tariff increases that affected the revenues in that segment.

Okay. Operating expense was up 66 percent. Is there a shift there, or --? Was that power, or can you give me some insight?

I think, on the operating costs, you (inaudible) refined products segment, it was mainly due (inaudible) ad valorem accruals and some of the accruals (indiscernible) ad valorem taxes and also salary costs.

(multiple speakers) -- you're talking about the operating costs now?

Right, operating expense.

From quarter-to-quarter? First quarter?

Right.

Yes, you basically had -- you had to drop some South Texas assets at Southlake, so principally it's just the change in the business. The acquisition of the South Texas pipeline was responsible for about $2.5 million of increased costs, and then about 600,000 for Southlake. We did have some higher power costs as well. But really, the acquisitions drove the moves in the operating (inaudible). You know, and the March drops were the refined product pipelines and terminals in South Texas and then the tanks, which are shown in that crude oil storage tank segment.

Okay. That's all I had. Good quarter.

Kent Greene (ph) with Boston American Asset Management.

Great quarter, fellows. Just some clarification on that million administrative expense that is going to show up as -- where is that going to show up in? Is that on top of the 1.9?

Yes, yes. The $1 million, which really comes out of the service agreement and also picks up the bonus element of that, will go into G&A and would fall in that line; that's almost exactly $2 million in the first quarter. Okay? Then there's a $750,000 increase, which would fall in OpEx, which is also us just getting our costs -- related-party costs right with the parent company, or GT. Those are for people that are -- their expenses are allocated out to the various segments, if you will. So, it's also salaried, benefit and bonus but it is allocated out to the segments because they are field personnel.

Okay, I got that. What about future acquisitions? You have sort of concentrated on acquisitions from the parent Valero. Are you looking outside? What are the size of the things and put a fence around it for us -- what areas geographically are you're looking at, or just areas as far as product mix?

Yes, there's no shortage of acquisition opportunities and you know, we don't limit ourselves geographically but we do prioritize what we look that. So what tends to happen is we rank higher -- acquisitions that are either bolt-ons or ones where we see some synergy that we can capture. So it's not that we exclude any geography but when we rank-order them, they tend to be higher ranked if we can take use of those assets that we already have and the overhead, spread it over a bigger asset base effectively. So, that's what tends to happen.

The third party versus Valero, I mean, really we're sitting pretty in a way because we have more than enough opportunity on both fronts to keep kind of aggressive growth and the distribution that we've had. Most of what we are looking at nowadays is third party deals, however. There's a lot of them on the market right now, all types, large and small, so I would tell you that that's most of what we look at right now is sort of non-Valero deals. But Valero is still there as an opportunity for us.

What size -- will you finance roughly 50-50, as you have been doing?

That's what we assume we will do. I mean, that's the sort of assumption we make when we run acquisition economics, and so, in size, there is everything from the sort of deals you saw us do in the first quarter, like a two terminal, $28 million deal like we completed in February, all the way up to deals that are many, many times larger than that. We have about the lowest cost of capital of any of these MLPs however you want to calculate it, and we have as much or more access to capital markets as anybody else. So, you know, it's financing in terms of a limitation really doesn't burden us (sic) relative to our competitors.

Thank you.

Carl Grace (ph), a private investor.

Yes, is there a maturity date for Valero LP unit shares, or any set future date whereby shareholder holdings might change significantly? Is there anything in the limited partnership contract?

There's no maturity date on a limited partner use, no.

I see.

The second part -- explain this to me, the second part of your question. I may not -- (multiple speakers).

I was wondering if there's some set future date whereby shareholders might expect some significant change in their holdings.

Not at all.

Okay. Now, the other thing is, is there awn Internet e-mail address where we might, say, ask a question?

Sure. You can go to ValeroLP.com. Under the Investor Relations section, you can click on the "Contact Us" part of that page; it's called "Contact Us" under the Investor Relations section, and it will send an e-mail directly to me.

We send an e-mail directly to you? Or they do?

It will just come directly to me when you hit 'submit'. We will be happy to reply.

Okay, contact use -- contact what?

I think "Contact Us", that's the name -- (multiple speakers) --

I got you. Thank you very much.

(OPERATOR INSTRUCTIONS). Sir, we have no further questions at this time.

Thanks, Carlo. We appreciate everybody being on the call today and again, if you have any questions, feel free to call or e-mail us. Thank you.

Ladies and gentlemen, we thank you for your participation in today's conference. This concludes your presentation, and you may now disconnect. Good day.