NuStar Energy LP (NS) 2004 Q2 法說會逐字稿

Good day, ladies and gentlemen, welcome to the Q2 2004 Valero LP earnings conference call. (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.

Good afternoon. Welcome to Valero L.P.'s second-quarter 2004 earnings conference call. I'm Eric Fisher, Director of Investor Relations for Valero L.P. With me today is Curt Anastasio, CEO of Valero L.P.; Steve Blank, our CFO; and other members of the management team. If you have not received the earnings release and would like to get a copy, you may obtain one off our website a ValeroLP.com.

Attached to the earnings release we have provided additional financial information on our business segment. If you have questions after reviewing those, feel free to give us a call after this conference call. I would also like to point out we have provided comparable 2003 segmental operating highlights, which you can also find on our website under the investor relations link. We hope you'll find this additional information helpful.

Before we get started I will 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 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 have described in our filings with the SEC. Curt.

Good afternoon and thank you for joining us today for our quarterly earnings conference call. The second quarter, we reported earnings applicable to the limited partners of $18.2 million, or 79 cents per unit, which compares to 17.1 million or 79 cents per unit last year. Year to date, earnings were up 27 percent to $36.7 million, or $1.59 per unit, compared to $28.8 million or $1.40 per unit for the first 6 months of 2003.

Earnings were higher in the second quarter of 2004 versus the second quarter of '03, primarily due to higher throughput volumes across the partnership system. The higher throughput volumes are primarily due to increased runs at most of the Valero Energy refineries the partnership serves and increased volumes from the acquisitions and internal growth projects completed since the second quarter of last year. These include the acquisition of the Southlake refined product pipeline from Valero Energy in the third quarter last year; the acquisition of 2 asphalt terminals from Royal Trading in February 2004; and the startup of the Dos Laredos propane terminal in Nuevo Laredo, Mexico, on June 1.

Distributable cash flow applicable to the limited partners for the quarter was $22 million, compared to 20.9 million for the same period last year, which is an increase of around 6 percent. Our distributable cash flow coverage ratio applicable to the limited partners is at 1.2 times, and it remains one of the strongest among the peer group.

You will also not in the release that we declared a quarterly distribution of 80 cents per unit payable August 13.

Turning now to some of our key operating and financial statistics, revenues were higher by approximately 8.2 million, primarily as a result of the acquisitions completed since the second quarter last year, as well as tariff and fee increases we implemented during the first and second quarters. The tariff and fee increases had the effect of increasing revenues by about $1.8 million in the second quarter, and are expected to increase revenues by about the same amount in the third quarter.

Included in the revenue increases just mentioned is the contribution of the Southlake refined products pipeline we acquired effective last August. If you recall, the Southlake pipeline connects Valero Energy's McKee refinery to the partnership's Southlake products terminal in the growing Dallas-Fort Worth market. For the second quarter, Southlake contributed around $1.1 million to EBITDA, or about 5 cents to earnings per unit.

Another key contributor to our second-quarter earnings was our most recent acquisition of two state-of-the-art asphalt terminals from Royal Trading, one near Santa Fe, New Mexico, and the other near Tulsa Oklahoma. This acquisition is proving to be a good contributor to earnings with the seasonable pickup in asphalt demand, and we expect it to be even better in the third quarter as road-paving activity continues. For the second quarter, the terminals contributed around $750,000 to EBITDA, or about 3 cents to earnings per unit.

With respect to our newly commissioned Dos Laredos propane terminal in Nuevo Laredo, Mexico, we are pleased to report that it started up successfully on June 1 and has been operating according to plan. We expect Dos Laredos to contribute around $4 million to EBITDA annually, and are working with Valero Energy, PEMEX, and others to increase the terminal's volume to as much as 8,000 barrels per day from the current throughput level of about 5,000 barrels per day. Given the growing demand in Mexico for propane, we're excited about the opportunities available to us and the positive relationships we're developing in Mexico.

Operating and administrative expenses increased by approximately $3.9 million and $1 million dollars from the second quarter of 2003, respectively. Most of the increase in operating expense for the quarter was attributable to the acquisitions we have completed, including increased overhead somewhat associated with those acquisitions and higher variable compensation expense.

However, part of the increase in operating expense and the majority of the increase in administrative expenses was due to the impact of the amendment to the services agreement, which was implemented on April 1. As we discussed on last quarter's conference call, those changes were made to more properly reflect how costs were allocated between Valero Energy and Valero L.P. Going forward, we expect administrative expenses to be approximately $3 million per quarter. Of this about $1 million is due to these changes.

Another variance versus the second quarter last year worth mentioning is the roughly 1.2 million increase in the number of units outstanding from the equity offering completed in August 2003. The dilutive impact of the increase in units outstanding was about 5 cents per unit. However, the equity offering further strengthened our balance sheet and puts us in an excellent position to opportunistically grow the partnership.

In fact, our debt-to-capitalization ratio at the end of the second quarter was 47.2 percent, compared to 48.6 percent at the end of the second quarter of last year. This ratio is better than most of our peers and the pipeline (inaudible) average.

Looking at the third quarter, we expect throughput levels across our system to be similar to second-quarter throughput levels. The U.S. refining industry continues to experience strong refined product demand, therefore we expect to see continued high throughput rates at the 8 Valero refineries we serve. There are also no major turnarounds planned at these refineries in the third quarter. Keep in mind that in the fourth quarter, Valero Energy's Benicia refinery goes down for a plant-wide turnaround for about 30 days.

With respect to costs, we anticipate operating expenses will be about $2 million higher in the third quarter related to tank inspection work scheduled to be completed as part of our integrity management program. These are standard-type costs that others in the industry have also been incurring. In the fourth quarter, we expect these costs to drop back down to more normal levels; and quarterly operating expense should return to a run rate of around $20 million.

In closing, I would 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 future growth, and our primary goal continues to be to increase cash distribution to unit holders as we continue to grow cash flow through our strategy of internal growth, acquisitions, and continuous improvement of our operations.

In fact, when you consider the quarterly distribution increase we made last quarter, to 80 cents per unit, or a $3.20 per unit annual distribution rate, we have already delivered an 8.5 percent increase in the distribution rate over the last year. And going forward, we will continue to evaluate further increases in the cash distribution to unit holders. At this time, I will open at up for Q&A.

(OPERATOR INSTRUCTIONS)

If there are not any further questions, we can go ahead and end the call.

Stand by for one moment, sir. Scott Soler with Morgan Stanley.

I just had one question actually. Given how good fundamentals have been in refining, I was just curious on a couple of fronts. What assets at Valero, in terms of dollar amounts roughly, qualify for ownership in match while(ph) in partnership? And has anything with Sarbanes complicated selling assets between entities? Or is there any color you can comment on that? It seems like this is a pretty ideal time to do things. I was just curious about that.

With regard to the first part of your question about assets available at Valero Energy that qualify for an LP operation, in theory it is nearly everything that Valero Energy has. As a practical matter we don't have any current plans, for example, to drop a refinery into Valero L.P. But the literal answer to your question is huge. It is quite large what the potential is.

That gives us the opportunity really to be very selective in our discussions with Valero Energy, as to what is most appropriate for them to sell to us. But the universe of possibilities is exceedingly large, with Valero Energy easily the largest (inaudible) refinery in the country. You can see from the past the type of assets we dropped; and there are others of that type and of new types that could be considered in the future.

With regard to Sarbanes-Oxley, we like everybody else of course have been implementing the compliance program. To me, Sarbanes-Oxley -- and I will defer to Steve on this -- doesn't impose any additional requirements or (inaudible) burdens with regard to intercompany or related company transactions with Valero Energy that we would not have covered off anyway.

We have a complex committee on the Board of Directors; and material transactions that pose such conflicts, those are presented to that committee. They were beforehand; they would be today. That committee has really almost unbridled power to hire financial advisors and lawyers. As they in fact have done in the past. They had that before Sarbanes-Oxley, they have that power today.

There are of course a lot of activity around Sarbanes-Oxley, to make sure that our internal controls are up to snuff, and that our processes and procedures are proper and satisfactory, both internally and to our external auditors. But I see that almost as a process in parallel with what we already would have done on related company transactions. Steve?

You hit the nail right on the head. That's right.

My second question, if I could real quickly, is regarding operating margins and looking at first quarter this year versus a year ago. Is that sort of 44 percent type operating margin the right margin to use going forward? Is there any reason to think it would be a little bit higher than that?

I am sorry. Were you on the second quarter or the first quarter? I didn't quite understand.

I'm just looking at this quarter ended; your operating margins are 44.2 percent on revenues.

I think that is a pretty good number. Unless we really radically change the business, that is (inaudible).

Thanks. All right. Thank you.

Kent Green, Boston American Asset Management.

My question pertained to the Mexican pipeline. You said that EBITDA potential is $4 million. Is that at the 5,000 or at the 8,000 throughput rate?

That is at the 5,000.

Are you responsible for developing industrial contracts down there for use of it? Is this a business unit, or are you going through a reseller?

By law, we sell to -- it is actually PMI who in turn con-sells (ph) the product to PEMEX. Both of those acronyms, PMI and PEMEX, are divisions of the national oil company in Mexico. They have the exclusive right and responsibility to distribute further in Mexico on that project. So, that is how it is working.

We are actually selling the shipper's products. We are not selling the shipper's product; we're transporting, storing, and making available for further distribution the shipper's product. So we don't have any commodity exposure ourselves at Valero L.P.

But you do expect that throughput rate to move up. What is the time frame on that, or is that -- how determinable?

We're working on it now as we speak; and I am optimistic that there is potential to do more than that (indiscernible) in Mexico.

Very good.

Working on it right now.

One other question. Giving the distribution rate increases, I noticed that sometimes you have waited 3 or 4 or 5 quarters; that it is usually a nickel a distribution increase. Is there any rule of thumb going forward or is that depending upon EPU cash flow?

We do not have a formal policy. But if you look at our history, we have been very near the top and often at the top at the rate by which we increase the distribution. And we intend to continue to be a leader in that pipeline peer group on the rate of increase in our distribution.

But we don't have a formal policy about it. It is a Board matter. All of the factors are considered, all of the pros and cons. As I say, we want to be among the leaders in continuing rates of increase in the future. But we don't have a hard and fast policy that is written in stone.

Could you bring me up-to-date on the split of the general partner? The splits at the distribution rates? What percentage your general partner gets, and what percentage are they at now?

On the (inaudible) distribution split, I think we put at (ph) the current blended rate; about 7 or 8 percent.

Right around 7 or 8 percent.

Which puts us in the low split, if you will. In other words the GP take in our partnership is among the lowest of any of the publicly traded partnerships.

At what dividend rate is that going to go to the next split? And what is it?

I was just going to say the maximum rate was lowered at 50 percent, which it was in the IPO, down to 25 percent.

I understand that.

In our case the GP takes at the 90 cents or the $3.60 annually, capped out at 25 percent.

At 350?

That $3.60 annually. Our current rate is 80, 80 cents annually, $3.20. So we have a little bit then into the 75/25 split. There is a little that gets into that tier. This is incremental. You know how the tiers build up.

I understand. Thank you very much.

Ron Londe, A.G. Edwards.

Just wanted to go through some of the segment data. Since you provided it so nicely I thought we might as well talk about it a little bit. You talked about being able to raise your tariffs somewhat. I was looking at crude oil tariff through crude oil pipelines. It actually declined to 37 cents a barrel from 41 cents a barrel in 2003 quarter. Was there any reason for that? Even though the volumes were up like 12 percent.

That is of course the overall tariff revenue per barrel. So that is influenced by precisely what line crude is moving on. It was probably a shifting - I think probably quarter-to-quarter there was more on the Ardmore, wasn't there? Ardmore crude supply, as opposed to some of the other refineries, which brought down the overall average some, just that relative shift. But that is all that is going on there.

It seems like there was a slight decline in the depreciation there too. Is there anything -- impairment or anything like that involved?

No. What we did was, you may recall in the first quarter we took out the Corpus Christi terminal, which had been in a pipeline segment previously, and we reclassed it down into the crude oil storage tank segment. So the depreciation dropped simply because of that; and you would find that depreciation now below in the crude oil storage tank segment.

Looking at refined products, you had some pretty nice volume gains there. In the average tariff per barrel, it looked like it went up from 48 cents to the current about 50 cents. The operating expenses that really moved up 30 percent, what was the reason? Was that acquisitions? Or what caused that operating expense to jump 30 percent?

What happened there is sort of there are a couple of things going on in our operating expense generally that are also true in that particular segment. Yes, acquisitions -- in that case the acquisition was the Southlake pipeline. The product pipeline that I mentioned increased our cost.

But then also we had a higher number for incentive compensation expense that got booked; and that is reflected there as well as in our overall operating expense. Then also, the effect of the overhead increase due to terms of the new services agreement that we covered in that last call; where we had overhead previously allocated to energy pipelines and it's now fully absorbed by the L.P. That is an influencing factor there as well.

Those are three main factors that are running through those numbers.

In the refined products terminal ling area, you had another nice, fairly good jump in revenue per barrel; 44 cents from 38. Here again you had operating expenses were up 38 percent. What was going on there?

On there, I don't think (inaudible) a lot. Well, first of all, with regard to the throughput, you had the acquisitions of course influencing that. Also our South Texas terminals had much higher refined product throughput quarter-to-quarter comparison. I mentioned the acquisitions. And we also had some fee increases, additive fee increases that were part of what I mentioned in my remarks at the outset of the call.

I don't think there is anything. With regard to expenses, again, acquisitions raised our expenses. Once again we had higher incentive comp expense there. Again the effect of the new services agreement passes through those numbers. Those really I think -- did I miss anything, Steve? Those three, it is a little bit of a broken record, but those three really apply there as much as to the refined product pipeline.

In the crude oil storage tank sector, it looked like you had a really large increase in revenue per barrel there; to almost 25 cents versus 20 cents.

There we had a big increase. They are 3 refinery tank farms involved in that segment, Texas City, Benicia, and Corpus Christi. We had a large increase quarter-over-quarter (technical difficulty) quarter versus last prior quarter at Texas City and a smaller one at Benicia.

So the cost of the rates involved there, if I remember correctly, Texas City and Benicia, -- Benicia in particular had a relatively favorable crude tank storage rate. So when you see increases at 2 out of the 3 tank farms, and at 1 in particular with a good rate, you'll have a sort of a disproportionate increase in the crude oil tank farm throughput revenue.

There was also again this re-class, when we took this Corpus Christi tank -- we call it the North Beach tank -- and put it down into the crude oil storage segment. That is a 30 cent a barrel rate, where most of or I think all of the tanks --

There's like 20 cents.

So that was a big driving factor, was simply that re-class. We just felt that it was more appropriate to show that crude oil tank down in that segment. Previously, it got its return as part of the tariff that ran from a pipeline going up from Corpus Christi up to Three Rivers.

Okay. I'm just trying to confuse everybody.

Yes. But you know, the simple fact though is when you put it all together, they are all up overall. Revenues were up and throughputs were up quite strongly. Mostly from acquisitions, but also from internal growth and our legacy system. So we enjoyed both this time.

Very good, thank you.

David Fleischer.

Curt, what is your view of this 10 times EBITDA acquisition market? Is this the time to sit on the sidelines when you see those kind of prices? Maybe it's the time to work a little harder on the first-dollar type investments that you have had some of here. I guess my question really is beyond that, what is the potential for these first-dollar investments, such as the Dos Laredos terminal? Can you come up with more of those, where the economics are just so much more superior?

Certainly we have noticed what is going on in the acquisition market. But really our strategy hasn't changed. We really think that we're going to be a leader in distribution payment growth by just following our strategy of internal growth acquisitions and improving our operations. The Dos Laredos really is a great example of the kind of thing we can do without relying on acquisitions.

In that arena right now, really our focus contains to be in South Texas. We're nearly done with an expansion of our Valley pipeline, the one that runs through the Corpus Christi refinery down to our Edinburg terminal in the Valley. It is one of the highest growth regions in the nation. That will expand our capacity there.

We're looking at brand-new projects also in the Rio Grande Valley, because we think we have more opportunities there. As I hinted at when I talked to someone about Dos Laredos, we're talking to the Mexicans about new projects there, concentrated really in the northern border region of Mexico, to build on what we have already done. So the potential there is really really great.

The high multiples you mentioned on these large bid auction type situations is one thing. But you see that we have been able to do smaller acquisitions that are very nicely accretive. In fact kind of on a penny per unit basis, as accretive if not more so than some of the huge deals you see being done at very high multiples.

So we are not locked into that. We won't overpay. We continue to look at everything that is out there, from large deals to small deals. But we're not going to overpay just to say that we got a big deal done, because it is just absolutely unnecessary for us to do something like that and maintain a very strong distribution growth rate.

Londe: How confident are you, Curt, that you will have another significant internal project, first-dollar type project, to announce, say in the next 6 months?

I'm very confident that we will have more internal projects to announce. You're saying 6 months. I don't know if it will be 3 months or 12 months or 6 months, but absolutely. I have an extremely high degree of confidence, because that is one plank, one leg of our three-legged strategy that I mentioned to you. That is what we're working on.

Okay. Thanks.

Mark Easterbrook, RBC Capital Markets.

Actually along the lines of the question from David, were you guys involved in any of the acquisitions that have recently been announced from, I guess, a lot of Shell terminals? Were you looking at those?

We look at everything. I will underscore -- everything.

All right. Would those assets have fit into your system nicely? Or would that have been new geographic areas for you?

Shell had few (ph) packages. Obviously the Southern -- let's call it the Southern package, which encompassed the Chase pipeline, some of the Texas assets, the Orion and so forth, would have been a better fit for us than the one in the upper Midwest quite obviously. Hopefully, that answers your question.

Moving onto maintenance CapEx, are you still sort of guiding people towards 14, 15 million for 2004?

Yes. No, we haven't changed that. (multiple speakers) slight variation quarter-to-quarter, but we're sticking with that run rate.

You mentioned one refinery being down in the third quarter. Are there any other refineries that are tied to your system that are expected to be down in the next 2 quarters?

Actually what I said -- just to clarify. I have misspoken. But it's actually the Benicia refinery in the fourth quarter being down for a major turnaround. There are no refinery turnarounds scheduled in the third quarter.

All right. That's it. Thanks.

David Maccarrone, Goldman Sachs.

Curt, I was opening to delve a little bit more into the question David has asked earlier about, more broadly, acquisition opportunities. And maybe characterize for us the supply of opportunities in that small to maybe midsized range, where you have historically seen better risk-adjusted returns, let's say. Kind of characterize the supply opportunities, the competition for them, and maybe give us a sense for how much of that opportunity is products versus oil, asphalt, or something else.

I think those opportunities are plentiful, as far as I can see for an L.P. of our size, which is still -- though we've grown quite a lot, we have more than doubled our size now, we still are relatively small. So we have that benefit of being able to do the small midsized deals and having a very nice accretion result from those. There are more than enough of those potential around for us to fuel our growth.

Don't forget with our 1.2 times coverage, also, that we don't have to even do a whole heck of a lot of those to have a very nice rate of increase in our distribution growth. So we are continuing to sit pretty. There are a lot of those opportunities, and a lot of them that I see are in asphalt and refined products and crude oil. It still does not appear to us to be necessary to stray very far afield from what we are already doing to have good solid singles and doubles and synergistic effects on kind of small to midsize acquisitions.

Is there a sweet spot, ideal size opportunity that you see out there, where the competition declines sharply for fit or size reasons?

I don't know that there is a sweet spot, but I think what you have seen is the bid auction situations with private and equity money has come in, have been the most competitive as far as I can tell. That is the one where hordes of people gather around and try to outbid each other. Those are the ones where you have seen somebody draw (ph) at a 10 time multiple. That seems to be where you most commonly see that effect. You do not see that so much on smaller deals. But to this point anyway that seems to be the case.

On Benicia, the volumes and tariff associated with that, maybe we will get that off line; but if you know it, real quickly?

On the shutdown? On the turnaround? (multiple speakers) turnaround? I think we are still evaluating that, but if you call us we can do that -- get into that off-line.

Thanks a lot.

Gabriel Hammond.

I was hoping you could give us an update on where you are on the floating-rate debt side; you have done it kind of 50-50 in the past. And what your philosophy is with that going forward.

Steve will answer that.

Right now, we're 52 percent floating, 48 percent fixed. We have got swaps on 167 million of (indiscernible) tied to separate 10-year debt instruments. Currently, the average pay rate under those swaps is about 3.5 percent; and we are receiving about 6.35 percent. So we've got nearly a 3 percentage point positive carry on those.

The foreword curve for LIBOR would suggest that LIBOR gets above the breakeven point on the economics of those swaps in 2007. When we put the swaps in place, the forward curve would have suggested we would have been there in '05. So everybody has been talking about increased interest rates for a long time. They are starting to move up, but the economic breakeven has really moved out on those.

So our intention is to just keep them in place; not to take a position one way or the other. Then as we grow the company, we can optimize sort of a debt position by raising fixed rate debt if that suits our purpose. Or just continuing to borrow under the revolver. Right now we have about $43 million drawn under our revolver. It is $175 million facility.

Also if you could talk about your coverage ratio. In the past you have spoken to a 1.2 times; and as you move forward here and become more comfortable with some of the assets that you have tucked in, do you see yourselves becoming more aggressive there?

As Curt mentioned before, we really don't have a hard and fast rule. We have been one of the best in the group in terms of the cover. We like that. We think it gives us flexibility to continue to fund distribution increases even if nothing much is happening to the base business while we are, let's say, laying a Dos Laredos pipeline for a period of time and waiting for that to come on stream.

But I think the Board is certainly comfortable with this approach so far. And really coverage and distributions are really going to depend upon earnings, cash flow, and opportunities in the business (inaudible) competing for the capital to grow the business.

Sure. Great. Thank you.

Mark Rightman (ph), A.G. Edwards.

I'm sorry; my questions have been answered. Thanks.

Ron Londe, A.G. Edwards.

I just wanted to know if you had any insight into the status of the Longhorn pipeline and when it might be starting up.

They say sometime -- the last I heard now is the fall. It went from kind of a midsummer to late summer to maybe the fall, and that is the best I can tell you. There was some talk about the line fill (ph) going in, and the working capital financing being arranged. But I think that is the latest I heard, sometime this fall. Does anyone in this room have anything different?

Great.

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

Great. Thank you all very much for joining us, and if you have follow-ups feel free to give me a call.

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