NuStar Energy LP (NS) 2004 Q3 法說會逐字稿

Ladies and gentlemen thank you for standing by and welcome to the Valero LP Acquisition of Kaneb Conference call. My name is Carlo and I'll be your coordinator for today's presentation. [OPERATOR INSTRUCTIONS].

It is now my pleasure to turn the presentation over to your host for today's call, Mr. Eric Fisher, Vice President of Investor Relations. Please proceed sir.

Thanks Carlo. Good morning and welcome to our conference call to discuss post transaction with Kaneb as described in the press release we issued earlier today. If you did not receive a copy of the release you may obtain one off the Valero LP website at valerolp.com. In addition we post flyer materials to go along with our remarks this morning on the website and I encourage you to have these available during the conference call.

With me today are Curt Anastasio President and CEO of Valero LP, Steve Blank, CFO of Valero LP and Ed Doherty, Chairman and CEO of Kaneb Pipe Line Partners. In addition John Barnes, Chairman and CEO of Kaneb Services and Bill Greehey, Chairman of the Board of the General Partner of Valero LP as well as other members of the management teams from each of these entities are also available to answer questions after our prepared remarks.

Before we get started I would like to address your attention to the forward-looking statement disclaimers that are included in the press release and in the flyer materials. In summary they say that forward-looking statements contained in the press releases on this conference call are intended to be covered by provisions of the Securities Litigation Reform Act of 1995. Factors that can cause actual results to be materially different including those of Valero LP, Kaneb Services and Kaneb Partners as described in their respective filings made with the SEC. You should have a copy of the presentation materials printed off of the web site we're going to begin the presentation on slide number 6. But now I'll turn it over to Curt Anastasio President and CEO of Valero LP.

Good morning and thank you for joining us today to discuss this exciting opportunity to create what will truly be one of the premier pipeline and terminal companies. I'd like to start off by going through the terms of the proposed transaction. The total transaction value is around $2.8m and there are 2 steps to it both of which are a condition to the transaction.

First Valero LP is offering to purchase all of the approximately 12.1m shares and common stock of Kaneb Services LLP or KSL for $525m in cash. On a per share basis the price would be $43.31 at closing. The purchase price includes the 5.1m common units that KSL currently hold of Kaneb Pipe Line Partners or KPP and their 2% General Partner interest in KPP. With respect to KPP unit holders Valero LP is proposing to exchange its units for KPP units at a value of $61.50 per unit, subject to a 5% fixed value collar. The collar is set around the October 7 price for Valero LP units of $57.25 per unit plus or minus 5%. If the price of Valero LP unit's move outside the collar the exchange ratio will be fixed and the KPP unit holder will receive either more or less in value depending upon where the VLI price is at closing. Accordingly between the prices of $60.11 per unit for VLI at the high end and $54.39 at the low end, the value for the unit holders will be $61.50. If the VLI price is at or above $60.11 per unit the exchange ratio will be set at 1.023 units of VLI for each KPP unit. If the VLI price is below $54.39 per unit, then the exchange ratio will be at 1.131 units of VLI for each KPP unit.

A useful chart depicting how the fixed value collar works can be found in the appendix of the slide materials posted on the Valero LP website.

Our General Partner Valero Energy will continue to own 100% of our General Partner. However, their ownership interest at closing will decline from around 44% to 21% of the common units, with the public holding the rest of the units. At closing we intend to recommend an increase to our distribution rate by $0.22 to $3.42 per unit or the current distribution rate for KPP. Once approved by our Board that would represent nearly 7% increase in our distribution.

Assuming a first quarter closing we will have since our April 2001 IPO raised the distribution from $2.40 to $3.42 or 42.5% - a distribution growth rate in excess of 10% per year.

As noted in the press release this transaction is subject to approval by the owners of each entity and will require a Hart-Scott-Rodino filing with the SEC. We do not anticipate any problem obtaining these approvals. So we expect to close in the first quarter of 2005.

Regarding the strategic rationale in the next slide this transaction will create the largest terminal operator in the United States and the second largest liquids pipe line operator in the U.S. Moreover it is without a doubt the best opportunity we have considered since our 2001 IPO from both the financial and strategic point of view. We're very disciplined when considering acquisitions requiring among other things that any transaction we pursue be accretive to distributable cash flow and this deal clearly achieves that. Steve Blank will show you later that based on our assumptions this transaction is more than 10% accretive to distributable cash flow.

Obviously by combining the operations we'll see significant cost savings and create new opportunities to increase revenue. We conservatively estimate the synergy from this deal will be at least $25m on an annual basis.

The assets are an ideal match for each other. We are sticking to our knitting in this transaction, staying in the petroleum liquids pipeline and terminal business. The transaction expands each company's geographic presence and as you'll see in a moment both gain access to markets not previously available. From Valero LP's perspective we diversify our operations geographically and dramatically diversify our customer base while more than doubling the size of the partnership. Kaneb has a high quality customer base that we are committed to growing and serving better than ever.

But I would also tell you that our special relationship with Valero Energy will be a real asset to this combined business. Later we'll give you some examples of ways we expect Valero Energy to move more of its lines through our assets. And as Valero Energy also continues to grow more and more opportunities will continue to present themselves.

The combined enterprise as described on the next slide will make us one of the largest MLPs with an enterprise value of around $4.3b. At 9,700 miles of crude and refined product pipelines we'll be the second largest operator of such assets in the U.S. We'll operate 101 terminals plus 4 large crude storage facilities. In total we'll have 85m barrels of refined product and crude oil storage capacity, making us the largest terminal operator in the country. We also expect that based on our conversations with Moody’s and Standard and Poor’s the combined partnership will have an investment grade credit rating, which is an upgrade to KPP's current ratings.

With regard to management Bill Greehey will remain Chairman of the Board of the General Partner, I will remain President and CEO of Valero LP and we will be head quartered in San Antonio, Texas. We do not intend to have any lay offs of Kaneb's employees. However the corporate staff would be relocated to San Antonio. In total we expect to have around 1,004 employees.

Now I'll turn it over to Ed Doherty of Kaneb.

Good morning everybody. First of all I'd like to start off by saying that we are really very, very excited about this transaction between Valero and Kaneb. We think it is a terrific deal both for pipeline partnership unit holders and the KSL shareholders and we'll talk a little bit more on that in the future.

We think there's a lot of growth opportunities for this combination and it fits us ideally and it fits Valero I think ideally.

Let me give you a quick overview for those who weren't quite as familiar with Kaneb as most of you probably are. Kaneb's is really made up of 2 publicly traded entities, Kaneb Services LLC and Kaneb Pipe Line Partners MLP. The MLP was formed in 1989 and it owns and operates pipeline and terminal assets. The assets are basically refined petroleum products and ammonia pipelines and petroleum and specialty liquids storage and terminals. Kaneb Services was created in 2001 and is actually the publicly owned General Partner of Kaneb Pipe Line Partners. It also owns 5.1m units of Kaneb Pipe Line Partners plus the GP interest. Our pipeline operations consist of 4 primary pipeline systems in the Mid West consisting of over 5,000 miles of pipeline and 25 pipeline terminals with approximately 7.7m barrels of storage.

The terminal operations, which consist of 54 facilities with around 60m barrels of storage, are located in 30 states, Canada, The Netherlands and Antilles, Australia, New Zealand and the United Kingdom. If you put our terminals from the pipelines and the terminaling group together we believe we're about the second largest independent liquids terminaling company in the world, the first largest in the Western Hemisphere and the third largest in the United States. As Curt said on the combination we will be the first in the U.S.

We also have a product sales business that primarily delivers bunker fuels to ships in the Caribbean and to a lesser extent in Nova Scotia, Canada and that's a business we would like to expand.

If you look at slide 10, for those of you who have the presentation you will see a map. It will give you a better idea of where our assets are located. You see our 4 pipeline systems which are centrally located in the United States, the East, West, North and Ammonia pipeline systems and a little bit later Curt will show you how those mesh in with the Valero assets very nicely. The East, West, and North pipelines are 3,000 miles of refined product pipeline while the Ammonia pipeline is around 2,000 miles. Outside of the pipeline system there are 54 terminals with 60m barrels of storage terminal, storage capacity. You can see that the bulk of our terminal facilities are located the big ones certainly are located on the East and West Coast we do have a large chemical terminal in Texas City but other than that very little exposure on the Gulf Coast. We also have 17 international terminal facilities located in Australia, New Zealand, the United Kingdom, Nova Scotia, The Netherlands and Antilles.

Moving on to the next slide. Talk about the benefits that we're so excited about with the Kaneb investors. KSL shareholders will receive $525m of cash. That works out to be $43.31 per share, which is about a 38% premium over the closing price on Friday. KPP unit holders based on Friday's closing price an exchange ratio of 1.094 units of VLI for each Kaneb unit. That's about a 21% premium. In addition Kaneb Pipe Line, KPP unit holders, will receive a 9.4% increased distribution payment by virtue of receiving the $3.42 that Valero has indicated that they intend to increase their distribution to. And when you factor that in you get a total return of approximately 30% to the KPP unit holders right out of the box. Added to that is that they get to participate in what we believe is going to be a great future for a much larger MLP.

Let me talk a little about the benefits we see about putting this together and going forward with this combined entity. First of all the combined entity will have a broadened geographic platform and more diverse operations. This will provide access to areas that we did not previously operate in and diversify the earnings base of the combined partnership. In addition with Valero - - and this is a very important part I think - - with Valero LP's General Partners split capped at 25 even though Kaneb's was relatively low for an MLP at 30%, the KPP unit holders will have more of the partnerships distributable cash available for distribution. That also lowers the cost of capital to Valero LP and that means they can more aggressively pursue acquisition opportunities, which further should benefit the shareholders.

Also as Curt mentioned earlier conservative estimates for synergies from this deal will be at least $25m on an annual basis and that - - let me emphasize again that Valero has offered to - - jobs for everybody in the Dallas area offices there so that does not include any employee cuts. Lastly combining these companies will provide a platform for future growth that's broader than either entity had independently allowing for greater potential for further distribution growth down the road. And one thing that I should mention because we've never had it before and Valero has always benefited from it -- it is going to be particularly beneficial having as a general partner the leading independent refining and marketing company in North America and since Valero realizes numerous operational synergies as a result of having this unique relationship with Valero Energy we can expect that Kaneb investors as -- Valero LP investors -- will receive the same benefits.

I'll turn it back to Curt.

Thanks Ed. I'm now on slide 12. Before going further I'd like to provide a quick overview of the current Valero LP systems for those of you not familiar with it. As you can see from this map Valero LP has a portfolio of logistic assets that are strategically located within Valero Energy, its refining and marketing supply chain. Primarily in the mid continent states but also in California and New Jersey. In total we support 8 of Valero's 15 refineries. Our business primarily involves transporting crude oil and other feed stocks to Valor's refineries and moving refined products to markets through our pipelines and terminals. We also own and operate 4 large storage facilities associated with Valero Energy's Corpus Christi, Texas City and Benicia refineries.

Our refined product pipelines consist of 23 pipelines that extend approximately 3800 miles while the crude oil pipelines consist of 9 pipelines with a length of around 800 miles. In addition we have 22 refined product terminals with 4.5m barrels of refined product storage capacity and 4 crude oil storage facilities with 12.6m barrels of crude oil storage capacity.

Bringing these 2 partnerships together -- as shown on the combined operations slide number 13 -- provides us with a strong asset position serving every major area of the country as well as Canada, Mexico, the U.K., Australia and New Zealand. This greatly diversified asset base will also be in every major sphere of operation of Valero Energy.

The map of our combined pipeline operations shows how complementary the pipeline operations are. Starting with the North pipeline system. This system has a throughput agreement with Soro (ph) Petroleum Company at its [manned], North Dakota refinery. The West pipeline primarily serves the fast growing Denver market. The East pipeline system moves a large amount of distillate to this primarily agricultural region. The Ammonia pipeline supplies 2.2m tones of anhydrous ammonia for agricultural use. The unique competitive advantage of this line is that it can receive product from anywhere in the world being marine terminals on the U.S. Gulf. And as you can see our existing pipelines primarily serve the South West and U.S. Gulf coast.

I'm now on slide 15. Here we've stripped away the pipelines so you can see just how extensive the combined terminal operations would be. Here it offers great access to a large customer base, which we intend to continue to nurture and develop. You can also see the locations here of Valero Energy's refineries. On the West coast a number of terminals surround Valero Energy's Benicia refinery. In the mid continent a wide and significant presence exists around the extensive pipeline system. On the Gulf coast 2 terminals exist near Valero Energy's Texas City refinery and finally in the Northeast you can see that terminals exist all around Valero's Paulsboro refinery.

Looking at terminals outside the U.S. You can see the Point Tupper, Nova Scotia terminal in Eastern Canada. This terminal is already used periodically by Valero Energy's Paulsboro and Jean Gaulin refineries and as those refineries are expanded we expect to see more volumes at Point Tupper.

In the Caribbean there are also synergies between the San Eustacia terminal and Valero Energy's Aruba operations that we will believe will lead to more bunkering volumes for example, at San Eustacia.

The U.K. facilities represent around 50% of the terminaling volumes in the United Kingdom and are very profitable. Similarly the Australia and New Zealand terminals have about half of the terminaling business in those countries and are also very profitable.

Turning to the next slide, on a stand-alone basis VLI derives about 60% of its operating income from its pipeline operations. KPP on the other hand only derives 35% of its operating income from pipelines, so it gets nearly 60% from terminal operations. You can see that by bringing the 2 parties together will better diversify these sources of income. Both companies enjoy stable, speed based businesses that will have even greater earnings stability going forward.

The pie chart on slide 17 show that for Valero LP this transaction greatly mitigates the risk of having one very dominant customer. Right now Valero Energy is 98% of our business. But with Kaneb Valero would only be 26% of our business with third parties making up the bulk of our revenues. Our exposure to operations at Valero's McKee refinery would also be dramatically reduced going from 40% to 15% of EBITDA.

Now I'll turn it over to Steve Blank our CFO.

Thank you Curt. Kaneb Partners and Valero LP reported their respective third quarter results today. Valero LP reported third quarter earnings per unit of $0.78 and for the first 9 months earnings per unit was $2.37. For their part Kaneb reported earnings per unit of $0.69 in the third quarter and $2.11 for the 9 months ended September 30. Distributable cash flow applicable to the limited partners was strong for both companies and Valero LP had $68m of distributable cash flow for the limiteds while Kaneb had $84m. the coverage ratio associated with that -- those distributable cash flows is shown on the second line from the bottom for Valero LP our cover for the limited partner distribution was 1.23 times. That's against our $0.80 by quarterly distribution and for Kaneb Partners their coverage was 1.16 times and that's against their 85.5 cent distribution or an annualized $3.42. The debt to capitalization at September 30 -- the ratios are shown at the very bottom -- Valero LP is very strong at 47%.

On page 19 we show the financing plan. We've used the actual results for Kaneb and their projections for the fourth quarter of this year to determine this financing plan. It assumes a closing at December 31. The $2.8b will be sourced in a variety of ways. First through the common unit exchange of Valero LP will be issuing 24.8m new common and we've assumed here at the October 7 price of $57.25 for Valero LP.

We have new debt issued of $550m. we will be - when we acquire Kaneb - we will be picking up their cash of $79m and then we will also be assuming debt that they have on their books projected at year end that's $686m is comprised of $500m of their 2 series of public bonds -- 250 each -- and then we forecasted a $186m of bank debt and because we anticipate having a lower cost of borrowing we will actually fair value debt that upwards - the public debt - and so we've assumed a $44m write up of those bonds.

And then finally Valero Energy will be contributing $28m of capital. That's to maintain their 2% GP interest. Those funds will be used as shown at the bottom of page 19. We -- and again this is subject to valuation after closing -- detailed valuation -- but currently we are estimating that the PP&E would be at about 1.68b and we will have about $1b of goodwill. Now that goodwill -- and this is important to note -- does not adversely attack the tax yield as goodwill for MLP tax purposes is depreciable and would be provided to the unit holders.

On page 20 we show the pro forma assumptions used in calculating the accretion resulting from this merger. Again the closing date is assumed to be 21/31/04 for purposes of measuring 2005 accretion. The forecast is based on each company's budgets for 2005 which were created separately.

The distribution as mentioned Valero LP will adopt Kaneb's $3.42 annual distribution -- which is a $0.22 annual increase to our current $3.20 annual distribution and that's about 7%. We've presumed $25m of synergies in the first 12 months. There will be a pro forma for the deal -- 47.9m common units outstanding of Valero LP. And then the interest rates that we've assumed are 6.5% on the 500m of new bonds that we would be issuing on this transaction and then 4% for revolving credit debt. Those are very conservative assumptions compared to where we could borrow today. So depending upon when we close if rates go up -- if they don't go up -- that's a real opportunity. Today we could borrow 10-year money at a full 1% less than the 6.5% we've shown here and that would be $5m of savings.

The pro forma statistics for the merger are shown on page 21. Expected synergies of $25m in the first 12 months after closing will come from a variety of items including -- we think -- $6m from terminal operations as Valero Energy would be moving volumes in markets that are active to Kaneb terminals where we have spare capacity. On the pipeline front, $5m of synergies, opportunities across the systems to increase throughputs. In terms of corporate expense reduction that's forecasted at $10m. That's simply the elimination of 2 public company costs. You know no annual reports and Board of Directors costs and rating agencies fees and all those sorts of things that are currently incurring would go away.

And then lastly we see about $4m of operating cost reductions as we would work to rationalize operations in certain areas. And again we want to emphasize that this is very conservative. We have no difficulty whatsoever seeing that we will achieve these synergies.

The 2005 projected pro forma EBITDA is $365m. That would be billed as far as Valero LP at about 135, synergies of 25 and Kaneb at 205m.

The 2005 pro forma distributable cash flow accretion we see at $0.37 and for the pro forma debt to capitalization ratio we think by year end ‘05 that will be approximately 46%. Not much different from where we entered the deal.

As mentioned we do expect the investment grade rating -- investment grade rated -- by both Moody’s and S&P who do rate Valero LP bonds. And with that I'll pass it back to Curt for some concluding remarks.

Thanks Steve. Let me just reiterate briefly a few of the many reasons why this proposed merger is such a great combination for the investors. As we mentioned the transaction is distributable cash flow accretive for both companies. Valero LP shareholders will benefit from the increase to their annual distribution from $3.20 to $3.42 per unit while KPP unit holders will obtain additional units based on the exchange ratio and therefore a higher distribution payment as well. We'll be combining 2 premier pipeline and terminal companies and that will result in better earnings diversification for both of us. This merger will better position both companies for future growth through a broader scope of operations and a dominant logistics business in the United States. We will have many opportunities to do internal and external projects that will generate enhanced unit holder value in the future. And finally we will continue to benefit from our relationship with Valero Energy by moving more of its product and feed stocks through our system as well as taking advantage of opportunities that arise as Valero Energy grows. As we do so we will never compromise the high quality service that Kaneb's customer have come to expect. So going forward we believe that we are in a great position to continue delivering industry leading distribution growth to our investors.

So at this time we'll open it up for questions and answers.

Thank you sir. [OPERATOR INSTRUCTIONS]. Our first question is from the line of Scot Soler, Morgan Stanley.

Good morning. Congratulations. Curt I had a couple of questions. First looking at -- I guess when you look at resetting the ‘05 distribution from that base what would you all anticipate would be a realistic distribution growth rate there forward? That was my first question.

Well we've always said that we want to be a top grower for distribution payment and that's what we've accomplished since April 2001. So we've positioned ourselves you know to meet that expectation. And what that means has changed if you look at MLPs over the last few years. And so we've always positioned ourselves to be at or near the top and that's our plan going forward. You know we do it not just with acquisitions, We do it with internal growth projects which are going to be much more available to us with this deal. And we also do it by you know continuously improving our operation.

So you know we will be there. I mean you just look at how the rate of growth we've had and that's the kind of position we want to be in -- expect to be -- going forward.

But just off that bigger base is that going to suggest a 10% type distribution growth long-term or is it--

I really can't lock it into a number like that for you because you know distribution payments are a Board matter. But they are very aware that our strategy is to be a top grower compared to our MLP peer group and our peer group is the cream of the crop. It's the guys who increase that distributable cash flow more than anybody else and more securely than anybody else. That's where we're positioned and we want to be at the top of that group.

Okay. It looks like -- I guess a second question is, in terms of the assets at Valero Corporation is this suggests that there will be less opportunity to transfer assets down or -- when you look at I guess the qualifying how many assets approximately are Valero -- excluding their refineries but just the pipelines associated with the refineries -- what type of dollar amount of assets are still up at Valero that could potentially be -- potentially be sold to this partnership?

To answer the first part of the question. I don't think it affects that calculus 1 way or the other. But you know I've always explained that potentially the asset drops from Valero Energy are huge because practically everything Valero Energy has it generates qualifying income from an MLP. That obviously as you can tell from this deal has not been our focus over the last little while here. Our focus has been expanding our third party business and diversifying so that Valero Energy is not so dominant as a customer of ours. But really this deal doesn't change you know what's available from Valero Energy or what's not available from Valero Energy. We've got a lot to focus on you know integrating these 2 businesses and squeezing out -- beating the synergy target we have -- and squeezing everything we can out of these assets that we have. And that's our focus. That's going to be our focus when we close this deal.

Okay. So that -- okay. We'll talk about it later. Historically in terms of your target capital structure what -- Valero's always had a very good balance sheet with MLP partners. What is your target debt to cap, and covered ratios going forward?

Well Steve, do you want to address this?

Well on the debt to total cap I mean pro forma this deal it really is unchanged. I mean it stays stronger than the peer group and the peer group tends to have debts to total cap., in the more mid to upper 50s and we are still here in the mid 40s so that's not an issue. Now arguably our debt to cash flow statistics you know have weakened some because we were so incredibly strong before. So we had room to accommodate a debt financing in this transaction. And we remain committed to having an investment grade rating. I mean it's that simple. That's not at all arguable and that's why we approached the agencies before we announced this deal to get a read from them. And they will today be coming out with their own press releases and giving the specifics. So I don't think our financial strategy's changed whatsoever.

In terms of the coverage ratio the numbers that we outlined on the pro forma EBITDA when you calculate the distributable cash flow that comes after looking at the interest expense and the reliability capital is as strong as we are standalone. There's no deterioration so you know we are going to have in ‘05 very strong cover of that 342 of the peer group. And I think we would continue to want to have excellent above market coverage. Not wildly so, but it's a nice place to be.

Okay. Thanks.

All right.

It's And sir, our next question's. Is from Matt Zott (ph) with First Capital Alliance.

I have a question concerning about the dividends paid until closing. You can tell me how the companies will hand it?

The agreements provide that those will be integrated so nobody is either going to get a double dividend because of the time at which it closes or is going to be shorted of a dividend that they would have earned. So that is covered in the agreements and people will come out even over that period of time -- our unit holders and theirs too.

I believe you are going to have some kind of pro rated dividend until it closes you know in between dividend payments?

I don't know how we're going to work that out Matt, but both companies have agreed that we will arrange it so that no matter what time the closing occurs that the Kaneb unit holders will get a full distribution that they're entitled either from Kaneb or partially from Valero.

Okay. Thank you and has due diligence been fully completed?

Yes.

Yes. In fact the contract and merger agreements have been signed.

Thank you.

And sir, our next question's from the line of [Yves Seagal] (ph) with Marcovia (ph) Securities.

Thank you. Good morning. Couple of questions. Number 1, how quickly do you expect to reach the -- realize the synergies? Is that $25m baked into the ‘05 guidance?

Yes. The 25m presumes the first 12 months after closing. The numbers that we've talked about with respect to ‘05 assume a 12/31/04 closing. Now that said we expect to close in the first quarter of ‘05 but just to kind of make it simple we've -- when we talk about those synergies I can tell you it's the first 12 months that we've presumed from flowing -- flowing from January 1 of next year.

Okay. And then conceptually. Have either party talked through -- in the case of Valero I guess to Valero -- but Ed have you spoken to any of your customers? Does -- do you anticipate any push back at all? That now Valero is going to be such an important of the combined entity?

We -- to answer your first question, we've not spoken obviously to any of our customers because--

Because you can't--

We obviously couldn't before the -- in fact there are only 4 or 5 people in the whole company who knew about this for the last few weeks. We would not anticipate that there would be any particular problem with the customers. As Curt said and I think the way they plan to do it is to meet with the customers as soon as it is legally and commercially feasible and to assure them that there will not be a situation where there's a conflict with energy and the partnership.

I think that some of our customers are basically indifferent to this, some of our big customers like the railroad are indifferent to it and the rest of them I think will ultimately be certainly satisfied with the way it's being run.

and then lastly, is it possible to discuss what the background of the merger? How it came to pass? And Curtis did you consider going a little further away from your core business? Did you look at any other type of asset on the gas side, or anything like that?

On the first part of the question I think we do have to do a merger proxy statement here which I think by law will lay out the principle chronology here but basically I guess we've been talking between you and John Barnes for the last several months, last few months and you will see a chronology which highlights those events in the merger proxy statement.

When we look at acquisitions with regards to step outs of types of asset I would tell you because we have a very dedicated development staff we have looked at practically everything, large and small, that's come down the pike in the last few years and implicit in your question is a lot of it really would have been a step out. There's been a lot of energy merchants divesting themselves of fractionation gas gathering. We've seen crude gatherings systems, natural gas pipelines generating assets and what happens with us is when we evaluate those and rank all those -- things get ranked order also in terms of how well we can integrate those culturally and operationally and do we have the right expertise and do we have synergies. And naturally enough when you do step outs you tend to have less synergy and bring less expertise to it than you do when you stick to your knitting like we are in this transaction.

So I guess the short answer is yes, we've looked at everything, but when you rank order these things –- you know transactional like -- the Kaneb one comes out on top.

Well thanks. Good luck everybody.

Thank you.

The next question is from the line of Mark Pibl with Barclays.

Hi good morning. 2 questions. 1 is what's your pro forma capital spending plans going to be for 2005?

46?

Well we've got 4--

For Kaneb it's about 27m which is all reliability and then for Valero LP it's 34m of which 19 is reliability and a little more than 15 is for growth principally stuff we're looking at doing in South Texas.

Can you see that number moving up due to some of these growth initiatives that you have planned?

Hopefully because that'll mean we have good payout projects that are worth funding.

Secondly are you planning any asset sales on the back end of this transaction?

We're not planning any going into it, no.

Okay.

When we get our arms around the operations we'll see what makes sense to do. But going in we don't have any targeted.

Okay. Thank you.

And sir, our next question's from the line of Douglas Rodriguez with EAC Management.

Hi. How are you? Congratulations. Just to go into the competitive aspects. You said there was no anticipated problems with the HSR filings due to overlapping competition. Could you elaborate on that and why you're so confident?

Yes. If you look at the map of operations that we showed during the presentation you see a nice complementary fit but very little direct overlap. And without going into details because I don't want to prejudge what for example the Federal Trade Commission might think is important because we have to wait and see what they think is important -- but there are obviously some areas where there's more overlap than others and we'll just have to see how they analyze those. But I think one thing we are confident of that even if they identify areas of concern we do not believe it's going to be material to the transaction.

Okay and could you comment with respect to any foreign competitive regulatory clearances you might need?

I think they're more in the nature of notification filings if anything but Ed you know more about that than I do?

Yes. Obviously since Valero was not involved in foreign areas at all there shouldn't be any sort of competition issues whatsoever. And there will be some foreign investment approvals required as we went through when we purchased Australia and New Zealand for example but I that I think is relatively a matter of administrative form more than anything else.

Okay. And last just a follow up question on the no assets sales planned. With respect to the Colorado market it looks like there's a little bit of overlap there and since due diligence has been completed are there any plans to get some of the synergies out of those particular assets? Maybe selling some things down or--?

Well we do think they're operating synergies there but we are not going in planning asset sales and that's really a matter of -- as I said -- the FTC analysis and discussions with them as what they regard as areas of concern. So I don't want to comment on that and prejudge what their analysis might be.

Okay. Thank you.

And sir, our next question's from the line of Mark Strome of Strome Investment Management.

Yes. Hi guys. Rarely do I get into a situation like this that works out absolutely as planned, so I congratulate you on this.

Good.

Very happy about this. I have a couple of questions. My question's just regarding KSL. There was a question asked about accrued distributions, how you're going to handle those with KSL because of the cash deal?

Well this John Barnes as Ed indicated we don't intend for any of our shareholders to forfeit anything in their distributions. We will go ahead with distributions as planned meeting our regular schedule. None of us know exactly when this will close but we don't intend for any of our shareholders to see any difference from what they would normally expect.

Okay and I joined the call a little bit late. Maybe you addressed this. I haven't seen the merger agreement yet but is there a lock up arrangement with KSL?

Ed, you might from a legal stand point do a better job of explaining that.

A lock up in what sense Mark?

Well if somebody else wants to go pay $50 can they do that without any penalty?

Yes. They can do that. We have the Board obviously felt very strongly that they had to maintain its fiduciary duties and the merger agreement so allows us to do that. If a better offer came along we are free to look at it.

Well thanks and congratulations.

Thank you.

Ed did you want to speak at all to the termination fee involved in that?

Well there is -- if in fact -- let me amplify my answer to Mark and thank you Joe.

There is -- we have the ability to look at another deal to actually say that we will -- this is for KSL or for KPP -- say that we will take that deal and to withdraw from the Valero deal and with proceed with that deal if in fact there is another offer which the Board in its exercise of its fiduciary determines that it must proceed and must leave the Valero deal and the Board is free to do that. However, if a deal with either that party who made that offer -- or any other party who makes that offer during that time -- is signed within 18 months of the date of the merger agreement and then -- the termination fee will be due to Valero at the time of the closing of that transaction. So in no event can we pay a termination fee until another transaction is closed. And that termination fee will depend on -- on what -- it's $25m for KPP. It's $15m for KSL and if there's an offer for both of them then it's $25m. Thank you for reminding me Joe.

You're welcome.

As you usually do.

And sir our next question's from the line of Mark Redman with AG Edwards.

Morning and congratulations. Looks to be a very promising transaction. Just 2 questions. First if you could just maybe on the synergies break that out in terms of the -- your forecast of accretion between cost savings, revenue enhancements and then also the savings from the lower GP incentive distribution right that Valero operates under? Go ahead.

I was just going to say the synergies do not include any reduction in the split. So I just want to make that clear.

Okay. Great and also -- I'm sorry?

Which obviously is a benefit but it's not included in the 25m.

Right and then also does that include any revenue enhancements or are those -- would those be additional?

I think on the slide that Steve took you through -- he talked about in terms of cost reduction with corporate expense reduction and others with the live [indiscernible] of that slide of 10m. operating cost reduction of 4m and that gives you 14. Terminal operations revenue again of 6m and pipeline operations of 5m. That got us to the 25.

Okay and that's purely your forecast is just based on the 25m.

That's right. There's nothing about the -- Steve alluded to interest rate savings for example. You have alluded to the lower split. Neither one of those things, nor a bunch of other things that we envisaged could happen is in the 25.

Right. And then secondly, although we don't formally cover KSL -- what was the -- if you exclude the price for the LP units -- what was your targeted purchase price to GP interest in that income?

We valued it as a basket, as a full basket. Actually we really valued this as a single business. And so the 525m for example for KSL was for everything. Which were the common units, the GP interest, the control valuation if you will--

Right.

We really did it as I say as a basket.

Okay.

Of value.

Okay. Great. Well listen, thanks very much.

And sir our next question is from the line of David Maccarrone with Goldman Sachs.

Thank you. Talked a bit about the enhanced growth opportunities organically. I was hoping you could quantify those a little bit better. Maybe starting off with what you see as your standalone growth rates for each of the companies? And then provide some of the numbers on what you think you can be achieved on the combined system? Maybe using the assumptions you've mentioned on the synergies, the revenue enhancements as an example going through those assumptions? And why those are the prudent or appropriate assumptions to be making -- not either too conservative or too aggressive as we look forward to ‘O5?

Well. We've broken it out for you in terms of revenue enhancement and cost reduction and the kind of thing that we're looking at, at the terminals and with revenue enhancement -- we've explained to you in terms of we think in markets where Valero Energy is financially incentivized to be in -- legacy chain of assets -- and where the capacity exists to accommodate that additional volume we think -- we would expect that that will actually transpire. We see opportunities in that regard and can I mention Paulsboro as a place where Kaneb terminals surround Valero's Paulsboro refinery. Colorado the Colorado pipeline system and the Denver area terminals are another possibility for the same reasons. If you look at McKee's connections to those markets chaining existing capacity into those markets and our own assets that are there already. Also if you look at -- we believe in terms of Valero Energy's strategy an announced strategy -- to grow their wholesale business -- and you've seen a lot of that in the East coast and other places with Valero Energy -- just look at the map of where Kaneb's terminals are.

They are situated in exactly the right places to attract more of that volume as Valero Energy upgrades their margin and sells more product at marketing terminals over the rack.

So we think there's every reason to believe they will be financially incentivized to push more volume that way. Another great 1 is in Northern California, in the San Francisco Bay area, where there is a need for [indiscernible] at Valero Energy's Benicia refinery. There are other customers there as well. Ed can comment. Kaneb already has 10 projects under construction in that same geography for other customers as well. It's just a great market, because it plays into the fundamental trend of imports into that market.

So these are some of the reasons why we think that we're going to more than capture the synergies. Also on the topic of synergies, I think some of the earlier questions illustrated an important point. We really have not included some other things that we think we really are going to work on making happen. Like Steve mentioned, the interest rate savings. You think of an item like procurement, for example, where we are in procurement alliances with some of Valero Energy's vendors. And just logically, who do you think buys better when you're talking about valves or other equipment or services - a $50b company or a $2b company?

So we think we have an enormous opportunity once we're really allowed to share information on that level of detail, to go out and find savings in that area. It's just an example of how we think we've just scratched the surface with the $25m.

Of the Valero volume that will -- you assume will go online onto the combined company systems, how much of that -- what does that represent as the potential of the total?

Well, I think I've told you. Terminal operations $6m, pipeline operations $5m, and expense reduction $14m.

But in terms of what VLO's finds that could come on the new system because of --?

That's a lot of what we've assumed in the pipeline and terminal operation synergies. The vast majority of it is Valero -- incremental Valero Energy volume.

Okay. I'll leave it at that. Thank you.

Thank you.

Sir, our next question is from the line of Stuart Morrell with UBS. Sir, if your phone is muted --? Sir, we do have 1 other question, from Mark Pibl with Barclays.

Hi. It's kind of a follow-up question. Moody's did affirm the investment grade, the AA3 ratings, but changed the outlook to negative. Moody's was looking for a clear de-levering plan to keep the rating investment grade, and I was just wondering if you have any plans along those lines.

Well, the rating that they've assigned us with the negative outlook is investment grade. I think you understand, I just wonder if everybody else does. Their concern centers around the debt [indiscernible] and they're not -- I think where we certainly are comfortable on terms of how we've structured this deal, they've began to recognize even though our interest expense for this combined entity goes up by about $30m, we are on the other hand eliminating the distribution, which would otherwise be paid on 5.1m common units plus the general [part take]. And that's almost exactly $30m. So there really hasn't been any additional load, if you will, on a combined entity as far as we would look at the numbers. Okay?

Now when we went in to talk to S&P and Moody's, we did -- just like we've -- today we have not talked about anything other than $25m of synergies and an early read on what we think we can do with the business. We haven't talked about asset sales or any of those things, because we said we haven't been able to judge what we would do, if anything. This looks like a good solid business. We understand we're taking on some additional debt to make the transaction happen.

We will work together as a group once more -- once we get more than 4 Kaneb employees involved to really get to see the power of this new company. But obviously they can't take a leap of faith with us when they're just trying to get a press release out to take a look at what this transaction as currently outlined says to that. There again, there's no question even though the debt to total cap ratio actually improves for Kaneb. Their principle concern has been debt, the EBITDA at both entities, and that's the reason for their action.

Again, on the 1 hand Moody's has upgraded Kaneb. S&P has downgraded Kaneb and then in our case we've just been downgraded slightly from where we were before.

Thank you.

[OPERATOR INSTRUCTIONS]. Sir, we have another question from the line of Stuart Morrell with UBS.

Gentlemen, I'm sorry everybody, I lost the line. I got back on and heard the end of that last answer but I'm just curious about your intentions to have guarantees or cross guarantees between Valero Logistics and the Kaneb entities.

Also, I'm not sure if you just answered, I apologize if it's repetitive, but on plans to issue equity.

And then just finally, if you have any target leverage metrics.

Okay. Target leverage metrics, we want to stay investment grade. It's that simple. We're at 45% basically now and pro forma to this deal about 45%. So that's pretty straightforward and the peer group tends to be in the mid-50's. So on just a leverage issue that's not an issue.

In terms of issue equity, we have no current plans to issue equity.

And then on the cross guarantee, what we have on the Valero LP side is the operating partnerships [indiscernible]. It's revolver and any interest rate swaps we have are all guaranteed by Valero LP, [VNLP].

On the Kaneb side, what we would look at doing is it will either become a sister operating partnership to our operating partnership or depending upon the tax answer it could become a direct subsidiary of our operating partnership. In either case, the Valero LP guarantee would be extended to the Kaneb operating partnership bond -- bonds. If it's a sister company we will certainly cross guarantee as well. If it's a direct subsidiary there's no need for that, because obviously now it's a vertical organization structure. And we've talked to the agencies about these structures.

It all sounds reasonable. Just 1 thing, not to harp on it, but do you have a debt to EBITDA target that you have? [Do you completely] agree your balance sheet leverage is low if anything for the [MLP] [indiscernible] but relative to EBITDA it tends towards the high side of the investment grade peers?

Yes, we'll want to get it below 4.

Okay, great. Thank you.

Yes sir, we do have another question from the line of David Maccarrone with Goldman Sachs.

Curt, in light of the implied acquisition multiple, it would appear that you're probably more willing to pay up for acquisitions going forward, small or large, and maybe have a greater opportunity to make deals accretive with a bigger footprint. Is that a fair characterization with respect to the multiple you're willing to pay, as well as the opportunities that maybe amplify on the opportunities that exist out there right now?

No, I think -- I don't think you can make that generalization at all. I think it depends on the acquisition opportunity. And as I said, this was the best opportunity, all things considered, financially and strategically, that we looked at. And even after paying the multiple you're alluding to, we've got very strong accretion. We're able to raise the distribution by -- right out of the chute by 7% for our unit holders, as well as pay the big premium and have a great growth profile going forward. So it depends entirely on the deal. I don't think it's indicative of what we're willing to do in acquisitions generally going forward, no.

Okay, thank you.

Gentlemen, we have no further questions at this time. Back over to you, Mr. Fisher, for any closing remarks.

Yes, great. We thank all of you for joining us this morning. If you have any follow-up questions you can feel free to give me a call. Thanks very much.

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