NuStar Energy LP (NS) 2004 Q4 法說會逐字稿

Good afternoon, my name is Janika (ph) and I will be your conference facilitator. At this time, I would like to welcome everyone to the Valero L.P. fourth-quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS) Mr. Fisher, you may begin your conference.

Good afternoon and welcome to Valero L.P.'s fourth-quarter 2004 conference call. With me today is Curt Anastasio, CEO and President 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 a copy, you may obtain one off our website at ValeroLP.com. Attached to the earnings release, we have provided additional financial information on our business segments. If after reviewing the tables you have any questions on that information, please feel free to contact us after the call.

Before we get started I would like to direct your attention to the forward-looking statement disclaimer that is included in the press release. In summary it says that forward-looking statements contained in the press release and on this conference call are intended to be covered by the provisions of the Securities Litigation Reform Act of 1995. Factors that could cause our actual results to be materially different include those that we have described in filings that we've made with the SEC. Curt?

Good afternoon and thank you for joining us today for our quarterly earnings conference call. Our solid fourth-quarter results closed out another year of record earnings and record accomplishments. In 2004, our unit priced at an all-time high of $61.75. For the year we delivered a total unitholder return of over 26 percent, which compares to the pipeline MLP average of 14 percent and the S&P 500 of 11 percent. These returns are among the highest in our peer group for the year.

With our record earnings, we were able to increase the annual distribution by nearly 9 percent over last year's rate, which is among the highest growth rates in the industry. And as you all know, with our recent announcement to require Kaneb, we expect to recommend an increase in the distribution to $3.42 per unit annually after closing, which is an increase in the annual distribution of nearly 7 percent.

Other 2004 accomplishments include the acquisition of 2 state-of-the-art asphalt terminals from Royal Trading and the commissioning of a new propane storage and distribution terminal in Nuevo Laredo, Mexico. Both of these investments are expected to be big contributors to earnings in 2005, as more volumes are expected to move through these facilities. We are also particularly pleased to have capped the incentive distribution payments to our general partner at 25 percent, as a reflection of Valero Energy's commitment to the growth and independence of Valero L.P. This is a unique advantage to our partnership in evaluating acquisitions, given that the incremental accretion from a transaction would no longer be required to be split 50-50 with our general partner.

Of course, the most important accomplishment for 2004 was the announcement of our agreement to require Kaneb Services LLC and Kaneb Pipe Line Partners, LP. The Kaneb assets are a perfect fit with our assets and will create an outstanding platform for future growth. Since the time of the announcement, both organizations have been working extremely hard to finalize the acquisition. And while we still have a few hurdles to clear, we think we're making very good progress towards the closing in line with our announced timeframe.

But before I get into more discussion on the Kaneb transaction, let me quickly go through the fourth-quarter results. For the fourth quarter, we reported earnings applicable to the limited partners of $17.9 million or 78 cents per unit, which compares to 18.3 million or 79 cents per unit last year. For the full year, earnings were up over 10 percent to a record $72.5 million or $3.15 per unit, compared to 65.6 million or $3.02 per unit last year. Earnings were lower in the fourth quarter of '04 versus fourth quarter of '03, primarily due to the previously announced plantwide turnaround at Valero Energy's Benicia refinery, which decreased our crude oil source throughputs by over 50,000 barrels per day and affected fourth quarter's earnings by approximately 4 cents per unit.

The good news is that operationally we had another solid quarter with overall higher throughput volumes in every other business line. Our crude and refined product pipelines and terminal throughputs were higher primarily due to increased runs at most of the Valero Energy refineries that the partnership serves, the acquisition of the asphalt terminals from Royal Trading in February and the startup of the Dos Laredos system in June.

Distributable cash flow applicable to the limited partners for the quarter was $22.4 million compared to 20 million for the same period last year, an increase of 12 percent. This increase is primarily due to lower reliability capital expenditures. Our coverage ratio applicable to the limited partners for the year was 1.23 times, well above last year's ratio of 1.16 times and the peer group average of around 1.12 tons.

You'll also note in the release that we declared a quarterly distribution of 80 cents per unit payable February 14. Looking at a few of the other variances for the quarter, operating and administrative expense increased by around $2 million from the fourth quarter of '03. The increase in operating expense for the quarter was partially attributable to the impact of amendments we made last year to our services agreement with Valero Energy that we implemented on April 1. As we discussed previously, these changes were made to more appropriately reflect how costs were allocated between Valero Energy and Valero L.P. These increased costs were offset by tariff increases.

The acquisition of the two asphalt terminals we completed this past year, the startup of the Dos Laredos system, and higher variable compensation expense also increased operating expense. Going forward we expect quarterly operating expense to be in the range of $21 million and administrative expense to be in the range of $4 million per quarter.

Interest expense increased by 1.1 million due in part to $43 million in additional borrowings in the first quarter of 2004 under the revolving credit facility to fund the $28 million acquisition of the Royal Trading Asphalt Terminal and a portion of the costs associated with the Dos Laredos project but also due to less benefit from our interest rate swaps compared to the prior year's quarter. We have since paid down $15 million of the 43 million in additional borrowings and our debt to capitalization ratio currently stands at 46.8 percent, better than most of our peers.

Now turning to the Kaneb acquisition, in December we announced that we had received a second request from the Federal Trade Commission for additional information and documentary materials. We have been working diligently with them to provide all requested materials as promptly as possible. Although we are not in a position to comment on the details of that process, we believe our discussions with the regulators to date have been constructive and we will be providing an update on our progress when appropriate. We can let you know however, that we have been notified by the Securities Exchange Commission that it has accelerated the effectiveness of our registration statement on Form S-4. As a result, proxy statements have been recently mailed out and the unitholder and shareholder meetings to approve the deal are scheduled for March 11.

Also with regard to integration efforts, transition teams from both companies have been set up and are meeting regularly to ensure a smooth startup. Senior and mid-level management positions for the proposed organization have been filled and the entire organization will be defined by early February. We have made tremendous progress since announcing the acquisition to the hard work and dedication of the employees at both Valero L.P. and Kaneb.

In closing, this acquisition is a great combination for investors, providing better earnings diversification, a broader scope of operations and distributable cash flow accretion and going forward it will position us to continue delivering industry-leading distribution growth to our unit holders.

So at this time, I will open it up for questions and answers. Operator?

(OPERATOR INSTRUCTIONS) Kent Green, Boston American Asset Management.

Yes, the question pertains to the Kaneb acquisition and in the future do you envision that you would be more interested in buying whole companies or not after this one, private or public? Or do you still think that -- are you getting to a size where that is more desirable to do it that way than to say, to look for bolt-on acquisitions? Then I have a second question pertaining to the dividend.

On acquisitions, you know we have financial screening criteria that really haven't changed in that an acquisition has to be immediately accretive and then meet various other financial and strategic thresholds that we have. I think there's opportunity to do both. I think we'll find opportunities where because of the spread of assets we have now we will find -- relatively small compared to a Kaneb transaction -- asset deals that we could fold into our much broader suite of assets that we have today and make those very effective little deals because they will be more synergistic than they would have been pre-Kaneb. Also we'll look at very large deals as well. So I think now our increased size and scope really gives us, as I said, a stronger platform for growth and whether it is an asset deal or a company deal we are going to have a lot more opportunities that will make sense to us once we close Kaneb than we can do today.

And then historically it looks like the Board has just met once a year to look at the dividend and I don't know what the exception of this most recent increase -- which is the result of acquisition, is that an ongoing policy or have you stated a dividend policy in contrast to other MLPs, some of which like to boost it every quarter, smaller amounts.

Yes sir. I understand. No. We do not have a formal dividend or distribution policy. We have stated as our objective to be a top grower with distribution, in other words, the rate at which we grow it which in our case has exceeded 10 percent annually since we went public in April of 2001 that we want to be at the top of the heap in increasing that distribution. So that continues to be our objective but we don't have a stated policy that says we will meet a certain number of times a year or that we will increase it a certain number of times per year.

Thank you.

Yves Siegel of Wachovia.

Good afternoon. From a strategic vantage point, is size important in terms of competing going forward?

Yes, I think there's a lot of advantages to size. You have better access to capital. You'll have more acquisition targets that will yield synergies that will make sense to fold into existing operations. And so I think from many standpoints and those are just two of them, that size gives you an advantage. Size in its own sake is not an advantage. You have to be smart about it. So size alone doesn't do it but in a deal like this which was a home run for us financially and strategically and for investors in both companies, that made the size question really academic.

The second is in terms of assets that you may consider after Kaneb -- before I even ask that question -- how quickly do you think you would be in a position to pursue other opportunities, number one? Then number two, would those opportunities extend into the gas arena?

On the first question we have dedicated staff of development people who I can guarantee are looking at opportunities every single day. Now as I mentioned we have a strict financial criteria for these things including the strength of our balance sheet. We are not going to compromise. For example, we have investment grade ratings from both credit rating agencies. We will not compromise that but we look at deals large and small every single day.

With regard to natural gas, we think we've got plenty of opportunities in accrued and refined products, liquid side of the business, and we stack those priorities up against competing alternatives and think we have more fertile ground to plow just sticking with our knitting for right now.

Super. Thank you.

Mark Easterbrook of RBC Capital Markets.

I've got a bunch of little questions. What is the anticipation for the first and second quarter in terms of maintenance turnarounds with the refineries that are tied to your system?

The turnaround schedule for first and second quarter? We've got it right here.

Basically in January, Corpus Christi was turning around, so that is impacting our crude tankage right now. And then Ardmore and Three Rivers, two Valero Energy refineries we serve, will be turning around in the second quarter. One of those may start in March, but they're really looking more like second quarter turnarounds at this point. So anyway we expect to be impacted in both those quarters by those maintenance projects.

How many days are those usually down, by about a week or so?

They're longer; they're more like 3 to 4 weeks. Corpus is 28 days and the other two are in the 20 -- 3-week range.

Also the maintenance CapEx I think for I think it was last quarter and this quarter has come in lower than we thought. Any reason for that and if you can give us any guidance going forward for maintenance CapEx, we would appreciate it.

Is this reliability you're talking about?

Yes.

The reliability will be up quite a bit in '05.

Is that more due to Kaneb or is that --?

No. All our comments really are standalone via (indiscernible) at this point but reliability was down in the fourth quarter against the fourth quarter of last year largely because we had some big projects in the fourth quarter of last year and it was about 2, 2.5 million in the fourth quarter of this year. Last year's fourth quarter we did a lot of work on the Houston line and we also had some automation projects, SAP, Toptech, things we were doing at the terminals. But in the '05 our budget is between 18 and $19 million for reliability. We are going to be doing a lot of work on the tanks that were dropped down to us by Valero Energy in March of '03. So that's really meaningful.

It is also in information systems, terminal upgrade, things that improve the quality of your assets so that going forward when we grow with Kaneb and our subsequent growth, we can digest that growth smoothly and easily and continue to grow. So part of what's happening in '05 is we're investing ahead of the curve to upgrade the quality of our assets and allow for a seamless growth in the future.

And then what was the at the end of the quarter the cash position?

16 million.

Okay, thanks.

(OPERATOR INSTRUCTIONS) And a follow-up from Kent Green, Boston American Asset Management.

Yes, just a clarification question on Kaneb. What split were they at with their general partner?

Their top split was 30 percent if I remember correctly and after that (multiple speakers)

On a weighted average basis, I don't want to misspeak but I think they are in the low teens. Would any of you guys know? (multiple speakers)

Were they higher than the split at Valero?

Yes, they were in a higher GP take of the distribution and is (multiple speakers)

That's what I thought. So that would revert back to Valero which of course adjusted for Kaneb by moving up on the split itself.

That's part of the deal economics.

We take hours from 320 to 342 annually and right now at 320 we're probably at the weighted average of around 8 or so and it would go up another 342 in our case to 12 or 13. So that is what I might be thinking about. I just don't know what their weighted average take is. But as Curt said, their top splits 30.

Okay, good.

David Fleischer, Kayne Anderson Capital Assets.

When you announced the acquisition you came up with a fairly -- fairly quickly you came up with a nice round $25 million synergy figure and cost savings figure. I guess now that you have had time to think about it and update a lot of your numbers and details I was wondering whether this is still a number that you feel good about or whether there is room for that to grow or whether that that's too bit of a number as I look at -- you had identified I think $5 million worth of insurance cost savings as one example. You talked about procurement savings and I was wondering if you could talk about some of those.

We're not changing the 25 million today but I still think we're going to find more. We're going to find I hope significantly more than 25 million but for now with the level of discussions we are allowed to have still while in this SEC process and still not having closed the deal, we really can't change the 25 yet. But I am optimistic we will hit a bigger number than that.

I know it's hard. I also know it's hard for you to get into too many details with them and getting into their asset and their numbers but as you have looked from even moderately afar at their assets and had more time to think about what you might do with them, and you did talk about some synergy savings, incremental volumes going through systems and terminals -- I'm just wondering if there was any more meat specifics you could put behind what some of those advantages were of putting the two companies together and what they might be going forward, if you could give us more insights into that?

Not yet, but stay tuned.

I think, David, one thing that is important is that interest rates have not moved up since we announced the transaction despite everybody's expectation and one of the things we commented on is that we ran the accretion economics with long-term funding at 6.5 percent for ten-year money for us and today we'd probably raise money in the 5.25 range. And every 1 percent off of that 6.5, so like if we borrowed at 5.5 that would be 5 million of savings, which is 8 cents. So we would have more than 8 cents of additional accretion to what we talked about if we could get into the market today.

Okay, thank you.

Rob Broomhall, Courtis (ph) Capital Advisors.

In 2004, how much was spent on pipeline integrity?

The integrity management program I think was 10.3 million but Steve can verify me on that. Do you have it there, Steve?

In '04, you are looking for we again -- what was it Rob? We had reliability, total reliability was about 8.5 million. Safety and environmental was about 1.3 million (inaudible).

The total integrity management program was 10.3 million in '04, so I guess I was right on that one. That includes everything, replacements, the expense associated with integrity management and the whole ball of wax. That's just the integrity piece. That is not all of what we call reliability capital. There's more to reliability than just pipeline integrity management constraint (ph).

Thanks.

At this time, we have no further questions. I would like to turn the call back to Mr. Fisher for any questions or comments.

Thank you. If anyone has any follow-up questions, feel free to give us a call. Thanks very much.

This concludes today's Valero L.P. fourth-quarter earnings conference call. You may now disconnect.