NuStar Energy LP (NS) 2005 Q1 法說會逐字稿

Good morning my name is Erika and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Valero L.P. First Quarter 2005 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. If you would like to ask a question during this time, simply press "*" then the number "1" on your telephone keypad. If you would like to withdraw your question, press "*" then the number "2". Thank you. Mr. Meador (phonetic), you may begin your conference.

Thank you operator. Good morning and welcome to Valero L.P. first quarter 2005 ea conference call. With me today is Curt Anastasio, CEO and President of Valero L.P. Steven Blank our CFO and other members of the management team. If you have not received earnings release, and would like a copy, you may obtain one from our website at ValeroLP.com. Attached to the earnings release, we have provided additional financial information on our business segments. If after reviewing a cash payable, you have any questions on information that is presented there, 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 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. With that I’ll turn it over to Curt?

Thank you, good morning and thank you for joining us today for our quarterly earnings conference call. For the first quarter, we reported applicable to limited partners of $17.8 million or 77 cents per unit, which compares to 18.5 million or 80 cents per unit last year. Distributable cash flow applicable to the limited partners for the quarter was $23.1 million compared to 23.2 million for the same period last year. We continue to maintain a strong coverage ratio applicable to the limited partners as 1.25 time well above average. Our overall coverage ratio covering both the general and limited partners was a very strong 1.31 times for the first quarter. Also note the Board declared a quarterly distribution of 80 cents per unit payable on May 13, the unit holders have record on May 6th.

Turning now to some of our key financial statistics, revenues were higher by approximately $4.3 million compared to last year primarily due to the completion of the Dos Laredos system on June 1st of last year. Higher throughputs in our crude oil storage tank business segment and the acquisition of two asphalt terminals from Royal Trading in February of last year. Crude oil storage tank throughputs were higher primarily due to improved throughputs that Valero Energy's Benicia and Texas city refineries compared to the first quarter of last year. With respect to our Dos Laredos system this project continues to exceed our expectation and we expect even higher propane throughputs next quarter. So far in April, we're averaging around 8500 barrels per day compared to 6000 barrels per day in the first quarter. On April 1, Valero Energy Corporation began supplying Pemex with increased volumes of propane supplied by their Corpus Christi and Three Rivers, Texas refinery. For the final three quarters of this year, we expect to average around 10,000 barrels per day as a result of the growing demand for propane in Northern Mexico.

Operating expenses increased by approximately 1.8 million from the first quarter of 2004. The increase in operating expense for the quarter was in part attributable to the impact of the service agreement amendment, which is implemented on April 1 of last year, an additional headcount positioned us to grow this business further. Operating expenses were also higher due to late March outage our Corpus Christi to use pipelines.

Going forward we expect quarterly operating expenses to be in the range of 22 million per quarter, exclusive of Kaneb acquisition. Administrative expenses increased by approximately 1.5 million from the first quarter of 2004. The increase in administrative expense for the quarter was again primarily attributable to the impact of the service agreement amendment. Increased headcounts and higher variable compensation expense. In addition, we incurred cost associated with the pending merger of our operations with Kaneb pipeline and partners L.P. and Kaneb Services LLC, which reduced earnings by about 1 cent per unit.

Going forward we expect administrative expenses to be approximately 3.6 million per quarter exclusive of the Kaneb acquisition. Interest expense increased by about 700,000 due to rising short-term interest rates partially offset by our lower debt balance. Since the first quarter of last year, we paid down around 11 million on our revolver and our debt-to-capitalization ratio stands at 46.8%.

Looking ahead to the second quarter, we expect throughput levels will be lowered due to the previously announced scheduled plant wise turnaround at Valero Energy's Ardmore and Three Rivers refineries that will at least last about three weeks. Therefore expect earnings to be slightly lower than our first quarter 2005 earnings.

In the second half of the year leading aside the effect of Kaneb acquisition, we expect to have improved earnings as we benefit from plan increases in our pipeline task which is going to effect on July 1. Higher throughput due to seasonal demand and the relative absence of turnaround at the Valero Energy refineries we serve. Currently, only the key refinery is scheduled for a turnaround in the fourth quarter. With respect to our 2005 reliability program, this year will be moving forward with many more projects to enhance the safety and integrity of our asset. As a result, we expect reliability capital expenditure will increase significantly from last year. For 2005, reliability capital expenditures are expected to be around $15 million, which is lower than the $19 million estimate we gave you on the fourth quarter conference call, of that around 4 million will be in the second quarter. In the first quarter we set 1.4 million.

Now turning to the Kaneb acquisition, I am pleased to say that the proposed acquisition by Valero L.P. and Kaneb Partners and Kaneb Services were approved in a special meeting held by the respective entities last month. This is a testament to the tremendous support we have received for this deal on both side. We are continuing to work diligently, to complete the transaction during this second quarter. Although we are still not in a position to comment on the details of that products, we believe our discussion with the SEC have been constructive. We will be providing further update on our progress when appropriate. We look forward to closing the Kaneb acquisition and remain excited about the many growth opportunities that we have with this larger more diversified company. Keep in mind we expect to increase our distribution to $3.42 per unit annually or $85.5 quarterly after the closing.

Going forward, we expect to continue to grow cash flow and distribution through internal growth and improvements in our expanded base business. At this time, I will open up Q&A. Operator?

At this time, I would like to remind everyone, if you would like to ask a question, press "*" then the number "1" on your telephone keypad. We will pause for just a moment to compile the Q&A roster. The first question comes from Scott Soler with Morgan Stanley.

Good morning, Curt.

Good morning, Scott.

I have a couple questions, this question to be very preliminary given how recent leases on Premacor with Valero, but just may be sort of very generally if you could talk about, you also got a very good balance sheet, you have good amount of cash and access to capital, the Valero, Premacor merger, the closes give the company and Royal 1805 product pipelines. I guess I was curious if you look at your opportunities for growth both with Valero and then apart from Valero and I know you still going to process of integrating the Kaneb assets. Curt, you talked very generally about sort of the pace of growth for Valero Partners. The bidding process for Valero, Corpus assets that are in L.P. qualify, excluding refineries. How you would look at those assets versus other assets that you might also look at for the company over the next several years. And again just if you be the very general -- but I was trying to understand sort of how you look at that opportunity with this announcement yesterday.

Thank you Scott. Yeah, I appreciated you pointing out that's the strong balance sheet and the really strong cash flow, I mean you look at our coverage, it's obvious that even after the Kaneb acquisition, we have really strong visibility to going our distribution and our strategy hasn’t changed on that. You know we want to be a top grower of the distribution payment, we have been to this part in our life, we told you that we are going to a core subject to the board of approval as always, but, regarding increase of the distribution to $3.42 from $3.20, once we get this deal closed and we are [endeavoring] getting at out a close in the second quarter.

Just cyclically on Premacor. Now I have to say that you know this is obviously a separate matter, contains in Valero Energy deal. We don’t expect it to affect the timing and of closing of our deal. I have not had any specific discussions at all with Valero Energy, about Premacor, as I am worrying about this, the way you are and the rest of the world is right now. But from what I can read out, it looks like a great deal for Valero Energy. You know you look at our growth historically, we've done it through a combination of acquisitions outside the Valero Energy with Valero Energy. We've had internal growth I think we had you know this year, year-over-year we've had about that 3% increase in our throughput, some of all it is on existing assets and so through a combination of our internal growth and continue to improve our operations and acquisitions, you know we will continue to be a top level grower of our distribution payments. So on the pace of growth that's what I can tell you strategically.

But as per assets, specific assets that related to Premacor is the Premacor acquisition at Valero Energy is doing. We have had no discussions on that. I am totally focused right now, on getting the Kaneb acquisition closed. That's where our resources are being applied and that's our mission at the moment in this company.

Okay, thanks.

Yeah, operator any questions out there?

Your next question comes from Ross Payne with Wachovia Securities.

How are you doing guys?

Hi.

You know, one question I would have related to yesterday's news, is A, if they get that merger done, what kind of impact would it have on the combination of VLI and Kaneb in terms of potential increased business, maybe out of East Texas or other or New Jersey will have you?

Yeah, you know Ross. Unfortunately, I really I can't comment on that right now because I honestly don't know. You know we haven't looked at it. I will tell you honestly flat out we haven't worked on it at all, we have had no discussions with Valero Energy about it and right now what we are focused on is the Kaneb deal. I am afraid at the moment we'll have to leave it at that and as we go forward we will see what develops, but right now there is nothing more that I can offer you on that.

Okay. That's fair enough. Any thoughts on whether or not the VLO announcement will have any kind of impact on the FTC's timetable with you guys?

It should, I don't control with the FTC's strength [inaudible] obviously, but it's a separate matter, with two separate companies and if you ask me my personal opinion, I don't expect it to reflect the timing or closing of the Valero LP's deal with Kaneb.

Okay, very good. The rating agencies made some comments yesterday. Can you talk to your current approach on dealing with them, as it relates to yesterday's news? Because obviously it had an impact on the way the rating agencies are looking at us?

Steve Blank, our Chief Financial Officer, do you want to answer that, Steve?

Yeah, well I think what we will do is we have not had any separate conversations with them, with the exception of Moody's who put out press release covering our debt. And I spoke with them [inaudible] with the Premacor announcing and they really didn’t change their view on us. Okay, they just again, reiterated the fact that they would be looking at us, which is the same thing they said when we announced the Kaneb transactions. I think our plans with the rating agencies will be once, we get a view to closing the Kaneb transactions or through to the SEC process will go acting and sit down and give them an update on where we are for the year in terms of our forecasting all of that and you know see what comes out of that.

Okay, did S&P have anything to say Steve?

No, not well not that I’m aware. I do not have a conversation with S&P.

Okay.

[inaudible], S&P came out and said --

Alright. Very good. That's all I have got, guys thank you.

At this time I would like to remind everyone, if you would like to ask a question, press "*" then the number "1" on your telephone keypad. Our next question comes from Kent Green with Boston American Asset Management.

Yes, my question pertains to future upgrade, say it debt or equity sources to fuel your acquisitions. I mean obviously we have seen these closed end funds like Kayne Anderson and [Tardess] Energy at all fidelity. It would have been created -- does that changed the way that you couldn’t finance either of the future and the cost to capital and does that seem to be increased financing available.

Well it certainly increases the financing available I mean, that we think it's a well done development, if you will, because clearly there is more money being put to work in the space and we know those, you know, pretty close in front that we have spoken to. So, I think the struggle in the MLP market historically has been, you know, that -- there was a lineup to raise equity when market conditions were favorable and that was in some extent limited capacity in the retail space. And so institutional involvement coming in the form of close-end funds or with the recent mutual fund legislation, which should open things up on as such can only be a good thing. In terms of access to capital.

Just another question, as I recall you put a cap on your partnership splits at 25%, is that correct?

Yes, that’s correct.

So, you know in the future, any incremental will come from that and I suppose that’s probably helped in your financing too.

Yeah, absolutely I mean we have one of the lowest costs of capital around in it that's -- one of the reasons is that our GP take is low relative to our competition and in fact wouldn’t we say that it was current blended GP take is approximately 7.6% at the current distribution of $0.80 a quarter [of 20] here at the GP. It's only taking 7.6%.

Thank you.

Your next question comes from David Fleischer with Kayne Anderson Capital.

Yeah, hi. You indicated that your discussions with FTC were constructive, was it, where I think it incurred. Is there any risk given these discussions, is there any risk at all that the [inaudible] risk with Kaneb deal, could only close with unacceptably large asset sales that -- make the transaction more attractive to you?

I really can’t comment on what kind of -- how we are going to end up with the FTC, you know like I said, my expectation is we are going to succeed in closing this in the second quarter and when I say closing, is that clearly implies that we are closing in on in terms that are acceptable to everybody involved here and that is my expectation. So, I mean I think I have to leave it at that right now, because I don’t want to prejudge or predict how the thing is going to conclude, but like I said, we are having constructive discussions and we are working towards closing it this quarter.

Okay, thank you.

Thank you.

Your next question comes from Ron Londe with AG Edwards.

Just I would like to ask a more, a [sub tier] question. With regard to the competitive environment in El Paso, Texas. Have you seen any increase in volumes or competition off of the lowering pipeline?

Well our El Paso line has been doing great. You know our volumes have been really strong. Long Horn I understand, it started making deliveries, but really it's not very visible to us. We -- this has been -- probably El Paso assets have been doing better than ever in the El Paso pipeline in terminal. Since they started making those deliveries, so, now I can't tell you that I seen an adverse competitive effect at all Ron.

Okay thanks.

At this time, I would like to remind everyone. If you would like to ask a question, press "*", then the number "1" on your telephone keypad. We will pause for just a moment and compile the Q&A roaster. At this time there are no further questions. [Mr. Zadora] may I have your other or any closing remarks.

Yeah, if you have any further questions feel free to contact just at Investor Relations. Thank you.