NuStar Energy LP (NS) 2005 Q2 法說會逐字稿

At this time, I would like to welcome everyone to the Valero L.P. second-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. (OPERATOR INSTRUCTIONS) Mr. Meador, you may begin your conference.

Thank you, operator. Good afternoon and welcome to Valero L.P.'s second-quarter 2005 earnings 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 including two of our newest members, Mary Morgan, VP of Marketing Development, and Jim Tidmore, VP of Terminal Operations.

If you have not received the 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 the attached tables you have questions on the information that is presented there, please feel free to contact us after the call.

Also note that the financial results for Valero L.P. for the second quarter and six months ended 2005 do not include the financial results of Kaneb Pipe Line Partners L.P. or Kaneb Services LLC, which were merged into Valero L.P. July 1. Beginning with the third quarter, the financial results of Kaneb will be included in the reported results of Valero L.P.

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 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 filings we have made with the SEC. Curt?

Good afternoon and welcome to our first conference call since the completion of the acquisition of Kaneb. We welcome all of you to this call, especially our new unit holders. We look forward to capitalizing on the many opportunities this merger creates for the new Valero L.P. As one of the premier midstream logistics MLPs, Valero L.P. is now in an outstanding strategic position to build on its diverse asset base.

With the merger completed, and excluding the assets slated for divestiture to Pacific Energy Partners, we have over 9,100 miles of crude and refined product pipeline, 94 terminal facilities, and four crude oil storage tank facilities with over 77 million barrels of storage capacity. This strong asset position serves every major area of the United States as well as international markets, in Canada, Mexico, the Caribbean, the United Kingdom, Australia, and New Zealand.

Later in this call I will provide more details on the merger, but first I would like to discuss Valero L.P.'s second-quarter results. For the second quarter we reported earnings applicable to limited partners of $17 million or $0.74 per unit, which compares to 18.2 million or $0.79 per unit last year. Year to date, earnings were $34.8 million or $1.51 per unit, compared to 36.7 million or $1.59 per unit for the first six months of '04. Distributable cash flow applicable to the limited partners for the quarter was $22.1 million, compared to 22 million for the same period last year. Our overall coverage ratio, covering both the general partner and limited partners, was 1.15 times for the second quarter.

With completion of the Kaneb acquisition, our Board has improved an increase in the quarterly distribution rate to $0.855 per unit, a 6.9% increase from the $0.80 per unit paid in the first quarter. This is the fifth increase in the quarterly distribution since the IPO in April 2001 and represents a 43% increase in the distribution rate in just over four years, or an average annual increase of more than 10% per year. This latest increase puts our annual distribution rate at $3.42 per unit.

Turning now to some of the quarter-to-quarter comparisons, earnings were lower in the second quarter of 2005 versus second quarter of '04, primarily due to the previously announced plant wide turnarounds at Valero Energy's Ardmore and Three Rivers refineries. These planned maintenance turnarounds affected second quarter's earnings by approximately $0.07 per unit.

Second-quarter revenues increased by approximately 2.6 million compared to last year, primarily due to higher volumes shipped on the McKee to Denver refined product pipeline; a full quarter's contribution from our propane pipeline to Nuevo Laredo, Mexico; and higher throughput volumes in our asphalt terminals and crude oil storage business. The increase in revenues were partially offset by lower volumes on the pipelines and terminals affected by the turnarounds at Valero Energy's Ardmore and Three Rivers refineries that I just mentioned.

Operating expense increased by approximately 1.4 million from the second quarter of '04. The increase in operating expense for the quarter was primarily due to higher regulatory, inspection, and repair costs as part of our 2005 reliability program to enhance the safety and integrity of our assets.

Administrative expenses increased by approximately $900,000 from the second quarter of 2004. This increase for the quarter was primarily attributable to increased headcount in anticipation of acquiring Kaneb.

Interest expense increased by around $800,000 due to rising short-term interest rates and a higher debt balance on our $175 million revolver. Our debt-to-capitalization ratio currently stands at 47.7%, much lower than a peer group average.

Since Kaneb Pipe Line Partners will not be reporting second-quarter earnings until we file the 8-K/a, let me walk you through some observations about their results. Kaneb Partners' results are expected to be in line with our projections and with their original budget. Although we have not closed the books, second-quarter net income applicable to limited partners, before merger-related costs and any charges, is expected to be around $22.2 million or $0.78 per unit. This compares with 21.8 million or $0.77 per unit for the second quarter of 2004.

Currently we're working on a Form 8-K/a filing that will report Kaneb's financial results and show the pro forma numbers for 2004 and the six months ended 2005 for the combined Company. These numbers will reflect the assets required to be divested as part of the order from the Federal Trade Commission approving the deal. The 8-K/a filing is due in early September, and we expect to file it before that time. In addition, we intend to provide additional modeling details at that time.

Now I would like to provide some additional comments on the Kaneb merger. First, we are on track in our agreement with Pacific Energy Partners to sell them the assets required to be divested; and we expect to close this quarter. You will recall, we announced the sale on July 5. The assets to be sold included two California terminals handling refined products, blendstocks, and crude oil; three East Coast refined products terminals; and a 550-mile refined products pipeline with four truck terminals and storage in the U.S. Rocky Mountains. Income from these held-separate businesses will be included in Valero L.P.'s results until the deal is closed.

The $455 million of proceeds received from the sale of these assets will be used to pay down debt, which will help strengthen our balance sheet and position the partnership for growth opportunities in the future. We're very pleased to have received such a great price, on top of being able to announce the sale of these assets so quickly, and to a very viable MLP who has agreed to hire on all of the employees associated with running these assets.

In connection with the closing of the Kaneb merger we also sold Kaneb's market oil refined products marketing business to Valero Energy for about $27 million, which will be used to pay down debt. Integration efforts are going very well, and the coordination by our management team has exceeded my expectations. I am very pleased with the quality of the assets we purchased and, most importantly, the quality of the people we hired from Kaneb.

Efforts are currently focused on capturing synergies, increasing the value of our assets, and looking for new opportunities to grow out business. Our strong asset base will provide us many opportunities to do large-scale internal and external projects.

With respect to financing the merger, we borrowed $525 million on a new five-year loan facility, and $180 million on a new $400 million revolver. Proceeds from these financings were used to pay the 525 million cash consideration to shareholders of Kaneb Services LLC, and to refinance Kaneb and Valero L.P. bank debt. Proceeds from the sale of the assets to Pacific Energy will be used to pay down bank debt.

Going forward, we expect to continue to report our four distinct segments -- crude oil pipelines, refined product pipelines, refined product terminals, and crude oil storage tanks, with Kaneb's assets included in these business segments. The Kaneb product pipelines will be included in the refined product pipeline business segment, and the Kaneb terminals will be included in the refined product terminal business segment.

In addition, beginning with our third-quarter filing, we will provide disclosure on our international results. Looking ahead to the third quarter, we expect to see significantly improved earnings with the earnings accretion from the Kaneb merger, increases in our pipeline tariffs which went into effect on July 1, higher throughput volumes due to seasonal demand, and the lack of turnarounds at the Valero Energy refineries we serve. The only scheduled turnaround is at Valero Energy's McKee refinery, which is scheduled to be down in the fourth quarter for planned maintenance for about 28 days.

I would also liked point out that we are very excited about this morning's announcement to partner with Pemex, the Mexican national oil company, in the construction of more than 110 miles of pipeline in northern Mexico and South Texas, and to ship oil products from Pemex's assets in the Burgos Basin near Reynosa, Mexico, to Brownsville, Texas. As part of our agreement with Pemex, we will have a 10-year shipping agreement to move oil products across our pipeline from Pemex's assets near Reynosa, Mexico, to a terminal in Brownsville, Texas. This is another great strategic growth project for us, which is expected to be accretive to earnings and will increase our volume of international business.

That same announcement this morning also referred to three-party agreement among us, Pemex, and Valero Energy wherein we have approximately doubled our shipment of propane to our Nuevo Laredo terminal in Mexico. We feel great about continuing to grow in Mexico and to build on the competitive advantages we have there and also in the U.S. along the border.

In closing, I remain very optimistic about the opportunities available to the new combined enterprise and the enhanced value we expect to provide the unit holders through better earnings diversification, a broader scope of operations, and distributable cash flow accretion. Going forward, this will position us to continue delivering industry-leading distribution growth to our unit holders. At this time, I will open it up for a Q&A. Operator?

(OPERATOR INSTRUCTIONS) Ross Payne, Wachovia Securities.

Two quick things. Obviously synergies are going well with Kaneb. I had to jump on and off here just a second ago, but is the synergistic number still 25 million? Or have you guys thought about increasing that number if the increased synergies appear to be out there?

At this early stage we're sticking with the 25 for now. I said back in November, when we put it out there, that we expected to do better than that, and I would still say we expect to do better than that. But it is early days for us putting these two Companies together. So we will stick with that for now.

Sure. One follow-up on Premcor, assuming that moves forward. Any ideas on what kind of opportunities may be out there, related to being able to add services to that part of the entity?

Of course as you well know, Valero Energy is still in the FTC review process on the Premcor deal and of course doesn't own those assets yet. The advantage has been historically for us, being affiliated with Valero Energy, is that there's a large stable of assets that is MLP-able, that is potentially sellable to Valero L.P.; and that is true now or actually truer now than it ever has been.

We have not struck any deal or specifically negotiated anything with respect to Premcor assets, since as I said Valero Energy is still in a review process on those. But our focus right now, I can assure you, is really not on something that may be on the com (ph) later. Our focus right now is on the assets we just bought on July 1 and what we can do in internal and external growth, and synergy capture, to get the most bang for our buck out of those. That is where our focus is right now.

Okay, understood. Thank you very much.

Ron Londe with A.G. Edwards.

Just had a couple things. In the crude oil pipeline data, you showed that volumes were down 17%. On revenues, were only off about 7.5. What was the disparity here?

Of course the crude oil volume is down. Is that the quarter-to-quarter page that you're looking at?

Yes.

Of course it is primarily due to those two refinery turnarounds that I mentioned in my remarks. We still there would have had some high tariff volume on, for example, the Wichita Falls line to McKee, which is a relatively high crude tariff line for us. So therefore there is some offset there if the tariffs are not all equal. Even though we have lost some volume, there is an offset by continuing to move good volumes on higher tariff lines like Wichita Falls.

Is about the same thing with the refined products line?

Yes, it should be a similar type analysis. One thing I mentioned in my remarks, for example, is that we had much higher volumes quarter-to-quarter on McKee to Denver. That is the Colorado Springs and to Denver. That is a relatively high tariff line for us, and we had strong -- we had more than double, I think, the volume quarter-over-quarter compared to -- Q2 '05 to Q2 '04. So that really helped us on tariff revenue there.

Of course Laredo, going down from Three Rivers to Laredo, Texas, with the higher volumes ultimately making their way to northern Mexico as well as the Laredo terminal, that was higher quarter-over-quarter I believe. That would have helped us as well on the tariff revenue side. So, yes, that's right; same type of analysis really. You get tariff revenue increases offsetting volume decreases on some of the other lines.

In the refined product terminals area, operating expenses were up 16%. Was there anything special that happened there?

I think we had some tank were, didn't we? We had API 653 work that came due. That is the main thing that comes to mind. Those are items that from time to time in this business are just going hit you in a particular quarter. But over the course of the year, I don't think we have any -- we see any change.

Valero L.P., looking at it as a stand-alone business, I don't think we have any change to what we previously estimated for you on maintenance and reliability capital expenditures. So it is really just more timing; what is hitting us in a particular quarter.

You have a pretty big swing in the cash flow from the Skelly-Belvieu pipeline company venture. It kind of swung from last positive 110,000 to -308 I guess this year. Is there anything that was going on there?

I know we had some expenses associated with Skelly-Belvieu.

We have a lot of hydrotesting work that is going to come up on that line, so there has been a fair amount of prep work if you will for that. But most of that hydrotesting is going to hit us probably in the second half of the year.

Okay. With regard to the announcement this morning with Pemex, are you going to need any additional storage in Brownsville to handle the volumes?

No, in Brownsville for Pemex we're going to a third-party terminal and they can -- really this volume is replacing the volume that was previously trucked to that terminal. So, no; if there's any additional storage needed there, it would not be our financial responsibility.

Okay, thank you.

(OPERATOR INSTRUCTIONS) Mark Easterbrook, RBC Capital Markets.

Just quickly going back to the maintenance CapEx, I think you have given out guidance as Valero on a stand-alone basis. Do you have any guidance for 2005 pro forma the KPP acquisition?

No, I think what we're going to do -- we had given guidance stand-alone for us in our 10-Q for about 15 million for regulatory, and that is still appropriate. But I think what we're doing is we're going through a budgeting and forecasting process right now with them. Also as Curt said, we haven't fully closed their books. So what we would prefer to do is to wait until we get the 8-K/a filing all ready, which should be filed no later than sometime the first week of September, and then come out with details for models on line item by line item.

Kaneb in their budget had something, I believe, in the mid-20s for reliability CapEx. But we really haven't done a full review of their financials and their projections. We have only been together with management for a few weeks. So we would prefer to wait, and then come out in September and give you full-blown line by line details for modeling purposes.

On the Pemex announcement today, how much CapEx is going to be spent in 2005 versus 2006?

It is a total cost of 54 million. There will be 39 million is our projection for this year, and we have spent about 8 million I think through June.

What types of returns would you expect on that project?

These are good. These are a strong return project. Steve mentioned the $54 million investment. We will be close to 9.5 million of annualized EBITDA. But this is going to be ramped up over the next 12 months. That 9.5 -- the two deals, the increased propane to Nuevo Laredo and this Burgos project, were linked together. One was conditioned on the other by us. We did not want to do one without the other. Pemex has ultimately agreed to that, on the terms that have been negotiated here.

So a vast majority of that 9.5, maybe 8 or more slightly more than 8, related to Burgos; and the 1.4 million, 1.5 million or so of annualized incremental EBITDA relates to the extra volume on the Dos Laredos project.

Last question. Do you have any other assets that you might have to announce? Or are you done with the FTC and then the Kaneb merger?

Let me answer it this way. We don't know. We have a consent decree in place that covers only the divestitures that are being made here. But the second part of your sentence made it a little more complicated, because we're not done with the FTC. They actually have fully vet the buyer and the sale process to make sure that they are satisfied.

And I fully expect they will be. I said in my remarks I expect we will close this deal this quarter, in the third quarter. That is what I expect to happen, that until the FTC gives their final blessing to that we cannot say it is done.

Okay, thanks.

Not to be tricky about it. We don't expect to divest anything more, but that is -- as a technical matter we're not done with them until we are done with them.

Yves Siegel with Wachovia Securities.

Just a couple of quick ones. Number one, do you have a sense of how much of the debt is floating versus fixed, and how that will look with the Kaneb merger as well?

It's Steve. We stand-alone at June 30 are right around 50-50, because we have 167 million of fixed to floating swaps in place. So we are at 50-50. They will not change us. On July 1 when we bought them we picked up 500 million of fixed-rate debt from them. But we also put in place a 525 million floating rate bank facility to pay for the KSL shares; and then we refinanced their floating debt. They really don't move us off that 50-50 mix.

Now when we pay down debt, when we get the asset proceeds from Pacific Pipeline Partners, that is 455 million. That has to be used to pay down debt under the terms of our indenture, or the Kaneb indenture. And we will pay off the floating-rate debt for a like amount of 455. When we do that we will move to probably around 65% fixed, 35% floating.

Steve, do you have a ratio that you target in terms of fixed and floating?

We really don't. We have tended to be 50-50, and that has worked out really well for us. Historically on those swaps, I think life to date we have been paid about 8.5 million; and they have got a marked-to-market of about 2 million right now.

It does not appear to us that being a floating-rate payer is nearly as attractive as it sometimes can be, because the yield curve is a flat. So personally, I like being 65% fixed, 35% floating as an outcome. We will probably fund Burgos under the revolver; and maybe in time we will build that floating mix back closer to 50-50, but it is early days yet. But right now I think is a good outcome.

Thanks Steve. Do you have an update of where do you all stand as it relates to the pipeline integrity and storage compliance on the tanks?

We're completely in compliance with what the regulations require us to have done to this point. In fact, we're a little ahead of schedule. So are the legacy Kaneb assets. So there is no issued there on compliance.

So the guidance that you have given, is that going to ramp up in terms of how much you have to spend? Or is that pretty steady as she goes?

Remember, the stand-alone L.P. numbers; Steve just went through and we said we're not changing that. We are still not closed on the books for Kaneb yet. So I think we will have a complete answer to that question in early September when we filed that -- make that 8-K filing.

The last two that I have is, one, some housekeeping on the tariff. What PPI adjustment will you be using on the rates going forward?

The last is, Curt, you mentioned in your prepared remarks that thus far the merger has exceeded, I think, your expectations. Would you care to elaborate in what sense or what? Thank you?

First of all, on the PPI, for those lines that are subject to a PPI adjustment, we use the FERC formula which varies year-to-year. So there's not one number that I can give you that is going to hold true forever. This year it was, what, 3 point -- ?

It's a little bit more than 3.6% that we used for both the Texas lines and the FERC lines.

So that is what it was this year; and it remains to be seen what happens over the next 12 months.

With regard to success on the merger, I think really I would credit our people with lots of good premerger planning that paid off in a very smooth transition. On July 1 when we closed this deal, we closed the acquisition of two public companies; we arranged a whole bunch of employee meetings; we closed the sale of Martin Oil to Valero Energy; we closed a $525 million loan facility that Steve referred to. That was all on the same day.

Within a few days we had signed agreement with Pacific Energy to divest the assets that the FTC mandate covers. We are in the process right now, making great progress, on refining our growth strategy, on identifying and capturing synergies. So that we've gotten to the point where even now I can say this deal looks very good, not just for investors but also for employees and our customers.

One of the strategic objectives of this deal, of course, was to diversify our customer base away from our having one predominant customer, Valero Energy; and we have accomplished that with this deal. We are assuring customers, ex-Kaneb customers for the most part, that we're a common carrier open-access system. We want to serve them at the very best levels of quality and service that they can achieve from a pipeline and terminal company. And we want to grow their business. We want to find ways to grow their business throughout our system, and to buy and build and to develop our existing assets in a way that meets their business objectives. We have a strong of meetings set up with customers in the coming days and weeks to explore that further, not just to assure them but also to understand better what issues and concerns they have.

It is now clear, having closed the deal, and listening to Steve's financial plan, we're going to end up with an extremely strong balance sheet. We've got investment-grade credit ratings. We have superior access to low-cost capital. We have a 25% cap on the GP (ph) take; it is one of the lowest around. We have strong cash flow. We have strong coverage of our distribution.

Now with the two Companies combined we have absolutely the strongest management team I have ever been associated with, and terrific employees who I have had the pleasure of meeting a lot of them at this point. I have been to every principal location just about, and will continue traveling to meet people in the weeks ahead. They are fired up. They're are enthusiastic. They have got great ideas. So that is why I can say without hesitation, even at this very early stage, that the integration is going great.

We have identified systems that should be integrated immediately. Some is already done, some will be done in the coming weeks and months as we have an orderly transition over to our accounting and other systems that we use. All of that is going very smoothly. We have no trouble accounting for the business. I am just really overwhelmed by how well our integration team did, to make sure that all of this happened as smoothly as it has. I can tell you, a lot of these people worked around the clock to make sure that that happened. So that is why I am as optimistic and as positive as I was sounding earlier.

That's great. Thank you.

(OPERATOR INSTRUCTIONS) There are no further questions at this time. Mr. Meador, do you have any closing remarks?

Thank you for joining us. If you have any further questions, feel free to call investor relations.

This completes today's Valero L.P. second-quarter 2005 earnings conference call. You may now disconnect.