NuStar Energy LP (NS) 2005 Q3 法說會逐字稿

Good afternoon, my name is Miles, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Valero LP reports third 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]

I would now like to turn the call over to Mr. Mark Meador, Manager of Investor Relations. Sir, you may begin.

Good afternoon, and welcome to Valero LP's third quarter 2005 earnings conference call. With me today is Curt Anastasio, CEO and President of Valero LP; 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 from our website at Valerolp.com. Attached to the earnings release we have provided additional financial information on our business segments.

Please note that the throughput barrels per day presented on these tables does not include throughputs for the held separate businesses sold to Pacific Energy Partners LP on September 30th.

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.

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've made with the SEC. Curt?

Good afternoon and thank you for joining us today for our quarterly earnings conference call. We had an outstanding quarter financially, reporting record third quarter earnings. A full quarter's contribution from the former Kaneb assets, was one of the primary drivers behind these great results.

Going through a few of the numbers, net income applicable to the Limited Partners for the quarter was $41.3 million, or $0.88 a unit, which compared to $17.9 million, or $0.78 per unit last year.

Included in the third quarter results are earnings from the held-separate businesses sold to Pacific Energy to September 30th, which are classified as discontinued operations on the income statement. For the third quarter, this amounted to $4.4 million of net income applicable to the Limited Partners, or $0.09 per unit.

If you recall, the held separate businesses consisted of 2 California terminals handling refined products, blend stocks and crude oil, 3 East Coast refined product terminals and a 550-mile refined products pipeline with 4 truck terminals and storage in the Rocky Mountains.

While we would have preferred to retain these assets, we received a great price for them. The $455 million of proceeds from the sale was used to pay down debt, which positions the partnership well going forward to capitalize on additional strategic opportunities.

Effective October 1st, the financial results from these held-separate businesses will no longer be included in the reported results of Valero LP.

Distributable cash flow applicable to the Limited Partners was a record $54.7 million, or $1.17 per unit, compared to $22.7 million, or $0.99 per unit for the same period last year. The $0.18 increase in distributable cash flow is largely attributable to the accretion from the Kaneb acquisition. Based on the $0.855 per unit distribution declared by our Board, as noted in the press release, our distributable cash flow provided 1.37 times coverage to the Limited Partners for the third quarter.

If you look at our balance sheet now, it's in great shape. At the end of the third quarter, cash on hand was $42 million and the Partnership's debt to capitalization ratio was only 38%, well below the second quarter of around 47% and much lower than our peer group average of around 54%.

Operationally, this was a challenging quarter for many companies affected by hurricane Katrina and Rita, but fortunately, we experienced no significant damage to our Gulf Coast assets from either hurricane. We did have to shut down certain of our pipeline and terminal facilities located in the storm's path prior to making landfall, however, our experienced engineers and operators were able to get these assets back up and running within a few days, which resulted in a minimal financial impact.

Fortunately, the only other impact to us from the weather was that storage throughput volumes at Valero Energy's Corpus Christi and Texas City refineries were reduced for a week due to hurricane Rita.

Next, I'd like to go through some of the quarter-to-quarter comparisons. Third quarter revenues increased by $205.5 million compared to last year, primarily due to the addition of the Kaneb assets and higher throughput volumes from seasonally strong demand. Keep in mind a large portion of our revenues now come from the former Kaneb bunkering business, offsetting bunkering revenues are expenses associated with the bunkering operations, which are shown as cost of sales on the income statement.

For the third quarter, bunkering cost of sales was $101.2, resulting in 8.9 million of gross margin from the bunkering business.

Operating expenses increased by $49.7 million from the third quarter of '04, due to adding the Kaneb assets, as well as higher regulatory, inspection and repair costs as part of our 2005 Reliability Program to enhance the safety and integrity of our assets.

Going forward, we expect quarterly operating expenses to be in the range of $65 to $70 million per quarter.

General and administrative expense increased by 6.8 million from the third quarter of 2004, primarily due to increased headcount from the acquisition of Kaneb and an amendment to our Valero service agreement, which was effective with the Kaneb acquisition. That amendment reflects the larger scope of services necessary for the Kaneb acquisition.

Going forward, we expect quarterly administrative expense to be in the range of $9 to $10 million per quarter.

With respect to depreciation expense, the 15.5 million increase from the third quarter of 2004 is primarily due to the Kaneb assets and excludes depreciation for the held-separate businesses. We expect depreciation expense to remain about the same going forward, in the range of $23 to $23.5 million. But keep in mind, that is subject to change, based on a valuation exercise we are currently undertaking.

Interest expense increased by $9.9 million due to additional debt incurred to finance the Kaneb acquisition, as well as rising short-term interest rates. To fund the acquisition, we borrowed $525 million on a new 5-year loan facility and 180 million on a new 400 million revolver. Proceeds from these financings were used to pay the cash consideration to shareholders in Kaneb Services LLC and to refinance Kaneb and Valero LP bank debt.

With the $482 million of proceeds from the sale of the held-separate businesses to Pacific Energy Partners LP, and the sale of Martin Oil to Valero Energy, we paid off $180 million of the $400 million revolver and partially paid down the $525 million term loan.

With respect to our public debt, we remain investment graded by S&P, Moody's and Fitch, all with a stable outlook. Going forward, we expect quarterly interest expense to be in the range of $14 to $15 million.

Now I'd like to provide some additional comments on some of our current and future growth projects. With respect to the recently announced pipeline project to construct approximately 110 miles of new pipeline in Northeastern Mexico and South Texas, we're ahead of schedule and expect to be in service by May of 2006. This project will take unrefined petroleum products, such as naphtha, from the Burgos gas fields of Northern Mexico, up to Brownsville, Texas, where they can then be marketed to Gulf Coast refineries.

The new pipeline will also connect to our recently expanded Rio Grande Valley products pipeline system, which transports refined products to the Valley from refineries in the Corpus Christi area. This allows us to increase our shipments to the fast-growing South Texas, Rio Grande Valley and Northern Mexico regions. Combined, we expect now to move around 36,000 barrels per day of petroleum products through our Edinburg and Harlingen, Texas terminals and on to Brownsville.

In the future, there is further upside to as much as 45,000 barrels a day, given the growth in those regions and our new capacity.

We continue to believe this will be an important geographic area for our business that will provide more accretive growth. We also plan to spend around $58 million in 2006, on strategic growth opportunities, which includes approximately $15 million of carry-over from the new pipeline project I just described.

Many of these projects focus on certain Kaneb assets that provide us with ample high return investment opportunities going forward. These types of projects involve expanding and improving existing terminal and pipeline infrastructure as well as building new facilities. For example, we currently have about $17 million of strategic projects planned, starting next year and continuing through 2008, associated with our ammonia pipeline. These capital projects involve building pipeline connections, storage and additional pump capacity to capture incremental volumes from increasing end-market demands. We expect these types of projects to provide very favorable internal rates of return.

As to the fourth quarter, we'll be focused on the continued integration of the Kaneb assets and identification of both cost savings and growth opportunities. Operations are expected to be impacted temporarily, by lower throughput volumes from the typical seasonal slowdown of demand for asphalt and the previously announced scheduled plant-wide turnaround at Valero Energy's McKee refinery.

Higher power costs, due to significantly higher national gas prices, and higher maintenance expenses on certain legacy Kaneb assets are also expected to impact fourth quarter earnings. And obviously, we won't have the contribution of the assets sold to Pacific Energy either.

Given those factors, we expect to report earnings in the range of $0.65 to $0.70 per unit in the fourth quarter, still a good number, given all that's expected to happen in that quarter.

Looking further ahead to the first half of next year, operations will continue to be impacted by a heavy turnaround activity at some of the Valero Energy refineries we serve. In addition, investments we have planned to upgrade some of the legacy Kaneb assets, will increase maintenance expense during that first half of the year.

However, by the second half of next year, throughput levels and maintenance expense will return to more normal levels.

In closing, we continue to see an abundance of growth prospects and opportunities from our greatly expanded geographic presence. The Kaneb deal has substantially enhanced our opportunity set and you'll hear more from us about growth projects and other initiatives.

I'm pleased to say, we've met the strategic objectives we outlined as it relates to the Kaneb acquisition, and more important, we still expect the acquisition to be accretive. We remain committed to growth; growing our customer base, while offering improved service to our customers, growing throughputs across our systems, and growing our distribution payments to our investors.

At this time I'll open it up for Q&A. Operator?

[OPERATOR INSTRUCTIONS] Ross Payne of Wachovia Securities.

First question is, can you give us some kind of indication of what kind of multiple you got on this sale, just to kind of back out some of the EBITDA associated with those assets?

Yes, we had associated with that pipe sale, budgeted [inaudible]. But we sold it at about 13 times multiple. And the Martin Oil, which we sold for about 28 million, there was quite a bit of value in the inventory position there and we got paid for that as well, so it kind of skews the multiple upwards to quite a hefty level. But again, a lot of that was inventory [value].

[OPERATOR INSTRUCTIONS] Ross, your line is open.

Since no one else is jumping on, I'll go ahead and kind of follow-up here. Can you guys talk in general about what you think Premcor is going to do long-term for you, given its combination with VLO?

We're talking to Valero Energy about them. We have identified possible specific asset purchases, legacy Premcor assets, from Valero Energy. But I would not expect it to be significant. We hope to get something done, but it will not be material to the Company, given the size we are now.

Okay. Are there things that are more organic in nature that you can do to kind of extend into their assets or vis-a-vis buying assets from them?

What I'm talking about with regard to Premcor is the potential purchase of assets from them. That's what I'm talking about there.

Right. I was just thinking, is there any kind of expansion programs you guys could just do organically that would be able to assist them with some of the services they may need or maybe geographically--?

Oh, we talk to them about that all the time, like we do really, now that we have, what, over 300 customers I guess, we talk to all customers about that all the time. And there are some such ideas that we're under discussion with Valero Energy. So, hopefully we'll get some of those come to fruition, absolutely.

Just because we've greatly expanded the customer base, doesn't mean we've abandoned opportunities with Valero Energy. We're still on those as well.

Sure. Also, any kind of comments on the recent announcements in changes in management?

Wow, what can you say? What more could Bill Greehey have done with Valero Energy than he's done? I mean just an unbelievable story. And as he said in his announcement, he leaves the Company in great hands, to Bill Klesse and team. So, they're in great shape. And of course, Klesse is terrific. You know, hard to find anybody with more industry experience than Bill Klesse. So, I think they're in very, very good hands.

And of course, Bill's staying on as Chairman, so they're not losing his insight and strategic direction.

And I assume you assume that this role will stay the same at VLI?

Yes. At the same time he announced his succession plan at Energy, he mentioned that he would be staying on as Chairman of VLI. Which is lucky for us.

Very good, guys.

Chip Hodge of John Hancock.

I was wondering, could you tell me what percentage of your EBITDA now comes from Valero, post Kaneb acquisition and where you think that might be going on a go-forward basis?

On revenue we're down to something like 23% and on EBITDA it's, what, 35 or 40?

It's about 40.

And you're comfortable with that level or where do you think it might be going forward?

Well, you know, really, one of the reasons we did the Kaneb deal strategically was to diversify away from Valero Energy, to be less dependent on some of the Valero Energy refining systems that really dominated our earnings in the past. So, time will tell how it plays out in terms of deals we find with Valero Energy and without Valero Energy. We don't have a specific target in mind that we're trying to get below or anything like that.

More likely than not, I would actually expect Valero Energy to be a smaller percentage going forward than even they are today. But time will tell. If we can find a great deal to do that's linked to Valero Energy at a customer, then I'll gladly take back what I just told you.

What it's all about is generating free cash flow and increasing our [inaudible] cash flow and our distribution pace. So we'll do that [inaudible] in whatever way it makes best [inaudible].

Okay. And one other thing. I know the agencies both have you stable and I get brain dead which agency flips on Valero Energy and has a negative or a positive. But when was the last time you met with them and where do you want to see yourselves going over the next couple of years from a ratings standpoint?

We hope to meet with them again soon. I'll turn it over to Steve. I'll just make one quick remark. Obviously, we think that we deserve much higher rating than we have and from all of the agencies. But having said that, I'll turn it over to Steve. Especially with what I just told you about our balance sheet. Just any financial measure that you want to look at, we think justifies a higher rating.

I think that pretty much says it. We talked to them most recently when we closed the transaction in July and they all finalized their rating after a lengthy period of having us under [inaudible] transaction. But to Curt's point, I mean, Kaneb standalone, before we acquired them, had leverage of about 66%. Combined we're now at 38%. Kaneb's debt to EBITDA had been about 3.5 times [inaudible] times. Our metrics actually slightly improved [inaudible] on the [inaudible]. So we think as a combined [inaudible] everything's stronger [inaudible] those metrics.

But I think to your point, that [inaudible] with [inaudible] Energy [inaudible].

Mark Reichman of AG Edwards.

I just had actually just a few questions. The first question was, could you just go back over the expected growth capital for next year and maybe just briefly summarize those projects? Because I may have picked up a little late and missed out on that.

And then second, I was looking at your November 2004 presentation on the acquisition of Kaneb Pipeline Partners and I just wanted to find out from you kind of what's worked, what hasn't, in terms of your expectations pre-merger?

I know that there were some forecasts made with regard to accretion and customer base mix. I think you were planning to go from 98% Valero Energy to 26% Valero and 74% third parties and also realized the 25 million in merger synergy. So I just kind of wanted to find out, now that you have a quarter since closing, looking back, what your expectations were and how things have really panned out?

To take your first one, first, what I had mentioned in my remarks was that we planned to spend around $58 million in '06 on strategic growth projects. That included about 15 million of carryover from the South Texas pipeline project and South Texas/Northern Mexico project that I described. And a lot of that capital is related to the Kaneb assets, where we have some high return opportunities that we're going to invest in, including some very good projects on the ammonia line that we bought as part of the Kaneb acquisition.

Referring to the comparison to what we said in November and to now, I would tell you it's worked out almost exactly as we thought it would, if not better. Now of course, the numbers we quoted back in November had what we're referring to as the whole separate businesses in them, businesses we ended up selling to Pacific Energy.

But if you look at pro forma on where we thought we were and you take out the cash flow [stream] or the EBITDA that we had sell, which fortunately we were able to get an excellent price for, we've cashed out of that cash flow stream and paid down debt with it and then if you adjust back and you account for the synergies and all the rest of it, we are almost exactly where I thought we were going to be and actually [inaudible] reflected better.

The $25 million synergy number did include some synergies associated with assets we sold to Pacific Energy, but now that we've had a full quarter under our belt, we were able to find at least that much elsewhere. So, we're sticking with what we said at the time, at least $25 million of synergies.

Mark Easterbrook of RBC.

Quick question on the fourth quarter, you mentioned the turnaround on McKee. Roughly how much will that cost results in terms of either [pre] or an absolute charge? I guess it's not charge, but how much of an impact will that be for the fourth quarter?

I guess the point of my question is, what kind of run rate can we expect in '06 on a quarterly basis?

We can give you run rates on throughputs by segment if you want, but to answer your specific question, in the fourth quarter, we think it's probably $0.02 [or so] for McKee. Which these days is about $1 million, $900,000.

And is that the only expected turnaround right now?

Yes, that's right. We do, as Curt mentioned in the conference call, we do have a very heavy turnaround scheduled in the first and second quarter of next year. [A lot of that for ultra low sulfur] [inaudible].

Again, I missed the early part of the call, but the maintenance CapEx expectations for '05 and if you have it, for '06?

For what we call reliability, it's a little bit of hodge-podge number, because what we're doing is we're counting just VLI standalone for the first 6-months, and then the combined entity for the past 6-months, but we're looking at something a bit over $25 million for '05. And then for reliability capital for the whole entity for next year, okay, again, sorry for the apples and oranges her but the [inaudible] VLI for the full year, we are budgeting 105-million of total capital, of which 50-something--how much is it?

47.

47 is for reliability including capitalized interest in that number.

So 47 million is the rough?

Yes, for next year.

[OPERATOR INSTRUCTIONS] At this time, gentlemen, there are no further questions.

Thank you, operator. If you have any follow-up questions, please feel free to call me at Investor Relations. Thank you.

Ladies and gentlemen, this does conclude today's Valero LP conference call. You may now disconnect.