NuStar Energy LP (NS) 2005 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, my name is Miles. I am your conference facilitator today. I do apologize (technical difficulty). At this time, I would like to welcome everyone to the Valero LP fourth quarter 2005 earnings release conference call.

Again, ladies and gentlemen, I apologize. We have experienced some carrier difficulties this afternoon. I trust that those situations have resolved themselves at this time. All lines for this conference call have been placed on mute to prevent any background noise; and after the speakers' presentation today, there will be a questions-and-answer session. (OPERATOR INSTRUCTIONS)

(technical difficulty)

-- results to be materially different including those we've described in filings we've made with the SEC. Turn it over to Curt.

Good afternoon and thank you for joining us and staying with us through that technical delay today for this quarterly earnings conference call. 2005 was a year of major growth and some outstanding accomplishments for Valero LP. We more than doubled the size of the Company and set several financial records and successfully integrated the Kaneb Acquisition. We've also positioned the Company now at a much stronger strategic foundation that will help drive future growth.

To list just a few of those financial records, compared to last year, enterprise value more than doubled from $1.7 billion to $3.6 billion. Revenues almost tripled to $660 million. EBITDA increased by around 65% to $219 million and more important, distributable cash flow, applicable to the Limited Partners increased by more than 50% to $136 million, providing us sample cash flow and distribution coverage.

Keep in mind since our IPO in April 2001, total unitholder return is close to 200% compared to the S&P 500 of 17%; and we've increased the distribution payment by nearly 43% over the same period. With the successful completion of the Kaneb Acquisition last year, we've positioned ourselves as a leading consolidator in the MOP sector. We are now one of the world's largest independent petroleum pipeline and terminal operators with assets throughout the United States as well as in Canada, Mexico, the Caribbean and Western Europe.

We closed the $2.9 billion acquisition of Kaneb and its general partner on July 1st of '05. We bought the GP at a valuation multiple which now looks cheap -- about half the implied cash flow multiples of general partners that since have chosen to become publicly traded. We've integrated the acquisition and it has met our expectations, having greatly expanded the breadth of our operation and reduced our dependence on Valero Energy.

The EBITDA and cash flows from the Kaneb Acquisition adjusted for the divestitures mandated by Federal Trade Commission have also met our expectations. While we would have preferred to have kept those divested assets, the sale enabled us to a substantial deleveraging, leaving us with one of the strongest balance sheets of any MLP. And we now have the financial clout and spread of assets to grow from here, through strategic growth projects and acquisitions.

The growth projects we have identified since the acquisition are organized around certain developments in the industry. The growth of ethanol and bio diesel is providing growth opportunities in practically every region of the U.S., as well as western Europe, for our (indiscernible). Growing markets, particularly in the Southwest as well as the West and East Coast, have increased demand on our terminals in those regions, resulting in more growth opportunities.

We also expect cash flow from our ammonia pipeline which is the premier ammonia mine in the United States, which has become even stronger in this era of high natural gas prices to increase from debottlenecking projects and pipeline extensions to industrial end users. And in Europe, the continuing export of gasoline to the U.S. and importation of diesel favors our European terminals. And of course we expect to see continued growth in South Texas and Mexico from projects that are already partially completed and which we expect will be done during the first half of 2006.

As I have also mentioned, we have one of the strongest balance sheets in the group after paying down around $.5 billion of outstanding debt since the Kaneb Acquisition. Our debt to capitalization ratio stands at only 38%; and our debt continues to be investment-grade rating.

Other 2005 accomplishments include the expansion of the Valley product line in South Texas; an increase in volumes on our Dos Laredos system from 5000 to more than 9000 barrels per day; and our new pipeline project to construct approximately 110 miles of pipeline in northeastern Mexico and South Texas scheduled to be completed in May. We expect all of these investments to be good contributors to earnings in 2006.

Now turning to our results for the quarter. Earnings applicable to Limited Partners from continuing operations and before certain non-cash items for the fourth quarter were $29.6 million or $0.63 per unit -- which compares to 17.9 million or $0.78 per unit reported last year. For the full year 2005, earnings applicable to Limited Partners from continuing operations and before certain non-cash items was $101.5 million or $2.90 a unit, compared to $72.5 million or $3.15 reported last year.

Overall, the partnership's earnings for the fourth quarter were below the guidance and expectations of $0.65 to $0.70 for the quarter when we announced third quarter earnings. All of the factors we mentioned at that time -- the sale of assets to Pacific Energy Partners on September 30th, the turnaround of Valero Energy's and the Key Refinery increased maintenance expense associated mainly with certain legacy Kaneb assets, the typical seasonal slowdown in demand for asphalt and higher energy costs -- all of these impacted earnings in the fourth quarter.

Unfortunately the plantwide turnaround at Valero Energy's McKee Refinery took longer than planned. As a result, our volumes and revenues were hit harder than we originally expected. We originally estimated that effect -- the effect to earnings per unit to be around $0.05. However it actually impacted EPU by an additional $0.03 or $0.08 per unit.

Distributable cash flow applicable to the Limited Partners from Continuing Operations was $42.2 million or $0.90 per unit for the fourth quarter compared to 22.4 million or $0.97 per unit as reported for the same period last year. For the full year distributable cash flow applicable from Continuing Operations to Limited Partners was $136.5 million, $3.90 a unit compared to 90.3 million, $3.92 per unit as reported for the full year.

As mentioned in the press release, the Board declared a quarterly distribution of $.855 per unit payable February 14tth to unitholders on record February 7th.

Our coverage ratio from Continuing Operations of the declared $.855 distribution was good at 105 times for the fourth quarter and was 1.16 times for the full year.

Before I get into the various explanations for the quarter, I would like to discuss the non-cash items reflected in our results and the sale of our Australian and New Zealand businesses, which are reflected as Discontinued Operations on the income statement.

Non-cash items totaled 4.6 million in the fourth quarter or $0.09 per unit and primarily relate to the write-off of a portion of idle pipeline in South Texas, and an adjustment to depreciation and amortization expense as part of the purchase accounting for the Kaneb Acquisition. These non-cash items had not been finalized at the time we provided guidance. With respect to the sale of our Australian/New Zealand businesses, we've signed a definitive agreement to sell our eight terminals in New Zealand and Australia to ANZ Terminals for approximately $65 million.

Our decision to sell was based on the limited growth potential we foresaw in this area and the nonstrategic fit to our overall business. We expect to use the $65 million in proceeds to pay down outstanding debt and to continue to improve our already strong balance sheet. Completion of the proposed sale is subject to customary conditions and is expected to close during the first quarter of 2006.

Included in the effects of these non-cash items and Discontinued Operations, net income applicable to Limited Partners was 24.2 million or $0.52 per unit for the fourth quarter of '05 and 100.3 million or $2.86 per unit for the full year 2005.

Next, I would like to go through some of the quarter to quarter comparisons. Similar to the third quarter the key driver for almost all of the key variances, fourth quarter to fourth quarter, are related to the Kaneb Acquisition completed July 1st, 2005. As a result, I would prefer to discuss variances for the fourth quarter of 2005 versus the third quarter of 2005, as I believe this would be more meaningful.

Looking at the fourth quarter of 2005 throughput by segment, through pipeline, refined product pipeline and refined product terminal throughput were all down compared to the third quarter, primarily as a result of the extensive turnaround at Valero Energy's McKee Refinery. Storage throughput on our accrued storage assets were up around 6% or to 532,000 barrels per day, as volumes were lower in the third quarter primarily due to the delayed crude shipments during that quarter as a result of Hurricane Rita.

Fourth quarter revenues increased to $286.2 million compared to the third quarter, primarily due to higher revenues at Saint [Astatious] and Point [Tucker] terminals. Higher revenues were partially offset by the turnaround at Valero Energy's McKee Refinery and seasonably lower demands in the asphalt business. Operating expense increased to 74.9 million from the third quarter, as a result of unplanned maintenance and regulatory work on several of our terminal and pipeline assets.

Going forward, we expect quarterly operating expense to be about 70 million per quarter.

General and administrative expense of $9.5 million was lower compared to the third quarter and in line with the guidance provided at the time of $9 to $10 million. We just entered into a new administration agreement effective January 1st, 2006, with Valero Energy which has transferred about 90 employees performing work for the partnership to Valero LP. These individuals now report directly to the management of Valero LP. This change better aligns the partnership's organization with its objective and improves the LP management's flexibility.

Going forward we expect quarterly G&A expense to be 9.5 to 10 million. With respect to depreciation expense, the increase to $24.6 million from the third quarter of 2005 is primarily due to the asset valuation exercise related to the Kaneb purchase accounting we mentioned previously in connection with the third quarter's results.

As a result of this exercise, we expect depreciation expense to increase by about $1 million per quarter going forward to around 24 to 24.5 million per quarter. Obviously this will not impact distributable cash flow.

Interest and other expense increased to 17.3 million, primarily due to booking the non-cash loss related to the portion of idle pipeline in South Texas to this account. Going forward, we expect quarterly interest expense to be in the range of 15 to 16 million.

With respect to our strategic growth budget for 2006, expenditures have increased slightly from the 58 million we mentioned in the third quarter call to now around $67 million. This is due to us carrying over to 2006 around $9 million we expect to spend in our South Texas and Mexico pipeline projects which we still expect to complete this May.

As a result of the $67 million strategic growth budget for 2006, around 24 million in expenditures will be for the pipeline project. The remainder focuses on many of the strategic growth opportunities that I've alluded to previously. With respect to reliability capital for '06, we expect to incur around 42 million which will be primarily used for new safety and reliability projects, such as upgrading our information control systems as well as investing in our recently acquired Kaneb asset. With these investments, we will increase performance and reliability.

Now turning to our outlook for '06. As we mentioned in the last quarterly conference call, operations are expected to be impacted by lower throughput volumes from scheduled turnaround activity at some of the Valero Energy refineries we serve in anticipation of new environmental specifications for fuel. Keep in mind this is an unusually heavy turnaround period. Also, as previously mentioned, earnings will be impacted in the first half of the year by increased maintenance expense.

For the first quarter of '06, we expect earnings and distributable cash flow to be similar to what we reported in the fourth quarter. The scheduled turnaround at Valero Energy's Texas City refinery, the typical seasonal slowdown in demand for asphalt and higher maintenance expense will impact earnings. We expect the second half of 2006 to be much better as we will benefit from increases in our pipeline tariff on July 1st and the contribution from our strategic growth project, particularly from our pipeline project in South Texas and northern Mexico which as I mentioned is expected to be completed in May.

In closing, I remain very optimistic with the opportunities we have at Valero LP to grow the partnership and, more importantly, to increase unitholder value. As I've said many times, the Kaneb deal has substantially enhanced our opportunities set to grow our third party customer base and throughputs across our system. Having a strong balance sheet now and investment-grade ratings allows us to continue to pursue a previous third party acquisition.

Also keep in mind that we are only one of a few partnerships to have the General Partners' incentive distribution rights capped at 25% which lowers our cost of capital and provides for future growth opportunities. With our strong slate of strategic growth projects, we are positioned to deliver distribution growth to our unitholders going forward.

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

(OPERATOR INSTRUCTIONS) [Mark Blackman] with A. G. Edwards.

I was going to ask you on your management presentation that I had dated November 2005, is your outlook in terms of the estimated throughput on each of the business segments, is that still intact or has there been any changes on those volume expectations?

I think, overall, they are intact. For the quarter by quarter it can shift a little because we don't control Valero Energy's turnaround schedule. But, overall, yes. I would say that should be substantially correct.

I missed what the maintenance expense would be for 2006 for the first quarter.

For the first quarter of 2000 -- is it just maintenance?

Right just maintenance.

I think we just gave you --

It is about 9 million.

About 9 million. Yes.

I thought you had a comment, you said the first quarter would look a lot like the fourth quarter. Is that including or excluding those charges? The (indiscernible) cash charges?

No. On a clean basis. If you look at the clean number for the fourth it should be we're thinking at this point where we stand in the first quarter similar in the first quarter. The clean number.

Mark Easterbrook with RBC Capital Markets.

Just have a couple of questions on the reconciliation between EBITDA and DCF. There's an item in there called Plus Non-cash Items. What is that exactly?

Yes that's basically three items, Mark. You've got 2 million for a write-down of an idle pipeline in South Texas and that -- .

So it's all the nonrecurring stuff?

That's right; and then you've got 2 million for depreciation true up and 600,000 for a change in revenue recognition to get it consistent across all the assets between VLI and Kaneb. Just when we recognize the revenue whether it goes into a pipe or into a terminal versus at the end when it comes -- when the product comes out of that asset.

Then distribution from joint ventures of cash distributions, is that a pretty good run rate going forward?

What is that?

The amount of cash that is coming from, I guess, joint ventures. It's about 2.1 million. Is that a good run rate on a quarterly basis?

Let's take a look. Probably it's reasonably (technical difficulty) one quarter. Depends on hydrotesting that we will do on (technical difficulties) line. And yes.

So three, three out of four quarters, that's a pretty good run rate?

What was your number again?

It was in the press release 2.169.

Yes it will be a little less than that in a few of the quarters simply the timing of a lot of work we're going to do on that scale to [Bellview] line.

Last question is on the cash flow. The income taxes. Is that 100% cash taxes?

We are presuming so at this point.

And then with the sale of the Australian and New Zealand terminals are there any other assets that you might think about selling that you acquired with the Kaneb Acquisition?

Not at this point. No. Certainly nothing material.

Then again going back to the management presentation that you had back in November. You had $47 million worth of maintenance CapEx and that's been dropped down to 42 million, now?

Yes.

Can you go through maybe what changed there a little bit?

Basically an assessment again that we don't seem to spend what we budget and we took a hard look at it and just, again, with a lot of those projects are small. It's just a resource issue how many people can get after all those projects.

I think we are a little smarter on the Kaneb side of the house now than we were sort of in September and October when we were putting the 46, 47 million together. What we actually needed to spend.

(OPERATOR INSTRUCTIONS). Mike Bell with Davenport.

Could you comment a moment on the acquisition market and the opportunities out there? The allotted capital chasing a few deals? And, secondly, remind us of what your backlog of organic projects might be over a longer period of time? And I guess the final thing, given that your balance sheet is so underlevered at this point, and opportunities to buy things maybe not what they used to be, would you ever consider buying back some of the MLP equity to sort of get it back in balance?

Let me try to take those one at a time; and first of all, in the M&A market, one of the comments I made in my opening remarks was that in retrospect, buying the GP Company of Kaneb looked cheap -- about half of what they seemed to be valued at now in the public marketplace. So if the public marketplace is representative of what the value of a GP interest now is, obviously, you'd have to pay up a whole lot more money; it would be a whole lot more expensive than what we had to do when we bought the Kaneb GP.

So absolutely particularly at that level, acquisitions are more pricey. However that having been said, I have got to tell you that we still see a very strong deal flow, both of assets and Company level deals. There's ample opportunity to grow by acquisition.

We actually presented a budget to our Board which showed that we could beat our financial and operating goals without having to do any acquisitions in 2006. So we do have that luxury but we have a full-time dedicated M&A staff who is always looking at everything out there and they do have a strong pipeline of deals to do.

So even though we don't need to do one in '06, if we find the right one and we have the capability do it. we certainly have the financial wherewithal to do it and the room on our balance sheet to do it.

The second question now was?

Longer-term projects.

Yes. Longer-term projects. What we are discovering, particularly, in light of the Kaneb deal -- I mean, every week we come up with something new. It's just been -- we have been accumulating more and more projects. So we've sort of frozen in a point in time and said, "ere we are in our strategic growth plan which we've told you a little about and how it relates to have ethanol at our terminals and bio diesel and extending our ammonia line to industrial end-users and all of those things."

But what we find is, as each week rolls by, we find a new one. Mary Morgan and her development and marketing staff are constantly out there coming up with new ideas, working with our operations folks, Rick Bluntzer and others here to uncover opportunities.

So that is one reason I'm so optimistic. There's a lot of excitement in the office. Each week we come in here and we find new things that are going to help the growth of this Company. So I'm very optimistic about that and then I guess the last piece was my buying back units. Maybe I will turn that over -- I mean we don't have any current point of view at right now and I'll just turn it over to Steve and see if our CFO has any further comment on that.

No. I really don't. (inaudible) .

I'll take that as a no.

(MULTIPLE SPEAKERS).

We've had a lot of good opportunities.

It wasn't that that was an end-all thing. But just when your balance sheet has gotten where yours is, let me just end it with this way -- overall is the Kaneb thing after you had to get rid of the assets that you did, has that created the accretion and value that you thought it would and just what sort of distributable cash flow per share growth do you expect this year and next versus your sort of longer-term? Are we taking a year off until we sort of get the thing back on track or --

No. Actually first of all, I have to say on the Kaneb deal after you adjust it for the assets we had to sell we are actually either -- we are slightly ahead of where we thought we would be on expectations. We publicly announced 340 million of pro forma EBITDA back when we announced the deal and we had to sell some EBITDA associated with asset sales. When you take that out and you come down to the adjusted EBITDA number as a result of the sale, and then you look at what we think we are going to have in '06 in EBITDA, we are actually slightly ahead where we thought we would be in our expectations with the Kaneb deal. So we are definitely not taking a year off.

Malcolm Day with Eagle Global Advisers.

Can you quantify some of this -- the -- you've got projects that you are talking about and you're very excited about. What kind of EBITDA growth are you looking for this year or what kind of EBITDA number are you talking about? You just went through that what was going to be better than 340 less this plus that. So what is the net number that you think you are going to do in '06?

(technical difficulties) We really can't give guidance on EBITDA.

Okay. Let me ask you this. What's the EBITDA of what you sold?

It was about $46 million. That's for Australia and New Zealand and the held separate business that sold on September 30th. What Curt was referring to was what we announced at the time of the deal, less that 46 million. We are going to beat that comfortably, we feel, in '06.

So if you take 340 and you subtract 46, you think you are going to beat that?

Yes.

Okay. I would hope so. You also talked about your distribution growth I think Curt talked about that you are going to grow your distribution, and I think you historically said that you want to be one of the top growers or up there in the top half of the group. I was wondering if you could restate your desire to be a top growth type MLP?

We have been and when you look at the speculative increase over time that is where we've been but we said -- we put out public information that for '06, we were targeting 7 to 8% in our growth in our distribution payment.

Changing gears a little bit, can you tell me if there's specific benefit on taking on your overhead from Valero and these 90 employees that you are going to take on?

Yes. Absolutely. As I said, I tried to say in my remarks what it does is, as we continue to evolve -- and the strategy here is to be a premier industry logistics player -- and as we continue to evolve as something other than really the pipeline turbo service for Valero Energy, what we need to do is have an organization that's aligned with the partnership's objectives. Not with Valero Energy's objectives or a refining company's performance or something else.

We need an organization that's aligned with our objectives which reports to our supervisors and which is measured by our key performance indicators and also is rewarded in accordance with how they do versus our performance -- meaning the partnership's performance. We think all of that is just good business practice and the organizational shift enables us to put together an organization so that everyone is rowing this boat -- the Valero LP partnership boat -- and is rewarded accordingly. As we succeed our people succeed whether it is management or anybody else. So, that is the importance of it to us.

Maybe there's no financial benefit in doing this.

I would hope there is. That's exactly what I was just trying to say to you is that when people are incentivized to perform and when their performance is measured against how they are doing against partnership objectives. Our expectation is that the partner will perform better as well.

Maybe I didn't understand what is -- how are they incentivized for the partnership (MULTIPLE SPEAKERS)?

Because they will be measured purely by metrics to be set by the Board which are only exclusively partnership mixed metrics. They are not mixed with anything about how Valero Energy was doing which is how it was when they were in Valero Energy, rendering services to us under the terms of the services agreement.

Mark Blackman with A. G. Edwards.

I think my question has been answered but you had mentioned that the run -- that you were looking for 7 to 8% growth and so, I guess my question would be, is that like fourth quarter run rate or fourth quarter annualized? Or is that based on kind of a paid distribution? And is growth in the distribution, do you think once we get past this pause, at least you know where you are experiencing the lower refinery volumes once you get into the second half of the year, you'll likely be able to increase, based on just the normalized earnings?

I think -- first of all, the increase that we've talked about is an increase that would happen this year. Okay, there's a timing of the payment maybe, obviously, the fourth quarter payment gets paid 45 days after the end of the quarter. But it is not a run rate that you would hit in the fourth quarter, Mark. I think what you mean there is the whole distribution increase might fall in the fourth quarter.

We are looking at something that would suggest itself, honestly, depending upon the turnarounds and the financial performance as we go through the quarter. But it would be a distribution increase, I suspect earlier than the third or fourth quarter.

But again we've got to be cautious when we talk about this because this is a Board matter; and we have to propose it and the Board has to agree with it. So we are not going to -- we're not on this call going to time a distribution increase for you but -- .

I guess what I was getting at is, you're comfortable enough that the business is going -- the earnings power is going to recover substantially once we get into the second half sufficient to be able to be at like a 366 by the end of the year with adequate coverage.

The business is going to be substantially better in the second half of the year. Maybe we just need to leave it at that for purposes of the call.

Okay, that's fair enough.

(OPERATOR INSTRUCTIONS). Malcolm Day. Eagle Global Advisers.

One last question. I think you stated that you think you can achieve your financial goals for 2006 without making any acquisitions. I was wondering A., whether that sort of 6 to 8% annual distribution growth is in your 2006 financial goals?

Yes.

Also I was interested in knowing if the acquisition market within Valero, if that is becoming more attractive or less attractive to you compared to other acquisitions you might be considering?

Well, yes, I mean our goals are always to increase our distribution. Every year that is the case and that range is in our expectation for '06. In terms of acquisition from Valero Energy versus other people, one of the advantages of us is that we can look to both those pools if you will for potential acquisitions.

And no, I don't -- I would not say the Valero Energy deals are more or less attractive than other deals. Sort of a generalized statement. It's really a deal by deal comparison.

Also right now, we are as I -- as I think might have indicated in my remarks earlier, we are spending a lot of time on internal growth; and we are finding new things practically every week that are very attractive and in fact more attractive than acquisitions whether they're from Valero Energy or for somebody else. So when that happens, our attention and our investment dollars get focused on the internal growth project. That is kind of where our mind is at right now.

Gentlemen, at this time, there are no further questions. Are there any closing remarks?

Thank you, Operator. If you have any further questions, please call Investor Relations. Thank you.

Ladies and gentlemen, we do appreciate your joining us today and, again, please accept my apologies for any inconvenience incurred regarding our carrier system problems today. This does conclude our Valero LP fourth quarter 2005 earnings release conference call. You may now disconnect.