NuStar Energy LP (NS) 2006 Q1 法說會逐字稿

Good afternoon. My name is Kimberly and I will be your conference operator today. At this time, I would like to welcome everyone to the Valero L.P. first quarter 2006 earnings release conference call.

All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [OPERATOR INSTRUCTIONS] Thank you.

I would like to turn the conference over to Mark Metter of Investor Relations. Please go ahead, sir.

Thank you, Operator. Good afternoon and welcome to Valero L.P.'s first quarter 2006 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.

If you've not received our earnings release and would like a copy, you may obtain one from our Web site 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.

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've described in filings we've made with the SEC.

Curt?

Good afternoon.

I'm pleased to announce that our board approved an increase in the quarterly distribution rate to $0.88.5 per unit, nearly a 4% increase over the distribution for the fourth quarter of 2005 and a cumulative 47.5% increase in the distribution rate since our IPO five years ago in April, 2001. This increase puts our annual distribution rate at $3.54 per unit.

The partnership also successfully completed the acquisition of Valero Energy's 23.77% interest in a 57-mile crude oil pipeline located in Illinois for approximately $13 million during the quarter. Valero Energy had acquired this pipeline as part of the Premcor acquisition last year.

We expect this acquisition to contribute around 1.5 to $2 million to EBITDA annually.

On March 30th, we closed the sale of our Australian and New Zealand businesses to ANZ Terminals for $68.6 million. We'll use the proceeds from the sale for general working capital purposes, including paying down outstanding debt which further strengthens our balance sheet.

The results for these businesses have been classified as discontinued operations on the income statement for the first quarter of 2006.

Now, turning to our results for the first quarter, we reported earnings applicable to limited partners of $35.3 million, or $0.75 per unit which compares to $17.8 million, or $0.77 per unit reported last year. Distributable cash flow available to the limited partners was $50.2 million, or $1.07 per unit for the first quarter compared to $23.1 million, or $1 per unit as reported for the same period last year.

The increase in net income and distributable cash flow compared to the first quarter of last year is primarily due to the Kaneb acquisition completed on July 1, 2005. Of the $31.3 million increase in operating income first quarter to first quarter, $28.7 million is attributable to the Kaneb deal.

We had a strong coverage ratio applicable to limited partners at 1.21 times for the first quarter, and our overall coverage ration covering both the general and limited partners was 1.25 times. With respect to our debt position, we continue to have one of the strongest balance sheets in the peer group with a debt to capitalization ratio of 38.5% at the end of the first quarter.

I'd now like to go over some of the main reasons why our results were better than the guidance we provided in the fourth quarter earnings conference call.

First, planned turnarounds at Valero Energy's Ardmore, McKee and Paulsboro refineries scheduled to take place in the first quarter and reflected in our previous guidance were delayed by Valero Energy. The Ardmore and Paulsboro refinery turnarounds are now scheduled to take place in the second quarter while the Mckee's turnaround is now scheduled for the third quarter.

In addition, our bunkering businesses in St. Eustatius and Point Tupper and some of the other terminal businesses acquired with Kaneb performed better than expected. This more than offset the negative impact from Valero Energy's Texas City refinery turnaround and unplanned outages at their McKee and Three Rivers refineries.

We also benefited from lower than expected natural gas costs, which is used as a feedstock to provide electricity to power our pipes and terminals. We originally had forecasted an average first quarter natural gas price of $9.05 per MMBtu used in ship channel basis, however, our actual price for the first quarter came in at $7.52 per MMBtu, a decrease of around $1.50.

And lastly, due to poor weather conditions, some maintenance expenses we had planned for the first quarter on the East and ammonia pipeline were deferred to the second quarter.

Since the results for the first quarter of 2005 do not include Kaneb, rather than comparing the first quarter of 2006 to the first quarter of 2005, it may be more meaningful to compare the first quarter to the fourth quarter of 2005. Looking at the first quarter of 2006, throughput by segment, crude oil pipeline, refined product pipeline, and refined product terminal throughputs were all up compared to the fourth quarter of 2005, primarily as a result of the extended fourth quarter turnaround at Valero Energy's McKee refinery.

Storage throughputs on our crude storage assets were lower in the first quarter compared to the fourth quarter of 2005 by around 4%, primarily due to the planned turnaround at Valero's Texas City refinery in the first quarter.

Operating expenses decreased 3.8 million to $71.1 million compared to the fourth quarter. We expect quarterly operating expenses to be in the range of 70 to 75 million per quarter for the rest of the year.

General and administrative expense decreased around $1 million to 8.6 million compared to the fourth quarter. Going forward we expect quarterly G&A expense to be slightly higher in the 10 to $10.5 million range.

Depreciation expense decreased around $450,000 to 24.2 million from the fourth quarter of 2005 and was in line with the guidance we provided in the fourth quarter of 24 to $24.5 million. We continue to expect depreciation expense to be around 24 to $24.5 million per quarter.

Interest and other expense decreased $1.8 million to 15.5 million and was in line with the guidance we provided in the fourth quarter of 15 to $16 million. Keep in mind that we booked a $2.1 million non-cash write-off to the interest and other expense line in the fourth quarter related to an idle pipeline segment in South Texas.

Going forward, we expect quarterly interest expense to be in the range of 15 to $16 million.

Looking at our capital expenditures for the year, we're anticipating expenditures to be in the range of 125 to $140 million. Of that amount, around 80 to $90 million is related to strategic growth projects and the balance to reliability projects.

With respect to our pipeline construction project in South Texas and Northeastern Mexico, we expect to spend an additional $12.5 million to finish the project. In total, the Cap Ex for this project will be around $58 million.

We have just completed construction of the pipeline segments connecting our Edinburg and Harlingen, Texas terminals to CITGO's terminal in Brownsville, Texas, and are nearly finished with the Mexican portion of the project which involved laying pipe south from our Edinburg terminal to the to the Texas/Mexico border and then further South into Pemex' Burgos Basin area. We anticipate this project to be commissioned by July 1, 2006.

Combined throughputs on this newly constructed pipeline and the recently expanded Valley pipeline are expected to be around 36,000 barrels per day, contributing around $8.2 million to EBITDA annually.

Beyond 2006, we continue to remain very enthusiastic about many of the growth projects we have planned, especially those that relate to the former Kaneb assets we acquired. Currently we've identified over $250 million of potential terminal expansion opportunities.

These projects focus on increasing throughput in markets with above average demand growth, primarily in the East, West, and Gulf Coast areas of the United States, and also at our facility in St. Eustatius in the Caribbean, Point Tupper in Canada, the United Kingdom and Amsterdam.

Additionally, we have identified over $30 million of potential debottlenecking and pipeline extension projects on our ammonia pipeline which could start up late 2006 through 2007.

And finally, we have around $13 million in growth projects scheduled to start around the middle of 2006 through 2007 at several of our terminals in the U.S. and Western Europe that focus on providing ethanol blending and biodiesel capabilities. If you add all these up, we've identified around $300 million of strategic growth projects that we expect to enhance our ability to increase throughputs across our system and continue to growth the partnership.

Now, turning to our outlook for the remainder of 2006, as we've mentioned in previous quarterly conference calls, the partnership's operations for the first half of 2006 will be negatively impacted by lower throughput volumes from scheduled turnaround activity at some of the refineries we serve. This is especially true for the second quarter, since turnarounds at Valero Energy's Ardmore and Paulsboro refineries scheduled for the first quarter were moved to the second quarter.

We expect this year to be one of the heaviest turnaround periods as refineries are taken down in anticipation of new environmental specifications for fuel, and additional maintenance expense, some of which was deferred from the first quarter to the second, will also impact earnings. As a result, we expect to report earnings for the second quarter of around $0.60 per unit.

The earnings guidance does not include any expense associated with the consent solicitation announced last week to amend the bond indenture, since that cost will be reimbursed by Valero Energy. However, beyond the second quarter, we expect the third and fourth quarters of 2006 to improve as we expect to benefit from an approximate 6% increase in our pipeline tariffs on July 1, limited turnarounds at the refineries we serve, the Burgos project coming online and other strategic projects that will benefit us in the second half of 2006 and beyond.

In closing, I continue to remain very optimistic about the opportunities we have at Valero L.P. to continue to grow the partnership and, more importantly, to increase unit holder value. As you've heard today, we have a significant number of growth projects, a majority of which come from the legacy Kaneb assets we acquired that have substantially enhanced our opportunity set to grow our third-party customer base and throughputs across our system.

I'd also like to emphasize that we are only one of a few partnerships to have the general partner's incentive distribution rights capped at 25%, which lowers our cost of capital and provides for future growth opportunities. For example, if you assume our partnership were to grow the distribution by 7% annually from our fourth quarter 2005 run rate of $3.42 per unit, cash savings to the partnership from the 25% split versus the 50% split would be around $95 million over the next five years. So clearly this is a substantial benefit to the partnership going forward.

By controlling costs, improving reliability and utilization of our assets, and with our strong slate of strategic growth projects, we believe we're positioned to deliver further distribution growth to our unit holders going forward.

Before I open it up for Q&A, I'd like to mention that Valero GP Holdings LLC, a wholly owned subsidiary of Valero Energy Corporation, recently filed an S-1 Registration Statement with the Securities and Exchange Commission to IPO approximately 37% of its interests in the general partner of Valero L.P. Valero Energy has stated its intention to eventually sell all of interests, including their general partner interests pending market conditions.

A copy of the S-1 Registration Statement of Valero GP Holdings LLC can be found on the SEC's Web site at www.SEC.gov.

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

[OPERATOR INSTRUCTIONS] We'll pause for just a moment to compile the Q&A roster. Your first question comes from Ross Payne of Wachovia Securities.

How are you doing guys?

First question, given Valero's intentions with the general partnership, you did have this somewhat small drop down here. Is there any expectations for anymore because the intentions of VLO, can we expect that to not occur in the future?

Well, it's always possible. Whether Valero sells its general partner interest or not, that we do deals with Valero Energy, but I think what I've tried to indicate in our remarks today is our focus is really internal growth projects to enhance assets and to enhance relationship with customers that we have outside of Valero Energy.

I think that's what we're alluding to with the 300 million is predominately that. So that's our focus.

Okay. Very good.

And on Premcor, EBITDA, is that pretty much in line with expectations, or exceeded or --?

It's probably -- right now, it's tracking a little bit better than we thought when we did the economics for that acquisition.

Okay. Very good. Thanks, guys.

[OPERATOR INSTRUCTIONS] Your next question comes from a Mark Reichman of A.G. Edwards.

Good afternoon. Just two questions.

The first, I may have missed it, but just maintenance capital expenditure expectations for the remainder of year. And then the second question on the refinery turnaround, I have down Ardmore in the second quarter and Paulsboro, which is, I guess, is out in the East, that that's scheduled for the third quarter, or no, I guess it's -- is it?

You've got most of it. It's Ardmore and Paulsboro in the second and McKee is now moved to the third.

Okay. Great, great.

And with regards to the maintenance, I did elude to the run rate, but you have more detail right there.

40 million for the rest of the year.

40 million for the balance of the year.

40 million. Okay, great. Thank you very much.

Thank you.

Your next question comes from Robert Lane of Sanders Morris Harris.

Good afternoon, gentleman.

Hello.

All right, ever so briefly, your distribution was a rather modest increase this quarter after having held it flat for about four quarters and I guess from the presentations y'all took around several months ago, I was under the impression that the increase in distribution, when you increased it was going to be more on the magnitude of 8 to 10%.

Is that still the guidance? In other words, should we assume that we're going to be having more quarterly distribution increases?

First of all on distribution increases, what we had guided you to was not 8 to 10, it was 7 to 8.

Oh, my apologies.

It's okay. And I guess what, you know, you see our cover and what I've told you is we're positioned for further distribution increases beyond the one we just announced.

But again, our -- we don't have a distribution in policy in terms of locking ourselves into what our distribution increase is going to be within any given period of time. We're running the business in a prudent manner and we'll present distribution increases to our board as we think they're appropriate in running and growing this business, but what we had guided you was 7 to 8 and we're not changing that on this call.

Okay. Thank you.

And once again, if you would like to ask a question, please press star one on your telephone keypad. Your next question comes from Doug Racklan of Neuberger Berman.

Hi, Curt. Good quarter. I have a couple of questions.

The first has to do with distributable cash flow. As we look out into the second half, you mentioned that you're going to get a 6% tariff increase. I'm looking at the first quarter of $1.07, obviously second quarter will be lower because of the turnarounds, but what kind of growth rate should we expect as we cycle into the second half?

Should we use the base of how the first quarter achievement? What kind of thinking should we have as far as the DCF per share for the second half and then going into 2007?

I think we've got to be a little cautious on our forecast tight now because Valero Energy has this S-1 filing pending, and since we don't have any forward-looking information there, we have to be sure that we're not deviating from what we publicly put out on that, but let me consultant with my counsel here, Fred Barron, I think I have to limit myself to that right now.

I think what we've told you is we feel very good about the year and we feel very good about the second half. And what we've consistently said is that the second half should be stronger than the first half, we continue to believe that and I'm afraid we'll have to leave it at that for now just because of the legal status of this filing.

Okay.

But from a first quarter base, we should expect the third and fourth quarter numbers to be higher, just as a result, as a 6% tariff increase and then obviously the new proctor's coming online, just want to get an idea what we should use as a base.

Both those things help our second half for sure, the mid-year tariff increase and some projects starting to flow through to the bottom line, absolutely. Those do help our back half.

Okay.

Also, I just wanted to ask you if you can answer this question as far as Valero's intentions, what was the impetus for them filing and going ahead and taking the GP public?

I think mainly it's a strategic reason and they said this also publicly, that really helps both companies. As much as we tried to convince the antitrust authorities, people at the FTC that we have two public companies, there's no sharing of commercially sensitive information, et cetera, et cetera, all of which is true, at the end of the day, like you saw with the forced divestitures, some of the assets we acquired from Kaneb, really, they effectively analyzed Valero L.P. and Valero Energy as one company in that deal to make their anti-trust determinations and to raise the competitive issues that they raised.

So going forward, if that's what they're going to do no matter how separate these companies are, you know, we really, it's in both companies' interests to take the step that Valero is taking because otherwise, strategically, we're going to be tripping over one another. You know, we're going to have their freedom of action is going to be limited, our freedom of action is going to be limited. So I think that's the driving force behind it, more than anything else.

Okay. Thank you.

Your next question is a follow-up from Mark Reichman of A.G. Edwards.

I was just going to ask about the $250 million worth of terminal growth opportunities. You'd mentioned some of those opportunities are outside the U.S. and I was just going to see what makes some of those outside the U.S. opportunities more attractive than, say, the terminals that you divested that were located in Australia and New Zealand.

Well, okay, I'll take the question as one about why did we divest Australia to New Zealand as opposed to other offshore assets and I'll give a couple of reasons for that.

One is that we couldn't come up with a good strategic fit for the Australia/New Zealand assets with everything else we were doing. We didn't have a good growth plan for them. Other owners may see it differently, we couldn't come up with one.

We also, just because of distance and time, the management and resources necessary to run those businesses well, run them the way we would want to run them, is really disproportionate to what they contribute. They're relatively small, we didn't see a lot of growth, and that's not true of all for the rest of our foreign or international business.

We see plenty of -- they're very solid businesses, they're sizable and there's plenty of growth opportunity in them.

So beyond just the time and distance, some of these newer opportunities fit in better with the other existing assets?

Absolutely.

Okay. Great. Thank you.

Yep.

Your next question comes from a Mike Beall of Davenport.

Good afternoon.

Perhaps I missed it, but can you give us a general range of the type of returns you expect to earn on this plus or minus 250 million and contrast those returns with the ones that might be available on acquisitions and risk adjusted, if you might talk about that.

Yes. And with that many projects, as you can imagine, the returns are all over the lot from 15 to 20% to 100 to 150%. But I would sort of peg it on average, you know, probably around 20% or so IRR for those type of projects.

When you see people paying for acquisitions nowadays, I would say the projects are superior in return to what we've seen in some of these recent acquisition multiples.

They would seem to be significantly.

Yes. Yeah. It's very tough to get a 20% IRR on an acquisition in a logistics base right now, very tough. I wouldn't say it's impossible, but it's not easy.

Well can you comment, you're not the only good-sized MLP that's turning to the organic growth path at the moment, what are the prospects for some sort of excess supply of infrastructure assets as a result of this? It seems like a lot of capital that was just buying and selling the same assets is not going to create new assets.

Yeah. Yeah, you know it's interesting. Our view of it -- and it's not true with everywhere and all places. It's become such a local matter, but where we're investing, obviously, we're infrastructure short.

When you talk about places like the East Coast and New York harbor, selected places on the West Coast and some of the other areas I mentioned in my remarks, we're putting money in because there's a need for infrastructure investment. There's a long-term demand there that needs to be met.

So it's not one of those things where you can generalize or where you could say every place, every place in the world, all locations, there's a need for infrastructure investment. But the ones we selected, we have no doubts that there is.

Well not to belabor this, but we generally talk about energy consumption only growing a couple of percent in general in places like you describes, and with energy prices so much higher, they may not even grow at all, it seems surprising that there's this need for infrastructure assets.

I'm not sure how all those things relate to one another, but I know, Mary, you want to comment on that?

Well, the comment that I would make is that you have to look at what is the supply pattern and logistics needs as products and crude are building around the world. Where's it coming from, where does it need to be stored.

Imports have remained extremely strong coming into the U.S., particularly on products and [throughpulls] and then we also have [the things] changing specifications drive the need for blending. And so blending requires typically more storage and so I think those are two trends that continue to drive this, even if demand is flat.

And what was trying to get at, it's hard to make generalizations like everywhere at all times we're infrastructure short, that's not the case. But some of the things Mary mentioned, for example, Western Europe, which is [long] gasoline short distillates, there's an opportunity to meet the continuing import demand in the U.S. through terminals that are able to gather and export gasoline.

They're distillate short and so you have to look at each place like that.

On the ammonia pipeline, we've identified projects where there's an industrial end user demand where we can do relatively low cost extensions to supply industrial plants that can use the feedstock transported in the ammonia pipeline.

So it's that sort of, I guess what I'm trying to convey is it really is specific to a specific market, to specific product. You can't just take a 1 or 2% overall increase in petroleum demand and say, therefore why do you need infrastructure. It's quite specific to where you have assets and what type of assets you have.

Thank you.

And just last thing, what is your targeted debt-to-equity ratio and it looks like if it's 50/50 then you have maybe 700 million in projects, or capital that you could spend before you sort of got to that ratio, which would be several years' worth. Is that one way to look at it?

I'd like to refer that to our CFO.

I would look at it not so much from a leverage ratio point of view, but from a debt to EBITDA point of view, because that's really the ratio that the rating agencies look to mostly. It's more of a cash to debt test, of course.

Our leverage is low [inaudible] at 38% and the average for the investment grade universe is probably in the mid-50s. But again, we tend to use as our primary measure of our financial flexibility debt to EBITDA and there we want it to be below 4 to 1.

Given you're expecting 20% returns, your debt capacity is enormous, in theory.

Yes, our debt capacity is enormous in theory. But what we have talked to the agencies about and our board about is, I would tell you, you probably have some room for debt, additional debt, just on the basis of our leverage ratio and our debt to EBITDA coverage today, but we run our economics based on 50/50 financing.

Thank you very much.

At this time, there are no further questions. Do you have any closing remarks?

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

Ladies and gentlemen, this concludes today's conference. You may now disconnect.