NuStar Energy LP (NS) 2006 Q3 法說會逐字稿

Good afternoon. My name is Ian and I'll be your conference operator today. At this time, I would like to welcome everyone to the Valero L.P. and GP Holdings LLC third quarter 2006 earnings conference call. [OPERATOR INSTRUCTIONS]. I would now like to turn the call over to Mark Meador, Senior Manager of Investor Relations for Valero L.P. and Valero G.P. Mr. Meador, you may begin your conference.

Thank you, operator. Good afternoon and welcome to the Valero L.P. and Valero G.P. Holdings LLC third quarter 2006 earnings conference call. With me today is Curt Anastasio , CEO and President of Valero L.P. and Valero G.P. Holdings LLC, Steve Blank, our CFO, and other members of the management team. If you have not received the earnings releases and would like copies of each, you may obtain one from our Web site at ValeroLP.com and and ValeroGPholdings.com. Attached to the earnings releases, we have provided additional financial information. If after reviewing the attached tables, you have questions on the information that's 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 disclaimers included in the press releases. In summary, the disclaimers say that forward-looking statements contained in the press releases 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 and filings we've made with the SEC. Curt?

Good afternoon and thank you for joining us today for our third quarter 2006 earnings conference call for both Valero L.P. and Valero GP holdings LLC.

Before we discuss the financial results for the quarter, I'd like to highlight several noteworthy events. First on July 14, units of GP holdings began trading on the New York Stock Exchange, providing investors an opportunity to participate in the incentive distribution rights associated with the ownership of the general partner of Valero L.P. Investors now have two investment choices based on the same underlying pipeline terminal of storage assets held at Valero L.P.

Since this is the first quarterly earnings call since the IPO of GP Holdings on July 19th, we'd like to welcome our new GP Holdings unit holders who are joining us on this call. The majority of my remarks today will address the performance of Valero L.P. since GP Holdings derives 100% of its cash flow from its interest from Valero L.P. Second, I'm pleased to announce that our Board each approved an increase in the Valero L.P. and GP Holdings, LLC quarterly distribution rates. Valero L.P.'s quarterly distribution rate increased to $0.915 per unit or $3.66 per unit on an annual basis, together with the $0.03 increase with respect to the first quarter of this year, this latest increase represents a 7% increase over the distribution for the third quarter of 2005.

Valero L.P. generated more than 1.22 times the amount of distributable cash flow necessary to pay this higher distribution for the quarter. With respect to the initial quarterly distribution rate for GP Holdings, the Board approved a prorated initial quarterly distribution of $0.2574 per unit for the period from its IPO of July 19th to September 30, 2006, which is based on an increased quarterly distribution of $0.32 per unit or $1.28 per unit on an annual basis. That represents a $0.02 or 6.7% increase over the expected quarterly distribution of $0.30 per unit stated in the IPO prospectus.

A stronger than expected performance from Valero L.P. for the third quarter of 2006 allowed GP Holdings to increase its distribution right out of the chute. I'd also like to mention that we have made the required Hart-Scott-Rodino filing on our recently announced acquisition of the St. James facility in Louisiana from Coke supply and trading LP. The 30-day waiting period expires today at 11:59 p.m., so we expect to close on December 1, subject to any FTC review.

Looking at Valero L.P.'s results for the quarter, reported earnings of $36.9 million or $0.79 per unit were much better than originally anticipated and considerably higher than the guidance we provided on the second quarter conference call, July 31. We were helped by a better than expected performance from our bunkering business in St. Eustatius, higher storage revenues at our Point Tupper terminal in Nova Scotia, increased throughputs on our central east product pipeline system, and lower maintenance expenses.

Our balance sheet continues to be in good shape. Our debt-to-capitalization ratio was 38.5% at the end of the third quarter. Looking forward, we expect the debt finance the St. James terminal acquisition, which should increase our debt-to-capitalization ratio to around 42% by the end of the fourth quarter, still well below the peer group average of around 50%. Since this is the first quarter that we now have year-over-year comparisons for the Kaneb assets, I would like to return comparing the results for the quarter current to last year's results instead of the previous quarter's results. I will compare the results for the third quarter of '06 to those of the third quarter of '05.

For the quarter, distributable cash flow available to the Limited Partners from continuing operations was $52.4 million or $1.12 per unit compared to $49 million or $1.05 per unit recorded for the same period last year. We enjoyed higher throughputs in revenues in all of our business segments for the third quarter of 2006. However, higher operating depreciation and amortization and G&A expenses resulted in a small decline in operating income of $1.6 million to $54.4 million compared to the third quarter of 2005. These expenses were well within the ranges we guided to in the second quarter conference call.

Total throughputs in the third quarter of 2006 were around 1.9 million barrels per day, 5% higher than the third quarter of last year. That was primarily due to higher throughputs from our recently completed Burgos pipelines, the completion of our Valley Pipeline completed in October last year, and on our El Paso pipeline system. Additionally, our purchase of the Capwood crude oil line from Valero Energy, effective January 1, also resulted in higher throughputs for the third quarter.

Revenue for the third quarter were $291 million, 13% higher than the third quarter of last year. Increased bunkering revenues of $23.5 million at our St. Eustatius terminal, higher storage lease revenues at our United Kingdom and Point Tupper terminals, and higher throughputs on our El Paso and Burgos pipeline systems resulted in higher revenues. We also benefited from the new FERC '06 adjustment effective July 1 on our both our refined product and crude oil pipeline segments.

Looking at the partnership's costs for the third quarter, operating expenses were $83 million, which was higher than third quarter last year by around $14 million. Operating expenses were higher in the third quarter, primarily due to planned maintenance expense and higher internal overhead costs. Additionally, terminal reimbursement projects performed on behalf of our customers also contributed to higher operating expenses in the third quarter of '06. Keep in mind, with respect to those terminal reimbursement projects, we are reimbursed by our customers with the offsetting amounts being reflected in revenues.

General and Administrative expense increased $1.4 million and 14% to $11.4 million over the third quarter of last year, primarily due to services that were previously performed by Valero Energy that have now been transitioned to Valero L.P. as part of our separation from Valero Energy. Finally, depreciation and amortization expense increased $2.3 million or 10% to around $25 million due to the finalization of the asset valuation exercise on the former Kaneb assets completed in the fourth quarter of last year and the Burgos pipeline project coming online in this quarter.

I'd now like to discuss briefly the third quarter 2006 results for Valero GP Holdings LLC. The results for GP Holdings have been presented using the equity method of accounting rather than consolidating the results of Valero L.P. As such, the results reflect a portion of Valero L.P.'s net income holding. For the third quarter, GP Holdings reported net income of $9.7 million or $0.23 per unit. Total cash distributions expected from Valero L.P. based on the $0.915 per unit distribution from Valero L.P. and the ownership of the 2% general partner interest, the incentive distribution rights, and 21.4% limited partner unit is $14.2 million.

After deducting expensing at GP Holdings for G&A and a small amount for interest, net distributable cash flow is expected to be $13.5 million. Based on the $0.32 distribution declared in the third quarter, we expect to pay GP Holdings unit holders $13.6 million in distribution. With respect to G&A expense for the third quarter, the amount of $877,000 included certain one-time costs associated with GP Holdings' IPO. However, we expect quarterly G&A expense for GP Holdings to be around $600,000 going forward. Also during the third quarter, GP Holdings borrowed $1 million on its $20 million revolving credit facility to finance working capital requirements. As a result, we expect quarterly interest expense to be around $15,000 going forward.

Now turning to Valero L.P.'s strategic growth program, which we briefly outlined in the last quarterly conference call, I'm pleased to say that we have started construction on several terminal expansion projects as part of our $250 million terminal expansion program. Several of these are expected to start contributing to earnings in mid- to late 2007. Expansion projects that are approved and underway include projects at our terminals in Amsterdam and the Netherlands, St. Eustatius in the Caribbean, Vancouver, Washington, Linden in the New York Harbor area, Texas City, Savannah, and Baltimore. Additionally, we recently completed tank repairs at our Piney Point, Maryland terminal.

The markets where we are investing to increase storage are mainly strategically located marine terminal facilities where we see growing demand for terminal capacity. Most of the terminals we're expanding are about 100% leased, so capacity is tight. In Amsterdam, we're about to start construction on a 1.65 billion barrel expansion at a cost around $68 million. This project will be completed in two phases, with the first phase completed in October 2007 and the second in January 2008.

The total expected annual EBITDA contribution is about $11 million. In the Caribbean at St. Eustatius, we plan to spend around $50 million to expand the storage by an additional 1.7 million barrels. That project will be completed in three phases. Phase I to be completed in March 2007, Phase II in August, and Phase III in January '08. The total annual EBITDA should be around $7 million. In Vancouver, we're looking to spend around $12.5 million to add 250,000 barrels of storage. The annual EBITDA will be around $1.8 million and this project should be completed in November of '07.

In Linden, New Jersey, we're looking to spend around $11.2 million to expand storage by 250,000 barrels and improve pipeline connections. We'll complete these projects in the fall of next year and expect annual EBITDA of around $1.6 million. This facility is used as a delivery locations by NYMEX traders and we're making improvements to our pipelines that connect to Buckeye facilities. At Texas City, we expect to spend initially around $8.5 million to expand the facility by 200,000 barrels. That project will be in service in September 2007 and will contribute $1.1 million of EBITDA annually. We have plans to invest more capital in this facility as we're looking to take advantage of the strategic location of the terminal, which is amidst several major refineries.

At our Savannah facility, we expect to spend around $3.9 million to return to service about 400,000 barrels of storage and to upgrade a loading rack. This project should be done in May of 2007 with annual EBITDA of around $1.2 million. At Baltimore, we plan to spend around $2.8 million to return to service 230,000 barrels of storage, improve pipeline connections and construct a new dock line and pump. These projects will come online in January of '07 and will contribute around $1 million to annual EBITDA. Finally, at our Piney Point, Maryland, terminal, we have recently completed about $2.9 million of investments that returned to service nearly 900,000 barrels of storage. The annual EBITDA will be around $1.7 million from these investments. We're also working on another return to service project at this terminal, in which we're looking to spend around $600,000 to return another 100 ,000 barrels of storage to service. This project is expected to be completed next month and provide an additional $170,000 of EBITDA.

We also expect to start construction soon on expansion projects at terminals in Portland, Oregon, and Stockton, California. At Portland, we're looking to expand the capacity of the facility by about 200,000 barrels. The expected cost and EBITDA contribution is around $8.1 million and $1 million, respectively. This project should be completed in August of '07. In Stockton, California, we plan to add an additional 160,000 barrels at a cost of $7.6 million. The annual EBITDA is expected to be around $1.3 million and start-up should be in November of 2007.

Over the next year or so, we expect to spend around $175 million on these expansion opportunities. On our ammonia pipeline, we recently completed our booster pump project that allows us to capture incremental tariff revenue by increasing throughput volumes to both existing and new customers. This was completed at a cost of $1.7 million and will contribute over $0.5 million dollars to EBITDA annually.

Currently, we're implementing a strategy to diversify our customers on the ammonia system by building pipeline lateral connections to industrial end users. Instead of $30 million of pipeline lateral projects on this system, which we originally anticipated, we've now identified over $75 million of potential projects. We'll continue to update you on these as they move forward. We also continue to evaluate expansion projects at our Point Tupper facility in Nova Scotia, where we believe we can add close to 2 million barrels of storage and perform a major dock expansion there and also at our Jacksonville, Florida, terminal, where we believe we'll have future expansion opportunities.

Turning to earnings guidance for the fourth quarter of 2006 for Valero L.P., for the fourth quarter, we expect earnings to be lower than the third in the range of $0.65 to $0.70 per unit due to higher maintenance expense and seasonality in some of our businesses. However, we continue to believe second half results for 2006 will be better compared to the first half. Fourth quarter operating expenses are expected to be within the range of $80 million to $85 million. Depreciation expense is expected to be in the range of 25 to $25.5 million. Interest and other expense is still expected to be 16.5 to $17.5 million, and income tax expense is expected to be in the range of 2 to $2.5 million.

Looking at our capital expenditures for the year, we're now anticipating expenditures to be around $150 million. Reliability capital expenditures are expected to be in the range of 42 to $43 million. For Valero GP Holdings, we noticed the fourth quarter consensus estimate is currently $0.29 per unit. No decision has been made with respect to the Valero L.P. and Valero G.P. Holdings fourth quarter distribution. However, if you assume that Valero L.P. distribution were to stay flat in the fourth quarter, we would expect earnings per unit for G.P. Holdings in the fourth quarter to be similar to the third or around $0.23 per unit.

At this time, I'll open it up for Q&A. Ian? Is the operator there?

Yes, sir. [OPERATOR INSTRUCTIONS]. And your first question comes from the line of Mark Reichman, with A.G. Edwards.

Good afternoon. Just a question on the CapEx. The $250 million worth of projects that you mentioned that would go into service by the second half of '07, what type of EBITDA would that investment generate, or maybe the way to think about it is what is the cash flow multiple on that investment?

We'll pull out the exact multiple for you.

There was a lot of numbers early on.

I think it's in that range of six to seven times.

Okay. Is Valero Energy, are they pretty much through their refinery turnaround schedule now?

Well, it's never through. It's always an --

Is it returning to normal now?

Well, we -- Steve, do you want to jump in?

Well, for the fourth quarter, it's going to be pretty light. McKee will have a turnaround in the fourth quarter and also Paulsboro will have a small one. As it stands now for '07, first quarter will probably be pretty heavy turnaround schedule, but then not too bad after that. It's a very fluid situation with these turnarounds, because much depends upon the frac spreads and them trying to optimize their business. We get as good as intelligence as we can. But candidly, just like this year, it will continue to be a moving target.

But the reasons we gave earlier are done. We talked about 2006 turnarounds because of the capital investments required by refiners like Valero to make clean fuels. That part is behind them.

Those all came to pass -- I guess what I'm wondering, are we going to get another -- when we get into the fourth quarter, are we going to be back repeating last year? Is there a high probability that we're back again to another heavy maintenance schedule?

At this point, from what we know. Like Steve just said, the fourth quarter looks light, based on the turnaround schedule that they publish, we do expect them to have a pretty heavy turnaround schedule first quarter of '07.

Do you think that will extend through the year or do you think?

No, I don't think so. Based on what we know now, it should be concentrated in that quarter only.

Okay, okay. Great. Thank you.

Mark Easterbrook, RBC Capital Markets.

Good afternoon, guys.

Hi.

A bunch of little questions, actually. Your income tax rate has been a lot less last few quarters. What rate should we be modeling going forward? I've got a 10% rate, but it hasn't hit that in the last four quarters, I think.

I think it's closer to, what, 6?

6%.

6. And then going on to maintenance CapEx, I think you guided us at $42 million for the whole 2006, but so far you've only had 22 million. Are you going to have a big catch-up in the fourth quarter, or is that 42 million a bit heavy?

That's what we're currently -- that's what we currently believe. We're forecasting to have almost as much spend in the fourth quarter as the first nine months of the year. Whether it comes true or not, we'll know in three months time.

And then going to the turnaround situation in the first quarter, do you know which refineries will be going through turnaround situations?

McKee is the big one.

I'm talking about the fourth quarter?

It's not heavy in the fourth quarter, but it is in the first. It's McKee and Ardmore, primarily.

And Benicia as well out in California where we have the crew tanks.

Okay, thanks, guys.

Samuel Arnold, Credit Suisse.

Good afternoon, everybody. A quick question on the Point Tupper in Jacksonville, you had mentioned that you are looking at potential projects and expansion there. I assume that one is not part of the $250 million? And two, could you give me any idea of how big these projects could be from a dollar standpoint?

They're preliminary estimates at this point because they're not as far along as some of the others I detailed, as you might tell from our remarks, I didn't give enough detail on that, but I think I said we expect to spend about 170 to $175 million in the next 12 months. The balance of that is an estimate of the projects at Point Tupper and Jacksonville. But it's a preliminary estimate.

Okay. And just -- I didn't catch it while I got you on the line, the Amsterdam, what was the capital spend there?

$68 million.

Great.

It's a euro contract.

So that's subject to change.

Yes, with the exchange rate.

Okay, great.

Ross Payne, Wachovia.

Obviously a lot of organic projects here, can you just refresh our memory on your target debt to EBITDA and debt to cap going forward and how you might structure this growth from a structure standpoint?

The debt to EBITDA, we like to keep at about 4 or below. With debt financing, the same change acquisition, that will creep up a little bit north of 4, but then we expect it to come down next year from the EBITDA from the projects that that comes through. Really debt to cap has never been an issue with us. It gets up to about 42% with that same change. Debt financing, which we expect to close on December 1. Really to our mind, that gating factor is the cash flow, debt to EBITDA ratio.

Okay. Have you guys looked at different vehicles for raising the equity component outside of straight retail?

We've noticed -- well, yes and no. We did place a lot of institutional -- I mean, a lot of VEH in the institutional market when we sold first traunch. But we've also noticed these hybrid equity securities that people like enterprise and others have done. Those look pretty interesting to us.

Very good, thanks, Steve.

Michael Blum, Wachovia.

Good afternoon, everybody.

Hi.

Just a couple of quick questions. One, now that you're separated the G&A from Valero, will that be a decent run rate going forward, that 11.5 times number?

Yes, I think so.

Okay. And you've talked in the past about a distribution growth target of 7 to 8% annually for this year. Is that still a good target?

Yes, with this distribution announced today we've achieved 7 and fourth quarter remains to be seen what we'll do there.

Okay, thank you.

Mike Beall, Davenport.

Good afternoon. I'm confused a little bit by this quarterly pattern. We indicated at the end of the second quarter that the fourth quarter would see improved operations because of fewer turnarounds, lower maintenance, and a seasonal increase in bunker fuel, now the fourth quarter we expect to be lower because of higher maintenance and seasonality. Can you just talk about that a minute? Was there a shift in the maintenance expense and what's different about the seasonality now than it was before?

I think you put your finger on it. The shift in the maintenance expense is a major factor there between the third and fourth plays out. When you look at third and fourth combined, they're playing out almost exactly as we thought they would compared to the first half. One of the comments I made that the third and fourth would be much better than the first half. There is a shift in expenses, just really timing between the third and fourth quarter. There is some seasonality to some of our business lines. Absolutely there is. Some may be better in the fourth quarter, but also some are worse -- [multiple speakers] -- for example, asphalt is obviously weaker. You expect to see weaker results going into the winter than you do going into the spring and summer.

Okay. On these organic projects. I assume that in most cases we get some kind of contractual commitment from our customers. How do we stress test these from a situation where we have a backwardization from the markets in oil and heating oil and stuff like that? Are we subjecting ourselves to cyclical factors a little more than we are at the moment?

No. The projects are backed by long-term contracts and multi-year contracts. So to that extent, temporary changes are not affecting -- they do affect our business on the margin because we do have a lot of terminal spread throughout seven countries where you'll see some incremental terminal revenue compared to a backward market.

They're renting a tank and whether they put barrels in it or not, we get paid.

Speaking of pipelines, there's something called a lakehead decision, there's been some protest or efforts by shippers to fees for use of pipeline reduced or increases reduced because they are owned by MLPs that presumably don't pay taxes and they want that income tax component removed from the rate base, if you will. Can you talk a minute -- is that an issue you're concerned about and how vulnerable would we be to any changes?

Obviously we've followed it. Right now we really follow the practice that all the other MLPs follow in terms of the methodology you need to following what categories your investors are paying what taxes. We're not doing anything different than anybody else does and we'll have to continue to follow it. Right now, it's sitting in a favorable disposition for MLPs like ours, but our tax director is here and would wow wish to comment further on that, or is that accurate?

That's accurate. This is Mary Morgan. In some of our locations, we have market-based rates that really aren't suggest to the regular normal that really aren't suggest to the regular normal calculations. We're under the regulatory offices of FERC that almost half of our pipelines are intrastate pipelines where we don't have that income tax allowance at all. That issue is currently before FERC

That's right.

Okay, thank you.

Thank you.

[OPERATOR INSTRUCTIONS] Sir, there are no further questions at this time.

Thank you, operator. Thanks for joining us today. If you have any further questions, please feel free to contact us.

That concludes today conference call, you may now disconnect your line.