NuStar Energy LP (NS) 2006 Q4 法說會逐字稿

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

Thank you, operator. Good afternoon, and welcome to the Valero LP and Valero GP Holdings, LLC fourth quarter 2006 earnings conference call. With me today is Curt Anastasio, CEO and President of Valero LP and Valero GP Holdings, Steve Blank, our CFO, and other members of our Management team.

If you have not received the earnings releases and would like copies of each, you may obtain them from our websites at valerolp.com and valerogpholdings.com. Attached to the earnings releases, we have provided additional financial information, including information on Valero LP's business segments. Please note that we have included our recently acquired St. James Crude Oil Terminal in the refined product terminals business segment. If after reviewing the attached tables you have questions on the information as 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, it says that forward-looking statements contained in the press releases and conference call are intended to be covered by the Private 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, and thank you, for joining us today for our fourth quarter 2006 earnings conference call for both Valero LP and Valero GP Holdings. I would like to welcome our new unit holders joining us on this call, who were part of the Valero GP Holdings follow-on offering this past December. With the completion of that offering, Valero Energy Corporation no longer owns any financial interest in Valero LP, which will allow both companies to grow independently going forward. We're excited about this, because independence is the key to our future growth. You'll recall that our Chairman, Bill Greehey stepped down as CEO of Valero Energy a little over a year ago. Recently, he resigned as Chairman of Valero Energy as well, allowing him to turn his attention to helping us grow Valero LP and Valero GP Holdings as our Chairman. We look forward to benefiting from Bill's leadership and experience. We expect to announce a new name for Valero LP and Valero GP Holdings next month, and we'll also be moving to a new office location in San Antonio this spring.

Now, turning to Valero LP's results. Valero LP reported solid fourth quarter financial results that came in at the top of our guidance range of $0.60 to $0.70 per unit and were significantly higher than last year. For the fourth quarter, we reported earnings applicable to Limited Partners from continuing operations of $33 million or $0.70 per unit, which was more than 30% higher than earnings of $25.1 million or $0.54 per unit reported for the fourth quarter last year. For a full year of 2006, earnings were up over 37% to $133 million or $2.84 per unit, compared to $97 million or $2.76 per unit reported in 2005. Distributable cash flow available to Limited Partners from continuing operations was also higher at $45.3 million, or $0.97 per unit for the fourth quarter, compared to $42.9 million or $0.92 per unit for the fourth quarter last year. For the full year, distributable cash flow available to Limited from continuing operations was $195.7 million, or $4.18 per unit compared to $142.6 million or $4.09 per unit reported last year.

With respect to Valero LP's distribution, we're pleased to have met our 7% distribution growth target for '06, which we announced early last year. As mentioned in the press release, the Board declared a quarterly distribution of $0.915 per unit payable February 14th to unitholders of record February 7th. In total, Valero LP declared cash distribution for 2006 of $3.60 per unit, up 7% from $3.365 per unit in distributions for 2005. Distributable cash flow available to Limited Partners from continuing operations covers the distribution to the Limited by 1.06 times for the fourth quarter and a strong 1.16 times for the 12 months ended December 31, 2006.

Earnings were higher in the fourth quarter of '06 compared to '05 primarily due to a solid operational performance from three out of our four business segments. Throughputs on our refined product terminals, refined product pipelines, and crude oil pipelines were up 20%, 9%, and 17% respectively. And storage lease revenues on our lease terminals in our refined product terminal segment were up nearly 10% compared to last year. Looking back at 2006, we had several notable achievements that will position Valero LP for even further growth. We completed about $92 million of expansion projects, including our $58 million Burgos pipeline project and $13 million of ethanol and biodiesel projects. In total, we expect all of these to contribute an additional $22 million to EBITDA annually. We also significantly expanded our portfolio of expansion projects, having announced a $300 million capital expenditure program early last year.

In 2006, we started major expansion projects at our terminals in Amsterdam, St. Eustatius, Linden in New York Harbor, Texas City, Portland, Savannah, Piney Point and Baltimore, Maryland. In addition, we completed the acquisition of the St. James, Louisiana, crude oil facility for $140 million in December, which is expected to contribute about $15 million of EBITDA annually. We bought this facility with expansion in mind, and during the same month it was acquired, we reached an agreement to expand the terminal by nearly 50% of its capacity. And we achieved significant improvement in our safety and environmental record in 2006, particularly on the legacy Kaneb assets that we had acquired. This resulted in Valero LP receiving national recognition for our safety record. One of the highlights of our safety performance was that we had no lost time injuries in the entire United States in 2006. The number of environmental incidents was also sharply reduced.

Looking at some of Valero LP's financial statement results for the fourth quarter, operating expenses were $79.9 million, or $4.3 million higher than fourth quarter of '05. Operating expenses were higher in the quarter, primarily due to environmental costs incurred on one of our pipelines and terminals, as well as other maintenance costs at our St. Eustatius terminal. General and administrative expense increased $5.4 million to $14.9 million over fourth quarter last year, primarily due to services that were previously performed by Valero Energy that have now been transitioned to Valero LP as part of our separation from Valero Energy. Depreciation and amortization expense increased $1.6 million to $26.2 million, primarily due to the acquisition of the St. James crude oil terminal on December 1st, the Burgos pipeline project coming online in the third quarter of '06, and other capital projects that we completed in 2006. Interest and other expense decreased $2.7 million to $13.8 million, primarily due to the write-down of a portion of idle pipeline in south Texas recorded in the fourth quarter of last year.

Last, reliability capital expenditures were $13 million in the fourth quarter and $36 million for the full year of 2006, well shy of the $46 million we expected to spend during the year. Several of the projects we had planned to start in the fourth quarter will instead be executed in 2007. Our reliability CapEx target for 2007 is around $45 to $46 million. I'll now discuss briefly the fourth quarter of 2006 results for Valero GP Holdings. I would like to again remind our listeners that the results for GP Holdings have been presented using the equity method of accounting rather than consolidating the results of Valero LP, and as such, the results reflect a portion of Valero LP's net income based on GP Holdings LLC's ownership interest in Valero LP. For the fourth quarter, Valero GP Holdings reported net income of $10.3 million, or $0.24 per unit. Total cash distributions expected from Valero LP based on the $0.915 per unit distribution from Valero LP and the ownership of the 2% General Partner interest and the incentive distribution rights, as well as the 21.4% Limited Partner units totals $14.2 million. After deducting expenses at GP Holdings for G&A and a small amount for interest and income tax, net distributable cash flow is expected to be $13.5 million or $0.32 per unit. The Valero GP Holdings Board declared a quarterly distribution of $0.32 per unit payable February 16th to holders of record as of February 7th.

I would now like to provide a brief update on Valero LP's capital expenditure program. We're making significant progress on the projects already started at terminals in Amsterdam, St. Eustatius, Linden and New York Harbor, Texas City, Portland, Stockton, California; and Savannah. And we continue to expect the majority of these to contribute to the partnership's earnings starting in mid to late 2007. We're now targeting March to start construction on our expansion project at the terminal in Vancouver, and we've recently completed tank repairs at our Baltimore and Piney Point terminals in Maryland, which has returned to service approximately 330,000 barrels of storage capacity. Also this morning, we announced a new $54 million expansion project at our St. James facility, which will add four additional crude oil storage tanks or around 1.45 million barrels of storage capacity. We expect to start construction on these tanks later this quarter and be complete by mid-2008. This project is backed by a ten-year contract and should contribute around $6.5 million of EBITDA annually.

Looking at some of the other new projects we've identified, we have an additional $30 million of expansion projects at our Amsterdam terminal on top of the $68 million that are already underway. These projects will contribute an additional one million barrels of storage to that facility, so combined, we anticipate spending nearly $100 million to more than triple the size of that facility to around 3.7 million barrels of storage. The total annual EBITDA from all of the projects at that facility is expected to be around $19.2 million. We've also identified an additional $21 million of expansion projects at our Texas City terminal on top of the $8.5 million already underway. This will add an additional 430,000 barrels of storage capacity to the facility and contribute $3 million more to EBITDA. So, including the projects I've just mentioned, we now expect to spend around $230 million in CapEx in 2007, of which around $185 million is for expansion, and the remainder for reliability, or as I've mentioned, around 45 to $46 million. We're still in the process of evaluating expansion projects we identified at terminals in Point Tupper, eastern Canada, and in Jacksonville, Florida, as well as the $75 million of pipeline projects on the ammonia system that we discussed in the last quarterly conference call. If you add up all of these projects, including the projects that are still under evaluation, we're now looking at more than $400 million for our capital expenditure program for the next couple of years.

Now, turning to earnings guidance for the first quarter of '07 for Valero LP, for the first quarter, we continue to expect earnings for Valero LP to be in the range of $0.45 to $0.55 per unit as previously disclosed. This is lower than fourth quarter primarily due to a heavy turnaround schedule at several of our customers' refineries, as well as higher maintenance expense and lower throughputs due to seasonality. For the full year '07, we expect EBITDA to be higher as we benefit from the St. James crude oil terminal, the Burgos project completed in July '06, and the ramp-up of terminal expansion projects. We're targeting 7% distribution growth in 2007 for Valero LP over 2006, and assuming a 1.7 times cash distribution multiplier to Valero GP Holdings, this would equate to nearly 12% growth in distributions to Valero GP Holdings.

2007 quarterly run rates for Valero LP is as follows. OpEx is expected to be around $86 million; depreciation expense is expected to be in the range of 28 to $29.5 million; G&A expense is expected to be in the range of 12.5 to $13.5 million; interest expense in the range of 19 to $20.5 million; and income tax expense in the range of 2 to $3.5 million. For Valero GP Holdings, given the lower earnings for Valero LP in the first quarter of '07, earnings for GP Holdings are also expected to be lower that quarter in the range of $0.18 to $0.20 per unit. Nonetheless, if you assume the Valero LP distribution stays at $0.915 per unit in the first quarter, we would expect first quarter distributable cash flow for GP Holdings to be about the same as the fourth quarter.

In closing, I remain very optimistic about the opportunities we have to continue to grow the partnership and increase unit holder value for both Valero LP and Valero GP Holdings. As you've heard today, Valero LP has a significant and growing portfolio of growth projects that have substantially enhanced our ability to grow our third party customer base and throughput across our system. We also continue to look at acquisitions as a significant part of our growth strategy going forward. By controlling costs, improving reliability, and utilization of our assets, and with our strong slate of strategic growth projects, we believe we are firmly positioned to meet the 7% distribution growth for VLI for 2007 and as you know, because of the cash distribution multiplier to GP Holdings, this means even more distribution growth to the Valero GP Holdings unit holders. At this time, I'll open it up for Q&A. Operator?

[OPERATOR INSTRUCTIONS] Your first question comes from Ross Payne with Wachovia Securities.

How you doing, guys?

Hi.

Curt, I wanted to ask you, obviously you have a smorgasbord of capital expenditures here that you're going to be doing. Can you talk about how you're going to finance that and any kind of target leverage metrics you may want to gravitate towards perhaps on a pro forma basis?

Yes, I'll turn that over to Steve Blank, our CFO.

Right now, Ross, we're assuming no equity issuance this year. The CapEx has crept up a little bit from what we had budgeted, by about $30 million or so because of the projects we just announced, but debt to EBITDA at year end still only gets up to 4.2 times, and that's pretty much what we'd keep an eye on as opposed to the leverage ratio. The leverage ratio is about 41% or so. That's the plan and we're sticking to it, unless we sign up additional projects, which push us to raise some equity.

Okay. And I assume the rating agencies are fine with that kind of leverage metrics?

Yes. We showed them the budget. The only thing that was new was the projects in Amsterdam and in Texas City, which we just announced. Those were not in the budget that we shared with the agencies.

Okay, all right. Very good, guys. Thanks.

Thank you, Ross.

[OPERATOR INSTRUCTIONS] Your next question comes from Michael Blum with Wachovia.

Hi, good afternoon.

Hello, Michael.

A couple of questions. One, just to clarify on the various expansions that you announced and the other ones that you've identified in the past, are those all supported by long-term customer commitments? And then the second part of that is, the returns for those various projects seem to vary. So I wonder if you could just shed a little light on what's driving that.

Yes. The expansion projects we announced are backed by long-term contracts, that's the first part of your question. And the second part is, you're exactly correct. The IRRs vary, but they sort of average out in the range of 15 to 20% IRR.

Okay. And what drives the variances there? From project to project.

It really just mostly depends on where it is. Some locations are more expensive to construct projects than others. I would say -- I can give you a list of cost and supply and demand factors, but the bottom line is location is a big, big part of it.

Okay. And can you -- you clearly have a lot of organic growth in front of you, so you don't need to do acquisition, but can you just comment on what the acquisition market looks like out there and what you're seeing?

Yes. We see a very full portfolio of potential acquisitions, both asset acquisitions and company deals. I think you have to be selective. Some of the acquisition opportunities have become quite pricey. We have a pretty disciplined financial screening and strategic screening which requires us not only to do acquisitions that are accretive, but also those where we feel we have an opportunity to do more with it than the last 12 months or the history of that performance or that company would indicate.

We're going to do the right opportunities like we've done in St. James. We bought it at a multiple where it was immediately accretive to us, but that wasn't why we bought it. We bought it because we knew that a new buyer and a new owner had the opportunity to run it differently than the previous owner and get more out of that asset than would be indicated by the acquisition multiple. That's what really made us pull the trigger on it. We've already started to approve that with the expansion that I just announced.

But there's no shortage of opportunities, not at all. In fact, there's as many or more than I've ever seen in the five and a half years we've been in this MLP sector. It's just a matter of being selective and finding the right one.

Okay, great. Final question is just, can you just refresh us again on what's the latest in terms of the refinery turnaround schedule for Valero?

Mark, do you have it handy?

Yes.

We'll pull it up in just a second.

Fourth quarter is supposed to be somewhat heavier, as we've announced. The McKee, Ardmore, [Venesia] refineries that Valero Energy has already announced, they've talked about those units going down from what we've heard, and then it gets lighter in the second and third and moderates a little heavier in the fourth quarter.

Great. Thank you.

Your next question comes from Mark Easterbrook with RBC Capital.

Good afternoon, guys.

Hi.

Just a quick question on G&A cost, that seemed to really run up a lot in the fourth quarter relative to third quarter. Was that where the environmental expenses were? And what's the projection for the G&A expense going forward?

Yes, the environmental is not in there, but it ran up in part because of unit price appreciation affecting stock based compensation. And we also booked an additional bonus accrual in the fourth quarter. But G&A has been creeping up, in part because of the separate ratio. Some of this stuff that we got from Valero Energy through economies of scale which we no longer will capture, because as we separate, we're staffing up for growth, candidly, as well. We've increased our head count, positioned ourselves to more aggressively grow the firm going forward, now that the FTC issues have been removed because of Valero Energy no longer controlling the General Partner. But the biggest part was the depreciation in the share price.

Okay. Just going forward, for the first quarter, you have 12.5 to 13.5 estimate for G&A --

That's a good estimate.

That's a good run rate?

Yes, again. We're looking at creeping up for growth.

Okay. In terms of financing some of these projects, would you look at hyperdebt that some of the other MLPs have started to use?

Definitely. I've got pitch books about three feet deep of them. So we are well aware of hybrids and they make a lot of sense, particularly for MLPs, and we're going to continue to keep an eye out. The terms have only gotten more attractive as the markets for those securities have evolved.

Okay, thanks.

Thank you.

Your next question comes from Samuel Arnold with Credit Suisse.

Good afternoon, guys.

Hi.

Just a question for you. A lot of your projects right now are primarily geared towards terminals. I'm wondering if you're seeing anything out there, any type of bottlenecks on the pipeline assets? In particular I know with Western Refining and some of the mergers out there that perhaps the Albuquerque line might be of a strategic importance to a few people. I was wondering if you could comment on any type of potential growth opportunities either in that area or any of the other systems?

First of all, part of our growth capital, you're right, the bulk of it is for terminal expansions, where we've seen tremendous expand, especially for good locations, water born terminals that are in the liquid markets. But we do have about $75 million slated for pipeline on the ammonia system. Those are all pipeline projects there. With regard to Albuquerque, you're right. There's a lot of interesting developments in and around that system. We do currently have spare capacity on that system today. So we would be able to, as opportunities arise, we have the opportunity to add to the bottom line without spending a lot more capital. So we are working on some things there is and we do hope that we can soak up our spare capacity as part of our pipeline growth.

Okay. And in general, I would think with the additional terminal capacity that at some point you're going to shift the bottleneck to the actual pipelines. Are you guys seeing that looking five years out or?

Yes, it really depends on where you're talking about. I think part of the story for us on the pipeline side is that we now have -- terminals are pretty much all leased up. Pipelines have spare capacity. So what we're looking at doing, where are there opportunities with shippers or end markets where we could use spare capacity that we have instead of building new pipelines, because that would really be a home run to run higher utilization rates on existing assets. We're focused on that first before we go out and start. We just did build a big pipeline system in the Rio Grande Valley, which was justified on the back of long-term business that we had with several customers, including PEMEX, the Mexican national oil company. So if we have an opportunity like that, we'll go out and do grassroots construction. Fortunately, we also have surplus capacity in our existing systems that we're working on filling up.

Okay, great. Thank you.

Your next question comes from Mark Reichman with A.G. Edwards.

I think most of my questions have been answered, but I'll ask about the ethanol blending and biodiesel projects. Where do you see that market going or developing, and what additional opportunities do you see for Valero to participate in that market?

Right. For us, it's been a positive development because we've been able to make investments to store and blend ethanol and biodiesel at various locations in the U.S. and also in Europe. We can earn a return on those investments, we can charge customers for those investments. That's been positive for us. I think that will grow. There's also kind of an indirect benefit to our ammonia system, because with increased corn plantings, there's more use of ammonia-based fertilizers, so that's a bullish factor for throughputs on the ammonia system. Beyond that, we're exploring how else might a company like ours play in this?

I think one of the initiatives, I'm Chairman of something called the National Association of Publicly Traded Partnerships, and one of the federal legislative initiatives they have this year is try to push for ethanol and all aspects of the supply chain being qualifying income for MLPs. If we can do that, we can look at other pieces of the supply chains becoming more attractive for MLPs like ours. Whether it be transportation, or buying and selling, or what have you. I think Congress will be amenable to trying to promote further investment in clean fuels, like ethanol and biodiesel, and I think that creates opportunities for companies like ours. Beyond that, I think I'm not sure yet really how the manufacturing piece of this will work out.

We've always looked at that as the higher risk end of the supply chain for ethanol, the actual ethanol plants, and you're already seeing a lot of compression of margins there. I think you'll find the field will be narrowed to a few survivors who will really be the leaders in manufacturing. We look at that as the higher risk end of the places we might plan. I think we would be more focused on storage and the handling and perhaps the distribution or transportation.

Well, on that point, it seems like there's always new ethanol plants sprouting up, particularly in the Midwest. Do you see, in terms of aggregating those volumes, do you think there'll be enough for one first mover MLP that gets into the space, or do you think that several MLPs can get involved in that?

We have Mary Morgan here, our marketing and development head, and maybe she has a comment on that.

I think there'll be more than one MLP that will be involved. I think one reason, though, that we're so favorably positioned, if you'd look at our system map, today ethanol blending is already total at almost all of our terminals on our east and our north line. So where we're looking for major growth is in other areas where we're not going to lose any pipeline volumes, We're not going to lose any revenue. Everything we do in this space is going to be additional. We've seen -- we're working on quite a few projects in the development phase, particularly over in the U.K. It's very strong over there, they call it biofuels over there rather than ethanol and biodiesel. On the west coast, because there's people -- different cities and things passing regulations to start requiring a larger portion of bio in both diesel and gasoline. For us, again, where we're not really faced with losing pipeline volumes as people blend more ethanol. We can participate in a wider range of storage and transportation, everything from rail to additional truck offloading to blending at terminals to storage at our waterborne terminals. So I think we have a whole array of opportunities here as this whole sector grows.

All right. Great, thank you.

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

Yes, thank you, operator. Appreciate, again, you joining us on the call. If you have any questions, please feel free to call Investor Relations. Thank you.

This concludes today's conference call. You may now disconnect.