NuStar Energy LP (NS) 2007 Q2 法說會逐字稿

At this time, I would like to welcome everyone to the NuStar Energy LP and NuStar GP Holdings LLC second quarter earning conference call. All lines have been place on mute to prevent any background noise. After the speakers' remarks, there will be a Question and Answer Session. (OPERATOR INSTRUCTIONS) Thank you. I would now like to turn the call over to Mark Meador, Director of Investor Relations. Thank you. Mr. Meador, you may begin your conference.

Thank you, operator. Good afternoon, and welcome to the NuStar Energy LP and NuStar GP Holdings LLC second quarter 2007 earnings conference call. With me today is Curt Anastasio, CEO and President of NuStar Energy LP and NuStar GP Holdings LLC; Steve Blank, our CFO; and other members of our management team. If you have not received our press releases and would like a copy of them, you may obtain them from our website at nustarenergy.com and nustargp.com (sic) Attached to the earnings releases, we have provided additional financial information from both companies including information on NuStar Energy LP's business segments. If after reviewing the attached tables you have questions on the information presented, please feel free to contact us after the the call. Please note that we have separated out the financial results of our new marketing supply and trading businesses and labeled as other on the business segment schedule included in the earnings release tables. 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 contain 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 described in filings we made with the SEC. Curt?

Good afternoon and thank you for joining us today for the second quarter 2007 earnings conference call. I am very glad to announce that our board each approved an increase in both the NuStar Energy LP and NuStar GP Holdings LLC quarterly distribution rates. NuStar Energy's quarterly distribution increased to $0.95 per unit or $3.80 per unit annually, which represents a 7.3% increase over the $0.885 per unit second quarter '06 and a 3.8% increase over the $0.915 paid last quarter. With respect to the quarterly distribution rate for NuStar GP Holdings, the distribution increased to $0.34 per unit or $1.36 per unit annually, which represents a $0.02 or a 6.3% increase over the $0.32 paid in the first quarter of 2007. Total distributions to be paid to NuStar GP Holdings based on the new $0.95 per unit distribution at the LP represent a 6.3% increase over the LP's distribution rate. For the second quarter, NuStar Energy's earning applicable to Limited Partners were $34.6 million, or $0.74 per unit, significantly higher than the $27.5 million or $0.59 per unit reported in the second quarter of last year. Year-to-date earnings applicable to Limited Partners were $61.2 million or $1.31 per unit compared to $62.8 million or $1.34 per unit for the first six months of '06.

Included in the results for the second quarter are several items, both positive and negative, some of which are one-time. These items, which can be found in other income on the income statement, include three large amounts. The first item relates to a $13 million fee or $0.27 per unit paid to NuStar Energy from Valero Energy as a result of Valero exercising its options to terminate early the 2007 services agreement. This agreement would have expired in December 2010, but it was terminated in the second quarter instead following NuStar's separation from Valero. This payment helps offset additional administrative expenses NuStar bears as a totally separate company. As you may recall, prior to our separation from Valero, we relied on employees provided by Valero to fulfill certain administrative functions in exchange for a fee. After Valero sold all of its interest in NuStar last year, they ceased providing us with employees and services, except for certain IT, HR, and telecommunication services under a new services agreement. Valero had the option to terminate that agreement in return for a $13 million payment, which they did in April. Also included in the other income category is $7.1 million or income or $0.15 per unit related to the business interruption insurance claim for the impact of the fire at Valero's McKee refinery that started in mid-February. Because GAAP accounting rules allowed us to recognize only a portion of our claim at this point in the process, we were not able to recognize about $6.8 million or $0.14 per unit of the claim related to when the refinery was shut down or running at reduced rates in the first and second quarters. We expect to recognize the income over the next two quarters the majority of the remainder of the business interruption claim, which we believe to be approximately $7.5 million. There will also be a small amount of the claim recognized to income once it is settled, which is expected to be in the first quarter of 2008. Going forward, barring any future turnaround activity or operational issues, we expect the McKee refinery incident will have a minimal impact to our operations in the second half of the year, as the refinery is currently running at or near capacity.

Another item included in other income is an approximately $3 million or $0.06 per unit currency exchange loss related to intercompany debt with our Canadian subsidiary. Although the impact from currency exchange fluctuations is recurring, we believe the unusually sharp decline of the U.S. dollar during the quarter warranted a special mention. We also incurred about $1.8 million or $0.04 per unit of one-time costs in the second quarter of 2007, primarily associated with our separation from Valero and establishing our new marketing supply and trading businesses. These costs are included in G&A and not other income. So to summarize the effect of all of these unusual items positive and negative, if you exclude the gain from the termination of the services agreement with Valero, and you add back the negative impact of the McKee refinery incident, the currency exchange loss and the one-time costs with our separation from Valero, earnings applicable to Limited Partners would have been $33.2 million or $0.71 per unit in the second quarter.

Distributable cash flow available to Limited Partners from continuing operations was $53.6 million or $1.15 per unit for the second quarter -- much higher than the $41.4 million or about $0.88 per unit for the second quarter of last year. The coverage ratio applicable to Limited Partners was a strong 1.21 times for the second quarter. Excluding again the one-time items I just reviewed, distributable cash flow available to Limited Partners from continuing operations would have been $52.2 million instead of $53.6 or $1.12 per unit instead of $1.15 per unit for the second quarter, and the coverage ratio would have been about 1.17 times compared to 1.21. As you would expect, throughputs on our refined product terminals, refined product pipelines and crude oil pipeline segments were lower in the second quarter of '07 compared to '06, primarily due to the impact of Valero's McKee refinery incident. However, revenues on our refined product pipeline business segment increased as we benefited from the tariff increases that were effective in July of '06 on our FERC regulated pipelines. We shipped more longer haul higher tariff barrels on our east and north pipelines compared to the second quarter of last year.

In addition, we again benefited from record throughput volumes on our ammonia pipeline. Market fundamentals driving this portion of our business include high corn prices driving increased corn plantings, and a bullish outlook supported by renewable fuels increased nitrogen units acre per planted, strong 2007 spring and sidedress seasons, steady industrial demand and customers resupplying terminal inventories in anticipation of strong fall demand. Going forward, we expect to benefit from the FERC new tariff increase of 4.3% on all of our FERC regulated pipelines, which was effective July 1st.

Now turning to some of NuStar Energy's financial statement results for the second quarter, the McKee refinery incident and higher operating G&A and depreciation expenses all contributed to lower consolidated operating income in the second quarter compared to the second quarter of last year. Much of the higher G&A related to the separation from Valero. Operating expenses were $85.4 million or $6.3 million higher than the second quarter of '06, mainly due to higher maintenance and regulatory expenses associated with pipeline integrity and tank inspections. Increased salaries and wages resulting from the acquisition of our St. James Louisiana terminal in December of 2006 and from our new marketing supply and trading businesses also resulted in higher operating expense. General and administrative expense increased $7.2 million to $17.6 million over the second quarter of last year, mainly because of increased headcount for services previously performed by Valero that have now been transitioned to NuStar GP LLC as part of our separation from Valero. In addition, a higher unit price compared to last year resulted in increased stock options and restricted unit expense.

Depreciation and amortization expense increased $3 million to $27.9 million, mainly due to the acquisition of St. James terminal in December, the Burgos pipeline project coming online in the third quarter of '06 and other capital projects completed in 2006 and 2007. Interest expense increased $2.8 million to $19.5 million, mainly due to a higher debt balance on our $600 million revolver, which has been used primarily to fund several of our expansion projects. Last, reliability capital expenditures were $7.3 million in the second quarter. Even though we have spent around $12 million for the six months ended June 30th, we expect reliability capital expenditures to be approximately $45 million for the full year of 2007.

I would now like to discuss briefly the second quarter 2007 results for NuStar GP Holdings. For the second quarter, NuStar GP Holdings reported net income of $11.2 million or $0.26 per unit. Total cash distributions expected from NuStar Energy LP based on the $0.95 per unit distribution from NuStar Energy LP and the ownership of the 2% general partner interest, incentive distribution rights, the 21.4% Limited Partner interest, are $15.1 million. After deducting expenses at NuStar GP Holdings, net distributable cash flow is $14.4 million or $0.34 pr unit for the second quarter of 2007.

With respect to NuStar Energy's internal growth program, I am pleased to say we're now in the midst of the largest capital expenditure program of our history with the majority of our $400 million of expansion projects underway. The Kaneb acquisition, completed just over two years ago, has proven to be the catalyst for our greatly expanded portfolio of growth projects. By the end of this year, we'll have completed an additional $116 million of internal growth projects. In fact, several of those -- or around $55 million worth -- should be done as soon as the end of September, contributing an additional $8.1 million to EBITDA on an annual basis. These include storage expansion projects at our terminals in St. Eustatius, Portland, Texas City, Lyndon and Stockton that have commitments from our customers ranging from six to ten years. Also included in the projects expected to be completed by September is one of our ammonia pipeline projects that we discussed previously. Construction is underway to build a ten mile four inch pipeline to two of our industrial customers on the southern end of the line in Louisiana. We expect to spend around $5 million to complete the project which should add close to $1 million to EBITDA annually.

Other projects expected to be complete by the end of the year are at our terminals in Amsterdam and Vancouver. In Amsterdam, we expect to have eight tanks completed in November at a cost of around $49 million. This phase of the project will add around 1.1 million barrels of committed storage or around $7.1 million to annual EBITDA. At our Vancouver terminal we're spending a little over $13 million to add about 230,000 barrels of committed storage. This project should be complete by the beginning of November and is expected to add close to $2 million to EBITDA annually. All in all, by the end of this year, we will have added over 3.2 million-barrels of capacity under firm commitments to our existing 80 million-barrels of storage capacity, which is the second largest independent liquid storage capacity in the world.

Looking further out, but right around the corner, we expect to have nearly $50 million of expansion projects completed by February of '08, which should add an incremental $8.6 million to annual EBITDA. These include the last phase of the St. Eustatius expansion project and four additional tanks at Amsterdam, which in total will contribute about 1.6 million barrels of storage to our existing capacity. Beyond the start of the year, we have around $140 million of expansion projects that are expected to add nearly 3.5 million barrels of storage and are scheduled to be complete during the second, third and fourth quarters of 2008. One of these will be Jacksonville, Florida expansion that we're now moving forward on. Here we are looking to expand the facility by nearly 500,000 barrels at a cost of about $21 million. We continue to evaluate other projects we'd discussed previously including expansion of our Point Tupper, Nova Scotia facility and other ammonia pipeline lateral projects. So as you can tell, we have a very strong portfolio of internal growth projects lined up over the next year-and-a-half that will add to our core set of stable, fee-based assets and contribute to what we see as a great year for the partnership in 2008.

Now turning to earnings guidance for the NuStar Energy LP. Even though we expect the Valero McKee refinery incident to have minimal impact to our operations in the second half of the year, as the refinery is now running close to capacity, the timing and contingency of recognizing to income any insurance proceeds related to the first and second quarters will continue to impact earnings per unit in any particular quarter over the next few quarters. Assuming we're able to record in the third quarter around $5 million of the remaining $7.5 million of the business interruption insurance claim, we expect earnings for the third quarter to be in the range of $0.75 to $0.85 per unit. For the full year 2007, we continue to expect earnings before interest, taxes, depreciation and amortization to be around $30 million higher compared to 2006, driven primarily by the Burgos pipeline project completed in July of '06, the acquisition of our St. James crude terminal in December, and the ramp up of our terminal expansion projects. With respect to the contribution from our new marketing supply and trading businesses which are just now getting started, we're forecasting the contribution to operating income of around $650,000 dollars for the third quarter and about $1.3 million for the fourth quarter.

Updated 2007 quarterly run rates for NuStar Energy LP are as follows: operating expenses are expected to increase to around $100 million in the third quarter as maintenance projects that were scheduled to takes place in the second quarter have been deferred to the third, mainly due to weather delays and timing of certain projects. After that quarter, we expect these types of projects to subside and operating expense will decline to more normal rates or in the range of $85 million to $90 million. General and administrative expense is expected to be much lower than the second quarter and in the range of $13.5 million to $14 million, primarily due to the absence of certain one time costs we incurred from the separation from Valero. Depreciation expense should be in the range of $27.5 million to $28.5 million per quarter, interest expense in the range of $19.5 million to $20 million, and income tax expense in the range of $2 million to $3.5 million. With respect to our capital expenditure forecast for the full year of '07, we're now forecasting total capital expenditures of close to $295 million, which includes approximately $236 million for strategic capital.

In closing, I am more excited than ever about the future of NuStar. In addition to a large portfolio of internal growth projects currently underway, we're also evaluating other storage and pipeline growth projects that are in the early stages of development and which represent still more growth potential for us. We continue to see strong demand from more energy infrastructure, not only in the United States, but also internationally -- and continued growth in product demand, a tight supply and demand balance and expanding array of specialty products including renewable fuels continues to be bullish for strong energy infrastructure growth companies like ours. With the majority of our internal growth projects coming online in late 2007 and in 2008, and the new marketing supply and trading businesses we have started in asphalt and other products, we feel confident that next year is lining up to be an excellent year for the partnership. This concludes my prepared remarks, and I'd now like to open it up for Q&A. Operator?

(OPERATOR INSTRUCTIONS) Your first question is from the line of Mark Reichman.

Good afternoon. Just two questions. The first is there was the news that Valero was looking at some asphalt plants from Citgo and I was just wondering what the status was on that. And also if you could maybe talk a little bit about those types of assets and kind of the risk profile and how they fit -- how well they fit into an MLP? And then the second question is in terms of biofuels and renewables, what opportunities do you see for the partnership? We talked an awful lot about terminals and pipelines, and those are good central avenues for growth, but maybe on the fringes on the biodiesel and the biofuels would be helpful.

I can't comment on what Valero may be looking at on the acquisition front, but I think we previously said that the asphalt business is one of our strategic thrusts. We do like the fundamentals. We think that supply is being constrained for various reasons, and demand will steadily increase, and it should be a good business to be in whether you're on the terminal and distribution side or the production side. We like that business. We're in it today and we plan to be in it to a greater extent going forward. With regard to biofuels and renewables, these are materials that we handle quite a lot of already. In the United States we have well over $2 million of storage devoted to ethanol blending into gasoline, and we're big in the biofuels business as well first and foremost in the UK, which was a little ahead of the curve on distributing biodiesel, since diesel is a primary transportation fuel in the U., so we handle a lot of it at our terminals there. I think this is obviously a growing opportunity. While the volumes are relatively small, the growth rate is high. There is a renewable fuels mandate that it is been federally mandated. States are looking at implementing more and more and higher targets for biofuels and renewables, so I think it is a good sector to be in. What we need to push further on is in the MLP sector and we are -- is to really educate our legislators that they should further allow the handling by MLPs like ours of renewable fuels, such that whether you're dealing with the storage or transportation or however you're dealing with renewable fuels, however you may be touching them -- they should qualify as qualifying income, so that we don't have an artificial constraint on the energy infrastructure of the nation, as this very important aspect of energy continues to grow in our country. So we'll continue to take that initiative. One of the organizations doing that is the National Association of Publicly Traded Partnerships. I think AOPL has been involved with it as well, so we'll continue pushing on that front.

Getting back to the asphalt plant, you mentioned you were a little reluctant to comment on that. Was Bill Greehey not quoted as saying NuStar had bid on asphalt plants?

I'm sorry, I thought you were asking me about Valero acquisitions of asphalt plants In our case, I told you it is a strategic thrust for us. I am not going to comment further on any specific acquisition opportunities because of confidentiality restraints that we're under, and I tend to honor what we said we would do with regard to confidentiality.

Great. Thank you.

Your next question is from the line of Sam Arnold with Credit Suisse.

Hi. Good afternoon, guys. Just a question for you on the St. James crude oil storage tanks you bought from [Coke]. Wondering if you can comment on the performance of those assets year-to-date with what's been going on with St. James crude versus WTI, if that's been overperforming or underperforming your expectations and what you see going forward?

It has been overperforming our expectations. The performance has really been quite good. After we bought it, we bought it thinking there was (technical issues) few days we had signed up deals to expand the terminal by about 50% of its size on the day we bought it. Steve, do you have any further comment on that?

No. As Curt said, it is performing from a top point of view, a bit ahead what we've seen the acquisition economics, and I think we said $15 million.

$15 million, right.

We're a little bit of head of that for the first six months of the year.

Okay. Strategically as far as crude oil pipelines, you have some stuff surrounding the Gulf and then going north. Is there any desire to take some heavier crude south?

Well, are you thinking Canadian crude?

Canadian crude, there is not a whole lot of people really throwing out lines from Cushing down to the Gulf Coast. I know Enbridge and Exxon are looking at one, and Texaco said a thousand times they're looking at seaway, but not a whole lot is happening. Are you investigating that?

We're following all of that, and if there's an opportunity for us to play in, we will. Some of the projects out there are very, very big projects that some of the other MLPs have had a several-year start on trying to develop these projects and they remain to be developed, but certainly we love crude pipelines. If there is a role to play for us as an investor or to grassroots something we would certainly look at it. At this point our involvement in Canadian crude has really been indirect. For example, we've been approached by moving -- about moving [Deliawinch] to Canada, and so to facilitate the pipeline transportation of some of the heavier crudes that is produced.

From Chicago or Patoka?

Well, two of those locations, two of those midwestern locations from Canada. So, yes, we would be moving the [Deliawinch] from the upper Midwest to Canada, so it is kind of an indirect play on what's happening in the Canadian crude developments.

That would be through your own lines that you already have or this would be --

That would be through our own storage, gathering it from pipeline deliveries in bulk and having our customers ship it probably by rail primarily.

Okay, by rail.

-- it plans out. It is a storage opportunity for us.

I see. Okay. That's good. And then I guess can you talk a little bit about kind of overall -- not Valero's refining outlook but just kind of -- are you seeing more I guess have you seen a pullback for refined products getting imported into the U.S. or how is that market going now that refining margins have kind of tapered off a little bit?

Most recently that showed record imports of gasoline in particular and most of it was blank components and not finished gasoline but I think it was 0.7 million-barrels?

A day.

A day on the stats that came out last week, so it is a tremendous amount of imports because the arbitrage was wide open seasonally.

But now that's closing and are you seeing that effect -- seeing the cutback I guess?

I think it remains to be seen. Seasonally we're kind of on the down shoulder of gasoline import business, just if you look at the pattern of what normally happens as you roll into August and September, but Paul may want comment. He's here -- Head of our Products Trading.

I think there is still a lot of uncertainty left. Hurricane season is just getting started, so there is a lot of uncertainty left. But we are seeing imports slow down just a little bit, but I think production is coming up from the refineries to offset that.

Got it. Okay. Thank you very much.

Thank you.

Your next question comes from the line of Michael Blum with Wachovia.

Good afternoon.

Hi.

Two quick questions. First is -- in terms of the marketing business, any thought for how big a component of your total business that may become?

We're a pretty big pipeline in terminal business, and I think I might have made a passing reference in my remarks that we're the second largest liquid terminal company in the world -- independent terminal company in the world -- so it takes a lot to make a dent in our overall business. But I think they're off to an excellent start. They had get licensed. There were a lot of start-up costs, systems involved to support all of their activity and make sure we had the right back office and accounting and all of that. And as I said in my remarks, they will start contributing to our bottom line the second half of this year during the third and fourth quarter, and I expect them to do a a lot more next year as we go forward in terms of contribution to the bottom line. We are primarily a pipeline to terminal business and that's how it will remain in '08, especially with all of the projects we're bringing on in 2008 that have contributed even more to our overall pie. But I think they will be a meaningful contributor to our product that will all be additive to what we're doing in the pipeline and terminal business.

I guess to your point since you are such a -- since you do have such a large asset base -- in the future do you think you would consider instead of recontracting to third party, sort of contracting that for your own capacity for the marketing group?

The way I look at that particular question is that our internal marketing group's another customer. They're in competition with everybody on the outside, and they don't have any preference as far as that goes. If they can cover our costs as well or better than the third party, and they can make us money, fine. If they can't, we're very happy to deal -- we have an excellent customer base, and we want to give them first class service, and we'll continue to do so and we want to expand that customer base. So there is no sweetheart deals here, that's for sure.

Last question. Can you commented on what you're seeing in the acquisition market now and particularly if you could talk about how you see the domestic opportunity relative to what's in the international market right now.

Uh-huh. I can say what I said before, there is a lot of potential deal flow and that there is a lot of things to look at. I think one of the things that we concluded is some of the things were on offer were really very, very pricey. You'd be making a big bet on price for not getting a lot of -- not delivering a lot of of value to your unitholders. We really have come up with a more, I think, contrarian strategy to go over some of the things that maybe are not shopped quite so much but that are really interesting in terms of their value proposition going forward. And I mentioned our strategically asphalt being a strategic thrust. That's one -- you don't see a lot of MLPs circling around asphalt opportunities, but we are very very interested in selecting the best ones for us, because we think that's where you'll see a big pickup in value over the next several years. And there are other things like that. In terms of high prices in acquisitions, it would be interesting to see now -- people have been wondering for awhile gets going to burst the bubble on like private equity firms, for example, investing heavily in this space. And we'll see if the current disruption in the bond markets and some of the reassessment of credit risks that's going on is a step in that direction to slow down some of that activity or not. That remains to be seen. I don't think there is anybody who will have the answer to that yet, but if in fact that happens, that may provide even more targets of possibility for companies like us that are strategic buyers.

Okay. Great. Thank you.

Your next question comes from the line of Mark Easterbrook with RBC Capital Markets.

Good afternoon.

Hi.

Going back to the marketing operations, I think you said in the third quarter $650,000, and I missed what you said for the fourth quarter. And then I was hoping you might say something about 2008, what you're expecting there?

I didn't say anything about '08, but I said I think $1.3 million on operating income for the fourth quarter.

Okay.

We expect it to be I would say significantly higher than that in '08, but we're not putting out a number on it.

Maintenance came in at least relative to my expectations a little bit light. What's your game plan for the whole year? What's your guidance on that front?

I think we said on reliability run rate of, what, Rick?

$45 million.

$45 million, so it was light the second quarter. But the reasons really were weather and also there were some project delays -- just slow getting started on some projects they were going to do, so the second half will catch up on this.

That's reliability.

But that's reliability. For maintenance, we saw stuff get pushed out in the second partially because of bad weather. It was just so rainy through much of the country that work wasn't happening, so we think in the third quarter the operating expense will be up a bit largely on maintenance, just deferred stuff.

Looking at the third quarter, what type of refinery maintenance is out there? Anything on the schedule?

Really not much at all.

It is light, pretty light.

And then last question, and you probably touched upon this. The G&A obviously went up a bit because you took over some operations for Valero. What's the run rate for next quarter and the fourth quarter for G&A?

Just a sec.

$13.5 million to $14 million is the run rate going forward.

Thanks, guys.

Thank you.

(OPERATOR INSTRUCTIONS) Your next question is from the line of Paul Sankey with Deutsche Bank.

Hi, guys, good afternoon.

Hi, good afternoon.

You've addressed some of this question already, but if we could go back to it -- I was wondering about the risks to your outlook over the next year with particular reference to the way remaining margins have pretty much collapsed over the past month or so. And secondly, the issue of [baquidation], whether or not the particular shift in the crude market is important to you. I appreciate that the biggest single risk to you guys is probably demand and specific refineries, and if you could address all of those four elements, I would be happy. Thanks.

Maybe taking the [baquidation] first -- we substantially mitigated the risk of that because all of our major terminal expansion, storage expansion projects are backed by long-term contracts in the range of six to ten years. These are people coming into these facilities and asking us to expand them not based on where the forward curve is for the next six months or three months or twelve months. But they're taking a long-term view that will be valuable to have physical storage in the right location. And our capital really is being spent in mainly what I would call hub or strategic locations where product or crude inflows and outflows will really be persistent -- at least in the view of our customers -- for extended periods of time. So we're not so concerned about that. It affects us on the margins, but really it is not really a driver, a significant driver of our results. With regard to refining, I realize crack has come in quite a lot. My ability to predict that is probably no better than yours, but there is always a seasonal effect. If you look back at '06, for example, if you look at the cracks in the spring and throughout the driving season in the summer, compared to when they rolled forward into August and September, my guess is you plot that curve over this year's curve and not a whole heck of a lot different from what you're seeing this year. There is a very strong seasonal effect to this.

So does that make much difference to you guys, though, or is it like the [baquidation] issue when it is sort of a side show?

It really doesn't, because being on the pipeline and terminal side, we're not participating in refining margins anyway, so whether it is hot -- when it is hot we don't benefit and when it is low we're not hurt. And for refineries tend to run pretty much as hard as they can year end if they have incremental -- they run on incremental economics. If they can make $0.01 on the last $1, generally speaking, they will run to run the last barrel. What we've seen is a lot of good consistency in our throughputs whatever the crack spreads happen to be. Now of course you run into things like unplanned turnarounds and unfortunate incidents like McKee blowing up, which does affect us. But that has nothing to do with where crack spreads are.

That was part of the question. What are the key refineries that we should watch out for for you guys in the way that McKee was so important?

That's the big one. In our pipeline systems, there are several refineries we're tied to -- that are Valero refineries -- McKee, Ardmore, and Three Rivers -- but the big one is the McKee system. I made the point early on that when we IPOed this company, now going on I guess about six years ago, two-thirds of our EBITDA or our cash flow was derived from the McKee system. We've now got that down to like 20 some percent, maybe 23%, still a very significant number, although nowhere near what it was when we IPOed. And that's been part of our strategy over the last several years is to mitigate that risk of McKee having problems the way they just did. That's why we're able to survive it so well and even raise the distribution during a period when McKee is down. And as I mentioned there is Ardmore, there is Three Rivers. We do have big crude oil storage tanks at Texas City, Corpus Christi and Benecia as well. And then indirectly, of course, since we do have pipeline systems that run throughout a lot of the geography of the U.S., we have indirect exposure to other refineries as well. So one of the things I noticed is that there is to some degree we have kind of a hedge in the operations of our company, because when McKee was down, that tightened up PAD 4 and to some degree the Mid-Continent, and helps to explain higher throughputs our east line -- what we call our east products line -- that runs up through the middle of the country. And I mentioned earlier we had higher revenues on the east line through long-haul barrels. And part of that was the North Platte terminal was a good destination for helping to supply markets that were short in supply when McKee went down and actually some other refineries had operating glitches that would normally supply that area. So it wasn't apparent the extent to which we do have a little natural hedge there as well against McKee until it actually happened big time in February. Going forward, I don't know. The economy still seems pretty good. People are dampening down some of their economic forecasts, but the growth rate is still good. There is still economic expansion, energy demand is anticipated to continue to grow, so I think --

Just a very specific one on the refining margin side, and I appreciate you saying it is not that relevant to you. But one thing of interest to us is there seemed to be somehow a shortage of crude even though there is plenty in storage seemingly. But at the same time there seems to be rather too much gasoline which I think you referenced might be related to blend stocks. Can you talk about more in the like the dynamics from your perspective of what's creating the refining margin here.

Paul have may have more insight in addition to what I said.

Just the causing the crack spreads to go down?

I mentioned seasonal effect.

The key factor I guess still is demand is still low, so no matter where it comes from, either imports or production, the gasoline still has to get to the market. That's what we provide.

It just seems you were referencing this being a surprising amount of blend stock and wondering if you have any more granularity on that?

No.

Maybe not. Sorry, I don't want to take all your time, but one very final one from me. As far as the credit markets are concerned, anything we should worry about from your specific point of view with what we're seeing in this -- sounds to me as if it might be a benefit to you because you have less competition for assets arguably than any other source you got?

That could be. Maybe Steve should comment on the credit markets and how it affects us.

Hopefully it won't affect us. So far so good. We've got great relations with our banks, and they're all very supportive in calling us virtually daily to see if we win some M&A deal, whether they can finance us.

One of the things you see is a flight to quality, and it is kind of reflected in the headlines in how well ten-year treasuries have done lately as people poured mope into that, are seeking shelter from kind of subprime mortgage problems and collateralized debt obligations that people have bought and so forth. And we are a quality investment. We're an investment grade investment with steady growing cash flow and a lot of very solid assets, and a very diversified geography, so I am hoping that any flight to quality would be in part be a flight to a company like ours.

That is great. Thanks a lot.

Your next question is from the line of Leo Larkin with Standard & Poor's.

Good afternoon. Could you give us any guidance for reliability CapEx in fiscal 2008 and also DD&A?

For '08. I didn't put anything out there at this point.

I think we can't yet. Our budget will be finalized at the end of October. We've just started the process at this point. It is just too early to give you guidance there. We'll probably give you guidance when we announce the third quarter results. Typically that's what we do. We'll give guidance at that time.

Okay. Thanks.

You have no further questions at this time.

Okay. Thank you all for participating.

Thank you, operator. If you have any questions please feel free to call Investor Relations.

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