NuStar Energy LP (NS) 2007 Q3 法說會逐字稿

Good morning. My name is Jessica and I will be your conference operator today. At this time, I would like to welcome everyone to the NuStar Energy L.P. and NuStar GP Holdings, LLC third quarter earnings conference call and acquisition of CITGO Asphalt Refining Company. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (OPERATOR INSTRUCTIONS)

Mr. Meador, you may begin your conference.

Thank you, operator. Good morning and welcome to our conference call to discuss NuStar Energy L.P. and the NuStar GP Holdings, LLC third quarter 2007 earnings results and the proposed transaction to acquire CITGO Asphalt Refining Company. If you did not receive copies of the releases, you may obtain them off the NuStar Energy L.P. and NuStar GP Holdings, LLC web sites at NuStarEnergy.com and NuStarGP.com.

In addition, we have posted slide materials that go along with remarks this morning under the investors portion of the L.P. and GP web sites and I encouraged to have these available during the conference call.

With me today is, Bill Greehey, Chairman of NuStar Energy L.P. and NuStar GP Holdings, LLC; Curt Anastasio, CEO and President of NuStar Energy L.P. and NuStar GP Holdings, LLC; Steve Blank, our CFO; and other members of our management team.

Before we get started, I would like to direct your attention to the forward-looking statements 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 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.

I'll now turn the call over to Bill Greehey, Chairman of NuStar Energy L.P. and NuStar GP Holdings, LLC.

Thank you, Mark. Well, this has been a milestone year for NuStar and we accomplished a lot. First, we completed our separation to become an independent company. Then we set up our own trading and marketing organization. We have completed a lot of high-return internal projects and we laid out a vision and strategy for the future.

Our strategy is to grow NuStar with organic growth and through acquisitions. The result is we spent a lot of time evaluating additional acquisitions, because as we said at the start of the year, one of our top priorities was to make a major acquisition this year.

While we are off to a great start with today's announcement, the proposed acquisition of CITGO Asphalt Refining Company. It is a great acquisition for our investors, the employees, and the communities where these facilities are located. It also gives us a new line of businesses that separates us from our peer group companies. This is the right acquisition at the right time for NuStar and our unitholders, as we are purchasing two very strategic asphalt refineries for about 50% of the combined replacement value.

As a result, it is expected to be accretive to the L.P.'s digital cash flows in 2008 and for the GP unitholders, the accretion is expected even higher because of the incentive distribution rights.

With this acquisition, we significantly increase the size of our company. Our revenues for 2008 are expected to be $5.8 billion and that includes CITGO Asphalt, which should earn us, NuStar, a first ever ranking on the Fortune 500 list. In addition, we have solidified our position as the second-largest independent liquids terminal operator in the world and we will continue to have the world's second-largest amount of petroleum liquid storage capacity.

The CITGO acquisition also makes us the leader in one of the most attractive asphalt markets in the country and we believe will be well-positioned to take advantage of what we see as a great business. CITGO Asphalt Refining Company currently supplies in markets between 10 to 15% of the U.S. asphalt market, which is the largest asphalt market in the world.

Investing in asphalt assets is a major part of our new strategy, as we believe that asphalt margins will improve as supply will be limited compared to continuing global demand. Vacuum tower bottoms, they are also known as VTBs, are considered the bottom of the refiner barrel. It can be used in three ways by refiners to produce higher-value products. They can be used in the blending of fuel oil and bunker fuels. Secondly, as coker feed to produce higher-valued life products, such as gasoline or diesel, and finally, to produce asphalt.

Higher refining margins have improved coker economics, which have led to many coker projects in the U.S. and around the world. These projects are increasing the consumption of vacuum tower bottoms, which, in turn, are squeezing the amount of VTBs available for asphalt. With the CITGO Asphalt acquisition, we are able to take advantage of coker margins without having to invest in a coker, which can be a very expensive endeavor. For example, when I was CEO at Valero Energy, we added a coker at the Texas City refinery, which cost us upwards over $330 million, but turned out to be a very profitable venture for the Company.

As most of these cokers are being added in North America, we expect increased dependence on asphalt imports from a world market that will be strained to meet their increased demand for asphalt. Currently the U.S. asphalt demand is running around 520,000 barrels per day and production at around 505,000 barrels per day, resulting in a short position of 15,000 barrels per day that has to be supplied with imports. However, with coker projects coming online over the next several years, we expect the asphalt market will become significantly tighter, resulting in a net short position of nearly 150,000 barrels per day by 2012, which assumes the new cokers are operating at typical utilization rates.

On the demand side, asphalt is growing at a rate similar to that of refined products in general. The bulk of asphalt goes toward the paving markets, where growth is primarily tied to state and federal appropriations to maintain and grow the nation's highway infrastructure. A smaller portion of the market goes toward roofing demand.

Globally, many experts believe that asphalt growth will average about 1.8% per year, primarily driven by China and the Far East economies. Growing demand and a shrinking in U.S. supply indicates a substantial growth in U.S. import requirements over the next five years that should lead to improved asphalt margins. As Curt will discuss later with you, NuStar will be well-positioned to take advantage of these changing asphalt trends with East Coast production from the CITGO Asphalt assets and our asphalt terminals in Houston, Oklahoma, and New Mexico.

In addition, we continue to aggressively pursue other asphalt opportunities that will tie in with this strategy. That is why I believe the timing could not be better to purchase the asphalt assets at attractive prices.

This is really the exact same strategy I followed when I was leading Valero. Over the years, we continued to buy distressed assets for pennies on the dollar at a time when no one else really wanted that. It turned out to be a great strategy. It is my belief that we are in the early innings of the asphalt business, which presents a unique opportunity for companies like ours that are willing to invest the capital at this stage in the cycle. With a majority of our terminal expansion projects coming online next year, now with the acquisition of CITGO's asphalt assets, our future has never looked brighter.

Now, I will turn it over to Kurt.

Thanks. Before we get into the details of the acquisition, I would like to briefly go over the third quarter 2007 results as well as provide an update on our strategic growth programs. For those of you who are viewing the slide presentation that can be found on our website, we are now starting on slide number five of that presentation.

In addition to the announcement of the CITGO Asphalt acquisition, I am very excited to announce that our Boards again approved an increase in the quarterly distribution rates, which is the second consecutive increase in our distributions this year. NuStar Energy's quarterly distribution rate increased to $0.985 per unit, or $3.94 per unit on an annual basis, which is an increase of almost 8% over the $0.915 per unit for the third quarter of 2006 and nearly 4% increase over the $0.95 paid last quarter. I am also pleased to say we had a strong coverage ratio of 1.36 times applicable to the limited partners for the first quarter.

With respect to the quarterly distribution rates for NuStar GP Holdings, the distribution rate increases to $0.36 per unit, or $1.44 per unit on an annual basis, which represents a $0.04, or 12.5%, increase over the $0.32 prorated distribution paid in the third quarter of 2006.

Looking at NuStar Energy L.P.'s third quarter 2007 results on slide number six now, NuStar Energy L.P. reported earnings of $45.4 million, or $0.97 per unit. Distributable cash flow available to limited partners from continuing operations was $62.7 million, or $1.34 per unit, for the third quarter. EBITDA from continuing operations was around $140 million.

NuStar Energy's third quarter results were driven by strong performances from the refined product pipelines and refined product terminals business segments. This was mainly due to much higher throughputs on our east and ammonia pipeline systems and the addition of our St. James, Louisiana terminal facility, which we purchased in December of last year. We also benefited from an increase in the FERC's new tariff index of 4.3%, which we began applying to all of our regulated pipelines starting July 1.

Our third quarter results were partially offset by losses in our marketing supply and trading business. For the third quarter, these businesses had an operating loss of around $3.7 million and approximate $2.2 million of the loss was margins-related, while the remainder related to operating expenses, including terminal fees, salaries, and wages of our trading personnel. We are very excited about the knowledge and skills that this new group brings to NuStar, and they will be particularly helpful in assisting us in optimizing the CITGO Asphalt synergies.

We again had some special items, both positive and negative, included in the third-quarter results, as you can see on the bottom of slide six. One of the special items included in the third quarter of '07 results in other income was a $7.3 million gain, or around $0.15 per unit, related to the sale of a coal property in Wyoming that was acquired through the Kaneb purchase in 2005. Also included in the other income category is $5.4 million of income, or $0.12 per unit, related to the business interruption insurance claim for the impact of the fire at Valero's McKee refinery, all of which related to the second quarter of '07. Although Valero Energy's McKee refinery is now running near capacity, there was still a $2.1 million, or around $0.05 per unit, reduction associated with downtime in the quarter. We expect to recognize this amount of income in the fourth quarter when we receive the insurance payment associated with the downtime.

Excluding the impact of these and other special items, earnings applicable to limited partners would have been $38 million, or $0.81 per unit, in the second quarter, which is higher than the third quarter guidance we provided during the second quarter conference call of $0.75 to $0.80 per unit. Looking ahead, now, to the fourth quarter, one of our seasonally-weakest quarters, we expect earnings to be in the range of $0.50 to $0.60 per unit. We continue to expect EBITDA for '07 will be about $30 million higher than in 2006. Expenses for the fourth quarter are expected to be as follows -- operating expense are expected to be in the range of $95 million to $100 million; general and administrator expense, around $17.5 million to $18.5 million; depreciation expense in the range of $28.5 million to $29.5 million; interest expense of $19.5 million to $20.5 million; and income tax expense of $4 million to $4.5 million.

With respect to our capital expenditure forecast for 2007, we are now forecasting total capital expenditures of $270 million, of which $214 million is for internal growth, $14.5 million for separation capital, and $41.5 million for reliability. Strategic capital was down $22 million from the previous guidance we provided, primarily as a result of one of the Amsterdam expansion projects being pushed back slightly in the early 2008.

On the next slide, number seven, you can see the status of our strategic capital program. To date, we have completed more than $80 million of pipeline and terminal expansion projects on the $400 million construction program which are expected to add over $12 million of EBITDA annually. With the exception of our Amsterdam Phase I project, which has been pushed back slightly to the first quarter of 2008, we continue to expect the remaining projects to be completed on time and on budget. We have around $265 million of terminal expansion projects, the majority of which are expected to be completed by early to mid-2008, which will contribute nearly $33 million to EBITDA annually.

Looking beyond 2008, we have just completed our strategic planning process and identified more internal growth projects. Several of these are in development and I expect to have more information for you in the near future.

With that, I would not to shift the discussion back to the acquisition of the CITGO Asphalt Refining Company, starting on slide number nine. With this acquisition, NuStar is now a major player in the asphalt business. CITGO is the largest asphalt supplier on the United States' East Coast. And with our analysis showing factors leading to a tight asphalt market and resulting expectations for our strong forward market, we believe we will be well-positioned to take advantage of these strong fundamentals.

As noted in the press release, the transaction is subject to customary regulatory approvals, including those under the Hart-Scott-Rodino filing with the Federal Trade Commission. We do not anticipate any problems obtaining these approvals, so we expect to close around year-end.

On the next slide, number 10, you can see an overview of the assets being acquired. Although NuStar Energy L.P. -- altogether that is, NuStar Energy, L.P. will add two asphalt refineries with a combined throughput capacity of 104,000 barrels per day and three terminals to our existing asphalt business, which includes eight terminal and nearly 2.6 million barrels of storage. The purchased assets include a 74,000-barrel-per-day asphalt refinery in Paulsboro, New Jersey and a 30,000-barrel-per-day asphalt refinery in Savannah, Georgia, which is the only refinery and asphalt producer on the Southeast seaboard. We are also acquiring three asphalt terminals located at Paulsboro, Savannah, and Wilmington, North Carolina. Combined these assets will contribute an additional 4.8 million barrels of storage to the over 81 million barrels of total storage capacity that NuStar currently has.

In addition, NuStar gains access to 20 terminals, shown on the map to the right as red dots, with a total storage capacity of approximately 3.8 million barrels that are used by the Company and leased from various third parties. Four of these 20 terminals are currently leased from NuStar Energy L.P. The acquisition also includes a commitment from the Venezuelan national oil company, PDVSA, to supply an annual average of 75,000 barrels per day of crude oil, primarily Venezuelan [buscan] and the Bcf 13 crudes, and around 9 million barrels per year of asphalt, or approximately 25,000 barrels per day, over a minimum of seven years period.

As a result, this provides us a secure supply to meet the crude feedstock needs of these refineries, as well as meet any necessary paving and roofing demand above and beyond what is produced by the refineries.

In 2006, CITGO Asphalt Refining Company produced and marketed over 27 million barrels of asphalt and 9 million barrels of light products including naphtha, high-sulfur diesels, and gas oils. This was approximately 15% of total U.S. asphalt consumption.

Turning to the strategic rationale on slide 11, we believe that much of the traditional market for MLP deals offers limited accretion due to pricing valuations for typical logistics assets. Asphalt is an area where assets are priced at below replacement value. In fact, when we exclude the value of the storage at Savannah, Paulsboro, and Wilmington, included in the $450 million purchase price, we believe we're acquiring the asphalt refineries at around 50% of replacement value. With global supply and demand fundamentals for asphalt expected to tighten, resulting in a sustained increase in asphalt margins, we expect this acquisition will generate a very attractive level of accretion to cash flows.

In addition, with this deal, we will continue to diversify NuStar's customer base and expand our geographic presence. It also complements our new marketing, supply, and trading operations.

Slide 12 sums up with what Bill Greehey mentioned earlier about our business. The tight supply and demand fundamentals in the asphalt business are expected to lead to a strong asphalt market. Asphalt is the smallest of three primary consumers of vacuum tower bottoms. As shown by the pie chart in the upper right, asphalt consumes about 12% of global vacuum tower bottoms, with more than half going to fuel oil in bunkers and the remainder consumed in cokers. However, by 2012, as most of the coker projects are expected to be online, the amount of global vacuum tower bottoms slated for fuel oil and bunkers will decrease, while the amount used for coker feed will increase.

As a result, VTB feedstocks used for asphalt production are expected to be squeezed. If new and existing cokers are operated close to their capacities over the next five years, the domestic asphalt market will be significantly more dependent on imports that we believe will lead to higher asphalt margins.

The resulting changes in asphalt trade flows are shown on slide 13. The upper map shows last year's actual U.S. inter-PADD trade flows, with excess asphalt production in the Gulf Coast and the mid-continent areas going to the East and West coasts, where demand exceeds production. Because production from other PADDs is not enough to supply the East and West coasts, net imports are also required. However, with total U.S. demand currently around 520,000 barrels per day, over 85% of U.S. demand is satisfied with production from the same region it is consumed.

Looking forward to 2012, we expect the picture will change dramatically. As you can see in the lower chart, we show anticipated balances at 2012 that would be required to meet asphalt demand under the assumption that new cokers we expect to come online will run at capacity and fuel oil production is not displaced. As coker projects in the mid-continent and the Gulf Coast come on stream, the mid-continent area becomes net consumers and can no longer help supply the East and West Coast regions. As a result, imports to the East and Gulf Coast would have to increase dramatically, as well as increased flows to the Gulf Coast to satisfy mid-continent asphalt demand.

We are also forecasting a similar tightening in the world asphalt markets, which would limit the amount of available imports to the United States. As a result, we expect to see favorable margins as asphalt competes with cokers and fuel oil for the limited supply of vacuum tower bottoms. NuStar now would be well-positioned to take advantage of these expected higher asphalt margins with East Coast production from the CITGO Asphalt assets to be acquired and our own asphalt terminals in Houston, Oklahoma, and New Mexico.

We believe CITGO Asphalt acquisition will be accretive to earnings and distributable cash flows as covered on slide 14. For purposes of calculating EBITDA and accretion to distributable cash flows, we have used NuStar's recently-approved 2008 budget. Due to the change in pricing for crude sold to CITGO Asphalt, we have created financial projections for the business based on our projected economics.

We are assuming that the deal will close around year-end. Although we have calculated working capital at closing to be around $100 million, average net working capital throughout the year is estimated at around $225 million. Based on our forward projections, the purchase price, including $225 million of average inventories, is at a multiple of expected EBITDA typical for a refining business.

We expect to finance the acquisition prudently, with at least 50% equity, including potentially a hybrid security. In our projections, we have also assumed a holdback of 50% of the cash flows from the asphalt business to account for the seasonality that comes with owning a processing business like CITGO Asphalt. In other words, we initially planned to run two times distributable cash flow cover, a portion of our distribution which would come from the asphalt business.

Furthermore, I would like to note that the CITGO Asphalt business is seasonal, with the first and fourth quarters of each year being the weakest. Typically, asphalt demand is higher in the summer months when municipalities are paving roads. As a result, we do not expect to see a material contribution to cash flows from this asphalt business until the second quarter of 2008.

Distributable cash flow per unit accretion, assuming a 50% holdback, is expected to be in the range of mid to high-single-digit percentage for NuStar Energy L.P. and given the incentive distribution rights, it is expected to be close to double that for NuStar GP Holdings, LLC.

In summary, I would like to conclude by reiterating a few of the many reasons why we expect this proposed acquisition to be a great deal for our investors. This acquisition provides a major entry into the U.S. East Coast market, a market that is expected benefit from tightening supply and demand fundamentals. We believe we are acquiring these assets for the right price at the right time. Because traditional MLP investments in logistics assets have become more expensive, we feel asphalt assets have been overlooked by both MLPs and by refinery consolidators, representing one of the few areas where assets are priced well below their replacement values.

With our expertise and plan going forward, we believe we have the necessary strategy to handle the commodity risk that goes along with owning production facilities. We've recently added a team of employees with extensive background in refining and asphalt marketing that will help run the new business. As I have mentioned, this transaction is expected to be distributable cash flow accretive.

That concludes my prepared remarks, and we would like to now open it up for questions and answers.

(OPERATOR INSTRUCTIONS) Gabe Moreen, Merrill Lynch.

Congratulations on the transaction. I had a couple quick questions in terms of margin assumptions you are using, if you can give us a dollar per ton or dollar per barrel assumption for '08 for the margins and perhaps put that in the context of, let's say, what the refineries would achieve, let's say, this year.

Yes, I think we are constrained. I am looking at Steve. We are constrained from putting out a specific margin number at this time. Steve, you might want to tackle that one.

Yes, that is pretty much it. Given where we are on the acquisition and financing plan, we cannot say a lot about projections, unfortunately, but as much as we can say is that the enterprise value for this based on average incomes inventories, we are paying the typical multiple for EBITDA that you would pay for this sort of business, refining business.

Which, of course, is significantly lower than the typical MLP acquisition multiples. As we said, we expect the return from the acquisition to be much higher than we would from our internal growth projects and from other mainstream MLP acquisitions that we have looked out. So we may have to leave it more or less at that at this time.

I will say this -- asphalt rack prices have never been higher than they are. They are much higher than they were in the past and because of the -- our bullishness on the supply and demand fundamentals, we do expect over the next five years very attractive margins in this business. I do not think we can say to much more than that. As Steve said, because of the legal constraints of upcoming financing. The other thing I might add to that it is -- I think I probably should leave it at that for now and we'll get back to you with any more detail that we can possibly give off-line.

Okay, maybe I can follow up with that. Curt, you mentioned rack prices for asphalt being extremely high, but you've seen Valero and [alone] come out with some comments how difficult the asphalt markets have been of late. I guess I am really just directionally trying to get a sense of what you are assuming for '08 as well as maybe of you can comment on I guess some of what are now your competitors' comments on current asphalt markets.

Yes, of course we're not making the CITGO acquisition based on the third or fourth quarter asphalt market. We are buying this for the long-term and how we see the trend in this business. Even if you look at '06 and '07, I think you'll see the trend is higher. We think going forward it is going to be even higher. So short-term fluctuations, whether it is in asphalt margins or gasoline margins or anything else, really do not drive an acquisition decision. It is more the longer-term fundamentals.

Fair enough. A couple more, if I could. Is there any ability to hedge your output here, asphalt output in general?

You know, on risk mitigation, if you will, on that subject, one of the things I threw out in my remarks was we're doing a two times cover instead of a 1 or 1.2 or 1.3 times cover like you normally see at NuStar Energy. So we are holding back a lot of the available cash flow in the form of a much higher coverage ratio for this business. That is one. Another is we can explore some deals on the marketing side that help to mitigate the risk, but, really, I would say we have got to be careful on that because we don't -- if we really believe in the story that I just told you, we do not want to give away too much of the upside by trying to lock in a number that we would regret later.

So I think it is a seasonal business. It does have strong quarters and weak quarters, so we are introducing some of that, but overall, we're going to be adding an awful lot of profit to the bottom line of this company. Of course, most of our business, still, even after this, is a more traditional type pipeline and terminal business, where we collect tariffs and we collect fees and lease rentals, which is a fee-based, steady-state business. So we have that natural hedge within NuStar Energy anyway.

Any turnaround scheduled for either of these facilities in the near to medium-term?

I guess they normally -- they do some turnaround work as we go into the winter right now. I would expect that to happen. They do not do them both at the same time. They do one refinery and then the other, but I am looking at the head of our operations here, Rick Bluntzer. By the time we close, it should be --

They stagger their turnaround schedule and that coincides, basically, at the beginning of the year to take advantage of the slow months and then they come up on production.

So that is typically how they run it.

So that is an annual sort of affair or occurrence?

That has been their mode of operation, that something --

We have not gotten in there yet to look at how they are operating and where we could be more efficient and squeeze more out of the operation. That is something we will certainly be looking at. The good thing is we have got some great people to do that and Rick has some great people that can do that. One of whom is an ex-refinery manager at Valero, Mike [Pesh], so we have got very experienced people looking at ways -- that are going to look at ways to optimize this operation.

Last question for me, there's been some stories out there about conventional refiners coming on the market over the next couple months. Any thoughts about possibly being interested in those type of assets?

You know, really, what we're telling you is really a bottom of the barrel story, and so the more you look at faux-conversion refineries, that is a different analysis. So I think what we are telling you is we are buying these because we want more exposure to the processing and the marketing and the distribution of asphalt. We like the whole supply chain of it, so if a refinery really does not fit that story. I think we would be hard pressed to fit it into that story.

Got it. Thanks very much, everyone.

It is a niche market.

Darren Horowitz, Raymond James.

Just a quick question on the marketing business. When you look at that business now, you lost some money on it, as you reported, and it looks like you had a little bit of operating expense escalation. Can you just remind us as to your expectations for this business going forward? It looks like when you get into 2008, the back half anyway, this new asphalt acquisition will give these guys a great platform to lever from. So can you just give us some color on your expectations there and how we should look at that business going forward?

I think I'm going to turn over to Paul Brattlof to explain a little bit about what happened in the third quarter here and I can pick up if I need to. Paul, would you care to?

Sure. What happened in here, we had -- most of the margin loss is really timing differences. We bought inventory that we have -- to start our business, and we've hedged all of that inventory. And as you know, the markets have gone straight up, and we have had to report some of the hedging losses that associate with this physical inventory that we've bought that will be sold in the next quarter. So we think we're going to get that back in the next quarter as the winter approaches.

Just on your point on the operating expenses, really they are just starting up. So half the loss was really just salary and certain setup costs. And to your point is they now have production facilities in 23 terminals to market, additional to market through.

You know, they'll be able to crack that operating expense not a whole lot or easily. I mean, half of Paul's group is really on the asphalt marketing side, so they're going to have something to do here real soon.

Okay, thank you.

Ross Payne, Wachovia Capital Markets.

First question, is this kind of asset typical to what we may see on an ongoing basis being put into the Company?

Well, we are going to look at more asphalt deals if we can make them work. We believe in the story. We have researched it very hard this year. If we find the right deals at the right price, we are going to do more of them, yes.

We have not abandoned -- having said that, we have not abandoned our traditional business. I mean, just look at our numbers. A big part of our business is a more traditional pipeline in terminal business and will continue to be, but we would love to do more deals like this one.

Okay. Also in Savannah, it looks like -- is that a plant that you might expect to expand given its geographic proximity, etc.?

I think we have got to go in and look at it. I do not think we're at the stage yet where we really could talk about specific expansion projects, but we did not assume we would in order to justify the acquisition. We thought we would keep it at 30,000 barrel a day capacity running the crude slate that has been run in the past. So even with that, without any further upside, the numbers came in really, really strong.

Okay. One other question. Is there much switching from concrete to asphalt in certain applications? How do you see the higher cost of asphalt and crude playing into that, if it all?

No, I do not really see that as a major factor. When you really look at the global demand and supply and the price competitiveness of the asphalt products, we did not see that as really a major factor. Mike, do you have a further comment on this? Mike [Olslo], head of development, who did a lot of the research and background work for the management team.

Asphalt price is going up, the concrete price is energy-intensive as well. It is going up at the same rate, also the steel used for the reinforcing market. The asphalt cement is only 5% of total hot mix that goes on the road, so even though the price of asphalt goes up, it is still a very small part of the total road construction cost.

All right, that is very helpful. Thank you.

Michael Blum, Wachovia Securities.

A couple of questions. I guess one, the economics that you are citing for this acquisition, is that just based on the current run rate of the business? You're not including potentially any expansions and the like?

Well, you know there's two parts to that question. First, current run rate, not really, because there is a lot that is going to change here, for example the way that PDVSA was selling the crude in the past is not the way they will be selling the crude in the future, so we had some make assumptions about the changes on that. But the other part of it -- repeat the second part of the question again.

Just does your economics assumed any expansions of your refineries or anything like that?

No, it does not assume any expansions, no.

I guess related that, assuming your thesis is correct and I think Mr. Greehey said 150,000-barrel-a-day potential shortfall, can you expand these refineries?

Well, I think theoretically yes, but we have got to go in and see really what makes economic sense. We haven't -- as I said, we have not had the opportunity to do that, therefore we have not assumed that we're going to do it. We ran the economics based on the current capacities, current throughputs.

Okay, thank you.

Barrett Blaschke, RBC Capital Markets.

I just had one quick question. When you made the comment about basically this being done at comparable multiples to other refinery transactions, what are you seeing that range as, I guess?

Well, if you look back of the last ten years, refiners have traded around 4.5 times on that (inaudible). That is looking at every deal in the last ten years.

So that 4.5 to 5.5 type range is what the past showed.

Okay, thank you. That is all I had.

Brian Darin.

Question on the purchase price. Could you provide an estimate of what the split is between the refinery and the terminal assets?

Yes, we can do that. Split between refinery and terminal assets on the purchase.

If you looked at the total tankage, including the tankage supply in the refinery operation, it's about $200 million is the market value for the tankage cost, versus $250 million for the refineries. If you look at just the terminals themselves, about $80 million is related to the terminals.

Okay, that is helpful. In terms of the seasonality of the asphalt business, can you give an order of magnitude between the summer and winter months? I mean, is pretty much all the cash flow in the summer months and we could expect -- just trying to get an idea of percentage what we should be thinking about.

It is a significant swing between summer and winter, yes.

For example, our crude contract is going to supply 60,000 barrels a day in the winter months and 90,000 barrels a day in the summer months, and that's -- probably we're going to even have to use inventories to dampen the seasonal flows. So I would say about 75% is during the six summer months.

With the first being the particularly weakest quarter. The fourth we kind of see as a draw compared to what we would produce without this business, but in the first, we would expect lower earnings because of this business, but then significantly stronger in the second and the third.

We do -- we will look at opportunities, too, to see what more we can do with the winter, either with refineries or through our asphalt marketing group, a winter field strategy to store so that you can sell for higher price in the summer. That is where Paul's people can help us.

Okay, in terms of the lands -- the competitive landscape in the East Coast, can you give us who the larger competitors are in asphalt refineries and terminals?

On the East Coast, not much, but --

There's only about four other refineries. Chevron Perth Amboy is the second behind CITGO and they have not been operating strongly the last year. We have got -- United is one, I believe.

And the imports you saw on the graph.

Most of the imports come into the East Coast and they are from Venezuela. And our contract is giving us control of most of those imports.

Okay, very good. One last question. Looking at third quarter earnings, can you provide a little more color on the average tariff rate in the product pipelines business? There seemed to be a big bump year over year.

Well, we had that FERC adjustment of 4.3% this year, so that was --

That is pretty much the color.

I think the volumes were down. I guess on a per-barrel basis, it seemed to be quite high.

Do not forget we had the McKee refinery fire this year, so physical throughputs were down. Even though we were financially compensated, or are in the process of being financially compensated via insurance, the physical throughputs were lower.

The business interruption goes into other income, so it would not show up in the segment revenue. So it is a distortion between the tariff increase you get from FERC and add to that, the throughput barrels are down because of the fire with the [PDI] offset going into other income.

Thank you.

John Tysseland, Citi.

Real quick, what do you see as the biggest risk for your thesis in asphalt at this point in time? What are going to be -- how should we go about monitoring margins in this business over the course of the next several years?

Well, I really do not -- we like it. That is why we're getting into it, so I do not really see any significant downside to it. I think, yes, the coker projects coming on is really of course a bullish factor, so we have told you there are a bunch of them. There something like 21 coker projects now just in the United States that are either committed or probable. So that is something we will certainly be monitoring as those roll forward.

We do not really see any asphalt-specific production being added. You might get little bit here and there out of like the Port Arthur expansion and so forth that Motiva has, but basically no one is going out there to build topping plans to produce asphalt.

Are imports a concern here? If margins get attractive, is that something that -- (multiple speakers)

Not really, because the call on imports we don't think will be met. There's going to be a net short acquiring imports, but as Mike said, we have a contract to import the Venezuelan asphalt and as for the rest of it, because of global demand, we do not think it is going to be met and the prices are going to get higher. And so there'll be a call for those imports, but whether they actually show up or not is another question.

Last question is given the attractive multiple, I assume that maintenance CapEx and operating costs or just more or less ongoing CapEx for these types of assets is going to the little bit higher, so you're free cash flow might not be quite as good as that multiple would make you believe. But is that -- am I kind of on the right track there, or I guess more or less, how do you think about maintenance CapEx in this business and on an order of magnitude versus other assets that you have, how much more capital-intensive is it?

The maintenance capital is not nearly as high as you would expect in a full fuel refinery. Actually most of the asphalt assets are logistics, the tanks and pipes required to operate in the business, because you only have the topping units as the refining process. So we're looking at $25 million of reliability for the Carco business in the '08 on top of the $50 million approximately that we are guiding for the base business on reliability.

All right, thanks, guys. I appreciate it.

(OPERATOR INSTRUCTIONS) Gabe Moreen, Merrill Lynch.

Just one follow-up on the potential uses of the hybrid securities. Just wondering if I can kind of get what your thought process is around the pros and cons of utilizing that avenue to fund at least part of the transaction.

Well, we think it is mostly a pro, because unlike a common unit issuance where you are kind of committed to grow the distribution by a certain percentage, we talk about 7% growth over the next five years before this Carco deal, but when we were IPOing the GP, Curt and I were talking about 7% distribution to (inaudible) . So that gets expensive after time, growing the distribution on the common. So a hybrid with a fixed coupon is very attractive particularly to an MLP, so we would try to optimize as much as we could the use of the hybrid to come up with at least 50% equity content that we intend to lay out.

But by no means are we ruling out common equity issuance. We think that is appropriate as well. It is just a question of timing around closing of the acquisition and all of that, so we have not issued common equity since 2003, so it has been a longtime. Our debt to EBITDA is very manageable, at about 4.2, 4.3 times. The debt-to-cap is very manageable at 45%. We're going to grow this business, both asphalt and the rest of the business. As Curt mentioned and Mr. Greehey mentioned at the outset, we've got a lot of organic growth projects building out these terminals we are still developing, not just the $400 million program we have talked about, but we have just shared with our Board in the budget a lot of other things we want to do. So we have got a real need for capital debt and equity over the next two years to really keep growing this

I guess to follow-up to that, is there a minimum size you feel that you need to do to make one of these hybrid issuances viable?

Not really. I think on a transaction like this, you could easily accommodate a $400 million hybrid. We've got to come up with $550 million at the purchase price. We are intending to upsize our revolver and we will be going out pretty soon on that to give plenty of financial muscle here and then we'll just opportunistically access the hybrid and common equity markets over the next seven months as closing approaches.

Thanks, Steve.

Louis [Shamey], Zimmer Lucas.

Congratulations on the acquisition. I just wanted a little bit more information on the crude supply contract with PDVSA. Exactly how does that work and how does that pricing compare WTI?

It is a long-term contract and we have a market pricing with price protection in relation to a similar quality crude. So obviously it is discounted off of WTI quite substantially. But because the quality of the crudes we are running here -- they are low-API, high-sulfur crudes that are great for making asphalt. So I am not sure what more -- Mike, do you want to add anything to that?

It is priced off of a formula that Venezuela will be using for all their crude sales and it is -- the protection gives us protection against Maya crude and it is discounted even below the Maya.

You may know that Mayan Mexican crude is also a heavy crude, though it is lighter than the ones we will be running here.

Got it. Then in terms of what kind of yield do you typically get from a barrel of crude in terms of asphalt and like product production?

I think, about, what, about three-quarters of the production is asphalt?

60 to 75% is asphalt. The two crudes we are getting are the Bcf 13, which is a little over 60% asphalt, and the buscan, which is almost 75% asphalt.

A little different in the two plants but, you know, the rest is the intermediates we mentioned.

Okay. And in terms of the existing CapEx projects --

(multiple speakers) say this too, the quality, we just talked about quantity there, but the quality is unsurpassed. The quality of asphalt, particularly the buscan crude makes, is of the highest quality.

If you're familiar with the PG grades, it is one of the few straight crudes that can make 7022 and 6428 type asphalts without the addition of polymer.

Okay, then on the financing side, in terms of the terminal expansions that you've already announced, would you consider yourselves, aside from this acquisition, needing to finance any of that with equity?

No.

Great, thanks.

There are no further questions at this time. Do you have any closing remarks?

Just thank you, operator. If you have any follow-up questions, please call us at Investor Relations. Thank you for joining us today.

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