NuStar Energy LP (NS) 2009 Q2 法說會逐字稿

Good afternoon. My name is Carra and I'll be your conference operator today. At this time I would like to welcome everyone to the NuStar Energy LP and NuStar GP Holdings LLC second quarter 2009 earnings conference call. After the speakers remarks there will be a question and answer session. (Operator Instructions). Thank you.

Mr. Meador, you may begin your conference.

Thank you, Operator. Good afternoon and welcome to our conference call to discuss NuStar Energy LP, and NuStar GP Holdings LLC second quarter 2009 earnings results.

If you have not received the earnings releases and would like copies of each, you may obtain them from our website at www.nustarenergy.com and nustargp.com. Attached to the earnings releases we have provided additional financial information for both companies including information on NuStar Energy LP's business segments. In addition, we have posted operating highlights and fundamental data for our Asphalt operations under the Investors portion of the NuStar Energy LP website. If after reviewing the attached tables and operating highlights you have questions on the information that is presented there, please feel free to contact us after the 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.

Before we get started we would like to remind you that during the course of this call, NuStar management will make certain statements concerning the future performance of NuStar and other statements that will be forward-looking statements as defined by securities laws. These statements reflect our current views with regard to future events and are subject to various risks, uncertainties and assumptions. Actual results may materially differ from those discussed in these forward-looking statements and you should refer to the additional information contained in NuStar Energy LP and NuStar GP Holdings annual reports on Form 10-K's for the year ended December 31, 2008 and subsequent filings with the Securities and Exchange Commission.

During the course of this call we will also make reference to certain non-GAAP financial measures. We have provided an additional schedule under the Investors and Financial portion of the SEC files portion of the NuStar Energy LP website reconciling these non-GAAP financial measures to their most directly comparable financial measure calculated in pursuant in accordance with US Generally Accepted Accounting Principles, or GAAP Our non-GAAP financial measures should not be considered as alternatives to GAAP measures such as net income, operating income, net cash flows provided by operating activities or any other GAAP measure of liquidity or financial performance.

I'll now turn the call over to Curt.

Good afternoon and thanks for joining us. I'm very excited to say that NuStar Energy and NuStar GP Holdings both reported record second quarter earnings. These results were also the second highest earnings of any quarter in NuStar's history. The LP's results not only exceeded the high end of our previous guidance range of $1.10 to $1.25 per unit but also beat analyst projections. At the LP, we reported second quarter earnings of $75.1 million, or $1.38 per unit, while the GP reported earnings of $21.4 million, or $0.50 per unit.

The LP's second quarter earnings included the benefit of an $18.8 million, or $0.34 per unit net gain primarily related to the sale of two non-strategic pipelines; the Ardmore-Winnie Wood products line in Oklahoma and the Trans-Texas pipeline. Excluding the impact from the sale of those pipelines and other items, second quarter 2009 adjusted earnings would have been $56.7 million, or $1.04 per unit. That still represents a record for the second quarter and it's the second highest quarterly earnings in NuStar's history. In addition, it is a nearly 600% increase over the $8.1 million, or $0.15 per unit earned in the second quarter last year. I was really pleased with the performance of our Storage and Asphalt businesses which were the main drivers for our record second quarter results. Earnings for both of those businesses significantly exceeded last years results. And so far this year, our results reflect a strong financial performance during a period of challenging market conditions.

The LP's distributable cash flow applicable to Limited Partners of $123.4 million, or $2.27 per unit, was also a record for the second quarter and nearly four times higher than the $31.5 million, or $0.58 per unit reported last year. We left the second quarter 2009 distribution unchanged from the prior quarter but we still expect to recommend to each Board of Directors a distribution increase for both the LP and the GP this year. For the second quarter of 2009, the LP Board declared a $1.0575 per unit distribution payable August 13, 2009, and the GP Board declared a $0.43 per unit distribution payable August 18. These distributions were both increases over the second quarter of last year with the LP distribution representing a 7.4% increase and the GP distribution representing a 19.4% increase. We also had very strong distribution coverage ratio of 2.14 times applicable to the Limited Partners for the second quarter of 2009. We expect to continue to maintain a higher coverage ratio to account for the seasonality of our Asphalt operations. However we don't expect the coverage ratio to remain this high through to the end of the year.

Now I'd like to review the second quarter results for each of our business segments. The biggest driver for our increased second quarter 2009 earnings compared to last year was our Asphalt operations. Those operations generated EBITDA of $46 million compared to negative $4.1 million last year or an increase of over $50 million. Last years second quarter earnings were burdened with the $61.3 million, or $1.10 per unit hedge loss we incurred in the Asphalt and Fuels Marketing segment. Our Asphalt operations primarily benefited from a significantly higher margin per barrel of $9.10 compared to $1.37 last year. $9.10 per barrel is also higher than the $8.89 per barrel last year after adjusting for the hedging loss. Our strategy of producing and storing Asphalt inventory at lower costs during the winter months and selling those inventories at higher prices during the Asphalt season allowed us to capture a generous margin in the second quarter.

We also benefited during the second quarter from a wide light-heavy discount in the crude oil we buy from the Venezuelans. While light-heavy crude oil discounts have been poor for complex refiners, the differentials on the Venezuelan crude we purchased for us to produce asphalt continue to be attractive. For example, the discount to WTI for both the Boscan and the [Batch Cara] 13 grades that we purchased averaged around $10 per barrel for the second quarter of 2009. That compares very favorably to for example, the Maya heavy-sour crude oil discount versus WTI of around $4.50 per barrel in the second quarter. So our discount was over double of that of other comparable heavy-sour crudes which benefited our margin. While our Asphalt sales volumes were negatively impacted at the start of the second quarter as a result of unseasonably wet weather on the US East Coast, we saw a marked improvement by the end of the quarter. Companies are unable to pave roads during wet weather because it can have a harmful effect to the quality of the finished pavement.

Compared to last year, our second quarter total sales volumes were lower by around 14% but the impact from the weather has only resulted in a deferral, not a cancellation, of road work projects. As a result I expect Asphalt sales volumes in the third quarter of 2009 to be significantly higher than in the second quarter as well as the third quarter of last year. In addition, we're seeing sales volumes increase in the second half of this year now that the weather has improved, deferred projects have been starting up and the stimulus funds are finally being put to work. I'd like to point out that while it's been a slow start to stimulus spending, we should start to see project spending ramp up in the second half of this year and even more so in 2010, and that's right on target with what we expected and what I've said previously. In other words, some of the stimulus spending would incur in 2009 but most of it would be expected to occur in 2010 and even 2011. Keep in mind a large portion of the stimulus funds are around 50% of the 26.8 billion available for highways have been apportioned to states in which NuStar markets rack Asphalt volumes. So it's not a matter of whether it's going to have a positive impact on our demand, it's just a matter of when.

Operating income in our Fuels Marketing operations was slightly positive as operating income from the Bunkery business of $3.7 million was mostly offset by a $3.1 million loss in our Product Supply in trading, wholesale and fuel oil trading operation. Because of increases principally in refined product prices that resulted in mark-to-market adjustments of some of our NYMEX hedges, against physical storage positions that we have taken, the margin we earned in our product supply and training and wholesale operations was negatively impacted. We fully expect to capture the physical appreciation associated with these products that we hold in storage as the products are sold and the associated hedges removed and the profit booked later this year.

Turning to our Storage segment, we continue to see very solid results from that part of our business. Operating income increased over $6.5 million, or nearly 20% compared to last years second quarter. Most of the increase was related to higher revenues associated with tank expansion projects completed under our 400 million construction program, but we also benefited from renewals of lease storage contracts at higher rates due to continued strong demand for our storage. Lower operating expenses, due to a decrease in power costs from lower natural gas prices, also boosted our bottom line in the storage segment. I expect we will continue to see strong results from our storage business for the remainder of the year as previously completed projects and rate increases will have a positive impact to earnings.

Based on our latest forecast we're targeting incremental EBITDA of around $38 million in 2009. Of the 38 million, approximately 20% is related to rate increases and the remainder, about 80%, is related to completed projects which is consistent with what we've been saying all along. And finally, operating income on our Transportation segment despite being around $5.3 million, or around 16% lower than the second quarter last year, actually did about $3 million better than we had anticipated at the beginning of the second quarter primarily due to lower than expected power costs. This is another great example of how our Transportation business is effectively hedged in ways that go beyond just tariff adjustments. When the economy is weaker and throughputs are down, pipeline energy costs tend to be lower as well.

The majority of the volume and revenue decline second quarter to second quarter was principally related to the impact of planned turnarounds at two of our customers refineries and a number of unplanned operational outages at two other refineries we serve. Of the $8.3 million decline in revenues, about $5.7 million or 69%, was related to the refinery downtime. And of the 200,000 barrel per day decline, approximately 98,000 barrels per day, or 49%, was also due to these outages. Our pipeline volumes were also impacted by lower volumes on our El Paso to Santa Fe pipeline space because as you will recall a shipper acquired our JV Partners interest last year and is now shipping product on its purchase base rather than our space. And that resulted in volumes being lower by around 34,000 barrels per day. However, the revenue associated with that volume decline is minimal or only around $400,000 of the overall $8.3 million revenue decline.

In addition, throughputs on our ammonia line were approximately 6,000 a day lower versus last year, unseasonably wet and cold weather in the Midwest in the first half of 2009 affected throughputs together with high inventory levels carried over from a late 2008 planting season. With Air Force spec throughputs on our ammonia line to improve in the second half of this year, corn plantings are still high and the renewable fuels mandate will continue to support throughputs on this system long term. And finally, while we are pleased with the sales price for the Ardmore-Winnie Wood and Trans-Texas lines in the second quarter of 2009, the sale also resulted in second quarter throughputs being lower by around 7,000 barrels per day. So of the 200,000 per day decline for the second quarter of 2009, around 145,000 barrels per day of that 200 or 73% was related to one off issues. Excluding the impact of those items, our second quarter throughputs were really down around 5% compared to last year in line with or better than the national average in this deeply recessionary year.

While Transportation revenues were less, we did benefit from around $3 million in lower operating expenses versus last year primarily due to lower power costs as a result of both reduced natural gas prices and reduced throughputs. The good news is that we've started benefiting now from the 7.6% tariff increase which went into effect July 1 for approximately 95% of all Transportation segment revenues. And even with lower throughputs in 2009, we continue to expect operating income for the Transportation segment to be slightly higher than 2008, as the tariff increase, the lower operating expenses and the completion of the East pipeline expansion project should offset the impact of lower throughputs.

Turning to some of our expenses for the second quarter, operating expense came in at $110 million, around $15 to $20 million lower than our previous guidance but approximately $3.5 million higher than second quarter last year. The reason for the large variance versus guidance was primarily due to lower than expected power costs and lower maintenance costs. Due to the unplanned outages and extended turnaround at the refineries we serve, as well as lower than expected natural gas prices, our power costs came in much lower than forecast. Lower than expected maintenance costs were the result of some of these costs slipping to the third and fourth quarters. G&A expenses were $6.3 million higher than the second quarter of last year and slightly higher than previous guidance. The majority of the increase compared to last year was due to the impact of an increase in the unit price in the second quarter of 2009. That increase had on our unit compensation expense versus a decrease in price in the second quarter of 2008. To a lesser degree, hiring additional employees associated with the former Citgo Asphalt Refining and Marketing business as well as to support the Companies other businesses also resulted in higher G&A.

Depreciation and amortization was roughly flat compared to the second quarter of last year and almost $2 million lower than our previous guidance. We benefited from significantly lower interest expense compared to last year or almost $5 million lower. This was mainly due to lower interest rates on our revolving credit facility. The average interest rate on our revolver was over 200 basis points lower than last year. We also benefited from a lower revolver balance because of reduced working capital requirements as crude oil prices were more than $40 per barrel less than last year. The last income tax expense was slightly lower compared to last year and around $3 million lower than our guidance. The variance versus guidance was mainly due to lower than expected insurance proceeds received for the damage incurred at Texas City from the Hurricane Ike and a larger than expected foreign exchange loss related to our Canadian subsidiary due to the decline in the US dollar. Both of these are considered taxable items.

We continue to make very good headway on our 2009 strategic capital program. As you might recall, earlier this year we were cautious on our capital spending given the challenging economic and capital market conditions. As a result, we lightened our growth program to approximately $80 million. However, with markets improving, our growth program currently stands higher at nearly $98 million and we continue to identify more projects. So far, through the second quarter of 2009, we have spent $51 million on high return growth projects. One of the major projects just recently completed is a $16 million pipeline expansion on the Southern end of the East pipeline. That project will allow us to increase the capacity and flexibility to accommodate new and existing customers and should contribute an incremental $4.2 million of operating income annually. Keep in mind our East line benefits from market areas that are more agricultural versus population-center based since it primarily serves farming communities. As a result, it has held up well in the midst of a weak economy and should benefit from the expanded capacity.

For the remainder of the year and into 2010, we will be primarily focused on completing various tank expansion and pipeline projects at Texas City, St. James, Louisiana, and Savannah, Georgia, and other high return projects at our Asphalt plants in Paulsboro, New Jersey and Savannah. Overall the $98 million of capital spending should contribute an incremental $27 million of operating income annually. Our balance sheet and liquidity position continues to be strong and we're still targeting a debt to EBITDA ratio in the range of three and one-half to four times by the end of the year. I'm excited to report that Moody's just recently raised their outlook on our public bonds from negative to stable, with both Fitch and Moody's now at a stable outlook for NuStar, we're nearly to the finish line in getting the negative outlook removed from all three agencies.

At the end of the second quarter, we had $363 million available under the revolving credit facility even with higher seasonal inventories and higher crude prices. As inventories start to seasonally decline during the second half of the year, our working capital requirements should decline as well, assuming the price of crude doesn't increase significantly from here. As a result, we are currently targeting our revolver availability to be in excess of $500 million by the end of the year. With improving capital markets and ample liquidity, we are well positioned to pursue additional acquisition and internal growth opportunities. The outlook for the second half of the year looks especially strong now that we're getting into an asphalt season that has been essentially deferred because of wet weather and because our storage segment should benefit from tank expansion projects completed last year.

With respect to our Asphalt operation, Asphalt Markets continue to be tight as supply remains at historically low levels and Asphalt sales volumes are increasing. A number of factors continue to keep Asphalt inventories at historically low levels. US refiners have continued to cut crude oil runs to avoid driving already weak light product margins lower. As a result, all refinery production including asphalt is being reduced. With narrow light-heavy crude oil spreads, complex refiners are running less heavy-crude and more light crude resulting in less bottom of the barrel being produced, including asphalt. Through May 2009, asphalt production was more than 5% lower versus last year and nearly 15% lower than the five year average. And on top of that, the continued lack of asphalt imports is also resulting in lower supply. Imports are almost 20% lower than last year and more than 26% lower than the five year average. And while some coker projects have been delayed or cancelled as a result of weak margins, we continue to see a significant amount of coker capacity coming online over the next few years and that should also constrain asphalt supply going forward. We have seen only one coker project canceled since our June update. This was a project that the Pasadena Refining System refinery in Texas which is one of the smallest Coker projects and one that we had not categorized as a firm project anyway, in other words they were not fully committed to the project, None of the firm coker projects we are tracking have been cancelled or delayed since that time.

Turning to highway funding, Congress just last week voted to stabilize the Highway Trust Fund for the 2009 fiscal year bypassing legislation to transfer $7 billion into the account which is another indication that Congress is fully committed to funding highways. With Safety (inaudible) September 2009 expiration date upon us, Congress is currently considering multiple options to allow the Federal Government to continue and possibly to substantially increase long-term transportation infrastructure investments. We continue to see positive discussion around a bill that would authorize significantly larger multi-year program with safety [lift]. This bill is currently called the Surface Transportation Authorization Act of 2009 and would authorize $500 billion for fiscal years 2010 through 2015, including approximately $337 billion for highways. That would be quite a substantial increase over the approximately $200 billion under the current highway program.

While there has been a push for swift passage of this bill, the Obama administration and the Senate are considering a different approach that would extend current federal Highway and Public Transportation programs and funding levels for another 18 months. In addition, the plan would infuse the Highway Trust Fund with enough funding to cover any shortfalls during the extension period. But during the time of this 18 month extension, Congress would continue to work toward passing a long term reauthorization of safety loop. Regardless of which path they choose, both are good for NuStar as Congress has shown its clear committment to continue investing in transportation infrastructure and the trend of federal spending in this area appears to be upward. Based on our current forecast, we are still projecting the EBITDA contribution for the Asphalt operations to be in the range of $100 to $140 million for the full year of 2009. While we expect a significant contribution from our Asphalt operations in the third quarter, it will likely not be nearly as large as the third quarter of last year because the rapid increase in crude oil prices in last years second quarter resulted in unusually strong asphalt margins concentrated in the third quarter. So most of the contribution last year was compressed into the third quarter as asphalt and product prices ran up following the dramatic increase in crude prices in the second quarter.

The fourth quarter of 2008 was then negatively impacted by the subsequent steep decline in product prices which lagged a drop in crude oil prices and negatively impacted our gross margin. This year we expect a contribution from Asphalt to be more evenly spread over the third and the fourth quarters. With respect to our results for the third quarter of 2009, we expect earnings per unit to be in the range of $1.10 to $1.50. As far as planned turnarounds scheduled for the second half of 2009 that would impact our pipeline, we've known for some time of a plant wide turnaround schedule that Valero's Three Rivers Texas refinery and some additional maintenance work that's scheduled for Valero's Ardmore, Oklahoma refinery.

Looking at some expense estimates for the third quarter of 2009, operating expenses are expected to be in the range of $130 to $135 million, G&A expense in the range of $24 to $25 million, depreciation and amortization around $36 to $37 million, interest expense $19 to $20 million, and income tax expense of $2 to $3 million. Our guidance for reliability capital expenditures has not changed as we continue to target around $70 million for reliability capital. As I've mentioned, we are now targeting around $98 million for internal growth projects for the full year of 2009. In the second quarter of 2009, we spent $10.5 million for reliability and $29.9 million for internal growth projects, the majority of that related to our storage business. In closing we continue to be well positioned to execute our game plan. Our solid balance sheet, investment grade rating and emphasis on financial discipline in a period of weak economic times will allow us to continue to grow all three of our segments and more importantly grow the distribution. We have a large portfolio of growth projects that we're working through for this fall's budget and strategic plan. And we've made tremendous strides in making NuStar one of the best places to work as we continue to excel in safety and environmental, take care of our employees and give back to the communities in which we operate.

So at this time, operator, I will open it up for Q&A.

(Operator Instructions). We'll pause for just a moment to compile the Q&A roster.

Your first question comes from the line of Brian Zarahn with Barclay Capital.

Good afternoon.

Good afternoon.

Excluding the gain from the asset sale, what was the EBITDA and DCS in the quarter?

Well you just back out the $29 million. Well what was the gain, Mark?

Same as the 18.8 so if you exclude it from EBITDA it was roughly $123.1 million for adjusted EBITDA and DCF was around $113 million.

So the coverage ratio--

It would have been 1.8. Yes, 1.8 on the coverage ratio.

And congratulations on the Moody's revision. Can you give us an update on the conversations you're having with S&P to remove the negative outlook?

Well I haven't spoken to them in a while. They did talk to me after the first quarter and said that they would - - at that time had decided to keep the negative outlook on but would revisit it after our second quarter results. And that's about as much as I want to say on that. I don't want to speak for them. But we'll be following up with them pretty soon to see where they are.

Thank you.

Okay.

Your next question comes from the line of Ross Payne with Wells Fargo.

How you doing, guys?

Hi.

First question is - - what steps, where are you on building increased flexibility for your supplies for the Asphalt business relative to your plans when you first got into the Asphalt side of the business?

You talking about crude supply?

Correct.

Yes, we're doing this in small steps because we don't perceive any risk to our crude supply. So there's no point in us going high hog into a capital investment program to run alternative crews when we don't need to. But we've done some things already, we've put in a crude oil blending system at one of the plants which enables us to run an Ecuadorian feedstock earlier in the year, we have several million more of capital going in this year that will increase our crude flexibility. And so we're doing it in small steps over time - - building up to the - - increasing our flexibility over time. Rick, do you want to add anything?

The only thing I'd add is that all of our capital projects that we're reviewing on the refinery side also would include our ability to expand and take advantage of crude flex going forward.

Also, from a volume standpoint, how big is the fourth quarter relative to the third or the second on a typical basis?

Well - - the season tails off in the fourth. The high point is the third. It slows down in the fourth, but I got [Mike Stone] here, fourth compared to second? I mean - - I guess - - is the question - -

Compared to the second - -

On asphalt volumes.

This year what we have planned is about the same, as the second quarter.

Pretty similar.

Okay.

I don't think that's typical but it will be this year because we're saying that the season is being delayed into the fourth quarter.

Right.

Okay, so if things are going to be somewhat even for earnings for Q3 and Q4 for Asphalt - - how do you - - I mean just better margins in the fourth quarter?

Yes. The margins are better.

Okay, and what drives that?

That compared to last year was really the - - remember the extreme volatility we had with crude prices fell a lot. First of all they ran up - - and to give the whole context they ran up a lot in the second quarter and then as they started to come off in the third - - you remember asphalt prices tend to be sticky on the way down so we benefited from a wide margin. The feedstock plummeted, the product prices were sticky on the way down so you had a very generous margin in the third and that kind of then, by the time you get to a fourth the product price decline started accelerating, so you gave back a lot of that margin. We don't see that same extreme volatility this year. It's not to say oil prices aren't volatile. I expect them to be jumping around all over the place the way they do almost every day, but that sort of extreme volatility is not our expectation for this year.

And the futures markets don't reflect that either - - dropping $100 like you did last year. To put some numbers against what Curt said, last year our margin, Asphalt and light products but on the Asphalt refineries, the margin was $16.44 in the third and it was negative $1.66 in the fourth because of the collapse in pricing structure. We don't see anything like that this year. As a matter of fact we expect the margin to be sort of comparable in the third and the fourth quarter.

That's an $18 swing in a margin that runs $8 to $9 for the whole year - - so.

Okay, so margins per barrel or per ton are going to be about the same but the tonnage will be higher in the third quarter relative to the fourth. So we can expect an increased number Q3 relative to Q4 for Asphalt but more flat relative to the prior year?

Yes. Due to volume, not margin volatility.

Okay, great. And also on the sale of Ardmore, have you guys put a multiple on that in terms of what you sold that for?

Yes. We have it, but It might depend I guess with the last 12 months going forward.

It was about 10. About 10 times EBITDA.

Okay, nice. You mentioned a lot of the sophisticated refiners are running lighter crudes. Are they simply switching off their cokers or what exactly are they doing?

Well the last time we looked at it - - and Mike Hoeltzel's here - - ask him to jump in. But it looks like overall cokers are running at about 70% of their capacity so that's down. But it doesn't mean they're making a lot more asphalt because their feedstocks are lighter too. Mike, do you want to comment further on the effect of the - -

Yes, just going over the data the first five months of the year, the crude utilization was 82.3% compared to 85.5% in 2008. Coker was down from 76.4% in 2008 to 73.6% in the first five months of this year. Now not all refineries that make asphalt have cokers and vice versa. So the reduction in utilization had an effect in that those are generally the barrels that make incremental asphalt and we've seen that as utilization goes down 1%, asphalt production generally goes down 2.5% to 3%.

This is really the big point. It's the lower utilization rate more than offsets the effect as it relates to asphalt production of cokers running at lower rates.

The lower overall refiner utilization rate more than offsets that decline in coker runs.

Okay. And finally, the last question I've got is if you can go on your thoughts of why the differential between heavy and sweet has shrunk and what might change that going forward.

It seems like the heavy crudes are hard to come by. We're in the fortunate position of having a long term contract for the heaviest, most sour crude you can buy just about. So we have a committed supply, but to the extent refiners are sort of depending on spot barrels, trying to get the right mix of spot versus term, they're finding those spot barrels extremely hard to come by. Mike, you want to comment further?

The biggest thing is the decline of the Cantera il Field in Mexico, it's somewhat offset by the KMZ field but still the overall heavy crude production in Mexico is down 8% year on year. And when you look at the amount they use internally the exports are down 14% to 15% year on year. So that lack of primarily the Maya crude coming into the US market is what's causing these differentials to shrink.

Thought on if that turns around at any point in the near future?

No. It's probably going to get worse because the KMZ field that's been replacing the Cantera il is about to hit its peak and the other thing there is we show our coker projects for the US on our website. But one thing that we don't have is that the Pemex [Minitiblin] refinery is scheduled to come on stream with a coker that's going to reduce Maya exports by 150,000 barrels a day and we hear that's going to be the fourth quarter of this year or the first quarter of next year. So that's making the heavy crudes even tighter.

Thank you very much guys. That's it for me.

Thank you.

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

Hi. Good afternoon, everyone.

Good afternoon.

A couple questions. One, do you have an expectation for how much debt you think you'll be able to pay down this year now that we're a little further along in the year?

Yes. The current forecast and we do a forecast once a week. But the current forecast shows about $150 million of debt reduction principally coming out of - - quite a bit of that is just freed up working capital as you come out of the seasonal asphalt business. And the rest is just typical debt pay down from excess cash flow coming from the business really.

Okay, and then you mentioned in the release that as you're recontracting storage you're seeing higher rates. Can you put a number on that? What's the magnitude of increase you're able to push through. And can you give a sense of how much of that storage is rolling over every year or quarter?

Yes. It's been good, but Danny Oliver will answer that.

Yes, for our renewals in the storage segment during the first half of the year, we have in 2009 we'll see an incremental $6.3 million EBITDA and I'm sorry, that's revenue, and annualized that would be $10.4 million. Now those are just the renewals that have happened in the first half of the year. We've still got six months to go and expect to see more of the same type numbers going forward.

Your other question about frequency of rollovers, I think as we've said previously more than 70% of our contracts are long term meaning more than one year and a lot of those are very long term. So if you figure something like let's say 29% are one year or less, coming up for renewal annually those are the ones with the most frequency. Danny and his people are renewing at much higher rates now. And a lot of those short terms it's a little misleading because a lot of those customers have been with us for years and their habit is to sign up one year contracts at a time. So short term is not always a short term as you might think. But the higher rates - - storage business has just been really really strong. And again, it's mainly because we have enough attractive locations. We have some very good locations and that's the main reason. They have long term value.

My last question is just do you plan or do you have a plan in terms of increasing the distribution for the third quarter, the fourth quarter, or both. And then the second part of that is in the past, you've given sort of a target growth rate for the year and I realize you haven't done that this year. But I'm just curious if you're thinking in the future of going back to that. Thanks.

Well, I think for this year really when we put the budget together things were so different last October. So we declined to put out a growth target which historically we've always done as far as I can recall. So we still haven't said anything and would prefer not to say anything yet and not comment on whether we plan one increase or two increases this year. It's really a board matter and we're increasingly confident that we can do one and it's appropriate to do one, but would rather wait until we announce the third quarter results.

Thank you.

(Operator Instructions).

Your next question comes from the line of John Tysseland from Citi.

Hi, guys, good afternoon. Can you give us a sense of what you're seeing in the Asphalt market in the third quarter and what some of your assumptions are for your guidance you put out today? I guess when I talk about that you can use like to second quarter as a base in terms of margins and volumes and kind of what you've seen in July versus June.

I'll pass that over to Mike Stone who is sitting here on how you see the market shaping up in the third quarter.

What we've said and what you've heard me say already is that sales volumes are going to be significantly higher in the third compared to the second. We're going to have a more even profit distribution between third and fourth quarter compared to last year because of the margin story that we just told you. But Mike, you want to add more color around that?

No, that's exactly right. What we've said earlier is that a lot of the season has been delayed this year because of the rain. The rain does not destroy demand. It just simply delays it and as soon as the weather breaks on the East Coast, we'll see those sales materialize. Also, I don't think we have in our forecast any information on the stimulus money and that's also expected to come in sometime late in the third quarter during the fourth quarter.

Very little of the stimulus money is actually spent. It's all been obligated and committed to projects but the actual spending is really only now just getting started.

Mike, do you have some data on that? Even though the states were required to obligate or release funding for 50% of their projects by the end of June through mid-July only 1.5% had been spent and it differs quite a bit by states. The states in which we market, for example, Oklahoma, had disbursed 8.7% of their money through mid-August and our sales were 139% of plan at our Tulsa terminal. Contrasting that on the Northeast that's supplied by our Paulsboro refinery. Those states had only released 1.3% of their funding or disbursed 1.3% and our sales there were around 70%. So we expect these states to start ramping up on their spending, we should see it in our Asphalt sales.

Just to give you more numbers, again we're forecasting about a 40% increase in sales in the third quarter versus second quarter just from the delay, about the same margins.

When you look at the amount of spending that the states have actually gone through with, is that 1.3% for some of the East Coast markets. What do you actually expect them to be able to spend? Is that something that they're not going to obviously spend 100% it doesn't seem like from 1.3 but is there a range that you do expect them to spend?

(Inaudible - two speakers) starting right now, but go ahead, Mike.

Yes, they released half of the contracts already so we expect it to start ramping up. But the whole $27.5 million in the base program we expect to be spent over about a two year period.

Yes and we see big spending going on in 2010.

And this is really not a surprise or new to us. I've been trying to say this right from the beginning when people would ask me about the federal spending - - that we'll start seeing some of it second half of the year but more so in 2010, the impact on our Asphalt demand.

And then if you could give me a sense of where you seen the Asphalt market in July relative to June. Has it been a steady increase or is there weeks that you see a steady stair step up?

As far as volume is concerned?

Yes, volumes, activity, spending, all of it.

Oh, the volume is the big indicator. It's just a gradual upwards since the last two weeks of June.

And on the federal spending if that's what you're asking - - spending of federal money, I think now, Mike, probably the month of August you're going to see a big jump. It really was a minor factor in July but you really start to see it ramping up in August. But again I think it's going to be even a bigger impact in 2010 the way it's shaping up.

All right, thanks guys.

Yes.

Your next question comes from the line of Andrew Gundlach with ASB.

Good afternoon. Just in relation to the last question. When you say that your Q3 sales will be 40% higher at the same margins, you're referring to Asphalt sales; is that correct or all of the yield?

It's actually the Asphalt rack sales.

Asphalt rack. Okay. And of the production in Q2, how much was sold and how much was inventoried for Q3 and Q4 sales?

Well you've sold a lot, but it's not all through a rack. We sold in wholesale and sold some exports.

When you say inventory that means a lot of the inventory wasn't for long. It's going to be sold - - within the next couple of months.

We actually peaked in our inventories at the end of June and we've kind of held them steady. We're drawing them just very slightly right now.

They're slightly drawing so we do peak in mid-June and we are drawing down inventories in July with production at full capacity.

But if you're asking about rebuilding inventory we're right on target for where we want our year-end inventory to be.

We're drawing it now.

And we've drawn about 200,000 barrels in the last couple weeks.

That's helpful, and Curt, when do you expect the mark-to-market loss to show up as profit from the physical sales?

We're expecting all of that this winter. We've got an exit strategy on that where we're going to deliver almost all of that product to the NYMEX and that will be spread between probably December, January and February.

Fourth and first quarter.

So - - but it will affect a little bit the fourth quarter and mostly the first quarter. Is that the way to think about it?

Yes.

And in the meantime those hedges can move around from now until the end of the year; is that right?

Yes.

Yes, they got to be mark-to-market.

Okay. Thanks very much.

Your next question comes from the line of Darren Horowitz with Raymond James.

Hi, guys. Good afternoon. Curt, just a quick question for you - - kind of putting the pieces of the puzzle together based on what you said. If we're looking at the third quarter capacity utilization at Savannah and Paulsboro, respectively. Is it fair to assume that Savannah probably should be running in total yield around 90% to 95% and closer to 95% at Paulsboro. Does that sound about right?

I don't think it's that high. Rick, do you have the utilization rates?

Utilization, I think, is capped out at right at about 85% to 87%.

Okay. Thanks, guys.

Yes.

Your next question comes from the line of Jeff [Feriack] with George Weiss Association.

Hi, guys. On Valero and Tesoro's calls they mentioned that hey are now bidding on some Venezuelan crudes. I was just wondering how your contracts are structured to kind of insulate you guys from the increased competitive pressures to source those crudes.

Right. Well - - we have a price protection formula in our contract, and Mike's looking at me so maybe he wants to address it.

Yes, we have the First Call on an annual average of 50,000 barrels per day of the Boscan production and 25,000 barrels today at the [Botche Carrol] production. And like Curt said, we've got a price protection formula on that as well.

Okay, great. How does the - - Valero mentioned they were about 85% utilization now. They saw 78% for the second half of the year. What's your anticipation for pipeline volumes?

Well I think we've factored in kind of a worst case on pipeline volumes. And the story we've been telling from the beginning is that we're looking at a situation on our pipeline segment of lower volume but the same to slightly higher profit by the end of the year versus last year for the reasons we've given, lower OpEx, tariff adjustment, all the things that we've told you about. And it really is - - you take a step back, what we've always said about the pipeline segment is that it's a very stable segment, no matter what the oil price is and no matter what the economic conditions, you get a lot of stability out of that segment but not a whole lot of growth. The growth in our Company has been in the Storage segment and in the Asphalt and Fuel Oil segment. And that's how we've always portrayed ourselves. So you're getting stability there and growth in the other segments and I tell you in this market, where I guess it's the worst economy now they're saying since World War II. It really has proven out again in spades, the high degree of stability in the transportation segment. Danny, I don't know if you want to comment further on volumes?

Well I was going to say in the first half we have five planned turnarounds and three unplanned events all of those eight fairly significant. And in the second quarter we have modeled our volumes based on what happened, I'm sorry in the second half we've modeled our volumes based on what we saw in the first half. Although in the second half we only have two events on the schedule. So it looks like the turnaround activity is going to be much lighter in the second half but we've still based our volumes based on what we saw in the first half.

(Inaudible - duplicate speakers) - - the idea besides the growth in pipeline. But we're able to do things there like the El Dorado expansion like we did on the Southern end of the East pipeline system. So those opportunities will come along, but it's not the main driver of our growth. It's more a stable asset.

Okay. Thanks, guys.

Thank you.

Your next question comes from the line of LWK with K3 Management Company.

Good afternoon. In case the weather and especially in the Northeast really is not cooperative for using asphalt, are the federal projects or the federal programs going to be there for funding for road repair and laying new roads next year especially. Or in case it really gets bad is it going to be sort of a lost season. And the next part of the question would be, is this even a realistic thought process?

Well the federal program is going to be there next year in answer to the first part of the question. But, Mike, do you want to - -

First of all it's going to stop raining. I got it from a reliable source. So you don't have to worry about it.

But even if it doesn't whatever is delayed by rain can be delayed in the next year, So it's not like if it doesn't happen this year it doesn't happen. The projects have already been left and the money is made available and it's just a matter of the weather clearing for them to do the work. It will just build up as a backlog is what the contractors call it.

Plus we've implemented the [warmix] technology which should allow us to sell a little deeper into the winter season than we have before.

But all the funding will still be there is what I'm saying?

Absolutely, and that's part of what I was trying to cover in my remarks is now we've got greater assurance in that regard. They've beefed up the Federal Highway Trust fund just recently and they put in another $7 billion, they've got pending legislation to greatly enhance it going forward. And there's a general - - we've spent a lot of time talking to polititions and there's a general recognition that, you might defer road repair maintenance for a while. But - - we are way behind where we ought to be. Every study shows that even the studies they commission on the subject show that, so this is votes too. This is an important vote-getting activity. So people will put up with it for a while but not forever. So it's not a matter of if but when.

Thank you.

Yes.

There are no further questions in the queue. You may proceed with your presentation or any closing remarks.

Thank you, Operator. If you have any closing or further questions please feel free to contact us at NuStar. Thank you for joining us today.

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