NuStar Energy LP (NS) 2010 Q2 法說會逐字稿

Good afternoon. My name is Sarah and I will 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 earnings conference call. 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). Thank you. Mr. Chris Russell, Vice President Investor Relations, you may begin your conference.

Good afternoon, everyone, and welcome to our conference call to discuss NuStar Energy LP and NuStar GP Holdings LLP second quarter 2010 earnings results. If you have not received the earnings releases and would like copies of each, you may obtain the information from our website at 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 Investor 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, 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 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 law. These statements reflect our current views with regard to future events and are subject to various risks, uncertainties, and assumptions described in NuStar Energy LP and NuStar GP Holdings' annual reports on Form 10-K for the year-ended December 31, 2009 and subsequent filings with the Securities and Exchange Commission. Actual results may materially differ from those discussed in those forward-looking statements and we undertake no duty to update any forward-looking statements to conform to statements of actual results or changes in our expectations.

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 Reports and SEC Filings portion of the NuStar Energy LP website, reconciling these non-GAAP financial measures to the most directly comparable financial measure calculated and presented 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.

Now let me turn the call over to Curt.

Thank you, Chris, and welcome to our conference call. NuStar Energy just completed a quarter that saw us increase our asset base in our storage segment, improve our balance sheet, and realize increased year-over-year growth in EBITDA in all three of our business segments. During the month of May, we acquired three storage terminals in Mobile County, Alabama, with a storage capacity of around 1.8 million barrels. These facilities purchased for $44.1 million are a great addition to our fee based business and are already generating additional EBITDA for our storage segment. In addition, during May NuStar received about $240 million in proceeds from the public offering of 4.4 million common units of NuStar Energy. Short-term, these proceeds were used to reduce outstanding borrowings under our revolving credit facility and to pay for the May terminal acquisition. But longer term, these proceeds will be used for future acquisitions and to fund our internal growth capital spending program.

As a result of EBITDA growth in all three business segments, EBITDA was a second quarter record $157 million, higher than the $142 million of EBITDA earned in the second quarter of 2009. Our storage segment EBITDA benefited from new customer contracts, higher renewal rates on existing contracts, increased customer demand for storage services, and additional EBITDA from our recent acquisition. As a result, revenues increased 10% or around $11.5 million.

Operating expenses in the segment increased about $7.5 million, due largely to our decision last year to defer hiring and maintenance and repairs at some of our facilities given the distressed financial and capital market situation. A 9% year-over-year increase in second quarter throughputs, excluding the impact of pipeline asset sales we completed in the second quarter last year, contributed significantly to higher EBITDA in the transportation segment. Increased US demand for gasoline and distillate have caused crude oil pipeline and refined product pipeline throughput to increase. In addition, favorable weather conditions in the Midwest US have allowed the planting season to start earlier this year, causing throughputs on our ammonia pipeline to be higher than they were in the second quarter of 2009. Higher tariffs as a result of last year's 7.6% increase on July 1, 2009, also benefited our transportation segment revenues in the second quarter of 2010.

Operating expenses in the transportation segment increased 7% or $1.9 million due to increased power costs as a result of higher throughput volumes and less benefit for pipeline product imbalances as a result of market fluctuations that we enjoyed in the second quarter of 2009. EBITDA in the asphalt and fuels marketing segment increased mainly due to improved gross margins in our fuels marketing operations. A $9 million increase in fuels marketing gross margins was partly offset by a $1.9 million decrease in margins in our asphalt operations.

Higher margins in our fuels marketing resulted from improved margins from our bunker fuel sales, fuel oil sales, and refined products trade. Higher asphalt operations gross margin per barrel of $9.66 compared to the second quarter 2009 gross margin per barrel of $9.10 was more than offset by reduced light product sales volumes. Second quarter 2010 asphalt sales volumes were basically flat with last year's levels, only slightly ahead. However, light product sales volumes were around 600,000 barrels less than second quarter of 2009, most of which constituted sales that will be made in the third quarter. Lower light product yields at both our plants and delays in the timing of some of our light product sales transactions contributed to the lower light product sales volumes. Crude runs and yields were lower than last year at both refineries, due to some logistical delays associated with purchasing and shipping crude oil during the second quarter. As I mentioned, light product sales transactions delayed in the second quarter will occur in the third quarter.

Operating expenses in the asphalt and fuels marketing segment increased 2% or $600,000. Second quarter 2010 OpEx included $3.9 million of lease and tower costs associated with additional asphalt terminals leased last year and early this year. Those additional costs were partly offset by lower operating costs from several different categories. Second quarter 2010 G&A expenses were $22.2 million, which is down $3.7 million compared to last year, with lower stock based compensation expense. Interest expense for the quarter was $18.9 million, down 1.4 million from last year due to lower interest rates and reduced debt balances as a result of our November 2009 and May 2010 equity issuances. The second quarter of 2010 included a $13.5 million pre-tax gain recorded for property insurance proceeds received due to damage caused by Hurricane Ike at our Texas City terminal in the third quarter of 2008. The second quarter of 2010 was still a record quarter and exceeded 2009 results after excluding this gain.

Income tax expense of $636,000 was lower than the $2.3 million incurred in the second quarter of 2009. The $4.7 million of additional income tax expense incurred on the gain associated with the property insurance proceeds for Texas City was more than offset by an $8.6 million tax adjustment related to the recognition of future tax deductions that we previously expected to expire unused. Distributable cash flow available to limited partners for the second quarter was $107.2 million or $1.72 per unit. Distributable cash flow available to Limited covered the distribution to the Limited Partners by 1.62 times for the second quarter of 2010.

Distributable cash flow was impacted by a $32 million swing between second quarter 2010 and second quarter 2009 in the mark-to-market adjustment on our hedging transactions. Non-cash losses of $23 million increased our distributable cash flow in the second quarter of 2009, while $9 million of non-cash gains decreased second quarter 2010 distributable cash flow. The $9 million of non-cash realized gain should become realized cash gains, generating additional distributable cash flow during the last half of 2010. When the inventory is sold, that's when it occurs. Most of this inventory is associated with our contango plan.

With regard to NuStar Energy's quarterly distribution for the second quarter of 2010, the LP Board declared $1.065 per unit distribution, payable August 13th. I'm pleased to announce that for a second consecutive quarter, the Board of NuStar GP Holdings approved an increase in the quarterly distribution. The second quarter distribution of $0.46 per unit, payable August 18th, represents a 2.2% increase over the $0.45 per unit for the first quarter and a 7% increase over the $0.43 per unit for the second quarter of 2009. This increase is driven by the higher general partner distribution and higher incentive distribution rights paid to the GP as a result of the LP equity offering completed in May of 2010.

Looking ahead to the remainder of the year, we expect our storage segment to continue to perform very well. EBITDA in our storage will be $22 million to $26 million higher than the $242 million generated in 2009. Storage will continue to benefit from higher renewal rates and additional income from our recent terminal acquisition. In the fourth quarter, the storage segment will begin to benefit from the completion of the early phases of our St. Eustatius terminal reconfiguration project. In 2011, our storage segment EBITDA should increase by an additional $20 million to $40 million due to the completion of the terminal reconfiguration project at St. Eustatius and the completion of early phases of two tank expansion projects at our St. James, Louisiana terminal, and the completion of various ethanol projects at several terminals in the storage segment.

One of the tank expansion projects at St. James will support the Bakken crude oil railcar handling project we announced this past April. The initial phase of this project has been such a success that our Board just approved a capital project that allows us to construct these tanks and increase the Bakken crude handling facility capacity from its current 5,000 to 10,000 barrels a day to 60,000 [net] barrels per day. 360,000 barrels of tank capacity will be constructed to support the Bakken crude unloading facility. The second expansion project at St. James involves the construction of 3.2 million barrels and will be leased to various third parties. After completion of both of these projects, our shell capacity at St. James will increase from 4.8 million barrels to 8.3 million barrels. Our storage segment should also benefit from an additional $15 million to $35 million of EBITDA in 2012, due to the completion of the two tank expansion projects at St. James.

In addition to our internal growth opportunities in storage, I'm excited to announce we signed an agreement to acquire a 75% controlling interest in a joint venture in Mersin, Turkey. The joint venture will own an existing 606,000 barrel terminal, a new 740,000-barrel terminal opening for business later this month, and a two-thirds interest in an offshore ship platform. The joint venture will also own land that could be used for the construction of additional terminal locations. We expect to close on this transaction by October. The Turkey acquisition adds to our international fee based storage business and allows us to expand our terminal presence in a new market where petroleum demand is growing faster than in most of Europe. The purchase price for our joint venture interest is expected to be in the range of $50 million to $60 million and we expect the transaction to be immediately accretive to our distributable cash flow.

Our transportation segment should continue to benefit from an improving US economy and increasing throughput volumes for the remainder of 2010. Throughputs for the last half of the year are projected to be 2% to 3% higher than the same period in 2009. Full year throughputs are projected to be higher by 1% to 2% over 2009, excluding the impact of the pipeline asset sales we did in the second quarter last year.

Revenue per barrel will be lower in the last half of the year due to tariff rates on interstate pipelines being reduced by 1.3% effective July 1, 2010. However, even with the 1.3% reduction, full year revenue per barrel should be higher than last year, since tariffs in the first half of 2010 were 7.6% higher than the first half of 2009. We expect these increased full year revenues to be offset by increased operating expenses due to higher power, maintenance, and other operating costs, causing 2010 transportation EBITDA to be comparable to last year. As we move into 2011, our transportation segment should continue to benefit from increased throughput as the economy continues to improve. With regards to future tariff increases, the Federal Energy Regulatory Commission is currently in the process of reevaluating the next five year index and any possible index adjustor for the period July 1, 2011 through June 30, 2016. We do not expect FERC to release the index or any adjustor until well into 2011.

We still expect our asphalt and fuels marketing segment to do better than it did last year, though asphalt earnings are expected to feel the pressure of weaker sales prices for the remainder of the year. Soft asphalt demand, particularly in the private sector construction market, is not allowing asphalt prices to rise commensurate with higher crude oil input costs. In addition, higher refinery utilization rates, which are helping our transportation segment, are causing supplies of asphalt to increase while overall demand is very weak.

Federal stimulus spending has increased this year as expected. Through July 22, the Federal Highway Administration reported that about $10.7 billion of the $27.5 billion available for highway projects has been spent. We're projecting that around $11 billion will be spent in 2010, much higher than the $5.6 billion spent last year. However, the increase in federal stimulus spending in the public sector has been unable to compensate for the higher than expected decline in private sector asphalt demand.

NuStar's 2010 asphalt total sales volumes and rack sales volumes should exceed last year's volumes, but due to our projections that asphalt prices will decrease faster than usual this season, we now expect 2010 gross margins to be lower than 2009. As a result, EBITDA generated from asphalt in 2010 is now expected to be lower than the $70 million earned last year. However, our fuels marketing operation should post results that are higher than the $10 million of EBITDA generated last year. Strong results in our bunker fuel sales, fuel oil sales, and refined products trading should contribute to these improved results.

Looking ahead to 2011, we feel that asphalt demand could be comparable to 2010 levels. However, total asphalt supply should decrease slightly due to a coking unit coming online during the year. As we have always said, supply should continue to decline in 2012 and beyond as more coking units come on line. In 2011, our fuels marketing operation should benefit from an additional $5 million to $15 million of EBITDA for crude oil handling and railcar offloading projects at St. James. A majority of the capital projects that we've mentioned coming online in 2010 through 2012 are a part of our $500 million internal growth program. We expect to spend around $165 million of strategic capital under this program in 2010, around $200 million in 2011, and the balance in 2012. The large majority of this spending will be on fee based projects.

Taking a look at NuStar Energy's projections for the third quarter, due largely to our forecast of soft asphalt demand, lower asphalt prices, and the July 1 reduction in interstate pipeline tariffs, we're projecting third quarter 2010 EBITDA to be in the range of $100 million to $120 million. Earnings applicable to Limited Partners for the third quarter are expected in the range of $0.50 to $0.70 per unit. Third quarter 2010 operating expenses are expected to be approximately $125 million to $130 million, G&A expenses in the range of $26 million to $27 million, depreciation and amortization expense around $38 million to $39 million, and interest expense $17 million to $18 million. The reliability capital expending is expected to be in the range of $50 million to $60 million for the full year 2010.

In closing, we're very pleased with the strong results from each of our three business segments in the second quarter. However, due to expected weak asphalt in the last half of this year, our full year EBITDA projections for NuStar are currently lower than we anticipated earlier in the year. We are now projecting that EBITDA results for the full year of 2010 will be only slightly higher than 2009's results. As we move into 2011 and 2012, our internal growth projects are expected to increase our EBITDA by an additional $25 million to $55 million for 2011 and an additional $15 million to $35 million in 2012. We should also see EBITDA growth from our May terminal acquisition and our recently announced terminal acquisition in Turkey.

At this time, I'll turn it over to the Operator so we can open up the call to Q&A. Sarah?

Your first question comes from the line of Michael Cerasoli with Goldman Sachs.

Can you talk just a little bit more about the Mersin, Turkey acquisition? Is this an area you were specifically targeting or do you expect acquisition growth to be more geographically diverse going forward?

It was an area we were targeting. We mentioned I think a couple of times publicly that we saw because of the product flows and the relative lack of logistical solutions in the Mediterranean region that that was a region we thought was prime for an acquisition. We found one here in the Eastern Med that not only is going to end up being done at a more attractive meaning a lower multiple than the typical United States MLP terminal acquisition, but also has upside potentially associated with the existing assets and then the raw land is in good locations for future grassroots projects. We like this region. We had targeted the region, but in our future acquisitions internationally, we aren't limited that region. We are looking in other areas as well. But there may be more we can do in the Mediterranean before we are done.

Okay, and in this transaction -- I mean you guys have been pretty public about going after international assets. But is this symbolic of the weakness in the domestic acquisition market? Do you see opportunities out there or has domestic acquisition market become a little frothy?

There are opportunities in the United States and North America too. But the best deal wins, and right now this is the best deal we had on our slate. Steve, did you want to comment?

Well, I'd just add that we did do an acquisition in Alabama for $44 million of roughly comparable size in Turkey, so there's still things getting done in the US.

Okay, and then just on asphalt, can you just talk a little bit about the asphalt trend at Paulsboro versus Savannah? Is demand more resilient in the South versus the Northeast?

Yes. We've seen our sales in the South holdup relatively strong this year compared to the Northeast, so the South has been doing very well this year.

Yes, year-to-date our North is just slightly under last year's figures and the South we're about 7% above, so altogether year-to-date we're above sales of 2009. But it's primarily because of the South.

Okay, thanks. That's it for me.

Thank you.

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

Thank you, guys. A couple quick questions for you. First, Curt, on the storage side, we're trying to get a sense of how much of the $22 million to $26 million year-over-year improvement is due to higher rates on the lease capacity coming up on the early renewal versus both the organic capacity additions in the Alabama terminal you acquired? And secondly, geographically are you still seeing a lot of strength in the West Coast renewals?

Yes, let me take it over to Danny and let him answer.

I might be going backwards here, but on the West Coast we saw a real step change last year and some of that will follow through into this year. But I think we'll continue to see that kind of step change in values every year, but we are seeing incremental revenue still from the West Coast this year. In terms of the overall revenue increase, by and large it was all from renewals -- I think there was $1.5 million of EBITDA from the Mobile, Alabama acquisition.

It's a combination of renewals and also increased customer demand for services. They were roughly equal, maybe mainly renewals, but those last two factors were roughly equal.

And then second question for me, Curt, on the transportation side -- within your remarks for the guidance for volumes to be up 2% to 3% in the back half this year versus back half of last year, can you give us more color on refined petroleum product versus crude oil throughput specifically? Your crude oil volumes were up almost 10% sequentially, and I'm wondering if that momentum is expected to continue and is really the driving force offsetting lower than expected refined product transport volumes?

Yes, refineries are running harder. They're running at higher utilization rates in light of improved margins, and also the reason they have improved margins is because demand for refined products is up in the United States, so did you want to comment further?

Yes, US refineries are running over 90% utilization rates, and that has a direct correlation to our top line utilization.

Okay, and then last question for me if I could, Curt. When you reconcile your EBITDA guidance down to cash flow, assuming your maintenance CapEx is going to land within the fair way that you outlined, it seems like you might be a little south of that 1.1 to 1.2 times coverage on a full year basis. Can you just give us some insight there?

Well, I think our current forecast really shows us reduced on the coverage ratio, but still in excess of -- but it will probably be one of the lower coverage ratios we have. Last year it was 1.25 and the year before it was about 1.25. But the asphalt shortfall particularly in the second quarter will lead to a tighter coverage ratio than we've had in the past, and that's still based on a budgeted distribution increase that we always have in the second half of the year.

Okay, thanks.

Yes.

I appreciate it. Thank you.

Okay.

Your next question comes from the line of Brian Zarahn with Barclays Capital.

Good afternoon.

Hello.

Just to follow-up on that last question, you do expect the distribution bump in the second half 2010?

Well, what I'll say is we budgeted one. Our coverage ratio for the first six months was right at 1 times. I mean, we had very weak cover in the first quarter, very strong cover in the second quarter, and it was right at 1 for the first six months. I think we'll just wait to see what the results are in the third quarter and the fourth quarter before we give any color on it.

The standard answer we always give out is it's a Board matter and the Company's results will dictate the amount of the increase but as Steve says we still have that in our plans, the distribution increase.

And then can you give us an update on 2010 CapEx including acquisitions and assuming the Turkey JV goes through?

Yes, 2010 CapEx, Mike?

Yes, we're looking at a total CapEx of about $214 million on the strategic side, and of course less -- that excludes the acquisitions, which are about $44 million for the Mobile, Alabama terminals and $56 million for the partial interest in the Turkey assets. 2011 is going closer to $250 million

And that's still early estimate on 2011. I think I said in my remarks, the approximately $200 million in 2011, just to leave ourselves a little bit of a sway up or down there.

Repeat that -- for 2010 that seems lower than your prior guidance. You said $214 million?

Yes, that's what our current forecast is because some of the projects starts stretching into 2011 now.

Okay, and that $214 million includes acquisition?

No, it excludes acquisition, and excludes liability capital as well.

The $214 million for strategic and then $44 million for GAO, $56 million for Turkey, you got the reliability assets, $50 million capacity and (inaudible).

About $314 million on growth CapEx?

Okay, and then we have an office building project which is also going to be about $30 million this year on top of the $214 million that Mike had for strategic.

Okay, and then can you give us the availability on your revolver?

Yes, just a second.

$500 million.

Okay, and final question. Given the pipeline spill in Michigan and other related events, do you expect maintenance CapEx to be pushing higher than you probably expected and -- maybe not this year, maybe next?

No, on our reliability, our run rate is on a pretty continuous -- we've got a pretty aggressive schedule that we imparted and we're seeing benefits of that aggression and that schedule now so we're seeing a reduction in some of our reliability CapEx associated with pipeline.

Yes, I mean we do much more I guess than just the average in terms of [smart] taking all of the miles of our pipelines.

Okay, appreciate the color.

Thank you.

Your next question comes from the line of Xin Liu with JPMorgan.

Good afternoon.

Hello.

I'm trying to reconcile your guidance for the third quarter. If I look at year-to-date, you're a little bit lower than last year, first half of the year, and third quarter it seems to be going to like $10 million to $15 million lower than last year in terms of EBITDA. Are you expecting a big ramp up in the fourth quarter?

Well, yes, we're expecting (inaudible).

What drove that?

Well, to some extent it's projects coming online.

It's the internal growth projects and storage income online in the fourth quarter, plus we've got a pretty good forecast for the fuels marketing side of the business in the fourth quarter.

Okay, fuels and marketing, got you. And your asphalt and fuel marketing, your OpEx this quarter seems to be low compared to the previous two quarters. I remember you guys had some additional OpEx leasing some additional terminals. Can you explain why quarter-over-quarter the OpEx is high?

We leased additional terminals and they did make us money. However, just like the whole rest of the asphalt business including the new terminals, because of the softer demand in the second half of the year, they are going to make less profit than we would have anticipated as well. So really the story comes back to the asphalt demand softness not allowing us to raise prices to recoup as much of our costs as we anticipated. But the new terminals are still profitable, just not as profitable as we were all hoping it would be, which is generally true of asphalt as we move into the latter part of the season.

Okay, so it's because of the throughput is less than -- ?

The profitability of the sale is less. So it's kind of back to margin. It's really not throughput.

Yes, I'm looking at OPAC, I assume a majority of those are fixed. Or is it because throughput is lower this quarter and you had lower -- ?

Are you talking about terminal throughput now?

No, operating expense on the asphalt and the fuel marketing side.

Yes, that's higher. We did lease additional terminals which drives up the cost. But I guess what I'm telling you is that side is also making money because we're making the revenue to cover that higher cost. Not as much unfortunately as we were hoping we would, which is generally true of the asphalt business this year.

Okay, good. And on your JV in Turkey, what's the duration of the contract that you have there and who are the counterparties?

Well, we have their existing contracts in place. In our press release of today you saw who our JV partners are. I'm really not at liberty to disclose exactly who the customers are. But these are customers who are interested being there on long term contracts, so those would normally be in sort of the 5 to 10 year range for those contracts. But they are big reputable outfits, including our JV partner does some business out of the terminal who has a major position within the Turkey market. For example, our JV partners is affiliated with 180 gas stations, service station networks within the country and the growing network there too. It's a well known brand there, so our partner also contributes to the profitability. And on top of that we'll have international traders and national oil companies just like we have in our storage business generally.

Thank you. This was very helpful.

Thank you.

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

My first question is this adjustment for the hurricane, what specific segments was that?

Couldn't hear you, Ross. What? What segment?

Correct. Yes, what segments did the hurricane impact come into play?

Are you talking about the original damage now?

Yes, an did it get loaded back into the segment data from this quarter?

No, that's in other income.

That's in other, okay.

Yes, you mean the insurance proceeds where you were paid is in other income?

Okay, got you, very good.

So I'm sorry, it hit Texas City, but it's not operating income.

Got you. Also, can you just speak more specifically to what you saw volume wise for just the individual products of gasoline, diesel, et cetera, during the quarter?

Yes, we've got that broken out. Give us just a minute. Danny is pulling it out.

Sure, in terms of -- I guess our transportation segment, we've got --

Generally while he's turning the page on that, as you see, Ross, really the increased refinery production, refinery profitability has really been on the distillates primarily, right? It's really distillate driven. Gasoline is up too, but distillate has really driven the more favorable outlook for the refiners.

Well -- and year-to-date 2010 versus 2009, our throughputs and our transportation segment net of the asset sales would have been up about 10,000 barrels a day. And on that, on those lines, crude accounts for about 40% of the volume, gasoline for about 30%, distillates 20%, and then other for 10%.

And most of the volume increase was in the side, gasoline was pretty -- ?

Yes, on the distillate side.

Pretty flat as well?

Yes, really you're talking about 1% to 2% change in each of those. They really didn't change that much quarter to quarter or year versus year.

Okay, and--

You're getting increase, not a decrease. 2008 and 2009 you saw demand collapse, and now you see it coming back.

So it's stable to slightly increasing it sounds like. And also any expectations on how far it will come out on the inflation adjustor for future years?

It's really, really too early to tell. I tell you part of what the industry is trying to do though is take account of the fact that the industry has spent a lot of money on integrity management under the existing regulatory regime. And all that cost is not getting captured in the current FERC regime. So we're going to work with the industry to make sure that the true cost, not just running these pipelines, but in some cases having to shut them down because they are no longer cost justified -- we're going to make sure that all of that gets properly accounted for, because what happens in these debates sometimes is shippers complain about higher costs on the lines that are still running and they aren't paying attention because the lines that are not profitable to run anymore because of these higher costs. So we'll make sure that all of that cost gets captured as the FERC considers what to do, so we're pretty optimistic that they will be fact driven. If we give them the facts, they are going to make a decision based on the facts.

Very good. Okay, thanks so much, Curt.

Thank you.

Your next question comes from the line of Barrett Blaschke with RBC Capital Markets.

Just a couple quick questions on asphalt. With the refinery utilization increases, what does that look like for the yield at Savannah and Paulsboro going forward?

Yes, I was referring in -- to our utilization increasing. I was talking about the more complex, the industry in general. Actually our utilization rates are running lower than last year in our plans, due to the softer margins. Paul, do you want to comment on that?

The yields are about the same, but the throughputs are down slightly.

Okay, so it's really more of an issue with your refineries and not so much a global thing?

Yes, I think that's fair, yes.

And then on the Turkey terminal acquisition, you also brought up some expansion opportunity there?

Yes.

Of about --

Very definitely, yes.

Can you give us a little color on expansion cost and timing there?

Yes, I'll give you a little color, though within the bounds of confidentiality that we're bound by with our partners. First, starting off, the EBITDA multiple we paid is very attractive. So if you think of a typical MLP terminal acquisition deal being in the range of -- oh, I don't know depending on what it is like eight times to plus multiple higher than that, this is a lower multiple than that. And then beyond that, we have expansion capital we can spend to expand quite substantially the EBITDA from the assets, so that by -- if we spend the money between now and 2012, by 2012, I think we have doubled, we have the potential to double the EBITDA annualized from this asset. And that's really before we get to some of the expansion opportunities that we think are out there with this available land I mentioned. So it's going to be -- from a financial point of view, it's really a home run. I wish it was 10 times the size, but given the size that it is, it's really going to be a financial home run for us.

Now in terms of cost, would it be basically spending what you've already spent again to double the capacity?

No, less. Maybe half of that.

Okay, so like $30 million?

Yes, $25 million to $30 million, in that range.

We haven't figured that out, but that's right, that's about the range, around $25 million.

And probably all spent -- with terminals are with new tax online by 2012?

Yes.

Okay, thank you.

Thank you.

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

Thanks, good afternoon. Just one quick question. Can you just talk about your assumptions? I think, Curt, if I heard you correctly -- on asphalt for 2011, you talked about demand being basically flat and supply a bit tighter. Can you talk about what your assumptions are on demand, because I would think that potentially the economy could be improving. What is your assumption on stimulus, et cetera?

I'm going to put that over to one of the Mikes in a second, but one comment I'd make about it is this is just sort of an early blush for us to look at it, looking ahead to 2011 saying what do we think is going to happen. We are obviously in an improving economy. You read a lot nowadays about disappointment with the rate of improvement. But if you just concentrate on the facts, this economy is improving, and we think you're going to continue to see recovery but it's going to be a modest recovery. It's not going to be a blowout recovery with the timeframe you're talking about, in our opinion, but by 2011. So we are going to see improvement, but our story is very much supply driven. You remember the coker projects that are coming in, the major coker projects concentrated in the middle part of the country which have made us very bullish about the supply and demand fundamentals -- that's really a 2012 story and beyond. So we are only going to see a slight effect on supply from those cokers in 2011. The supply reduction that we have been touting since we did the Citgo asphalt acquisition really kicks in in 2012 and beyond. Now, on the demand side, Mike did you want to comment some about 2011 demand?

Yes, on the demand side, we're showing 2010 and 2011 both being about the same as 2009. The public funded highway and street construction is about the same. What we're seeing is a rebound in the private residential construction, but that's almost offset by a decline in the commercial construction. It seems the commercial construction lags the GDP by about 18 months, so that stays down through 2011. However, we see all three sectors coming back strong in 2012, looking more to a 7% to 8% overall increase.

Just to give a little contextual comment, if I may, on this Citgo asphalt acquisition we did in early 2008 when it became available. What we have been very pleased about is we've made a lot of money during the first two and three years or so that we bought this asset. The first year of adjusted EBITDA of about $150 million, we had what, $220 million for the first two years, and this year, the first half of the year we've made around $40 million or so on a $450 million acquisition. So it's true, we're getting into a soft patch of this year for the reasons we outlined. But all of this period, running up through 2011 to the coker story that kicks in 2012, I think this has been an excellent acquisition for us in terms of what has already returned for us during this period of time. Actually much higher profit margins during the 2008 through 2010 period than you would have expected looking at the history of this business. So we have been pleased with that. Mike?

And actually one of the cokers is coming onstream mid year next year, and it's expected to reduce the supply of about 10% or so of the total US supply, so it will start picking up.

What made me get off on that count a little bit is someone made an aside about a moment ago about -- so your lower utilization applies only to your plans, not to other refiners. During this whole period of time that I just mentioned we're about the only refiner I can think of that made money. They've lost billions of dollars over the last couple years, and I don't take any joy in that because a lot of them are good customers of ours. So it's not, I don't want to leave the impression there's something uniquely negative about our plans, which really are about the only ones that have made money in refining the last couple years.

Great. Thank you for the commentary, appreciate it.

Thank you.

Your next question comes from the line of Louis Shamie with Zimmer Lucas.

Hi. So I guess, Curt, you provided some guidance as to EBITDA contributions from growth CapEx in 2011 and 2012. It's a pretty wide range. I think you said $25 million to $55 million for 2011. What accounts for the wide range there?

It really just ties to the specific guidance we gave per segment. I agree it's a very wide range.

So what would cause it to be, the contribution to be on the low end versus the high end of the range?

It could be construction delays. It's really not going to be on the storage side related to the fees. Most of this is contractual. The fees have already been arranged.

We've probably been pretty conservative because we don't have a history of destruction. We've been on the conservative side.

It was concluding -- I noticed that as well. It's a pretty big range, but really most of it is on the storage side, most of that range. The asphalt guidance is really a tighter range because we're pretty much saying we expect it to be fairly comparable.

Well, he's talking about [process] anyway, so --

Could you say that -- let's say it's construction delays, what would the cumulative amount between 2011 and 2012 would be, assuming -- ?

We don't have that for you now. We could help you if you want to call us separately we could give you some feedback on what got delayed for a quarter, what that would mean, but it's just a range.

And then my other question was regarding fuels marketing and contango trades there. What do you guys expect to earn from that this year, how much of the outperformance in marketing is coming from that?

You mean just the contango trade?

Yes, exactly.

I think it's about $4 million to $5 million this year.

Okay, and that's expected to be realized later in the year basically, like Q3 or Q4?

Fourth quarter, yes.

Fourth quarter. Great. Well, thank you very much.

Thanks, Louis.

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

Good afternoon. What was your inventory at the end of the quarter, in terms of -- if you can break it out to kind of crude input versus refined product, finished goods?

Now this is of course -- the height of the inventory curve would have been at the end of June.

We had, do you want me to, I've got -- we've got about 7.8 million barrels, of which have 2 million barrels or so was crude.

Was crude?

Of the asphalt product.

And the rest is asphalt and other goods?

And the other products.

Right. The intermediates and the bunker and all of that.

Okay, and then the second thing is the numbers that you gave earlier in response to the question on Turkey lead times, $25 million to $30 million of spend to double the capacity -- is that referring to your ownership stake of 75% or is that the gross numbers?

Let me make one clarification. I wasn't using eight times for our acquisition of Turkey. I kind of threw that out as a hypothetical standard multiple. We bought it as a lower multiple than that.

That's right, sorry, but are you referring to the enterprise value or just on a gross basis or just your 75% stake?

I'm talking about on our stake, the purchase price that we paid versus our share of the cash flow.

I understand. So if you would pay $25 million to double the capacity, what you're saying is that the full spend of the JV is going to be $33 million? Am I understanding it correctly?

The $25 million additional was to we think about double the EBITDA. And the $25 million would be our share or 75% of the total capital required, but our share of the EBITDA would double from our initial share of the EBITDA. Let me try and put it that way.

I understand. And then can you talk a little bit about the Bakken? I guess you talk about it in this release, but also a couple days or weeks ago you did the municipal bond or the quasi municipal bond where you borrowed 50 basis points. And I assume all that money is going to expanding the St. James facility to take Bakken. If you're paying 50 basis points for money, I assume you're spending it all down there. It's got to be a pretty high return.

Well, typically we're running on levered IRRs. But it's great to get money that cheap, no question about that. And so we had $56 million from the first expansion project. We just closed on another $100 million of GO zone bonds on July 15th. And we've just gotten approval for another $100 million, which will apply to basically the second project that Curt mentioned with St. James, which is building 3.2 million barrels total with the tanks. So yes, it's great. I mean these bonds don't pay -- the investors don't pay state or federal tax, so it's very very cheap money.

Okay, so you expect that $256 million that you just highlighted to be spent this year and next in effect?

Yes.

$55 million of that -- sorry, is for St. Andrew and the other $200 million will be spent this year and next year completing those two storage projects in St. James.

Plus the Bakken.

The Bakken project and 3.2 million barrel project we mentioned.

About two-thirds is for third party storage not related to the Bakken.

But the third party is around $125 million to $130 million of capital. That's the third party piece.

That's the third party piece. And that will take you to 360,000 a day of capacity?

That 360,000 barrel tank that's going to be targeted for use in the Bakken project and the Bakken unit project is about --

It will allow you to get to 60,000 barrel per day capacity.

And it's about $52 million of capital.

And then a separate project is building 3.2 million barrels of storage.

And how big do you ultimately see -- I hadn't realized St. James to be, could service the Bakken in this way. How big potentially do you see St. James being?

Well, we're building it so you can do up to a capacity of 60,000-barrels a day at St. James. But the terminal itself has a lot going on now, because it's a hub location particularly for crude but also other products. When we first bought this, this was a 3 million barrel terminal or so with a lot of land, and we bought it saying this is a pretty good acquisition based on a multiple of how it turned in the past. But we bought it for future growth. So now we're going from 3 million to 8.3 million and we think we'll find even more than that to deal with this terminal. It's kind of a huge success story for us. It's kind of like Eustatius, when we bought in 2005, we expanded that tremendously. Or Amsterdam, where we tripled the size of what we started out with when we bought it in 2005. This one we bought in 2006 and we're on the way to tripling its size, more than doubling anyway with the current capital and I'm sure we'll end up tripling it over the next couple years. So that's the kind of thing we look for in an acquisition and that's what we just told you about with Turkey, where we said we can expand it rather substantially at relatively low cost, so it's a success story.

And we're not through, Andrew. We still are working some projects. Those are just the ones we've brought to completion so far.

I understand. Last question, Sunoco seems to be spending some time turning operating or refining operating assets into storage operating assets, Philadelphia where they want to service the New York Harbor or something like that. Do you see any of that ultimately putting pressure on New York Harbor and other types of East Coast storage operations? Or is it logistically complicated and there will always be kind of -- not on the lowest end of the cost curve with such a strategy as compared to your assets?

Yes, there's still a significant amount of unserved demand for storage on the East Coast, and I know what Sunoco's doing. We've got some projects to expand. Others have expanded and yet there's still unserved interest. But I don't see that putting a dampening effect on -- we're seeing a lot of storage projects in the last couple years, and the rates go up every quarter.

I understand. Great. Thanks so much for answering the questions.

You bet.

Thank you.

Your next question comes from the line of Joseph Siano with Credit Suisse.

Hi, good afternoon, guys.

Hi.

I just have a few questions. On the $500 million growth CapEx program, the breakout with $165 million in 2010, $200 million in 2011, and the rest in 2012, can you just give us a little more detail on the specific projects that comprise those numbers?

Well, Mike's got the list here. Obviously we've talked to you a lot on this call, the way it ended up on the St. James expansion. Go ahead, Mike.

It's about 18 separate projects, and most of the spending is on the St. James project with the third party storage and the Bakken crude handling, plus a project that's pretty far along at St. Eustatius, and one that's close to being finished at Texas City. It also includes the project we mentioned with the acquisition of the Turkey refinery. Just about all of it is in the storage segment. Very little of it is in the asphalt and fuels marketing and transportation. There's only about $10 million of the $500 million in transportation and even less than that in the asphalt refining.

There's a few ethanol blending projects as well. I mentioned that in my remarks.

Okay, great, and turning to the transportation, can you give us a general sense of what percent of the tariffs are based on the PPI?

Yes, the FERC regulated tariffs?

Yes.

Well, they all are. Some are governed by Texas Railroad and some are governed by FERC, and the ammonia pipeline is subject to change too. So really virtually everything on the pipeline side is the transportation segment and the storage segment get moved every year, based either on government regulation or contract.

The contracts that usually CPI has.

Or even storage. So what we always point out with the exception of the asphalt fuels marketing segment, really great thing about our business is if inflation ever does come back, we'll be able to ride higher on the fee structure and the tariffs.

Looking at the volumes in the transportation segment, can you just remind us again the volume in 2009 associated with the sold pipelines?

It was in Q2 versus Q2, it was almost 53,000 barrels a day.

And remember that was a lot of volume and no money. That's why it's a volume hit, but not hardly any money hit.

And year-to-date 2009 versus 2010, it was almost 58,000 barrels a day.

And then turning to the fuels marketing, how repeatable do you view the profit there?

Well, we've invested money in one of the projects Mike mentioned coming to its last phase is in Texas City, and part of what we did is to invest money there, because we think there's a long term opportunity in fuel [hour] trading not just out of that facility, but that's where we've invested in the projects that Mike mentioned. So we think that's sustainable. Bunkers has been consistently profitable even in times of poor shipping markets, and that will recover with it, it will be supported by economic recovery as well. And now crude trading is something in that segment we just told you we're expanding because we see this profit opportunity with the Bakken and frankly other crude grades that we can blend and remarket to the industry from that location. So we wouldn't invest capital if we didn't think these were sustainable opportunities over the long term.

Got you, and one final question just on the G&A -- that was pretty low compared to I think last quarter you'd put out $27 million to $28 million expectation. It looked like it came in at $22 million, if you could provide any more color on that?

I think the biggest single factor was the unit compensation expense that -- Chris, you're looking at?

Yes, that was down almost $4 million year-over-year and it's probably about $3 million versus our projection back in April for the second quarter. Our unit price was down $3 in the quarter.

And the quarter a year ago was up nearly 8.

Right.

Just the timing of the swings comprises.

All right, thanks guys.

Thank you.

Your next question comes from the line of Barrett Blaschke with RBC Capital markets.

Hello?

Sorry, one follow-up question on asphalt spending. The outlook is that commercial, private sector, and government will kind of even out in 2012. Is there any expectation for what the government spending level is going to be by 2012?

Well, we have a couple things going there. We had the Highway Trust Fund reauthorization actually at an increased level for the balance of this year. What the industry has been pushing for is long term reauthorization so the contractors can plan. So it's nice that we've got more money on the basic federal spending program this year, but it really needs to be authorized on a multi-year basis to give the industry more confidence. But let's assume that happens, which at current levels is a shortfall. The infrastructure in this country will continue to deteriorate at the current levels of road funding that our Congress looked at in this year. It's already too low, and that's part of what all of us involved with this industry are going to be pushing for. Again, presenting the facts to our politicians.

Then with regards to stimulus, it continues into 2012 and I think that what happened in the markets where we're concentrated on the East Coast. The East Coast states have tended to lag the spending as compared to the obligated amounts -- in other words the amounts that they put for specific projects of the amount that was originally portioned to them. So we may see as it continues into 2012, we may see a little bit more of that in our markets on the East Coast stay in place -- New Jersey, Pennsylvania, New York, so on and so forth, a little bit more of that being done in 2012 than you would see nationally. Mike, do you want to comment further on that, because we're saying $11 billion this year is $5.5 billion last. That still leaves -- out of $27 billion, that still leaves another $11 billion, so there will be some --

And that's on the stimulus and we expect the Highway Trust Fund to be reauthorized for a six year period starting around 2012 at about $337 million dedicated for highways and bridges. But the big factor is we expect the non-federal funding to start coming back in the states and municipalities.

I think that's really the swing factor here.

All right, thank you.

Thank you.

At this time, there are no further questions.

Thank you, Operator.

Presenters, do you have any closing remarks? This does conclude today's conference call. You may now disconnect.