NuStar Energy LP (NS) 2010 Q3 法說會逐字稿

Good afternoon. My name is Casey 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 third quarter 2010 earnings conference call. All lines have been placed on mute to prevent any background noise. After these speakers' remarks there will be a question and answer session. (Operator Instructions). Thank you. I will now turn the call over to Chris Russell, Vice President of Investor Relations. Please go ahead, sir.

Thank you. Good afternoon, everyone and welcome to our conference call to discuss NuStar Energy LP and NuStar GP Holdings LLC third quarter 2010 earnings results. If you have not received the earnings releases and would like copies of each, you may obtain them from our website at NuStarEnergy.com and NuStarGPHoldings.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, please feel free to call or contact us after the call. With me today is Curt Anastasio, CEO and President of NuStar Energy LP and NuStar Energy 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 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 these forward-looking statements, and we undertake no duty to update any forward-looking statements to conform the statement to actual results or changes in our expectations.

During the course of this call, we'll also make reference to certain non-GAAP financial measures. We provided some additional schedules 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 flow provided by operating activities or any other GAAP measure of liquidity of financial performance. Now I'll turn the call over to Curt.

Thanks, Chris. NuStar Energy's third quarter results were stronger than expected, when guidance was given on August 2nd. Third quarter 2010 EBITDA of $131 million was higher than our guidance of $100 million to $120 million, and higher than the $124 million of EBITDA earned in the third quarter of 2009.

Third quarter 2010 earnings of $0.90 per unit were also higher than our third quarter guidance of $0.50 to $0.70 per unit, though less than the $1.03 per unit earned in the third quarter of 2009. The lower year-over-year third quarter earnings per unit is mainly attributable to about $0.20 per unit of dilution that occurred as a result of NuStar's November 2009 and May 2010 equity issuances. Distributable cash flow available to Limited Partners for the third quarter was $84 million or $1.30 per unit, higher than the $61.5 million or $1.13 per unit generated in the third quarter of 2009. The $22.5 million increase in distributable cash flow available to Limited Partners was due to the quarter-over-quarter increase in EBITDA, lower reliability capital spending, plus the fact that our mark-to-market hedging adjustment was $16.5 million better in the third quarter of 2010.

In the third quarter of last year, we reduced distributable cash flow available to the Limiteds by $15.3 million for an unrealized non-cash hedging gain. This quarter, we added back an unrealized non-cash hedging loss of $1.2 million. As a result of our strong third quarter performance, the Board of Directors of both NuStar Energy and NuStar GP Holdings declared increases in the distributions of both Companies. NuStar Energy's Board of Directors declared a third quarter distribution of $1.075 per unit which is $0.01 per unit or about 1% higher than the second quarter of 2010 and third quarter 2009 distributions of $1.065 per unit. The NuStar Energy distribution will be paid on November 5. Distributable cash flow available to Limited Partners covered the distribution to the Limiteds by 1.21 times for the third quarter of 2010.

For a third consecutive quarter, the Board of NuStar GP Holdings has approved an increase in the quarterly distribution. The third quarter distribution of $0.48 per unit, payable November 10, represents a 4.3 increase over the $0.46 per unit paid for the second quarter of 2010 and a 10.3% increase over the $0.435 per unit for the third quarter of 2009.

Higher than expected third quarter EBITDA and earnings per unit results were mainly attributable to better than expected results in our transportation and asphalt and fuels marketing segments. Higher throughputs on our crude, refined products and ammonia pipelines boosted our transportation results. Increasing refined products demand, a customer deferring a refinery turnaround until 2011 and increased ammonia demand in anticipation of a strong Fall crop planting season contributed to the higher throughputs. Reduced asphalt supply in the Northeast and stronger than expected light product margins, due largely to improved refining crack spreads contributed to better than expected margins in our asphalt refining and marketing operations during the quarter.

Revenue enhancement and cost control initiatives implemented by our asphalt refining and marketing group also contributed to our better than expected performance. Our efforts to increase asphalt sales volumes of higher margin polymer-modified and specialty grade asphalts during the third quarter were successful, increasing our revenues and margins from those products during the quarter. Consolidating our marketing efforts into fewer terminal locations allowed us to reduce some of our leased terminal costs.

In addition to performing better than guidance, all three of our business segments performed better than they did during the third quarter of 2009. Our storage segment continued to benefit from new customer contracts, higher renewal rates on existing contracts, increased customer demand for storage services, and additional EBITDA from our May 2010 Mobile, Alabama terminal acquisition. As a result, revenues increased 5% or $5.9 million. Operating expenses in this segment increased 5% or $3 million, due largely to increased OpEx incurred as a result of the Mobile, Alabama terminal acquisition and our decision last year to defer hiring at some of our facilities until 2010.

A 5% year-over-year increase in third quarter throughputs contributed to higher EBITDA in the transportation segment. Increased refinery utilization rates caused crude oil pipeline throughputs to improve. In addition, better weather conditions this year in the Midwest and strong worldwide demand for corn caused throughputs on our ammonia line to be higher than in the third quarter of 2009. Higher throughputs more than offset the 1.3% tariff reduction that went into place July 1 on a majority of our pipelines, causing revenues to increase by $2.6 million or 3% in this segment. EBITDA in the asphalt and fuels marketing segment increased, mainly due to improved gross margins in our asphalt refining and marketing operations.

Total gross margins increased by $10.7 million. Per-barrel gross margins increased to $7.83 in the third quarter of 2010, compared to third quarter 2009 gross margin per barrel of $5.03. Tight asphalt supplies in the Northeast, higher light product margins, and increased sales volumes of higher margin polymer-modified and specialty grade asphalts all contributed to the improved gross margins.

Increased margins in asphalt refining and marketing were partially offset by lower margins in our fuels marketing business, which were due mainly to paper hedging losses recognized during the third quarter on our fuel oil inventories as a result of rising prices. We expect those losses to be offset when the fuel oil inventory is physically sold in the fourth quarter of this year and the margin is recognized on those barrels. Operating expenses in the asphalt and fuels marketing business decreased by 7% or $2.5 million during the quarter. Lower terminal rent expense, due to our internal cost control initiatives, made up the majority of the decline in OpEx.

Third quarter 2010 G&A expenses were $26.9 million, $7.7 million higher than last year. The increase was due primarily to higher stock based compensation expense. NuStar's unit price increased close to 8% in the third quarter of 2010 versus being down 4% in the third quarter of last year. Interest expense for the quarter was $20.6 million, up $800,000 from last year. Reduced debt balances as a result of our November 2009 and May 2010 equity issuances were offset by increased interest expense incurred as a result of our issuance of $450 million of 4.8% senior notes in August.

Proceeds from the debt issuance were used to repay a portion of the LIBOR plus 62.5 basis point principal outstanding under NuStar Logistics' revolving credit facility. $450 million of fixed-to-floating interest rate swaps were entered into to minimize some of the additional interest expense associated with issuing those bonds and to maintain our 50/50 fixed-to-floating rate debt structure. As we move into the fourth quarter, EBITDA is projected to be in the range of $110 million to $130 million, or $20 million to $40 million higher than the fourth quarter of 2009. Continued strong results in our storage segment, along with increased earnings in our bunker fuel sales, fuel oil sales and refined products trading operations should contribute to our higher fourth quarter 2010 EBITDA.

Earnings per unit applicable to Limited Partners for the fourth quarter of 2010 are expected to be in the range of $0.60 to $0.80. Fourth quarter 2010 operating expenses are expected to be approximately $120 million to $125 million. G&A in the range of $27 million to $28 million. Depreciation and amortization, around $39 million to $40 million, and interest expense, $19 million to $20 million.

The fourth quarter should also be very active on the internal growth and acquisition front. Last week, we announced that NuStar and Koch Pipeline Company reached an agreement on a pipeline connection and capacity lease agreement. Under the agreement, NuStar will reactivate a previously idled pipeline in South Texas that will now be utilized to transport Eagle Ford Shale crude oil production to Corpus Christi, Texas refineries and terminals. We expect the project to be completed and in service during the second quarter of 2011.

By December, we expect to close our previously announced acquisition of a 75% controlling interest in a joint venture in Turkey. The joint venture will own two existing terminals with storage capacity of around 1.3 million barrels 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. With Turkish GDP projected to grow at 6% to 7% per year, petroleum demand is expected to increase much faster in Turkey than other European countries.

This fast growing market, plus two Turkish partners with a long successful business history in Turkey make this storage acquisition very attractive to NuStar. 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. The EBITDA multiple on the transaction is projected to be four to five times.

In December, we expect to complete two large internal growth projects. Our St. Eustatius terminal reconfiguration project should be completed, and generating additional EBITDA in early December of this year. Start up for this project was delayed approximately 30 days due to tropical storm activity in the Caribbean during the third quarter. Our Texas City terminal redevelopment project should be completed by the end of the fourth quarter. Total capital spending on these two projects should approximate $110 million and provide an additional $25 million to $30 million of annual EBITDA.

For the full year of 2010, NuStar Energy EBITDA is expected to be in the range of $480 million to $500 million, $20 million to $40 million higher than last year. Our 2010 storage segment EBITDA should be $14 million to $18 million higher than the $242 million generated last year. That's less than our most recent guidance of $22 million to $26 million higher than last year. The delayed start up of our St. Eustatius terminal reconfiguration project and lower third quarter vessel activity at St. Eustatius, also a result of tropical storm activity, are the main reasons for the lower storage segment guidance. The $14 million to $18 million increase in 2010 storage segment EBITDA is a result of the previously mentioned internal growth projects coming online in late 2010, higher renewal rates at some of our terminals, and additional income from our Mobile County terminal acquisition in May.

2010 EBITDA in our transportation segment is now projected to be $5 million to $10 million higher than 2009. This is higher than our previous guidance of comparable to last year, due to higher than expected throughputs, specifically on our mid-continent refined products and ammonia pipelines. One of our customers deferring a turnaround from the back half of 2010 into 2011 also contributed to the increase in our guidance.

EBITDA for 2010 in the asphalt and fuels marketing segment is projected to be $25 million to $35 million higher than the $80 million earned in 2009. Asphalt operations EBITDA is now expected to be comparable to the $70 million of EBITDA generated in 2009. As cited earlier, reduced asphalt supply in the Northeast and stronger than expected light product margins, as well as NuStar's revenue enhancement and cost control initiatives, are contributing factors to our slightly improved outlook for asphalt in 2010.

Our fuels marketing operations should post results that are $25 million to $35 million higher than the $10 million of EBITDA they generated last year. Strong results in our bunker fuel sales, fuel oil sales and refined products in crude trading should contribute to those improved results. Strong results in our fuel oil sales occurred primarily in the Gulf Coast where we invested capital to expand that business. Reliability capital spending for 2010 should be $50 million to $55 million while our total strategic capital spending should fall in the range of $215 million to $225 million.

Looking ahead to 2011, our results should continue to see the EBITDA benefit from the completion of more projects in our internal growth program. The majority of these internal growth projects are in our storage segment, which should benefit from $30 million to $40 million of additional EBITDA in 2011 from the projects. Tank expansion projects at our St. James, Louisiana and St. Eustatius terminal in the Caribbean will contribute the largest pieces of this additional storage segment EBITDA in 2011.

2011 will also benefit from our recently announced Eagle Ford Shale project with Koch Pipeline Company, which is expected to start up in mid 2011. We believe that the project with Koch would not be the only EBITDA-generating capital project we identify in the Eagle Ford Shale area. NuStar has transportation and storage assets in South Texas that could serve as effective beings to transport and store Eagle Ford production.

Asphalt demand should be modestly higher in 2011. We feel that both public and private sector demand will improve slightly next year. Supplies of asphalt should decrease starting mid-2011 as a coking unit in the Midwest starts up production. This combination of slightly increasing demand and reduced supply in the last half of 2011 should cause EBITDA in our asphalt operations to be slightly higher in 2011.

Reliability capital spending in 2011 should be comparable to 2010 at $50 million to $55 million. 2011 strategic capital spending should be significantly higher than in 2010, in the range of $320 million to $330 million; however as we move into 2011, we feel confident that additional strategic capital project opportunities will be identified, causing our 2011 strategic capital to be even higher.

In closing today, we are very pleased with our stronger than expected third quarter performance and look forward to closing out 2010 with a record fourth quarter. In addition, with the EBITDA benefits from our large strategic capital spending program, and our upcoming Turkey terminal acquisition, EBITDA and distributable cash growth should continue into 2011 and beyond. So at this time let me turn it over to the Operator so we can open up the call to Q & A. Operator?

(Operator Instructions). Our first question will come from Michael Cerasoli from Goldman Sachs.

Good afternoon. Can you talk about the returns or EBITDA multiples in storage, that is, what you think is available domestically from an organic perspective versus international acquisitions and how do you decide to pursue one versus the other?

The best use of our capital wins is basically the answer. Well, we just gave you an idea on both of those areas that you talked about. We were able to do an acquisition in Turkey at what we project to be a four to five times multiple and we've got some good internal growth projects going on of roughly six or six to seven times EBITDA multiples, and both of those we think are very attractive and merit allocation of capital, so it's really not a matter of one wins out over the other. There are other strategic considerations some time where something short-term may look good but then we have a different point of view on the long term value of that asset, so we're not just looking at let's say an acquisition or an acquisition based on what it did the last 12 months or the last three years or the last five years and figuring the multiple that way. Our job is to have a point of view about how or what it is going to be worth going forward. So it's not to get too complicated in the answer but basically if it's something that meets our financial and strategic criteria, whether it's acquisition domestically or internationally, that's really not what governs it so much as the best project wins.

Okay. And then on to asphalt. Can you just spend some time talking about state and local spending in regards to that segment and then what sort of indications you're getting as we look into 2011?

Yes, we think the big components of spending that support asphalt demands such as the federal will continue to be there at a pretty good rate in 2011. We think we're going to have at least a continuing resolution that continues the highway trust fund spending at sort of historical to slightly higher rates going into 2011. There's a lot of political uncertainty about whether there's going to be a multi-year authorization and whether it's going to be higher like people like Oberstar wants so we're kind of leaving that whole political uncertainty aside and saying you're at least going to get what you've seen historically from the federal.

And then in the private sector, when you look at sort of housing inventory being worked off and housing starts, particularly in our markets, we think that private residential and commercial activity will be somewhat better as well. So overall we're seeing sort of a modest uptick in demand. And with regard to the stimulus spending, there's actually been more of a lag of the spending in NuStar's markets, which are concentrated on the East Coast, compared to the rest of the country. In other words, the rest of the country has already spent more of its road-related stimulus funding than our markets have, so we have a little more to look forward to in 2011 than with other regions. And Mike Hoeltzel is here. Mike, do you want to comment further with regard to private, public, state and local, maybe state and local?

I think you covered most of it. State and local is lagging behind on the public spending, but the stimulus is keeping the federal funding in line. And then on the private demand, we feel that commercial hasn't yet bottomed out yet but the residential is starting to make a slight comeback, and that's what we expect to lead most of the growth in 2011.

Okay, finally, do you expect any incremental blending opportunities following the selective approval of E15?

We've got good ethanol blending projects all over the map as it is. I don't really think E15 is going to be a major factor for us to enhance what we already have going on ethanol, but it remains to be seen how much of that is actually going to be made available and where. But Danny, do you want to comment further on it?

Well, nearly all of our truck racks for gasoline have ethanol blending available now, so it's just really a matter of dialing in a different blend if that's where they want to go so to speak, so no problem for us.

Great. Thanks and I look forward to seeing the team at the Analyst conference.

Look forward to seeing you, thank you.

Our next question will come from Mark Reichman from Madison Williams.

Good afternoon. I just had a couple of questions regarding the agreement with the Koch Pipeline Company. The first is how much do you need to spend to get Pettis up and running?

Not that much. The pipeline existed so we're just connecting kind of both ends to their business and it's somewhere between $5 million and $10 million is what we'll have to spend to get going.

And then have you said what the duration of the lease is?

Well, I think all we said is that it's long term.

Okay, and then Curt had mentioned other opportunities in the Eagle Ford. As you evaluate those opportunities, do you see yourself more or less just kind of looking at the assets that you have and maybe striking more agreements with an operator like Koch, or do you actually see that area as being a potential for some significant investment in new facilities?

Well right now, we're focusing on the assets that we have, and you know it's not just the Eagle Ford Shale development. We have probably half a dozen pipelines that are -- that go through certainly the Eagle Ford development and also the Barnett field up in the Dallas Fort Worth area as well as the Niobrara field in Colorado. So we've got like I said about half a dozen pipelines that we're working projects on. The one common theme on those particular pipelines is they are underutilized, so there's significant upside to participating in these developments that are current assets.

Fantastic. Thank you for the color.

You bet.

Our next question will come from Joseph Siano from Credit Suisse.

Good afternoon.

Good afternoon.

I guess just to first follow up on the Eagle Ford, how do you anticipate the volume growth to occur once the project comes online?

Well, yes. Into this project I'm going to turn it over to Danny, but the first one we signed up here is a combination of a minimum guarantee. In other words, we take our pay with some volume upside. And we expect to actually capture the volume upside on the project based on what we know about our shippers' intentions and plans here, but Danny do you want to comment?

Well that's exactly right. Most of it is guaranteed, like as Curt mentioned, with some upside as they fill the line, but there's also an expansion case that we're already working on, and I think that in our press release we mentioned that starting off the pipeline can do 30,000 barrels a day but it's expandable up to 50,000, and we're already working on that.

So how quickly could you potentially bring that to 50,000?

Doesn't require much. I think it's just the horsepower initially. It's not a major time lag or major amount of capital.

Okay, great. And then I guess just quickly on the Turkey JV. I think originally you had expected maybe an October timeline foreclose but now December. Can you comment on what was the delay there?

Yes. It's really -- there's no commercial issues between the parties or anything like that. It's just really longer than expected, sort of bureaucratic processing in Turkey. Some of the permits, it would have to be transferred into the new joint venture, so we don't anticipate any problems. Just that whole process going a little slower than we thought.

Okay, fair enough, and then just more generally on distribution philosophy. Could you remind us again what philosophy is in terms of how you view the cash from asphalt and fuels marketing? You target holding back the 50% of that cash flow or is it 50% of just the asphalt and not the fuels marketing, how you think of that?

Yes, really, we discussed it initially really more with just the asphalt segment, I mean the asphalt portion of the segment. And since we acquired the asphalt operation in the first quarter of 2008 through September 30 of this year, we've not used any of the asphalt distributable cash flow to pay for the distribution. I understand money is fungible, but the coverage ratio that the rest of the business has provided has been 1.08 when you look at the roughly 2.75 years that we've owned that business. If you count the asphalt DCF with the rest of DCF that we have, the coverage ratio has been 1.2 times over that 2.75 year period.

Okay, and then I guess digging into the fuels marketing a little bit, first what's the break out between the fuels marketing EBITDA and asphalt EBITDA for the current quarter?

Well, I can give you that. We've had -- year-to-date, you want it for the quarter or for --

For the quarter. I don't think I saw it in the reconciliations this quarter.

For the quarter, about $34 million came from asphalt operations.

Okay. Good, and that's the EBITDA?

Yes.

And then last one on that is what's really changed from last quarter to drive the much-stronger-than-expected 2010 results in the fuels marketing and then how much of that $25 million to $35 million is locked in?

Yes, I don't think it's so much when you talk about last quarter is this, a change in fuels marketing so much as a change in our outlook on asphalt. We always anticipated a pretty strong fuels marketing contribution this year significantly higher than last year and that held up and that's still our outlook for the year. But really, our outlook on how asphalt would contribute to the bottom line is what has strengthened.

And then for the fourth quarter, I think a lot of it is the Contango trade which is locked in, so much of the continued benefit that Curt talked about in the fourth quarter from that segment, it's really much more on the fuels marketing -- the non-asphalt portion of that segment, some of which is Contango.

Okay, great. Thanks guys.

Thank you.

Our next question will come from Brian Zarahn from Barclays Capital.

Good afternoon. With your entry into Turkey can you give a little more color on your thought process to expand in emerging markets?

Yes. I think as I said earlier if we have an investment to make that meets our financial criteria and it stacks up well as a priority against our other allocations of capital, you then really need to look at all the other aspects of investing in a new location. Can we do it efficiently, will we have enough critical mass there, is it synergistic with anything else we're doing from sort of an overhead or an operational or a trading standpoint? And Turkey met all of those criteria and you have to make a political assessment as well. And of course Turkey is a modern secular nation, although it's largely Muslim, democratic institutions are in place, and it's really a very important ally not just to the West but to the United States. So we didn't have really any hesitation in making that investment in a geographic area where we've actually been looking for some time in the Mediterranean and I think we'll have more to do there.

So as you get further afield from that, some of the other issues become more, get more into play in terms of is this something we can efficiently manage, is it synergistic and so forth. So we account for all of that and we rank order all of our investments whether it's acquisitions in emerging markets or investment in Texas City or Houston area, and we prioritize them based on taking all of those financial and I'll say non-financial criteria into account and prioritizing where to put our capital. So but we're not -- all of that having been said, there's no limit per se geographically. We could invest anywhere in the world provided we screen those investments the way I've described.

I think I might just add, Curt, that we listen to some of our major customers, some of the national oil companies and majors that we do a lot of business with and when they tell us they want to be in some region, we're interested in that region. So typically, those moves would be backed by a lot of support from our customers.

And storage in particular, is a global business and you have oil traders and national oil companies like Danny said who have a global perspective on where they want to store and trade and so forth, so they talk to people like us about multiple locations.

Appreciate the color. On your maintenance CapEx you mentioned 2011 to be similar to 2010. Given the heightened attention of pipeline safety, can you talk about your expectations for any increase in maintenance CapEx, maybe after 2011?

Yes, there will be after 2011 because of the heightened expectations and the potential for heightened regulation, there will be some increase that everybody faces, not just NuStar. But it certainly appears at this point to be manageable and it comes into play in the whole discussion about tariff adjustments because these are real costs that pipeline operators whether it be NuStar or anybody else is going to be facing from a regulatory -- a mandate standpoint that they didn't have beforehand and should properly be recoverable in a pipeline tariff. And so that's part of what that discussion is going on right now, a robust and sheer operation. Rick?

I would point out that we've always had a robust integrity management program, especially around our storage and the pipeline. We've done things in the past that had postured us to where we're getting good results on all of our second and third tool generation runs. So our reliability capital I think is in line with where we think we need to be on our integrity program.

And just to support what Rick is saying, from the times we've looked at this in terms of capital from a per-barrel standpoint or comparing to some of our peers, for better or worse, we're toward the high end. We think it's for the better, because you're maintaining the integrity of your assets, they are long-term value and reliability of their operation, not to mention safety and environmental excellence. And from a relative standpoint, we should be impacted less by increasing requirements than some of the peers that we look at.

Finally, you've got backlog on some projects, favorable environment, acquisitions with low cost of capital. I guess you hinted at it earlier about your distribution policy but when do you think you can return to 2009 growth rates?

I think this year -- we never really gave specific guidance on a distribution increase other than saying we had one budgeted and it wouldn't be a big one. Next year, we expect it will be higher than this year but I don't think it will be back to 2009's level but certainly it could be. Really it will depend a bit about asphalt. If the economy comes back faster, we'll be in a much better shape to get back to a level of increase that we have in 2009. But the storage projects start coming in very strongly starting next year. The coverage ratio should be fully restored by 2012, so I think long answer there but next year should be better than this year and the next year probably will be back to -- should be back to 20, 29 levels of increase. And the coverage ratio should be restored up to -- this year we'll probably be close to 1.1. Next year, about that level as well, maybe a bit higher depending upon asphalt, and the year after that, I hope, we'll be back in 2012 to the sort of 1.2 plus level that we had both in 2009 and 2008. I think our coverage ratio is 1.27 in 2009 and about the same maybe 1.25 in 2008.

Thank you.

So all of the money we're spending on storage at these lower multiples than what we trade at are all going to be finding their way to the bottom line.

Great. Thank you.

Our next question will come from Steve Maresca from Morgan Stanley.

Good afternoon, everybody. You talked a little bit about storage rates increasing. Can you give an order of magnitude or what rates are increasing and what do you attribute the strengthened rates to?

Yes, we've had a lot of increases but we kind of booked already. Danny, do you want to comment further?

Well just looking at quarter-on-quarter, Curt had mentioned that the storage segment revenues were up about $6 million, about half of that was due to higher renewal rates. I think for the full year 2010 in that $14 million to $18 million increase on EBITDA really most of that was on renewals. I don't think you're going to see that repeated next year. I think there were some step changes in some of our markets in '09 and the beginning of 2010 that we've adjusted those rates and--

It will be less about renewals and more about new projects coming online.

Right. Going forward.

Okay, that's helpful. And did you talk about what you expected fourth quarter EBITDA? I know you went through the other numbers and I may have missed that, a range for fourth quarter EBITDA?

$110 million to $130 million.

Okay. That's all I had. Thanks.

Good. Thanks, Steve. Just to follow-up on the coverage ratio, I think one important thing to recognize is what we put together the budget in the fall of 2008 or 2009, we really cut our strategic CapEx for storage because given how bad things were with who was going to bankrupt next in the Investment Banking community, we put together a self-financing budget for 2009, and as the year progressed, and the access to capital opened up, we started spending more than we had budgeted on storage.

But we were really hurting this year in terms of our distributable cash flow and EBITDA for that decision we made to do a self-financing budget for 2009. So while the asphalt business has been shorter than we initially budgeted, that's kind of an obvious thing to point to, I would say our decision to cut CapEx on the storage side hurt us this year, and now we've got the flood gates open, we've got more projects than we know what to do with honestly, at very attractive multiples of EBITDA. So that's really going to help next year and then even more so in 2012.

Our next question will come from Xin Liu from JPMorgan.

Good afternoon.

Hello.

Just want to get a little bit more color on your asphalt business. You mentioned in the third quarter the market is a little bit stronger. When I look at the benchmark price in New Jersey, asphalt prices, actually it was down a little bit on average from the second-quarter levels. Can you give more color on what you're seeing in the market?

Yes, the price or the margins?

The price. I'm looking at the price, the overall asphalt price is a little bit lower than second-quarter levels.

Okay. Well, what we tried to give you on color was more about margins than the absolute price of the products that we sell. The margins are better for the reasons we laid out in the call in terms of the cost initiatives and supply tightness in the marketplace, particularly in the Northeast. And so that really is what was responsible for the bottom line improvement, either Mike or Paul or anybody wants to comment further on that. Maybe we just expand the answer a little bit to why the third quarter is good as it is.

I think one of the things that happened to the price of the crude dropped dramatically early in the -- I guess, late in the second quarter and that carried forward. And then the price of the forward curve worked up a little bit in the price, but I think the margins were a little bit stronger. And what also is happening to us in the third quarter is the wholesale volumes we saw those margins come in but the [wrap] prices that you were quoting were actually held pretty steady.

Okay, got you. And another question, you mentioned there, the customer delay on turnaround. When do you expect that turnaround to happen in 2011?

That's all in our 2011 forecast of a better 2011 compared to 2010 but when did they move that to?

First quarter.

First quarter, okay, got you. Thanks.

Our next question will come from Darren Horowitz from Raymond James.

Hi guys. Curt, if you were to back out the Contango trade on fields marketing that you got locked into the fourth quarter, how much visibility do you have into higher margins from the polymer-modified specialty asphalt projects continuing not just the back end of this year but into early 2011?

It's been steadily increasing. Like this year, we more than doubled our sales of-- we tried to increase our sales of warm mix, the polymer-modified sales are up. They're not double but they are up and the margin on specifically polymer-modified, how does the margin run on the ploymer-modified versus the hot mix?

Well especially as a whole it's $1 to $10 a barrel premium.

Yes.

So that's quite a big range.

The more polymer that you have in the products, the higher the concentrated polymer plus the $10.

But the volume has been climbing. I think the PMA is now what, about 10% of our sales?

10%.

Currently, from being in sort of the mid-low single digits when we first got into this and the warm mix is still a very small percentage of our volume but it has a rapid growth rate to it, so I guess to expand a little bit on my answer, going forward, we expect these types of specialty products to be an increasing proportion of our overall asset sales -- asphalt sales. We see some of that going on already and we expect that to continue and that's really a part of the reason behind how you saw us announce this alliance with Road Science, the group that had, they were affiliated with some materials and they have all of the proprietary technology around some of these higher margin asphalt specialty products, and their alliance with NuStar will enable us to jump start what we see already happening, which is an increasing proportion of the specialties being part of our overall sales.

Sure. If you were to take the PMA and the warm mix together do you have a target for 2011 as a percent of the gross? Is it 15% or closer to 20% to 25%? Obviously it comes or has come at higher margins so it's working.

I don't remember. It won't be as high as 25%.

It will be closer to 15%.

Okay, and then on the supply side, can you quantify the impact that you think that started with the Midwest Coking Unit is going to have on domestic supply in the middle of next year? I'm just curious as to your thoughts on the supply-demand balance for 2011.

We've been looking at the three cokers that are coming on between mid-2011 and mid-2012. If they're run at a typical percent utilization would be about a 70,000-barrel-a-day decrease in asphalt supply.

Okay. Thanks guys I appreciate it.

Thank you.

Our next question will come from John Tysseland from Citi.

Good afternoon gentlemen. Real quick, can you remind me if or how you hedge your currency risk with your investments outside the US, or do you consider the returns high enough that your currency fluctuations are not necessarily a concern?

Yes, they are pretty much not a concern. I mean, we -- in St. Eustatius, it's dollar-denominated. Virtually all of the contracts in Point Tupper are dollar-denominated, US dollar denominated, and Amsterdam, we have Euro contracts and a Euro investment so we're sort of hedged that way. And in Turkey we're considering what to do there.

It depends to some extent on projects going forward and what they might be contracted for. As Danny said a lot of times we're going places because companies want us to go there, so depending upon what we do there we'll either hedge or not hedge. We've never hedged the balance sheet exposure. It's just too expensive and not particularly fruitful to do that, so all my comments are about profit and loss accounts.

Right. That's helpful. And then also on the same topic, when you repatriate the returns on those type of investments are there any costs with bringing that back into US dollars or no?

Yes, there are. I mean you always have local area taxes because we don't get flow-through partnership status in any of the countries that we're in really, so you do have that leakage. We try to manage that as best we can by putting debt into that entity or whatnot; and the tax rates vary all over the place by the way from very, very low taxes in St. Eustatius to more a more normal tax of, let's say 25% to 30% in the other jurisdictions we're in.

When you repatriate you have a withholding, now our partners can get credit for that foreign tax paid against their return. What we do is we go in with our eyes wide open and these investments and know we fully burden the leakage. We presume the whole tax load of local income tax and a withholding on the repatriation. And we're still looking at after-full-tax multiples of five to seven times.

So we stack it up against everything else.

Of DCF with the tax leakage and if you look, John, at our DCF table, you see we actually deduct the taxes paid both in the states and overseas to recognize that it is a true leakage. But again, the partners do get a credit for it.

Great. That's helpful. Also more on the thematic side. We've seen a lot of GP take out and MLP simplifications. I just wanted to get your view on if that makes sense for NuStar and to pursue that type of transaction. And also, do you view these as normal kind of investments or do you see it as more of a strategic competitive issue?

Well, we've noticed that those deals are going on, and we do look at it all, we evaluate it on a regular basis, we keep our Board apprised on how it looks. The situation we're in because NuStar has one of the lowest cost of capitals of all the MLPs that's a less compelling reason by far for us than it is a lot of the companies who have decided to do this. But it's something we will, we have evaluated and we'll continue to evaluate, so Steve do you want to add more to that?

I think that's it. Having [cut] the split from 50 to 25 years ago, we don't have the burden that others do. I think our weighted average take probably is about 13%, something like that, so many of the others were much higher and it was driving their cost of capital and candidly, we're just not having trouble getting deals done at good multiples. We haven't been in a bidding process for an M&A deal. We found the best way to spend money is organically at six, seven times multiple. Given where we're trading, those deals are particularly attractive.

Great. Thank you very much.

Our next question will come from Ross Payne from Wells Fargo.

Curt, how are you?

Hi, Ross, how are you?

Just wanted to ask you on the asphalt side, is there a decent amount of pent-up demand on the private side as well as on the public side?

On the public side there's a ton. I mean, the infrastructure in this country including the roads and highways continues to deteriorate. I mean, we were behind on the condition of our infrastructure before the financial collapse, so there is just a ton of pent-up demand and it's really going to hurt our economy if we don't get our infrastructure in shape to continue to compete globally. I remember recently tacking a trip to China around some of the major cities. It is scary how much better their roads are than ours, and so they are zipping along getting goods to market and being extremely cost-efficient and low cycle times and all of that, so this is a real issue for the country.

I think on the private side, as we've said, we think commercial hopefully has about bottomed out. Residential is starting to uptick now particularly in our market. You see housing inventories being worked down and you see more housing starts, we think that modestly continues into 2011, that whole process. So there will be more demand there and then Mike, you've looked closely at all of this. Do you want to comment further on that?

Well, there are a number of options being considered on the public side to make up for the difference but politically it's not clear, there's opposition from both sides on new taxes, so they're looking at bonds and sales tax increases and frank fees as possible options to increase the amount of funding available for highways. There is no news on that yet.

There's a lot of political uncertainty right now. Obviously you got the November elections coming up and nobody wants to step into a land mine on that and commit to anything, and then you'll have a lame duck section of Congress, a session of Congress coming up after that. So I think we're just kind of in the crazy season in terms of anybody stepping up seriously on political solutions to this problem until the elections are past us and we know what the new Congress looks like and people can get a little more serious about taking the point of view on this.

Okay, on the state budgets, I mean obviously they've been very tight. They're looking at maybe some potential new taxes. But can you speak just generally about what you're hearing from the states and their ability to contribute to the federal funds?

It varies state by state. We did find that the State of Virginia found $1 billion in their highway funding budget that was available for spending, so there's some positives there, but in general, it's just states are still finding their revenues quite a bit shorter because of the recession and it will take a while for that to recover.

It's tied to the economy. The economy improves, the states will have more money available.

I think the states are in the same position as the Federal Government and everybody is looking for ways to fund the backlog that you talk about, Curt, and nobody wants to step up and present anything at this time.

But it's going to have to be addressed. There's a lot of proposals floating around and I think as I said we'll know more about this after the election. And probably not really until 2011 will politicians get serious about this subject again.

Okay, thanks guys.

Thank you. Our next question will come from Andrew Gundlach from ASB.

Good afternoon. Steve, with respect to your comments and some forecasts for 2011, it looks like the businesses can match to the cash flows except for the growth CapEx and so assuming that you spend $330 million, do you see that all debt-financed and if you would go over that or at what point do you start thinking about equity?

Yes, in the budget we presume no equity issuance for next year, so the debt to EBITDA we believe will come down from where we are now. We ended the third quarter about 4.57 times. Our budget shows us not as high as that next year. Probably more on average in the low fours but by the end of this year we'll probably be at four times as we come out of the seasonal build of inventory for asphalt. So we'll continue to delever in the fourth quarter, be at about four times. I don't think we'll get above 4.5 times next year.

Now much will depend upon how the business goes. We've, as Curt mentioned in his comments, we expect asphalt to be a bit better next year and that whole segment to be a bit better than it is this year, and then he gave color around what we thought the other two segments would do next year, so again, no equity issuance presumed, if we spend much more capital than that, yes, maybe we would do an equity deal. Obviously we haven't budgeted anything on an M&A deal next year, so that too could drive us to an equity issuance.

Yes, that's helpful and when you use 4.5 times, do you mean ex the seasonal inventory or with the seasonal inventory as kind of a maximum that you look at?

I would tell you that we can go above that and when you have peak inventories much depends not just on the volume but the price of that inventory.

Right.

We would like to be at 4.5 and below even at the peak levels, so I would say on average next year, we're probably around, let me just say 4.25 and the high point might be 4.4 when you're in June or so at peak inventory, so also our numbers are a bit inflated this year on that debt to EBITDA for two things. One we have a contango trade which we could unwind at any time and take that debt position down. Also we've raised Go Zone money which shows up as debt on our balance sheet yet the cash that's associated with that is actually sitting in an escrow account.

There's a Louisiana project financing money.

Right. Very cheap money that we've raised to expand the St. James facility, just the way that our covenant works and our bank agreement, you can't take cash on your balance sheet and net it against your debt position. We had $85 million of cash on our balance sheet at September 30 in addition to that free cash that we can get our hands to if we wanted to; we had nearly $90 million of Go Zone money we've raised, which is in escrow and shows up in our cash flow statement as we actually draw it out of escrow and spend it on the projects in St. James so the numbers are a little higher than otherwise just because of those features of how we have to calculate that covenant.

Makes sense and just extending the conversation to your earlier answer to the distribution growth where you said that 2012 you'd get closer to the 1.2 number and resume the growth rate of the dividend of past years or at least the peak of past years. Does that imply that starting in 2012, 50% of asphalt will start getting paid out because the rest of the business will be a 1.2-times-distribution coverage? So suddenly 2012 is an accelerating year where you get not only 50% but even maybe catch up a bit? How should one look at that?

It could. I'll be honest. I haven't dissected our 2012 spread yet. I mean, I could answer that better for 2011 than I can for 2012. It could really be that just the storage and the pipeline business alone is getting us close to that 1.2 times because these are done at very attractive multiples but I don't know precisely the answer to how that split will be.

Well maybe we can talk about it the next few days and a couple other quick questions. The Eagle Ford I assume that's in the transportation segment and I'm just curious what 30,000 barrels a day and 50,000 barrels a day means in terms of potential EBIT or EBITDA? I assume it's Texas-regulated, not FERC-regulated?

Well, unfortunately, it's backed by a single contract with a customer which we're not really at liberty to discuss those details since it's not a common gear to a line of multiple shippers.

But Danny told you it's a $5 million to $10 million initial investment so you can get a range pretty much just from that but I think the important thing is the start of, it's the first of what we think will be multiple deals there and it could really add up to something meaningful for us if we do what Danny said which was to increase the utilization of a lot of underutilized assets we have because that has potential to drop very quickly to the bottom line. You're not talking about a two or three-year pipeline project to get it done so as this develops, we'll certainly keep you posted but we've made a nice but relatively small start in this, and we think it has a lot of growth potential.

Just to give you context, 50,000 barrels per day is almost exactly 5% of our total pipeline throughput so it's a 5% increase.

Okay, and then just one other question on 2011. In your releases you talk about the potential for storage or so-called the internal storage projects to add, I can't remember the number now, $30 million to $40 million on a year-over-year basis. That is only referring to Texas City and St. Eustatius I assume and then the question is--

Those are the two single biggest pieces but that's sort of the overall.

But is that all you can do at St. Eustatius? In other words St. Eustatius has been turned around for the new customer and that's it or there are additional spend items?

Well now you're talking about something different. The 2011 over 2010 $30 million to $40 million is correct as an overall incremental amount but we do have, we're going to spend money on additional growth at St. Eustatius It's not going to all show up as 2011 EBITDA, it gets to what you're asking Steve about for 2012 because we think 2012 has a lot of potential to be a lot better than 2010 or 2011 but we're in the process of working on projects to do a further expansion at Eustatius.

Okay, so of that $320 million to $330 million spend as it stands today, how much would you say is in storage?

The vast majority.

Yes, the vast majority. We can get you more precise numbers.

But it's a good 80%.

And mostly that is the traditional five times build?

Maybe six.

Five or six.

Okay.

In that range. More like six.

Great. Okay, thanks for taking the questions.

Sure.

Our next question will come from Bradley Olson from Eagle Global Advisors.

Hi guys, how is it going?

Hi, good.

Just a couple quick ones. The first, you guys might have mentioned this, maybe I missed it but you mentioned a project on the storage side running about a month late. Which project was that specifically?

That was what we call the St. Eustatius reconfiguration project which was to convert some existing tanks and do some additional construction at St. Eustatius. And I brought that, that was because of the tropical storm activity and I brought that up really to explain why our guidance was lower in terms of the storage EBITDA improvement for 2010 compared to what we had previously said. It was because of that delay.

Okay, and that St. Eustatius this past quarter you mentioned the tropical storm activity but it wasn't enough to really hurt your overall fuel-marketing results? It was my understanding that St. Eustatius facility was pretty integral to your overall fuel-marketing operation.

It's not. It's not. It's really more of the US Gulf is the locale for the fuels marketing. Now we do have a Bunker marketing operation at Eustatius, and they had some delays because of the conditions in the sea as well, but they are still going to turn in a strong year.

Okay, and just one last question. I know that there was some talk that the St. James project was going to have Bakken-sourced crude and then from what I understood, it might be moving to Brazil-sourced crude. Have you guys, has that project found kind of where that crude supply is going to be coming from?

Well, in St. James we already are bringing Bakken into St. James for blending and marketing for ourselves and potentially for others too so we've started doing that already. Paul do you want to comment further on the rest of that?

Well that is for us, that's what we're bringing in. Well we've got a lot of customers that are involved in Brazilian productions that are interested St. James and as Curt mentioned we've already got the Bakken flowing so I guess I would say yes to both your questions.

Okay, all right thanks a lot.

Thank you.

Our next question will come from Yves Siegel from Credit Suisse.

Thanks.

Hello? Are you there?

Hello? Can you hear me? No?

Yes, we hear you fine.

Okay, well just a quick one then. As you think about the fuels-marketing operations, how large do you think that could get? Could that expand much beyond where you are today?

I think right now, the environment is not real conducive for growth on the product side. I think you're seeing some of the carry go out of the market so I think right now where we're at is probably where you would see that. The Bunker side, I think there's some growth opportunities on that, that we're exploring but I think we'll still try to make some headway there.

And to expand, does that mean individuals or would you acquire assets to expand that?

It would just be adding new locations where we have supply or we could grow.

Okay, great. Thanks guys.

Thank you.

Our next question will come from Selman Akyol from Stifel Nicolaus.

Thank you, good afternoon.

Hello.

As it relates to the Turkish acquisition I believe you referenced a four-to-five-times EBITDA multiple on it, which strikes me as being considerably lower than what you could typically do internal growth projects on, so my first question is, was there anything that drove it to be at those low multiples, number one, and then number two as you look out potentially to other emerging markets are there more in the pipeline, at very reasonable multiples?

Well, anything that drove it. I mean, I think we have a partner who is looking for, looking to NuStar to really come in because of our operational background, our safety and environmental performance. Our experience operating terminals and that's really now strategically where they wanted to concentrate, really our partner wanted to concentrate on trading, marketing, they have a very successful business going in Turkey they think they can expand further, so it's really from a strategic point of view. It was important to them to get the right partner and they thought we were it, and there will be other opportunities like that internationally as we go along here into 2011, so it won't be the last one.

All right, thank you.

Yes, I'm not sure if that answers your question. I think you just have to find the right partner, the right strategic fit and just hit it at the right time.

We have no further questions in queue.

Thank you, Operator. I'd like to thank everyone for joining us this afternoon. If you have any questions please call the Investor Relations group. Thanks and have a great day.

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation. You may now disconnect.