NuStar Energy LP (NS) 2012 Q2 法說會逐字稿

Good morning. My name is Kristy, and I will be your conference operator today. At this time, I would like to welcome everyone to the NuStar Energy LP and to NuStar GP Holdings LLC second quarter 2012 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. I will now turn the conference over to Mr. Chris Russell, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Kristy. Good morning, everyone, and welcome to our conference call to discuss NuStar Energy LP and NuStar GP Holdings LLC's second quarter 2012 earnings results. With me today is Curt Anastasio, CEO and President of NuStar Energy LP and NuStar GP Holdings LLC, Steve Blank, our CFO, and other members of our management team. Before we get started, we would like to remind you that during the course of this call, NuStar management will make statements about our current views concerning the future performance of NuStar that are forward-looking statements within the meaning of the federal securities laws. These statements are subject to the various uncertainties and assumptions described in our filings with the Securities and Exchange Commission and will not be updated to conform to actual results or revised expectations.

During the course of this call, we will also make reference to certain non-GAAP financial measures. Our non-GAAP financial measures should not be considered as alternatives to GAAP measures. Reconciliations of these non-GAAP financial measures to US GAAP may be found either in our earnings call press release or on our website. Now, let me turn the call over to Curt.

Good morning, and thanks for joining us. The recently completed second quarter and the few weeks that followed were a very active period for NuStar. In April, we completed the unit train offloading facility at our St. James, Louisiana terminal. That facility constructed jointly with EOG Resources can offload at least one 70,000 barrel unit train per day. To date, the facility is operating better than we had anticipated and should provide EBITDA to our storage segment in 2012 and for years to come.

In early May, NuStar closed on a new five-year, $1.5 billion credit facility that replaced our previous $1.25 billion facility. The larger revolver gives us access to additional capital to fund our increasing internal growth capital program. Late in May, we put hedges back on in our heavy fuel oil and bunker fuel inventories that had been unhedged for about two months during the quarter. We estimated that second quarter results would have been about $32 million, or $0.44 per unit higher, if these hedges had remained in place. Shortly after the inventory hedges were put back in place, we unwound the remaining $470 million of fixed-to-floating rate interest rate swaps that were in place on a portion of our 2020 and 2022 senior note maturities. With 10-year treasury rates falling to near-record low levels, we decided to unwind the swaps. $22 million in cash proceeds were received as a result of unwinding the swaps.

In the first week of July, we connected our Corpus Christi to Three Rivers, Texas 16-inch crude oil pipeline to a pipeline constructed by TexStar Midstream Services. These two interconnected lines are moving Eagle Ford shale crude oil from Frio County in south Texas to Corpus Christi. This is the third pipeline project we have completed in the Eagle Ford shale in the last year giving us the ability to move up to 250,000 barrels per day of Eagle Ford crude to the Corpus Christi market.

On July 6, we announced plans to sell 50% of our asphalt business to Lindsay Goldberg and create a joint venture. This transaction is moving ahead as planned and is expected to close no later than September 30. After closing, we expect to deconsolidate the asphalt operations. These July transactions are part of our plans to change the strategic direction of NuStar by reducing our exposure in the margin-based portion of our business and becoming more focused on optimizing and growing the fee-based storage and pipeline transportation segments of the Company. I will talk more about future plans for the fee-based side of the business later in this call.

Taking a look at NuStar's second quarter earnings, total EBITDA for the Company was negative $161 million. Obviously, that's significantly below last year's second quarter. It is primarily the result of $272 million of non-cash charges related to asset impairment, mainly related to the writedown of the Company's asphalt refineries as a result of the expected sale of 50% of its asphalt business to an affiliate of Lindsay Goldberg. Those impairment charges were partially offset by a $29 million pretax non-cash gain on a legal settlement. Excluding these and other items, second quarter 2012 adjusted EBITDA would have been $88 million.

Our storage and transportation segments continued to benefit primarily from additional EBITDA being generated as a result of the capital we have invested in internal growth projects over the last couple of years. Storage -- second quarter EBITDA of $77 million was $13 million, or about 20% higher than the second quarter last year. The third quarter 2011 completion of a storage expansion project, plus the April 2012 completion of the unit train project, both at St. James, Louisiana, as well as higher storage rates on new and existing storage contracts all had positive impacts on this segment's EBITDA. Included in the segment second quarter results, was an asset impairment charge of about $2 million from one of our refined product storage terminals.

Pipeline transportation segment EBITDA of $45 million was higher than the $43 million earned second quarter last year. Higher pipeline revenues as a result of the 6.9% 2011 tariff increase and additional EBITDA generated by the Eagle Ford shale projects completed for coke pipeline and Bolero in the second and third quarters of 2011 were the main drivers for the increase in EBITDA. This segment's results would have been even higher if not for a 45-day, second quarter turnaround at one of our customers' refineries.

While our storage and pipeline segments performed well, our asphalt and fuels marketing segment generated negative EBITDA of $285 million during the quarter compared to $78 million-plus earned in the second quarter last year. The asphalt portion of the segment lost $279 million of EBITDA during the quarter, compared to $55 million generated last year. Again, mainly due to the $266 million, or $3.69 per unit non-cash charge related to asset impairment adjustment on new storage asphalt refineries that I had mentioned earlier. In addition to being burdened with the asset impairment, continued weak demand for asphalt and gross margins which were significantly lower than last year's second quarter margins also contributed to asphalt's poor performance during the quarter.

Our fuels marketing operations lost $6 million of EBITDA during the quarter, mainly as a result of our heavy fuel oil and bunker fuel inventories being unhedged for a portion of the quarter. Those operations generated $19 million of EBITDA in the same quarter last year. The San Antonio refinery EBITDA was breakeven for the quarter [generating] $4 million less in EBITDA than the second quarter of 2011 as a result of lower crack spreads. As of the end of the second quarter, NuStar had hedges in place on all of our heavy fuel oil and bunker oil inventory. We still have some hedges in place for a portion of the 2012 and 2013 volumes to be produced at the San Antonio refinery. And, that has been the case since late 2008, no hedges are in place for any of the crude or asphalt inventory associated with asphalt operations.

With regard to second quarter corporate expenses, G&A expenses were $23 million, $3 million lower than last year, primarily due to lower compensation expense. Interest expense for the quarter was $24 million, up $3 million from last year. Increased debt levels required to fund internal growth programs, higher borrowing costs associated with our new credit facility, and reduced savings from fixed-to-floating rate interest rate swaps were the main reasons for the increase. NuStar's borrowing costs increased by about 1.25% per year under the new facility, and that cost increase is consistent with the change in the bank's credit facility market over the last five years. NuStar's debt-to-EBITDA ratio as of June 30 was six to one times. As a result of the expected weak second quarter results in asphalt and fuels marketing. On June 29, we obtained an amendment to our $1.5 billion credit facility which increased the leverage ratio covenant for the second and third quarters in 2012 to 6.5 to 1 times and 6 to 1 times, respectively. The covenant requirements had been 5.5 to 1 in the second quarter and 5 to 1 in the third quarter.

With regard to our second quarter distribution, NuStar's Energy's Board declared a distribution of $1.095 per unit. The distribution will be paid on August 10. Distributable cash flow available to limited partners covered the distribution to the limited by 0.22 times. The Board of Directors of NuStar GP Holdings declared a second quarter distribution of $0.51 per unit. The GP Holdings' distribution will be paid on August 14.

Moving on to the outlook for the last half of 2012, the storage segment should continue to benefit from the expansion projects completed at St. James in the past year plus the fourth quarter completion of a one million barrel storage expansion project at our St. Eustatius terminal. Third quarter 2012 results in storage are expected to be slightly lower than third quarter of 2011 because increased operating expenses, mainly maintenance expenses, at several of the terminals will more than offset the additional project income for that quarter. However, EBITDA for storage for the last half of the year is expected to be higher than the last half of 2011 while full-year EBITDA should be $25 million to $35 million higher than it was last year.

Results in our pipeline segment in the third quarter and the last half of the year are expected also to be higher than 2011. This segment should benefit from the FERC tariff adjustment effective July 1 of 2012, as well as additional EBITDA generated by our Eagle Ford shale projects with TexStar and Bolero. As mentioned earlier, the Eagle Ford pipeline connection project with TexStar Midstream was completed earlier this month. The construction of the new 12-inch line for Bolero should be completed and in service late this quarter or early in the fourth quarter. A fourth quarter turnaround by one of our customers is expected to reduce pipeline throughputs more than we initially anticipated. After adjusting our forecast for the turnaround, we now expect 2012 transportation segment EBITDA to be $10 million to $20 million higher than 2011.

Third quarter results in asphalt and fuels marketing are expected to be lower than third quarter of 2011 as results in fuels marketing, specifically bunker and crude oil trading operations are expected to be lower than last year. However, results for the last half of the year are expected to be higher than the last half of 2011. Reduced exposure to asphalt, as a result of the expected 50% sale to Lindsay Goldberg, as well as improved results in heavy fuel oil and bunkers should contribute to a stronger last half of the year in that segment. Full-year results in asphalt and fuel marketing are of course down significantly lower than last year, even excluding the impact of the large non-cash asset impairment adjustment.

As I said earlier, we plan to close on the sale of 50% of our asphalt business to Lindsay Goldberg by the end of the third quarter. Negotiations on an ABL facility which should finance about two-thirds of the joint venture's working capital requirements are in progress. We expect the ABL to be syndicated and closed by mid-September, allowing the final sales transaction to close shortly thereafter. The initial proceeds from this transaction will be used to pay down NuStar's revolving credit facility. We expect to reduce our debt levels by $400 million to $500 million depending on the JV's working capital requirements as a result of this transaction. The joint venture transaction allows NuStar to reduce its earnings volatility by reducing our exposure in the margin-based portion of our business, allows us to pay down debt and will provide additional opportunities to invest in stable higher return pipeline and terminal assets while simultaneously giving the asphalt JV the flexibility it needs to prosper in a more robust margin environment.

Turning briefly to guidance for third quarter corporate expenses, G&A expenses are expected to be in the range of $29 million to $30 million. Depreciation and amortization, around $40 million to $41 million. And, interest expense $25 million to $26 million. As we change the strategic direction of NuStar, we plan to invest more strategic capital on the fee-based side of the business, grow our annual EBITDA, increase our distribution growth, and significantly reduce the Company's debt. In terms of capital spending for 2012, [reliabilities] should total $45 million to $50 million while strategic capital should now be in the range of $425 million to $475 million.

Due to strong customer demand in the St. James area, we plan to construct a second railcar offloading facility at our St. James terminal. The estimated costs for that project are the main reason for the increase in our strategic capital guidance. We continued to pursue and identify new strategic growth projects not included in the current strategic capital guidance as well as look at acquisition opportunities as they arise.

On the pipeline transportation side of the business, we're pursuing additional strategic growth in the Eagle Ford shale region and other shale areas where our pipelines are located. In storage, we're pursuing growth opportunities at our St. Eustatius terminal in the Caribbean. Based on the projects we are currently pursuing, we feel our 2012 spending could be higher than the $425 million to $475 million range if some of these projects are finalized in the next couple of months. Strategic capital for 2013 could range from $400 million to $500 million, again depending on the number of new projects we finalize this year and next.

As a result of these capital spending projects, 2013 EBITDA should be higher than 2012 in all of our business segments. Storage EBITDA is expected to be $30 million to $50 million higher while transportation EBITDA should be $40 million to $60 million higher. Excluding the $266 million charge related to the non-cash asset impairment from 2012's results, the asphalt and fuels marketing segment EBITDA should be $30 million to $50 million higher as well.

Based on our current plans for strategic capital and EBITDA growth for the remainder of the year and all of 2013, we feel NuStar will be able to restore distribution growth to the higher levels more consistent with our past performance. But, this time, let me turn it over to the operator so we can open it up for Q&A. Operator?

(Operator Instructions)

We will pause for just a moment to compile the Q&A roster. The first question comes from the line of Brian Zarahn of Barclays.

Good morning. I appreciate all of the color on the segment performance and also for guidance. On guidance for '13 on asphalt, is that on an apples-to-apples basis with your deconsolidated results? Is that just fuels marketing and your 50% stake? Or, how do you -- that $30 million to $50 million of expected growth in that segment? Can you talk about that little bit?

By then, of course, as you know, the asphalt will have been deconsolidated. It's in the joint venture. So, the numbers we are giving you are predominately the relative performance of the fuels marketing piece, which is the bunker and the fuel oil marketing and the crude oil trading.

Just for further clarification, bear in mind, that guidance takes into account the fact that you had a $32 million hit for taking off the hedges in 2011 -- 2012, I'm sorry.

2012, right. But, it is apples to apples, because that's what happened in 2012.

And then, can you talk a little bit about the process for arriving at a JV versus the asset sale versus a complete asset sale?

Yes, we were approached on this by this private equity firm -- Lindsay Goldberg. And we got into discussions with them on it, and obviously, this is the worst that our asphalt operations have performed since we got into this in 2008. We've made money every calendar year except for this one, and selling at a low -- somebody once told me -- is not a great idea -- selling out totally.

So, we wanted to try to find a deal, if we could, that worked where we stay exposed to an upturn in this business while not selling it at a fire sale price. But, at the same time, basically get it out of our strategic direction and out of our story and really out of our numbers because of this deconsolidation. It was an opportunity to substantially delever it -- delever the Company. Give us some breathing room to invest in the fee-based side, because we have got all these opportunities in the fee-based side. We're talking about Eagle Ford and all the rest of it. But, still retain some equity exposure to a turnaround in the business going forward.

If markets do improve in the out-years, would you consider selling the remaining 50% stake in asphalt?

Well, we just considered selling 50%, so we look at every possibility, but that is not our present intention at this time. Our present intention is to be a partner in this business for the indefinite future.

Last question for me -- I noticed your income tax expense was relatively high in the quarter. Can you talk about that? And, your expectations for income tax for the remainder of the year?

Some of the income tax expense was related to an assessment we received. It was a little bit high this time because of -- there was some reset of some depreciation and all involved in that. So, it was unusually high. It was a one-time thing. That was about $5 million related to that, that I would call a one-time thing.

Okay. Thank you.

Your next question comes from the line of Cory Garcia of Raymond James.

Good morning. I have a broader viewpoint question. We've seen a small but growing number of these lower-margin international refining assets that have been shut down, particularly in the Caribbean area. Just wondering if there's any way that you are looking to possibly leverage this trend in terms of your current position? Obviously, you have St. Eustatius -- is there really a buy versus build argument to make here? Or, are you just seeing it as a building out St. Eustatius terminal capacity?

The St. Eustatius terminal capacity is really being primarily driven by new crude production and the way in which the crudes are flowing now in the world. Crude oil used to come west to the United States -- that used to come west to the United States, like Middle Eastern crude used to utilize these [break bolt] facilities like St. Eustatius. Now, you have got more and more Latin American and Brazilian, in particular, (inaudible) that is not flowing that way. It is flowing to the US and to eastbound destinations. And so, you still have -- you've got an asset being utilized but for a completely different customer base and a completely different trade flow than in the past. So, that is really what is driving the expansion, and we have other customer interests there, too. We have refined product interest. We have trader interest. But, really the predominant driving factor on the strong interest in St. Eustatius is this new crude production that is flowing in a different direction globally.

Danny Oliver is here, our Development guy. Do you want to added anything to that, Danny?

I would just say St. Eustatius is in the perfect location to meet that new customer demand with that crude oil off the coast of Brazil. So, there is no reason to acquire a new facility to improve our position geographically, and clearly building new storage is cheaper than acquisition.

Sure, I guess I was just looking at if more from a product flow angle, because as you alluded to the flows of even the product side have sort of been flipped as US Gulf Coast refining capacity now seems to be sending product more to Latin America. Is there any opportunity to build out product terminal capacity in those Latin American areas?

Yes, I think they will need more terminal capacity. Absolutely.

Most of our demand -- as Curt mentioned, we do have some products -- [light] products demand, but most of it's on the crude and fuel oil side.

Okay. I appreciate the color.

Just wanted to come back to your maintenance CapEx on a go-forward level. Clearly, the impact of the JV will take that down a bit, and offset a bit by the huge project backlog that you are bringing online over the next year. Any color that you can provide on a good run rate going forward as we look into the 2013 timeframe? Is $40 million to $50 million a good number to use? Or, could it be even lower than that?

I'd say it's probably actually a little higher than that. Maybe in the $50 million to $60 million range.

Okay. I appreciate it.

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

How are you doing?

First question is on this working capital. It looks like it's $400 million to $500 million, but also in the press release, it says minus -- less -- joint venture working capital requirements. Are there -- it sounds like two-thirds is going to be funded by the JV? Is the other one-third going to be a reduction from the $400 million to $500 million you are expecting here?

No. No, it's not. Basically, we are getting $175 million from Lindsay Goldberg for the PP&E, and we're assuming we get another $300 million advanced to us by the ABL facility. That's put in place at the JV, which is totally non-recourse to us. And then, we assume -- we plug the one-third balance that is needed from the JV to buy from us. So, that $150 million, assuming $450 million of total working capital. $300 million coming to us from the JV loan. We have the other one-third -- or $150 million -- on our balance sheet as debt. We're just plugging that estimated one-third difference that the ABL loan advance, given the collateral position they seek to take.

Okay. Thanks, Steve.

Also, you have added a lot of rail, I think, to the whole asphalt operation. What kind of commitments do you have there in terms of rail cars and leases and what have you?

Yes, they range from a year to two or three years out. Yes.

How are the economics looking now on moving Canadian crude to East Coast refiners?

Very good. They still are a substantial discount compared to our alternatives. So, we want to do as much of that as we can manage.

Okay. And then, finally -- obviously, you're on review by Moody's; were moved down by S&P. If you can talk to what kind of steps you're going to take? Or what you think the likelihood of your ability to maintain the investment grade rating on the Moody's side?

We hope that it's good. They put out their commentary, as you've read, I am sure; and saying the steps we take here over the next few months are very important to look for us to delever. I think, importantly, they point out the need for us to increase EBITDA as opposed to just shoring up the balance sheet with equity issuance. And we agree with them that we need additional EBITDA. And, the steps we are taking first and foremost to delever provides us financial flexibility to do the stuff in the Eagle Ford, the St. James, and St. Eustatius which, as we've outlined today, leads to pretty significant EBITDA growth next year. So, we are hoping they are going to be patient and let us transform ourselves as we've communicated we intend to do.

Okay

We will fight the good fight.

Okay. And, Steve, any thoughts on where you might end up the year on leverage metrics?

I think probably about 4.5 times at the end of this year. And then, next year it should be working its way down to four as the EBITDA shows up more and more. That is the plan.

Thanks.

Thanks, Ross.

Your next question comes from James Jampel of HITE.

Just following up on the debt metrics -- is that assuming no equity issuance? Moving from down to 4.5 end of the year to four next year?

I'd rather not comment, simply because there's other things that we're working on strategically, and depending upon what happens there, it exes out a need for equity, or there may be a need for equity. As we've outlined, we've got pretty significant capital that we are spending this year -- the $425 million to $475 million range. As Curt said, it could be higher, depending upon some of these strategic initiatives we are pursuing.

And, that's Steve's alluding to.

It could be pretty high next year depending on what we do in Eagle Ford, what we do in St. Eustatius on the Brazilian crude side, and the second unit train opportunity that we think we have in St. James. Not to be not clear, but there is a lot going on, and equity needs will depend upon what we decide strategically to do.

I see. Okay. Now, you spoke about resumption of distribution growth. About the range of timeframe we should start thinking about that?

If 2013 comes in the way we fully expect it to, you're going to have a lot more room than we do currently to start pumping up the distribution growth again. So, that is really why I made that statement -- because that is what our outlook looks like.

So, we would have to see the entirety of the results of 2013?

No. No, I wouldn't say -- I didn't say that.

No, no. I think we just need to give meaningful guidance on what the distribution increase could be next year. It depends on the same factors that I just outlined with respect to --

We are in the middle of a housecleaning. Part of which -- or a big part of which we're talking to you about today. When we get past all of that, and we get these projects coming online, starting like in the next Eagle Ford one in September or October and all of the rest of it, that EBITDA -- that cash available for distribution starts coming through, and then, you start -- you're on the distribution growth rate track again.

When we were up at the MLP conference in May, I guess it was, we said that over the next two or three months we would be making some major announcements in a couple of different areas. Once other shoes drop, and we have maybe the whole picture better that we can communicate, we are going to come out and lay out what we think 2013 could look like, and certainly should be able to indicate what an acceptable distribution target might be -- for next year.

More detailed guidance on 2013.

Okay, fair enough. Can you comment a little bit about the decline in barrels per day on the refined product side first? And, on the crude side, second? It's quite a decline on the refined product side.

The refined products were affected mostly by a turnaround in one of our customers -- in the second quarter. One of the things you don't see, though, in our throughput is that, that decline was basically completely offset by the volumes on our Pettus South crude line, which is the deal we did with Koch last year. It's actually a capacity lease agreement so those volumes do not count in our throughputs since it's a capacity lease. But, those volumes would have offset the light product shortfall because of the turnaround.

All right. And, the crude side?

The crude side is affected from the same turnaround. We have the crude and the product lines coming out of that customer's refinery, so when they go down for turnaround, we feel it on both sides.

And, that is the second time the question has come up. Last quarter, same thing. We should look at breaking that out in our throughput schedule to make that more clear about the terms of this Koch contract. Because the throughputs are there, it's just -- it's a capacity lease. We'll better clarify that in the future.

And then, lastly from me -- could you go through the benefits of deconsolidation? And what you'd expect your income statement and notes to look like after going through that?

Well, we will have an investment in joint venture line item on our balance sheet, and then we will pick up equity earnings in that joint venture. For purposes of distributable cash flow, we would only count cash that was actually distributed out to us. So, you would back out the equity earnings and add cash for purposes of DCF, and that is the same way our financial covenant works with our bank group.

The principal advantage of the deconsolidation is, you are not having all that working capital on your balance sheet, and that's the principal advantage of doing the joint venture, I would say. In addition to retaining exposure to a business which we think is absolutely going to improve, you are also having two-thirds of the working capital being financed in a non-recourse way by bank group, which we're currently reaching out to, to put the ABL facility in place. It is really a big deleveraging exercise. It's the big first benefit. Second benefit, of course, is you continue to have exposure to improving the business.

Should we expect less disclosure on the results of the joint venture?

You're not going to see every line item in our numbers, and we won't have it broken out segmentally, of course. Obviously, we'll be perfectly happy to communicate how the business is doing to you. But, yes, there will be less financials. (multiple speakers)

It's going to be different the way Steve just described it.

We will follow SEC and GAAP.

All right. Thank you.

Thanks.

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

One -- really two quick questions for me. One -- Curt, you talked about strategically focusing the Company more on fee-based investments. Are you planning to run your fuels marketing business any differently going forward? Just in terms of reducing the exposures there? Growing that? Any change in the way you are going to run that, given the change in strategy?

First, keep it hedged. That is number one. The hedges were effective for four years. When we took them off right before the market dropped because our guys had a bullish view on prices. They're back on. That's not going to happen again, at least, as long as I'm around. So, that is one thing difference.

The business -- we want to do this business where really it's mainly leveraged to our existing storage business. We did a redevelopment at Texas City in the US Gulf where we're able to bring from inland refiners bottom of the barrel material, blend it, up for the bunker market where that's the best option. And, that's worked very well, and the inventories we carry turn over pretty rapidly. It's not like the asphalt business. It's a much more rapid turnover of inventory, and they're very effectively hedged. Same thing in St. Eustatius, doing business out of our St. Eustatius terminal -- bunkering operation -- that has worked well for years. Wherever we go with this, we are looking for minimum risk, rapid turnover in the inventories, and where we can effectively hedge.

So, as I tried to convey in my remarks though, we see our big expansion opportunities right now really on the pipeline and storage side. Not as much -- although it has been a very good, profitable business for us in bunker and fuel oil. The growth opportunities look much more substantial. Particularly on the pipelines, because you have all -- not just the Eagle Ford but other shale plays where we have assets on the ground that are underutilized that can be filled up to capacity and/or connected to third parties and with some new build opportunities as well. That's where the big bang for our buck is right now.

Okay. Thanks for that.

Just the other question I had -- in terms of the San Antonio refineries? The plan going forward is excluding the legacy hedges that you have in place, effectively your plan is to run that refinery on an unhedged basis going forward? Is that right?

Yes. Yes, the hedging we did was not really as effective as we hoped it would be. So, as we go forward, we expect we'll be -- we're already unwound or taken off some of these hedges, and over time we will pick our spots to get the rest of it done. But, it is positively cash flowing, and it has been making money. So, that is the plan there.

Okay. Thank you.

Okay.

Your next question comes from the line of Adam Limbach of Allstate.

Good morning. To start with, as it relates to your 2013 (inaudible) -- if I take the midpoint of you growth CapEx forecast of $450 million, roughly how much of that would be directed toward your international operations?

It's very little. Very little. The large bulk of this is the stuff we've highlighted in our remarks today.

We don't have the big St. Eustatius project in those numbers. That is separate. It's being worked on, but it's not in those numbers.

Okay. Second, when you mentioned your leverage targets -- 4.5 times at year-end. Presumably, that's on more of a run rate basis as opposed to a last 12 months -- or year-end, full 2012 look? Is that safe to say?

That's a snapshot at December '12, looking back at the trailing -- the yearly, yes. And, obviously, it presumes Lindsay Goldberg's been closed. It presumes some other things which --

I guess the last question from me, and it goes to your comments about changing the strategic direction. Are there further asset sales contemplated within either your transport or storage business? Particularly in light of your comment on this call regarding the difference in multiples of building versus buying?

No. We don't have anything on the table for divestiture for transport or storage. There may be little odds and sods here and there, like some idle pipeline somewhere that I'm not thinking of. But, basically, no. There is no divestiture program in mind for pipelines and storage.

Okay, thanks. That is it for me.

Your next question comes from Kevin Cashman of Assurant.

Hello. Question on gross debt reduction plans for the next year. It looks like with the two 2013 maturities offsetting proceeds expected from Lindsay Goldberg, and then it looks like with CapEx projects and the distribution, that you would be short free cash? Is there a target for gross debt. It seems like more of the leverage coming down from the EBITDA growth expectation versus a total gross debt reduction? I'm just kind of wondering?

Obviously, we'll be getting in some proceeds from Lindsay Goldberg. We've got about $670 million, I think, available under the revolver as of June 30. So, we'll be getting in -- it depends on what the working capital level is and whatnot, when we close the transaction. But we've modeled with Lindsay Goldberg and receiving about $475 million in from that. We have got the $100 million under the revolver -- we paid off under the revolver. We've got about a little less than $500 million coming due in the first half of next year. We could accommodate that under the revolver, we believe -- take that out that way.

And that depends upon bond opportunities. Our preference would be to take it out in the bond market. Probably, a big, one single transaction to take out both the [leave] margin and a June maturity next year. Probably we would look at taking that under the revolver or do a single bond offering in advance of those maturities to get set to repay them.

Given the ratings, would that be marketed to both [IG] and high-yield investors? Or, I guess, it would depend?

Yes, we would obviously seek counsel from underwriters we haven't selected yet and get their thoughts, and also we're going to be talking to the rating agencies because once we start getting these steps taken, instead of just announced, and close Lindsay Goldberg, we're going to be going in and saying this is these very transformative transactions we have done here. This is a very strong Company. The businesses that we have, on the storage and transportation side, we're dealing with some of the strongest companies in the world -- major oil companies, major trading houses, national oil companies, strong integrated companies. They always pay us. If they don't pay us, we have a lien on the inventory in the tank or in the pipe. This is a rock-solid business that we are going to once again have and concentrate on.

And so, obviously, we're going to be preaching our case with the rating agencies and try to, at minimum, hold the line. Ultimately, we're going to be asked to be upgraded back to investment grade by Standard & Poor's. We were not happy with the decision in light of the steps we had communicated to them that the decision -- they're entitled to their opinion. I would have preferred they would have given us a chance to actually transform ourselves, which we believe is happening right now. But, anyway.

Okay. I appreciate the comments. Thanks.

Your next question comes from the line of Brett Reilly from Credit Suisse.

Morning. Could you help us frame the opportunity on the pipeline side a little bit more? Specific opportunities you are pursuing? And when maybe we can expect some announcements from a timing perspective?

Yes. Other than the projects that we have already announced, we are working on just expanding our system in the Eagle Ford. We also have some underutilized pipelines up in the North Texas area, around the Barnett, Niobrara, Granite Wash, shale plays. I think we are getting pretty close to some deals on the Eagle Ford. I don't know what to tell you really in terms of time. I hope we have another deal or two to announce this year, but we are still working on that.

Is it just a function of negotiating with customers and signing long-term contracts? What are the factors limiting the announcement of those projects?

Yes, that's what it is. Just getting the commitments to the projects all signed up.

Got it. And then, on the second question -- you made the decision to leave the fuels marketing segment unhedged for the first time in four years last quarter. Whose decision was that? And, besides the bullish crude outlook, why was that decision made?

It's obviously recommended by our traders, but everybody was aware of it, including all of the Board was aware of it. It wasn't a rogue trader instance or anything like that.

And, the plan is, obviously, that will be a one-time thing and not pursued again?

Yes.

All right. That's all from me, thanks.

In fact, we even changed our management policy on that. So, it's kind of locked in that way now.

Your next question comes from the line of Jeremy Tonet of JPMorgan.

Good morning. A lot of my questions have been asked so far, but I just wanted to follow up a bit more on the asphalt JV. I was just curious -- is there going to be any change in how the business is run? Or, any change in the strategic direction there? Will the JV look to opportunistically expand? Or, could you provide any color on that side?

Well, the JV is going to have its own CEO and its own Board. And they are going to develop the strategy for that business. The advantage for them is they will able to do it -- look at it as a stand-alone business. Look at all their options, optimizing what they have. Look at whether acquisitions are the right way for them to go. And, I am sure that they will come up with their own strategy, and it won't necessarily be the same strategy that we have. I would expect some of the things to be the same. Try to -- right now, there is incentive to run more Canadian and minimize your crude costs and all the rest of it. But, beyond that, they will have, as I said, their own management team, their own Board, and those are the people who will devise a strategy.

That is it for me. Thank you.

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

Hello. Good morning. Actually, my question has already been asked. Thank you.

Thanks, Louis.

Your next question comes from the line of Selman Akyol with Stifel Nicolaus.

Good morning. Thanks.

On the refined products terminals, you had the writedown there. Can you talk a little bit more about that for the $2 million? And, is there any more to come?

Yes, that was part of a -- it's a small, underutilized terminal on our Houston 12-inch line, which it's really part of the strategic redirection of that line. You might remember, that's a very underutilized refined products line from Corpus to Houston, which the cost -- somebody mentioned earlier about refineries and exporting products to Latin America and beyond. That's really -- we've talked about this in past calls. That's what has hurt the throughputs on that line. We are redirecting it into an Eagle Ford, probably a Y-grade NGL line to Houston. As a result of that repositioning of that line, that little terminal really has no play anymore in the use of that line. So, that's what that write-off was about.

Fair enough. I appreciate that.

Lastly for me, since everything else has pretty much been asked -- in terms of the joint venture, are they going to have future capital calls on you? Or, would you expect to -- if there were capital calls -- can you just talk a little bit about that?

Well, there is nothing hardwired in the agreement that would require us to put in capital expenditures for growth. Again, the Board -- they will have their own Board, as Curt outlined, and it if they want to do something and if they need additional capital, they can call us and ask, and then we'd consider it.

NuStar will have the option to participate in that, or not.

All right. Thank you for the color.

(Operator Instructions)

Your next question comes from the line of Dennis Coleman of Bank of America.

Yes. Thanks. Good morning.

A couple from me. Can you talk a little bit about -- I'm thinking of the Eagle Ford. But the larger picture is the NGL price action that we've seen in the last quarter, where there was a sharp sell-off. Obviously, there were some bigger picture things with turnarounds and things going on at some ethane crackers. But any potential impact of slowing drilling in some of these liquids-prone areas?

We don't see any of that. Most of the NGLs that we've talked about ending up on this system that's not in service quite yet. But, that is associated wet gas from crude oil wells. The price of the NGLs really is quite irrelevant, but I will tell you that the wet gas coming out of those fields, when you look at all of the components, that barrel has on an MMBtu basis is worth still about $8 an MMBtu. So, there is still economics even if you were drilling for the wet gas on purpose. But, most of what we see is coming from the crude oil zone and really just a byproduct of the crude oil drilling process.

Okay. Thank you.

A couple other -- just if I can -- I'm sorry to circle back to this working capital question that Ross asked, but I just wanted to make sure that I understand exactly what is going on with the balance sheet. So, the net result is you get $475 million proceeds in and reduce debt by that amount? And, there is no other add-back? The $150 million of inventory -- I was a little unclear -- is that still on the balance sheet then?

Yes.

So, it's the $475 million less $150 million is the net impact on that?

No. Think of it this way -- instead of having all of that debt because you own 100% of it, you're going to have now $150 million assuming that is one-third of the total working capital need of the joint venture. So, the $175 million comes in. That's the payment for one-half of the PP&E, and $300 million comes in -- that's clear. You get that $475 million, that pays down debt, but you're left with that $150 million that you would have already had including the other [$475 million].

I got you. So, the net reduction is that $475 million.

Yes. That's right. But, we will have always -- while we are in this joint venture for a period of time -- we have this obligation to plug finance the amount estimated at one-third, which the ABL bank group will not advance.

Perfect. Last one for me, just to make sure that I understand -- the hedge gain from unwinding the interest rate hedge? Where is that flowing through the income statement? Is that in these one-time items that you've -- there are two or three in the income statement there that are clearly the one-time items here? I just wanted to know where that's flowing through?

It gets amortized as a reduction to our interest expense over the life -- over the remaining life of those swaps. So, we had some swaps in place through 2020, and some swaps in place for 2022. Those proceeds get amortized over the next seven to nine years.

So, obviously, it doesn't have much of an impact in the current quarter. Unlike going unhedged, then we're selling high cost inventory in a foreign market. That $32 million hits the quarters. Accounting technique.

Yes, it doesn't offset. That is very helpful. Thank you very much.

There are no further questions at this time. Presenters, are there any closing remarks?

Thank you, Operator. We'd once again like to thank everybody for joining us on the call today. If anyone has any additional questions, please feel free to contact NuStar's Investor Relations. Thank you.

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