NuStar Energy LP (NS) 2013 Q3 法說會逐字稿

Good morning, my name is Holly and I will be your conference operator today. At this time we'd like to welcome everyone to the NuStar Energy L.P. and NuStar GP Holdings LLC third-quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions). I would now like to turn today's conference over to Christopher Russell, Treasurer and Vice President of Investor Relations. Please go ahead, sir.

Thank you, Holly. Good morning, everyone, and welcome to today's call. On the call today are NuStar Energy L.P. and NuStar GP Holdings LLC's President and CEO, Curt Anastasio; Executive Vice President and CFO, Steve Blank, and other members of our management team.

Before we get started we'd 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 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. These 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 on our earnings -- in our earnings press release or on the website. Now let me turn the call over to Curt.

Good morning, and thanks for joining us today. Let me start with some recent developments that we expect to have a positive impact on NuStar's financial results in 2014 and 2015. Last week NuStar's Board of Directors approved Phase 2 of our South Texas Eagle Ford crude oil pipeline system project. Phase 2 will increase throughput capacity on the system by approximately 65,000 barrels per day.

Phase 2, together with Phase 1, which we publicly announced on October 4, will add an aggregate 100,000 barrels per day of incremental capacity. Phase 1 should be available for service in the third quarter of 2014 while Phase 2 should be available during the first quarter of 2015.

Total capital cost for Phase 1 should be $40 million to $50 million while Phase 2 capital cost is estimated to be in the range of $125 million to $135 million. Phase 1 is expected to generate annual EBITDA of about $20 million per year and Phase 2 should generate annual EBITDA of up to $40 million per year depending on the number of barrels committed to the second phase.

In the second quarter of 2014, prior to the completion of Phase I, we plan to complete the construction of a new private dock at our Corpus Christi North Beach terminal. The new dock will more than double our current loading capacity of about 125,000 barrels per day and will allow us to handle all the new volume associated with Phase 1 and Phase 2 plus additional volumes we end up shipping to Corpus Christi.

This past week we also finalized a letter of intent with a long-term anchor shipper for most of the pipeline capacity on NuStar's 12 inch pipeline from Mont Belvieu to Corpus Christi. Under that agreement, while physical volumes may not be shipped on the line until the second quarter of 2015, NuStar would receive a reservation fee payment beginning in the second quarter of 2014.

Total capital requirements to get the line into service are expected to be in the $130 million to $150 million range. Once the line is in the new service we expect it to generate $15 million to $25 million per year of incremental EBITDA based just on the volumes to be shipped on the pipeline by the anchor shipper. The 12 inch line will have the capacity to move more, up to 110,000 barrels per day, and we're actively marketing the remaining capacity to various other third parties.

We're in advanced discussions with our Asphalt joint venture partner, Lindsay Goldberg, to finalize an agreement that allows us to exit the asphalt JV. The agreement should also allow us to materially reduce the amount of the existing $250 million credit facility and the $150 million of credit support for guarantees and LCs for the joint venture.

I recently announced publicly that I was headed for meetings with PDVSA, the Venezuelan national oil company, in Caracas to further reduce or else terminate our current crude purchase obligation of 30,000 barrels a day that we supply to the asphalt JV, which as recently as July had been 75,000 barrels per day. Those meetings were very positive and as we announced last Friday, PDVSA has mutually agreed with us to end NuStar's contractual obligation to purchase the crude oil as of January 1, 2014, thereby ending a significant financial obligation of the Company.

Now let me review NuStar's third-quarter earnings results. Our fee-based pipeline and storage segments, which now account for more than 95% of our business, were in line with our expectations, but the Fuels Marketing segment performance was lower than expected. EBITDA in our pipeline segment increased to $75 million, $20 million higher than the third quarter of 2012. Increased throughput volumes, primarily on our Eagle Ford pipeline assets, plus higher pipeline tariffs as a result of the July 1, 2013 FERC tariff adjustment of 4.6%, contributed to the improvement.

Total pipeline throughputs of 884,000 barrels per day were up slightly from last year's third quarter. Crude oil pipeline throughputs were 7% or 25,000 a day higher than the third quarter of 2012 due to the completion of several Eagle Ford shale projects in the past year and the December 2012 crude oil asset acquisition from TexStar Midstream. Throughputs on or Eagle Ford crude oil pipeline system were 175,000 barrels per day during the quarter, about 45% or 53,000 a day higher than the third quarter of 2012.

In August we completed a pipeline project for Conoco Phillips in the Eagle Ford shale with the construction of a 100,000 barrel terminal facility, truck offloading facilities and a pipeline connection to NuStar's existing 12 inch Pettus Texas pipeline. These new assets improved our third-quarter pipeline throughputs and should add about another $15 million in annual EBITDA.

The higher Eagle Ford throughputs were partially offset by a change in tariff structure which technically reduced throughputs as they were previously calculated on our Ardmore, Oklahoma crude oil pipeline system by 27,000 barrels per day in the quarter, but did not affect actual revenues on that system.

Historically, Ardmore crude oil throughputs were reported and tariffs were charged based on volumes transported on two different segments of the system. Effective January 1, 2013, a new joint tariff covering the two segments was put into place so we now are only reporting one volume for the two systems.

Third-quarter throughput on our refined product pipelines were 4% or 20,000 a day lower than the third quarter of 2012. A late start to the fall harvest in the Midwest caused throughputs on our East refined products pipeline and ammonia systems to be lower than last year's third quarter. We do expect some of this volume shortfall to be made up during the fourth quarter.

Storage segment EBITDA for the quarter was $66 million or $8 million lower than third quarter of last year. The segment benefited from a 7% increase in throughput at our storage facilities as well as increased earnings associated with internal growth projects at our St. James and St. Eustatius terminals during the first quarter of 2013.

Our internal growth projects along with our Eagle Ford, crude shale system acquisition have increased storage throughputs with additional Eagle Ford crude oil barrels being shipped down our 16 inch pipeline to Corpus Christi and stored at our Corpus Christi North Beach storage facility.

Reduce demand and lower renewal rates for storage and terminal services at several of our other domestic and international terminal locations compared to last year along with reduced proceeds from our agreement with EOG at St. James due to tightening crude spreads more than offset the benefit of increased throughputs and the new projects compared to last year.

Our Fuels Marketing segment lost $9 million of EBITDA during the quarter compared to last year's third-quarter loss of $7 million. Most of the loss occurred in bunker marketing. Continuing weak demand for bunker fuels plus increased competition in the US Gulf and the Caribbean caused bunker margins to be lower than last year.

Third-quarter G&A expenses were $19 million which is $6 million less than the third quarter of 2012. Interest expense for the quarter was $31 million, up $7 million from last year. The increase in interest expense was partly offset by $2 million of interest income we earned on the $250 million unsecured revolving credit facility between NuStar and the Asphalt JV.

NuStar's September 30 debt balance was about $2.5 billion. In August we issued $300 million of senior notes and we used the proceeds to pay down a portion of the borrowings outstanding under our $1.5 billion revolving credit agreement. As of September 30, our debt to EBITDA ratio was 4.3 times.

Our equity earnings in joint ventures were negative $5 million for the quarter. Our 50% share of the Asphalt joint venture, which we mentioned could be sold soon, generated losses of $8 million while our 50% interest in the Linden, New Jersey storage terminal earned $3 million positive during the quarter.

With regard to our third-quarter distribution, NuStar Energy's Board has declared a distribution of $1.095 per unit. The distribution will be paid on November 14. Distributable cash flow from continuing operations available to limited partners covered the distribution for the limited's by 0.79 times. The Board of NuStar GP Holdings declared a third-quarter distribution of $0.545 per unit. The GP holdings distribution will be paid on November 19.

Taking a look at projections for the fourth quarter of 2013, the pipeline segment should continue to benefit from the completion of Eagle Ford shale projects, but could be offset by maintenance expenses related to projects that were not completed during the third quarter as originally expected. As a result, fourth-quarter EBITDA results for the pipeline segment should be comparable to the third quarter, though higher than the fourth quarter of 2012 while full-year EBITDA for the pipeline segment is expected to be $60 million to $70 million higher than it was last year.

With regard to Storage, our throughput based storage facility should continue to benefit from the completion of our Eagle Ford shale projects. In addition, the segment will start to benefit from our second 70,000 barrel per day rail car offloading facility which we expect to complete at St. James later this month. Overall fourth-quarter EBITDA results for storage should be higher than they were the same quarter last year, but comparable to the third quarter of this year.

For the full year we now expect the storage EBITDA to be about $5 million to $15 million lower than 2012. Results in our Fuels Marketing segment should improve in the fourth quarter as a result of the new bunker fuel supply agreement we entered into during the third quarter. In addition, the segment should benefit from seasonal refined products blending. The fuels marketing segment's fourth-quarter EBITDA should be positive and higher than the fourth quarter of last year. Full-year EBITDA for the segment is expected to be anywhere up to $10 million.

During the fourth quarter we expect G&A expenses to be in the range of $26 million to $27 million, depreciation and amortization expense around 44 (technical difficulty) 5 million, and interest expense in the range of $32 million to $33 million. Based on these projections fourth-quarter earnings per unit should be $0.20 to $0.30 per unit while distributable cash flow from continuing operations per limited partner unit should be in the range of $0.80 to $0.90 per unit.

2013 full-year reliability capital spending should be $35 million to $45 million, while our strategic capital is now projected to be in the range of $300 million to $325 million, lower than previous guidance due to spending on a couple of projects in deferred into 2014.

Based on the recent developments I mentioned in my opening remarks, we have updated our financial projections for 2014 and 2015. Pipeline segment EBITDA is projected to be $40 million to $60 million higher than in -- in 2014 compared to 2013. And an additional $50 million to $70 million higher in 2015 versus 2014.

2014 EBITDA growth is expected to come from a full year's benefit from the Eagle Ford project we just completed in August, the second quarter 2014 completion of our private dock expansion at our Corpus Christi North Beach terminal, the third-quarter 2014 start-up of the first phase of our South Texas Crude Oil Pipeline system project, and July 1, 2014 FERC tariff adjustments.

Growth in 2015 pipeline segment EBITDA is expected to come from a full year's benefit from the second-quarter 2014 completion of our dock expansion at our Corpus Christi terminal, as well as the third-quarter 2014 start-up of the first phase of our South Texas Crude Oil Pipeline system project.

In addition, the segment should benefit from the first-quarter 2015 start-up of the second phase of the South Texas Crude Oil Pipeline system project, the second-quarter 2015 reactivation of our Houston 12 inch pipeline and the July 1, 2015 FERC tariff adjustment.

We are projecting that our 2014 and 2015 storage segment results will stabilize and continue to be comparable to 2013's results. In 2014 EBITDA growth realized from the completion of our second unit train at the St. James Terminal in late 2013 and from the completion of our Eagle Ford shale project should be offset by reduced profit-sharing proceeds on the first St. James unit train.

During 2015 our projections assume that demand for storage and terminal services and storage segment EBITDA remain comparable to 2014. We will of course be working to develop new projects to improve the 2015 storage outlook any new storage projects identified and approved would provide additional EBITDA to 2014 and/or 2015.

Projections for both 2014 and 2015 assume that the majority of our storage leases expiring over the next couple years are either renewed or leased to new customers at what we full will be prevailing market rates during the period. If demand for storage deteriorates more than we currently see the risk of course always exists some of these tanks will not be least in 2014 and 2015 at those rates causing EBITDA to be somewhat lower than projected.

EBITDA results in our Fuels Marketing segment in both 2014 and 2015 are expected to improve slightly over 2013 and to be and the range of $10 million to $30 million for both years. Most of that increase is driven by our return to a back-to-back trading model in St. Eustatius and our initiatives to reduce bunker operating expenses. And we also plan to continue to minimize the working capital in this segment.

In 2014 and 2015, our G&A expense should be in the range of $90 million to $100 million per year. Based on these EBITDA and expense productions we should begin covering our distribution in the second half of 2014. We also project that our full-year coverage ratios for 2014 and 2015 will exceed one times.

So as you've heard this morning, we've made a lot of progress in getting NuStar back into a position where we can once again cover our distribution near-term and we are now working on new growth opportunities for the pipeline and storage segments that would increase NuStar's EBITDA and distributable cash flow projections even further. So now let me turn it over to our operator, Holly, so we can open up the call to Q&A.

(Operator Instructions). Steve Sherowski, Goldman Sachs.

I may have missed this, but what are your volume commitments on your South Texas Phase 2 project?

It was a total open season of 100,000 barrel a day of expansion of which we can get 90 a day of firm commitments for the FERC rules. We have 40 a day firm committed already signed up. And we continue to work with producers in the area that their current interest exceeds the capacity we have on the line. So we have already got a good return on the first 40. But we expect to fill it up.

Got you, okay. And I'm sorry, how does -- so you said on your 12 inch wind you are going to start receiving a reservation payment in the second quarter of 2014, is that correct? And how does that work, how does that compare with the $15 million to $25 million that you guided to once the line is up and running?

We haven't disclosed that publicly, but we are working on a joint press release with the anchor shipper. And so -- which should be forthcoming shortly, I don't know if it will be this week or next week, it really depends on sort of their internal review process. But we should -- I would expect to see more detail in that joint press release.

Okay, understood.

But that payment is reflected in the commentary I made about covering the distribution in the second half of 2014 and the rest of what I said about 2014.

Okay, got it. And I was just wondering, have you seen any improvement in storage rates given the I guess slightly less backward dated forward curve?

I'm going to turn it over to Danny Oliver, but again storage is very location specific. We are one of the biggest liquid storage companies around the world and it is very location specific. So when you talk about renewal say on the West Coast it's not the same as a renewal in Amsterdam. But having prefaced it that way, Danny, do you want to add more color to that?

Sure. I think we have reduced a lot of contracts this year, I think we have seen, per Curt's comments, some stabilization in those rates. We are not projecting any improvement going forward. But we are not expecting further deterioration. Just from a global perspective, after running utilization rates in the storage segment up around 97%, maybe 98% in the last five, six years, over the course of 2013 our utilization rates went from about 97% down to about 90%.

And there's really just a few key terminals that that really affected us at. But we haven't assumed going forward that those utilization rates really improved that much either. Obviously we will be working hard to get those tanks on lease. But we haven't factored that into Curt's comments, just more of a stable market going forward.

Okay, understood. That is it for me. Thank you.

Stephen Maresca, Morgan Stanley.

Good to see the business improvements. I had a couple questions I wanted to touch upon. First, Curt, can you remind us how much you save on the Venezuela contract cancellation, how much of a positive in dollars is this for NuStar in 2014?

Well, in terms of dollars out the door it is huge, right, because we started out with a 75,000 barrel a day commitment and if you use sort of $90 million to $100 million a barrel, that is hundreds and adds up to in excess of $1 billion over the remaining term of the contract. So what that really creates -- and of course we then resell that to the asphalt JV.

But that created not just a financial strain of meeting those payments but also contingent liabilities in the Company because of sales to our counterparty in a business that frankly has really, really been struggling. So I think that is a big positive for us in terms of concerns about the financial stability of the Company going forward, our overall financial condition, the credit worthiness of the Company.

In my mind any sort of disaster scenario relating to that arrangement is really off the table, that is history if anyone had concocted such a scenario. So it is used in that regard. I think it should also be a better deal for the JV too to get a little more crude flexibility in what they try to run. Not that they wouldn't ever run any Venezuelan again, they may from time to time. But they had a lot more flexibility now to try to optimize their operations. So I think all around it is a good thing.

Great. And then switching to the South Texas crude oil pipe projects, of that 100,000 barrel a day expansion you just mentioned before 40,000 of it is signed up already. You gave some EBITDA numbers. What is assumed in those EBITDA numbers for those projects in terms of volumes? Is it the full $100 million or the $90 million, as you mentioned, is all you can offer?

In 2014 it is only the Phase 1, which is finished first, that is fully signed up so we do have that filling up once it goes into service in 2014. The rest of the $90 million we have being phased in over the course of 2015 after it comes in service in I believe February 2015. But we have none of the walk-up capacity being filled in our projections, although we think that will happen.

So that EBITDA numbers include $90 million?

Yes, phased in over the course of 2015.

Yes, okay. Got it, thank you. And then, Curt, in terms of your plan to have distribution coverage second half of 2014, you gave some G&A numbers. Are there any mention on the Analyst Day in terms of looking at G&A cuts in savings, is there anything further that can be done in that regard for 2014 or 2015 to even further help coverage?

I think our numbers reflect the cuts that we fully expect to achieve. So we are always going to review our expenses because we need to be cost competitive with the other midstream companies that we are competing against while still offering first-class compensation and benefits to all of our employees, which we do, even with these changes. So I think what we have done we are very confident is really a sweet spot the right place to be. But we will always -- we will review all our expenses all the time to make sure we stay competitive.

Okay. Final one for me. On the asphalt negotiations to exit, can you talk a little bit about what form that would resemble, what sort of compensation you might receive and, importantly, how much you would potentially save on interest expense from exiting that credit facility or reducing it as you said?

I can't do that yet because we need to have the consent of our counterparty to disclose those details. But obviously we view it as a positive. This is a business that has lost -- well, in terms of EBITDA something like negative $54 million, a similar amount if not a little more this year, a higher number in terms of net loss or net income. And we have a 50% interest in that. So it has been a big drag on the bottom line results of this Company.

So obviously withdrawing from -- and even more over it is not strategic to us. Our strategic direction which we announced over a year ago is to move away from refining and marketing and including the asphalt and all of the things that we have done over the last year, doing the Lindsay Goldberg deal and pursuing a total exit, selling our San Antonio refinery, closing out all the hedges, getting out of wholesale marketing and trading, early termination of another crude contract we have with Statoil for Peregrino. I could go on and on.

Over the last year our people here have done an extraordinary job accomplishing a strategic redirection of this Company. And we are most of the way there. We are almost there, we are not quite done. But we will be, we will be. And you see it in the reverse and the restoration of coverage and getting this Company back on the distribution growth path that we did for all of our history prior to that.

So it's -- I'm afraid I can't reveal the specifics you want quite yet. But it will be a positive thing for this Company once we announce the last step in that JV deal.

Great. Well, I appreciate the color, Curt, thanks.

Brian Zarahn, Barclays.

On asphalt, I know you can't discuss terms yet, but when would you expect in terms of timing a decision to be made?

We are hoping by year end but it ain't over until it is over, right. That is our hope and that is our -- we believe that is reasonable but we will see.

Okay, and then is there any update on potential terminal asset sales?

No, the asset sales -- there are no asset sales included in the 2014 budget and the 2014 and 2015 outlook or guidance that I have given you. But we are going to continue to evaluate divestitures to see if we should continue to own those assets or they are better owned by somebody else. But it is really not a driver of our results and none of that is assumed in our 2014 and 2015 guidance.

And then on the Eagle Ford and NGL pipe projects, can you give a little color on contract duration for these projects with shippers?

All of the Eagle Ford contracts are five years -- this might be Danny. And we will have a little more color on the 12 inch term when we come out with a joint press release. But it is long-term.

And then on -- can you talk about financing plans for next year's expansion CapEx?

We have assumed everything would be financed under the revolver. We have $1 billion available to us as of yesterday under that $1.5 billion revolver. And the debt to EBITDA was 4.3 times at the end of this quarter, probably be about that the end of this year because we have some working capital.

We should provide most of the money needed for additional capital in the fourth quarter. And then the debt to EBITDA is in the low fours pretty much throughout next year. So there is no need for equity unless we do something sizably bigger than what is in the budget in the form of another major project, an acquisition, something along those lines.

Thanks, Steve.

Okay, Brian.

Matt Niblack, HITE.

It is actually James Jampel from HITE. Just two questions. Would you view the non-US storage as core to the Company? And couldn't you eliminate a lot of the uncertainty going forward with storage renewals by selling those assets?

Well, I am not going to get into specifics of assets that we might keep or that we might divest. But Europe is a very profitable operation for us, our people have done a really, really good job. In a weak environment. I mean think of all the things you have read about the UK and Northwest Europe economy over the last couple of years. And they have Those assets leased, there has been a little slide on renewal rates but that is not unique to Europe. And they have done a great job in the Amsterdam terminal which we had in the recent past, tripled in size, they've got a fully leased up. They have really done a terrific job.

So I am not going to get into comments would we sell or keep this or that. I will generally say we have a lot of valuable assets in this Company, very valuable assets, including Europe. And so, anything sold whether it was that or anything else, we have a lot of things we could sell at very attractive prices that is not our plan, it is not in our 2014 budget, that's not in our 2015 outlook. But we do have a lot of valuable assets in this Company.

And the second question for me. When you look at the G&A next year over this year, about what percentage cut do you guys consider that to be internally?

I had to calculate the percentage, but -- the numbers I gave you are what we are going to do.

Could you briefly review the numbers?

Yes. We said $90 million to --.

We said $90 million to $100 million in G&A for both 2014 and 2015.

And in terms of number of people affected, what is your ballpark estimate of the G&A rationalization, about how many people are affected?

There are no people -- that doesn't entail any layoffs or reduction of headcount.

I see. So the source of the savings is coming from -- where are they?

It is coming from overhead generally, some compensation-related expenses and just really rightsizing our benefits so they are comparable to our midstream competition, while still being best in class. But it doesn't affect any people -- it doesn't affect headcount.

Okay, thank you.

[Eric Mondoblott], [Bond Capital].

Appreciate the detail on the base business plan you provided today, but was hoping that you could spend a little bit of time comparing the current business plan to some strategic transactions that might arguably create more value for NuStar shareholders.

Examples could include something that follows the Devon Crosstex model where Valero could combine their MLP assets with new start to accelerate their drop-down process rather than conducting their own IPO of their midstream assets, potentially combining with another low-cost to capital oil levered MLP like a Sunoco Logistics that clearly is very hungry for growth right now or even combining with one of the big C-corps that -- a Kinder Morgan, a ONEOK that would realize significant synergies with their own assets plus capitalize on the tremendous tax benefits afforded by C-corps buying [MLPGPs].

So could you give us some thoughts as to like how like you're comparing the base plan with some other potential high-value options of possibly available to the NuStar family given the current consolidation trends in the industry?

Well, basically what you're talking about is selling the Company and the Company is not for sale and that is a Board decision -- it is not my decision, it is a decision of the Board of Directors. The Board, they looked at our plan and they have approved our plan. So if the Board decides to sell the Company that is their prerogative. But that is not what we are working on. We are working on our plan to improve our results. We've got a great Company with great assets. We found a way to grow out of the recent problems we've had the last year or two and that is what we are going to execute on.

When you call it a sale of the Company, Curt, aren't their combinations that would allow shareholders to participate in a new entity such as a combination with a Valero? A combination with Sunoco Logistics? A combination with other lost cost to capital MLPs that would not be a sale of the Company for cash but a combination that would allow NuStar to benefit from a lower cost of capital vehicle and realize significant synergies, a lower cost of capital and probably significant upfront accretion and significant DCF accretion over time.

If we execute on our plan we will have a lower cost of capital and we will be able to grow this Company very nicely. And so, that is -- I am afraid you are going to have to accept that as my answer for now.

Understood. Maybe just one last kind of comment. You look at the Crosstex Devon transaction, like overnight if we did a combination with Valero we would take our nine or 10% yield at NuStar and turn it into 5% or 6%. Like it seems like a pretty significant bar out there, a pretty high bar to cross when comparing the base plan with some other potential options that may or may not be available in front of the Company.

I think I have given you my answer to this question. And I don't think this is the right forum to discuss what other approaches might be made hypothetically to our Company by other people.

I just want to make sure that we don't miss on what's a once-in-a-lifetime very hot M&A market to potentially combine our Company with another Company and unlock significant synergies and value for all unit holders.

I think I have given you the best answer I can give you. Any other questions?

No, thank you.

Okay.

Michael Blum, Wells Fargo.

Just one item that you said in your commentary I just wanted to expand upon. You talked about returning to a back to back trading model at St. Eustatius. Can you just kind of talk a little a bit more what you mean by that and what you were doing previously? Thanks.

Yes, what we meant by that is when we first got into the conquering at Eustatius it was really in support of -- well, it was supply with some storage customers who were on the island to find the heavy oil that we the retail operation for marketing the bunkers. When that opportunity went away we were supplying -- responsible for the supply ourselves for our own bunker marketing operation and now we have returned to the original model where we have on island customer providing supply to the bunker marketing.

And the advantage of that is obviously you reduce your working capital, you have less price risk, you're buying only what you know you are going to sell and you know what your margin is going to be to a high degree of certainty right there at the dock or in the -- right around the terminal facility in the proximity of the terminal. So that is what I mean by these sort of back-to-back deals rather than dealing with a long supply chain and taking that working capital and pricing risk and trying to supply yourself at that location.

Thank you.

Paul Jacob, Credit Suisse.

Curt, the first question I had is just trying to gauge the level of confidence that you have that you will be able to divest the asphalt -- the remainder of the asphalt business at what you would deem a reasonable price. And if that price is too low do you see a possible scenario where you try to delever the ongoing financial commitment that you have and perhaps retain your exposure to that business?

We have a deal that we are working on to exit. The business is not strategic for NuStar to continue investment in that joint venture. So to lay out our fee-based storage and pipeline strategy for you and what we intend to do in those areas. So we are working to complete the deal that is on the table for advanced negotiations to do that. And that is what we are all working on right now, we are not contemplating doing something different from that. But that is our goal and we should know more about this in the near future.

Okay, that is helpful. And then in terms of what the PDVSA contracts expiring, what type of crude do you plan to offset that with? And if that is mainly Canadian crude how do you plan to ship that to your refineries?

Well, they at the asphalt JV are already railing Canadian crude into the plant at Paulsboro. So that is an operation that is already in existence and so that -- I'm sure the JV will be looking at opportunities not just to continue to do that but see if there is way they can expand to do that.

And I wouldn't rule out any Venezuelan either just because the term contract is expired. There may be times either because of cost or quality or logistics considerations where they want to buy some stock cargo from Venezuela or other heavy crude. But the term obligation to do that will end effective January 1.

Okay. So was it more a matter of getting rid of the term or you think you could find some margin reductions by supplying those refineries with different types of crude?

Margin improvements, actually, yes. You might remember that when the Brent TI spread blew out you had a lot of inland refiners buying relatively cheap WTI-related crude and Canadian crude compared to the international grade like Brent-related pricing. And so, that was a big advantage for them to run hard and produce, among other things, asphalt.

So the asphalt JV is endeavoring to reduce their feedstock costs compared to the international [water boring] grades like the Venezuelan heavy crudes so they can capture some of that relative pricing advantage and improve their margin. And so, that is -- this latest development pushes them in that positive direction.

Okay. And then on the guidance for 2014 and 2015 what do you expect for maintenance capital expenditures?

I think we put out $35 million to $45 million a year.

Okay.

In that range.

All right, great. Thanks, that is all I had.

Norman Kramer, Kramer Investments.

I have another question about the business going forward also. It seems to us here that considering the terrific geographical area you are in, more or less a lot of assets in Texas and almost in the heart of the Eagle Ford, that your what I would call difficult financial situation right now probably makes it somewhat difficult to take up every possible good opportunity that comes in front of you.

So what I'm wondering here is has there been any consideration to cutting the distribution say in the range of perhaps 40%, which would straighten out your financial situation one, two, three, put you at plus coverage maybe [1.1%], [1.2%] and probably make it much easier to do business with potential lenders. And perhaps achieve a lower interest rate on long-term debt that you might want to sell.

Our feeling here is this might work out to be within just a few years to put you in a better place than you would be just going along the current path. So has there been any consideration of that?

Well, obviously we are aware that that is a possibility. We didn't work on that at all. The distribution payment is a Board matter -- level of distribution payment is a Board matter. And we came up with a plan that enables us to restore coverage, really we think restore the financial health of the Company, significantly lower our cost of capital over time as we execute on this plan. And that we don't really have the restriction that you're talking about, the inability to grow in the Eagle Ford.

We just outlined a lot of Eagle Ford growth that we're going to execute on and that is probably not even the end of it. So we are capitalizing on our geographic advantage and are able to do that even in our current situation. So that is our plan going forward. I don't know, Steve, do you want to comment further on it?

No.

Stephen Maresca, Morgan Stanley.

Hey, guys, just had a couple quick follow-ups. One, what is your interest expense assumption for 2014?

We -- it's -- what's our spreads, about 2 over LIBOR?

Yes.

We borrow at about 2 over LIBOR, so about 2.25. And then we have just taken the forward curve for 2014 and 2015, certainly for 2014 that is embedded in our budget. So it shows a quarterly increase in base LIBOR and then the 2% on top of that. But I don't know exactly what the interest rate is per quarter, but it is moving up -- the forward curve is moving up.

Our spread is about 75% fixed, 25% floating right now, Steve.

Yes, that is an important point. So we are mostly hedged against that increase.

So I can just take the year end -- not year end -- quarter end debt at September 30. And then like you said before, Steve, you are going to finance next year with credit or the revolver, so I can do my math on this and get somewhere close to where your interest expense will be?

Yes, debt will be up a little bit in the next quarter, in the fourth quarter because of the strategic spend. We are also freeing up working capital so it mitigates that increase. And debt will increase next year of course given the size of the strategic spending that we have in the guidance we gave -- what was it, $325 million to $375 million is the strategic for next year. So debt will go up by some amount close to that next year.

But the EBITDA will be fundamentally improved because, number one, if we get the Lindsay Goldberg deal done we are not going to be running those losses through EBITDA. That doesn't account for purposes of how the bank group calculates that, they only pick up TCF if there is a distribution. But just all the other guidance we have given for the segments will really cause a meaningful jump in EBITDA from what we have forecasted for this year.

Okay, great. And then final one for me is more of a clarification. You mentioned coverage, Curt, and the way I heard you was distribution coverage in the second half of 2014, but also full the full year 2014. Is that a fair statement, you expect to cover for the full year in 2014?

Yes.

Okay. So light in the first half but enough in the second half to cover for the full year?

Yes, stronger in the second half, that is right.

Not terribly light, but (multiple speakers).

(Multiple speakers) a little light.

Okay. Okay, thanks a lot, guys.

(Operator Instructions). Selman Akyol, Stifel.

Real quickly, in terms of the Fuels Marketing segment, and I appreciate everything you have done there, but is there anything else that can be done there to improve results on a go-forward basis or are we really just kind of waiting for the market to turn there?

Well, no, we really are proactive not just on this -- I mentioned this so-called back-to-back deal, but we are also taking steps to minimize working capital in the business until the margins improve. And also reduce our operating expenses particularly on the Marine-related expenses. And Doug Comeau is here. Doug, do you want to comment more about what steps are we taking beyond just the ones that he mentioned?

Yes, absolutely. In a low-margin environment you look for ways to improve the business. And one of the ways that you improve the business is either lower your cost of goods sold or reduce your operating expenses. And we are looking at both of those when we did the back-to-back model deploying to a third-party supplier in St. Eustatius. Those costs that we would have withholding that inventory on hedges or any of those inventories or the sales, some of that goes away.

So we think that there is at least a $5 million improvement in cost of goods sold related with third-party supply. And then we also have about $7 million of operating expenses by shedding some marine vessel equipment that we have in St. Eustatius.

Same way with the Gulf Coast, the Gulf Coast we can reduce some of our rent expense in tanks outside that we would rent from third parties, also barges. And then we wait for the market to turn. We have seen some signs that the bunker market is strengthening on the margins and that this business provides us a way to rent all of our tanks, which is a good way for tank usage and also go ahead and provide us a good margin above that.

Yes, let me remind everybody, just picking up on that last point that Doug just made is that when we talk about losses particularly in the bunkers. The bunkers are Fuels Marketing are paying market-related storage rates to our storage segment at both St. Eustatius and Texas City. And so the losses come after they have made enough money to cover all those expenses.

So in a relatively weak storage market this is one of the reasons we got into this in the first place. Like at St. Eustatius there was a period -- probably goes back more than six, seven years ago now, Danny, when storage -- where once again you're in a cycle where storage was very weak and the bunker business was started up there in order to optimize the fact that we had spare capacity at a terminal which is a very good bunker marketing location.

We have that at two locations, mainly two locations, at Texas City near Houston and at St. Eustatius. So having the capability to engage in these activities enables you particularly in a market with some weakness in storage to pick up revenue, third-party revenue covering those expenses from the guys who are then trying to make a margin on top of that. And they have done that very, very well for the last year or so where bunker is really weak and not just for us but the whole bunker industry is way down if you follow it at all.

But they are continuing to cover those costs as well, as I said, in a relatively weak market. So the thesis that it is within a small part of our business, remember now the whole Fuels Marketing segment, which includes a very profitable blending operation, a small bit of crude trading, that is down now to less than 5% of our business from probably 25% a couple of years ago. That having been said, they are helping us to cover storage in a period of relative weakness which was, as I said, the thesis for being in it to begin with.

I appreciate that. My next question really relates to the exit from the asphalt joint venture. And I know you can't say a lot and it's still being negotiated and everything, but just in terms of it, should we think that there should be any costs associated with that?

Cost from the exit? No.

Okay. And then my last question, in terms of just -- we've got your capital programs that you have outlined for 2014 and 2015. But are there other opportunities you are looking at that make you could bookends around or just say this is our opportunity set, hasn't been approved by the Board yet but we are involved in looking at?

Yes, I mean we are compiling a list of projects right now that could be additive to what we have guided to on 2014. And there is lots of interest from people to help us finance that if we decided to pursue it. So we are going to be developing that over the next few weeks really.

Yes, it is all in the fee-based pipeline and storage business.

It is in the fee-based business and I would tell you that some of the opportunities we see is driven by the big oil shale plays that need to have logistics moving their oils to market. So, for example, engaging in rail that takes crude from the Mid-Continent and getting it to market at St. James. We are also looking at facilities on the East Coast and West Coast to do the same. The Mexican market for export of light products, the LPG's that can be transported and sold there. We have a terminal in Nuevo Laredo, we also have a pipeline connection to the Valley Pipeline that can take propane down to Brownsville.

So we are really trying to participate in every way, shape or form how these oil shale plays are reshaping the energy market in the United States. And so, we do have a lot of opportunities in front of us in order to figure which ones are the best return for the Company and how we move the Company forward when we have capital to spend.

And I am very confident on that. We have done a great job on our growth projects over the years. We just (inaudible) for the Board and the performance was excellent. And so, I am very confident we are going to have a pipeline of new growth projects not reflected in anything we said today as we roll forward into 2015 and beyond that we can execute on and continue to drive growth and distributable cash flow.

And I think Curt mentioned earlier we are not done in the Eagle Ford either.

That is right.

Thank you.

At this time there are no further questions. I will turn the call back over to you for closing remarks.

Thank you, Holly. I would like to thank everybody for joining us on the call again today. If you have any questions please call Investor Relations. Thanks.

Thank you for participating in today's NuStar Energy conference call. You may now disconnect.