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NuStar Energy L.P. (NYSE:NS)

Q1 2013 Earnings Conference Call

April 24, 2013 10:00 ET

Executives

Chris Russell - Vice President, Investor Relations

Curt Anastasio - President and Chief Executive Officer

Steve Blank - Executive Vice President and Chief Financial Officer

Analysts

Steve Sherowski - Goldman Sachs

Cory Garcia - Raymond James

James Jampel - HITE

Operator

Good morning. My name is Georgina, and I will be your conference operator today. At this time, I would like to welcome everyone to the NuStar Energy L.P. and NuStar GP Holdings LLC First Quarter 2013 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 would now like to turn the conference over to Chris Russell, Vice President of Investor Relations. Sir, you may begin.

Chris Russell - Vice President, Investor Relations

Thank you, Georgina. Good morning everyone and welcome to our conference call to discuss NuStar’s first quarter 2013 earnings results. With me today is Curt Anastasio, President and CEO of NuStar Energy L.P. and NuStar GP Holdings, LLC; Steve Blank, Executive Vice President and 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 U.S. GAAP maybe found either in our earnings press release or on our website.

Now, let me turn the call over to Curt.

Curt Anastasio - President and Chief Executive Officer

Good morning, and thanks for joining us on the call. As a result of the September 2012 sale of 50% of the Asphalt operations and the January 1st sale of San Antonio refinery, beginning in the first quarter of 2013 NuStar had less exposure to margin based operations than we have had in several years. This reduced margin based exposure should lead to less volatile and increased distributable cash flow in the future.

As expected, our pipeline segment performed well in the first quarter, but storage and fuels marketing both fell short of our initial expectations. EBITDA in the pipeline segment increased to $56 million, $6 million higher than in the first quarter of last year. Higher volumes on our Eagle Ford pipeline assets and longer haul higher tariff producing pipelines plus higher pipeline tariffs from the 2012 FERC adjustments contributed to the improved results. These positive factors were partially offset by lower throughputs on some other pipelines as a result of turnarounds at some of our customers’ refineries.

Total pipeline segment throughputs were comparable to last year’s first quarter. Crude oil pipeline throughputs were 6%, or 21,000 barrels a day higher than the first quarter of 2012 due to 2012 completion of two Eagle Ford shale projects and the December 2012 crude oil asset acquisition from TexStar Midstream. Throughputs on our Eagle Ford crude oil pipeline systems increased by 55% or about 55,000 barrels per day compared to the first quarter of 2012. However, those increases were partially offset by the impact of the turnarounds that I just mentioned.

First quarter throughputs on the refined product pipelines were down 4%, or 20,000 barrels a day compared to last year due to our decision to take our Houston 12-inch pipeline out of service to convert the line to NGL pipeline service and also due to the customer refinery turnarounds during the quarter. As we have discussed in the past, throughputs in our Houston 12-inch pipeline had dropped significantly in the last couple of years as a result of changing supply economics out of Corpus Christi, Texas. In recent years, throughputs on this 105,000 barrel per day capacity line have exceeded 90,000 barrels per day, but more recently dropped to as low as 6,500 barrels a day. We have placed this line into NGL service and expect to make an announcement within the next couple of months regarding adding approximately 75,000 barrels a day of throughput on that line.

During our fourth quarter earnings call we discussed our acquisition of an Eagle Ford crude oil production and gathering system from TexStar which in fact closed in December and that we anticipated closing a second deal with TexStar in the first quarter of 2013 that would include a natural gas pipeline and two fractionation units. In mid-February TexStar notified us they were terminating the right to the parties to proceed to the second closing. So, at this time, we don’t believe a deal will close on the terms that had been agreed. But note that no capital spending estimates or incremental EBITDA projections related to that second deal with TexStar are included in any of the 2013 or 2014 guidance figures that we are mentioning on today’s call.

Storage segment EBITDA for the quarter of $76 million was $3 million less than the $79 million earned last year. Increased earnings associated with internal growth projects completed in our St. James, Louisiana and St. Eustatius terminals in 2012 and during the first quarter of ’13 were more than offset by lower throughputs and reduced demand at several terminals.

Throughput volumes were down 9% or about 70,000 barrels compared to the first quarter of 2012. Turnarounds at three different refineries of one of our customers caused throughputs at three of our crude storage facilities to be reduced. As the turnarounds are competed throughput levels should improve in the second quarter. Apart from the temporary impact of refinery turnarounds reduced demand for storage has been driven by backwardation of the forward pricing curve.

Our Fuels Marketing segment generated $2 million of negative EBITDA during quarter, lower than last year’s comparable amount of $16 million. Remember that due to the sale of the 50% of the asphalt business and the January 1, 2013 sale of the San Antonio refinery, the only results currently included in that segment relate to our crude oil trading, heavy fuel and bunkering and fuels for lending. This year the segment first quarter results were mainly impacted by losses in the bunker market. Reduced worldwide demand for bunker fuels plus increased supply in the U.S. Gulf Coast and the Caribbean caused 0239 bunker margins to be negative during the quarter. We anticipate that bunker margins will continue to be lower than we initially expected at least for the third quarter.

In the first quarter, our G&A expenses were $27 million similar to the $27 million of last year. Interest expense for the quarter was $30 million, up $9 million from last year, higher borrowing costs associated with the January 2013 issuance of about $400 million of junior subordinated notes increased borrowing associated – costs associated with the May 2012 renewal of our credit facility and the impact of downgrades by the rating agencies were the main reasons for the increased interest expense. NuStar’s March 31, 2013 debt balance was $2.4 billion, about $100 million lower than the March 31, 2012 number, while our debt to EBITDA ratio was 4.3.

Regarding the asphalt JV, recall that our sale on September 2012 of a 50% equity interest means that the results within asphalt no longer impact our distributable cash flow or our bank covenant. That being said our equity earnings in JVs was $11 million loss in the quarter. Those losses were principally related to the asphalt JV and are mainly due to seasonally weak asphalt margins.

With regard to our first quarter distribution NuStar Energy’s Board of Directors has declared the $1.095 per unit distribution and the distribution will be paid on May 10th. The Board of NuStar GP Holdings declared a fourth quarter distribution of $0.545 per unit and the GP Holdings distribution will be paid on May 15th.

Taking a look at results for the remainder of 2013, the pipeline segment should continue to benefit from additional crude oil throughputs in the Eagle Ford as a result of the third and fourth quarter completion of the construction of two crude oil gathering lines that will supply crude oil to the 12-inch line acquired from TexStar. And then on to our 16-inch Three Rivers, Texas to Corpus Christi line. In addition the pipeline segment should see higher throughputs and EBITDA from the first quarter 2013 completion of truck offloading facilities and the third quarter 2013 completion of a 100,000 barrel terminal and the associated pipeline connections to our existing 12-inch Pettus, Texas line for ConocoPhillips. After flowing through the 12-inch Pettus line those barrels also connect to our 16-inch Three Rivers to Corpus Christi pipeline. After these 2013 projects are complete, we expect total throughputs on the Eagle Ford pipeline assets to increase from the first quarter levels of around 155,000 barrels a day to 225,000 barrels per day by the end of 2013.

Total pipeline segment throughputs after benefiting from these additional Eagle Ford throughputs plus reduced turnaround activity at customers’ refineries should be around 1 million barrels per day up from first quarter throughputs of around 820,000 barrels a day. Second quarter results for the pipeline segment should be higher than the first quarter of 2013 as well as higher than the same quarter of last year. Full year EBITDA for the segment is expected to be $60 million to $80 million higher than last year, a bit lower than our previous full year guidance of $70 million to $90 million due to some operating issues that caused operating expenses to increase in throughput volumes on the TexStar crude system to be lower than expected during the first quarter. Throughputs on that system are now at anticipated levels that we are hopeful we can make up some of that shortfall over the balance of 2013.

As I mentioned earlier, storage segment result should continue to be impacted by backwardation of forward pricing curve, which should cause second quarter results to be lower than the first quarter as well as the second quarter of 2012. However, for the full year, we do expect the storage segment EBITDA to be $10 million to $30 million higher than it was in 2012. As we move into the third and fourth quarters of 2013, the benefits from the internal growth projects completed in our St. James, Louisiana, and St. Eustatius terminals in 2012 and during the first quarter of ‘13, the fourth quarter ‘13 completion of a second 70,000 barrel per day railcar offloading facility at St. James, and seasonally reduced maintenance expenses should begin to more than offset the impacts of reduced demand at some of the terminals.

With regard to fuels marketing, the full year results are now projected in the range of $20 million to $40 million. We expect the weak worldwide demand for bunker fuels to continue to have a negative impact on the segment through most of the rest of the year. That being said, we do expect second quarter results to be higher in both the first quarter of 2013 and the second quarter of 2012. We expect second quarter G&A expense to be in the range of $26 million to $27 million, depreciation and amortization expense of around $43 million to $44 million, and interest expense in the range of $32 million to $33 million. 2013 full year reliability capital should total $35 million to $45 million. Our strategic capital spending is now projected to be in the range of $400 million to $450 million with around $265 million related to internal growth in the Eagle Ford shale.

Now, let me take a couple of minutes to provide you some updated guidance for 2014. In the first quarter of 2014, we expect to complete the expansion of our dock loading facilities at our Corpus Christi North Beach terminal facility. That will allow us to increase our Eagle Ford related pipeline throughputs even further as well as our Corpus Christi North Beach terminal throughputs. By the middle of 2014, we plan to increase our pipeline throughputs again by investing in an expansion project that will increase the throughput capacity of one of our Eagle Ford pipeline systems.

In addition, in the second half of 2014, we plan to be moving NGLs on the Houston 12-inch pipeline. Based on these expansion projects, our 2014 pipeline throughput should increase another 150,000 barrels a day to around 375,000 causing 2014 pipeline segment EBITDA to be in the range of $40 million to $60 million higher than in 2013. Storage segment EBITDA for 2014 is projected to be $20 million to $40 million higher than 2013. Incremental earnings generated as result of the completion of the second St. James railcar offloading project and the Corpus Christi terminal project should provide most of the additional EBITDA.

With regard to fuels marketing, we project that 2014 EBITDA should be comparable to ‘13 and in that range of $20 million to $40 million. Strategic capital spending for 2014 is currently projected to be in the $250 million to $300 million range, but that range could easily increase as we are identifying more internal growth projects. The liability capital should be slightly higher than 2013 and in the range of $40 million to $50 million. Based on our current forecast and guidance for 2013 and ‘14, we feel that our coverage ratio will exceed one-time in 2014 and beyond.

So, at this time, I would like to turn it over to the operator, so we can open up the call to Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question will come from the line of Steve Sherowski with Goldman Sachs.

Steve Sherowski - Goldman Sachs

Hi, good morning. Just given that, it doesn’t look like the TexStar NGL acquisition is going to go through, how does this change any of your capital market access or needs or timing for the remainder of the year?

Steve Blank

Not terribly much. We had budgeted a second junior subordinated note issue this year to accommodate that transaction and more specifically the CapEx associated with that transaction, because it’s going to be $100 million upfront, and then about $300 million of capital to be spent over the following 18 months. So, CapEx is quite a bit down, because of not going back and obviously we don’t spend the $100 million, but Curt mentioned the Houston line putting that into NGL service that was going to be used for that NGL TexStar deal. We are now working on, as Curt mentioned, there are potentially at different customer, 75,000, so, there is still some capital associated with that. So, we could do a bit of a hybrid rest of this year. We do have a bond maturity coming due in June. And we had one in March. So, we are currently examining how best to finance the new CapEx program. It could be a combination of bond hybrid and the drawn, all of those, some combination of those.

Steve Sherowski - Goldman Sachs

Okay, thanks. And just regarding that Houston 12-inch line, you mentioned 75,000 barrels a day of throughput, is that in addition to the 105,000 barrels a day that was available for the period?

Curt Anastasio

I mentioned as the capacity of that line or that was kind of the run rate when refined products used to move from Corpus Christi refining complex to Houston. So, it’s unrelated. It’s the actual throughput in that line had dropped to almost nothing actually in times. And so we had to find and we have talked about this in the last probably more than a year, a year or two publicly. We had to find alternative use for that line. Well, we have got it now, because of all the activity in South Texas and in and around Corpus and Houston. So, it’s going to go from basically empty to close to full.

Steve Sherowski - Goldman Sachs

Got you. I am sorry, I am in additional capacity on that line, but the capacity is going to say that it’s going to stay the same?

Curt Anastasio

Yeah.

Steve Sherowski - Goldman Sachs

Okay.

Curt Anastasio

No, no we have not changed the capacity, I was just referring to the increased throughput.

Steve Sherowski - Goldman Sachs

Got you, okay. Alright, that’s it from me. Thank you.

Operator

(Operator Instructions) Your next question will come from the line of Cory Garcia with Raymond James.

Cory Garcia - Raymond James

Good morning fellows. I appreciate all the incremental color on ‘13 and ‘14 guidance, it’s going to be very helpful. Looking at sort of the crude by rail theme in your agreement with EOG as it relates to spreads now coming in. How best should we think about that from both a profit-sharing standpoint and also from an overall volume standpoint through that unit?

Curt Anastasio

We are leaving with the spreads in that deal, that aspect of that deal is still in the money and Danny Oliver is here, he can talk more about it.

Danny Oliver

Yeah, I mean, we still collect the fees to bring those strengths in, then we still have some storage associated with those that unit train volume. So, we still continue to collect those fees. Our upside of the spread profit-sharing goes away when the WTI/LLS spread is at about $7.

Cory Garcia - Raymond James

Okay.

Danny Oliver

Anything above that we still participate in that profit-sharing?

Cory Garcia - Raymond James

Okay, that’s great to know. And then in terms of your second unit train that you guys are building out up, any color on the securing of commitment shippers on that line?

Curt Anastasio

Yeah, our base load customer Great Northern committed to 30,000 barrels a day which base loaded that project and we are continuing and we have got several interested parties and more volume we are working through those contracts now.

Cory Garcia - Raymond James

And any ability to I guess take heavier crudes down that line or is there going to be incremental sort of infrastructure steaming that would be necessarily to sort of retrofit any of that?

Curt Anastasio

We are not set up for heat right now. We’ve talked about it with some customers but right now the demand has been on the lighter crudes Bakken maybe a little bit of the Eagle Ford. But there is enough interest we can do it, I mean it could turn out to be another good project there.

Cory Garcia - Raymond James

Absolutely, I appreciate it guys.

Operator

Your next question will come from the line of James Jampel with HITE.

James Jampel - HITE

Thanks for taking the call. Came in late, I heard some of the detail on the management guidance for EBITDA for 2013 and 2014, but I didn’t hear it all summed up, I must have missed it?

Curt Anastasio

Well we did it by pipeline and storage segment and summed up in terms of ’14 over ’13 is that what you’re looking for or…?

James Jampel - HITE

Yeah, yeah ’13 over ’12 and then ’14 over ’13?

Curt Anastasio

Okay. So, what we said basically just to repeat a little bit of it.

Steve Blank

60 to 80 up on pipelines that’s ‘13 I mean ‘13 over ’12…

James Jampel - HITE

Right.

Steve Blank

And then 10 to 30 on storage ‘13 over ‘12 and then fuels marketing 20 to 40.

Curt Anastasio

With 20 to 40s absolutely…

James Jampel - HITE

Yeah, that was absolutely – that was incremental.

Steve Blank

And then…

James Jampel - HITE

Right, so this 20 to 40 is 2013 EBITDA from fuels marketing?

Curt Anastasio

And ’14, yes right.

James Jampel - HITE

Okay.

Steve Blank

And then for ‘14 storage up an additional 20 to 40, higher than ’13.

James Jampel - HITE

Pipelines were 40 to 60 higher than ’13.

Steve Blank

And then fuels and marketing about the same amount of money would be earned in ’14 as we expect and guided to in ‘13, 2013.

Curt Anastasio

Okay. So, in total you’re cutting that 60 to 100 EBITDA increase ’14 over ‘13.

James Jampel - HITE

60 to 100, 14 over 13?

Curt Anastasio

Yeah.

James Jampel - HITE

And second question, on the TexStar deal that’s not going to occur. What was your projected EBITDA there?

Curt Anastasio

Yeah nothing in 2013 that we have a little bit of capital and that Steve addressed earlier that we’re now not going to spend because it was $100 million upfront many and then you had the right spend in another 100 plus over the succeeding 18 months. So, that’s – and obviously none of this is now in our guidance for ’13 or ’14. But we previously had in the ‘14 EBITDA about $80 million.

James Jampel - HITE

Alright, thank you.

Operator

(Operator Instructions)

Curt Anastasio

The one follow-up on this TexStar thing that capital we were going to spend I mean we’re going to find other opportunity we already are. We’ve laid out some of it here but we just keep finding opportunities especially in the pipeline, some in the storage, but more so in the pipeline now a days. So, I expect that the basic economics of that deal to be replaced or surpassed.

Operator

And there are no further questions at the time.

Chris Russell

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

Operator

Ladies and gentlemen this does conclude today’s conference. Thank you all for joining. And you may now disconnect.

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