NuStar Energy's CEO Discusses Q3 2013 Results - Earnings Call Transcript

Nov.12.13 | About: NuStar Energy (NS)

NuStar Energy L.P. (NYSE:NS)

Q3 2013 Earnings Call

November 12, 2013, 10:00 AM ET

Executives

Christopher Russell - Treasurer and Vice President, Investor Relations

Curtis Anastasio - Chief Executive Officer, President and Director

Steven Blank - Executive Vice President, Chief Financial Officer and Treasurer

Danny Oliver - Senior Vice President, Marketing and Business Development

Douglas Comeau - Executive Vice President and Chief Operating Officer

Analysts

Steve Sherowski - Goldman Sachs

Stephen Maresca - Morgan Stanley

Brian Zarahn - Barclays

James Jampel - HITE

Eric Mandelblatt - Soroban Capital

Michael Blum - Wells Fargo

Paul Jacob - Credit Suisse

Norman Kramer - Kramer Investments

Selman Akyol - Stifel

Operator

Good morning. My name is Holly, and I'll 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. (Operator Instructions) I'd now like to turn today's conference over to Christopher Russell, Treasure and Vice President of Investor Relations. Please go ahead, sir.

Christopher Russell

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 U.S. GAAP maybe found either in our earnings press release or on our website.

Now, let me turn the call over to Curt.

Curtis Anastasio

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 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 1, 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 for Mont Belvieu and 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 per day and we are actively marketing the remaining capacity to various other third parties.

We're in advance 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 our Eagle Ford crude oil pipeline systems were 175,000 barrels per day during the quarter, about 46% higher or 53,000 a day higher than the third quarter of 2012.

In August, we completed a pipeline project for ConocoPhillips in the Eagle Ford Shale, with construction of a 1,000 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 throughput 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 throughputs on our refined products pipelines were 4% or 20,000 a day lower than 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 throughput with additional Eagle Ford crude oil barrels being shipped down our 16-inch pipeline at Corpus Christi and stored at our Corpus Christi North Beach storage facility.

Reduced demand and lower renewal rate 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 loss $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 U.S., 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.

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 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 cover the distribution to the limited by 0.79x. 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, although higher than the fourth of 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 facilities continue to benefit from the completion of our Eagle Ford Shale project. In addition, this segment will start to benefit from our second 70,000 barrel per day railcar offloading facility, which we expect to complete at St. James later this month.

Overall, fourth quarter EBITDA results for storage should be higher than 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 segments 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 a range of $26 million to $27 million, depreciation and amortization expense around $44 million -- [ph] $45 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 being 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 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 startup 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 startup of the first phase of our South Texas crude oil pipeline system project.

In addition, the segment should benefit from the first quarter 2015 startup 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 adjustments. 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 projects should be offset by a 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 and new storage projects identified and approved would provide additional EBITDA to 2014 and to our 2015.

Projections for both 2014 and 2015, assume that the majority of our storage leases expiring over the next couple of years are either renewed or leased to new customers, and what we feel will be prevailing market rates during the period. If demand for storage deteriorates more than we currently see, the risk of course always exist, some of these tanks will not be leased in '14 and '15 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 in 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 expenses 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 1x.

So as you've heard this morning, we made a lot of progress in getting NuStar back in a position, where we can once again cover our distribution near-term and we're 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.

Question-and-Answer Session

Operator

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

Steve Sherowski - Goldman Sachs

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

Curtis Anastasio

It was total open season of 100,000 barrel a day expansion, of which we can get 90 a day of firm commitments for the FERC rules. We have 40 a day from 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've already got a good return on the first 40. But we expect to fill it up.

Steve Sherowski - Goldman Sachs

So you said on your 12-inch line, you're 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?

Curtis Anastasio

We haven't disclosed that publicly. We're working on a joint press release with the anchor shipper, which should be forthcoming shortly. I don't know it will be this week or next week. It really depends on sort of their internal review process. But I would expect to see more detail on that joint press release. But that payment is reflected in the commentary I made about covering the distribution in the second half of '14 and the rest of what I said about '14.

Steve Sherowski - Goldman Sachs

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

Curtis Anastasio

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 in 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 the renewal in Amsterdam. But having it preface it that way, Dan, you want to add more color to that.

Danny Oliver

I think we've renewed a lot of contracts this year. I think we've seen, and per Curt's comment, some stabilization in those rates. We're not projecting any improvement going forward, but we're not expecting a further deterioration. Just from a global perspective, after running utilization rates in the storage segment up around 97%, maybe 98% in the last five or 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 improve that much either. Obviously, we'll be working hard to get those tanks on lease. But we haven't factored that in, to Curt's comments, just more of a stable market going forward.

Operator

And your next question comes from the line of Stephen Maresca of Morgan Stanley.

Stephen Maresca - Morgan Stanley

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?

Curtis Anastasio

Well, in terms of dollars out the door, it's huge, right, because we started out with a 75,000 barrel a day commitment, and if you use sort of $90 million or $100 million a barrel, that's hundreds and adds up to in excess of $1 billion over the remaining term of the contract. And of course, we then refill it 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 been struggling.

So I think that's like 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's history, if any one had concocted such a scenario. So it's used in that regard.

I think it should also be a better deal for the JV too. They'll get a little more crude flexibility in what they try to run, and not that they wouldn't ever run any Venezuelan again, they may from time-to-time, but they have a lot more flexibility now to try to try to optimize their operations. So I think all around it's a good thing.

Stephen Maresca - Morgan Stanley

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 you gave 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?

Curtis Anastasio

In 2014, it's only the Phase 1, which is finished first, that's fully signed up. So we do have that filling up once it goes in the 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 of 2015. But we have none of the walk-up capacity being filled in our projections, although we think that will happen.

Stephen Maresca - Morgan Stanley

So that EBITDA numbers include $90 million?

Curtis Anastasio

Phased in over the course of 2015.

Stephen Maresca - Morgan Stanley

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 and savings, is there anything further that can be done in that regard for 2014 or 2015 to even further help coverage?

Curtis Anastasio

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

Stephen Maresca - Morgan Stanley

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?

Curtis Anastasio

I can't do that yet, because we need to have the consent of our counterparties to disclose those details, but obviously, we view it as a positive. This is a business that has a lost -- well, in terms of EBITDA, it was something like negative $54 million, or similar amount, if not a little more this year, a higher number in terms of net loss and net income and we have a 50% interest in that. So it's been a big drag on the bottomline results of this company. So obviously, we're trying, and even moreover it's not strategic to us.

Our strategic direction, which we announced over a year ago is to move away from refining and marketing, including the asphalt and all of the things that we've 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 a strategic redirection of this company. And we're most of the way there. We're almost there, we're not quite done, but 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 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.

Operator

And your next question comes from the line of Brian Zarahn of Barclays.

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?

Curtis Anastasio

We're hoping by yearend, but it ain't over till it's over, right. That's our hope and that's our believe that's reasonable, but we'll see.

Brian Zarahn - Barclays

And then is there any update on potential on terminal asset sales?

Curtis Anastasio

There no asset sales included in the 2014 budget, and the '14 and '15 outlook or guidance that I have given you. But we're going to continue to evaluate divestitures to see if we should continue to own those assets or they're better owned by somebody else, but it's really not a driver of our results and none of that is assumed in our '14 and '15 guidance.

Brian Zarahn - Barclays

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

Danny Oliver

All of the Eagle Ford contracts are five years and we'll have a little more color on the '12-inch term when we come out with the joint press release. That is long-term.

Brian Zarahn - Barclays

Can you talk about financing plans for next year's expansion CapEx?

Danny Oliver

We've 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 at the end of this quarter. Probably would be out that the end of this year because we're going to free up some working capital. It should provide most of the money needed for additional capital in the fourth quarter and then the debt-to-EBITDAs in the low 4s, pretty much throughout next year. So there is no need for equity, unless we do something sizably bigger than what's in the budget in the form of another project, an acquisition something along those lines.

Operator

Your next question comes from the line of Matt Niblack with HITE.

James Jampel - HITE

It's actually James Jampel from HITE. Just two questions. Would you view the non-U.S. 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?

Curtis Anastasio

I'm not going to get into specifics of assets that we might keep or 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 of things you've read about the U.K. and Northwest Europe economy over the last couple of years, and they've kept those assets leased. There has been a little slide on renewal rates, but that's not unique to Europe. And they've done a great job in the Amsterdam terminal, which we had in the recent past, tripled in size. They've got it fully leased up. They've really done a terrific job.

So I'm not going to get into comments, would we sell or keep this or that. But I'll generally say, we have a lot of valuable assets in this company, very valuable assets, including Europe. And so anything sold with that or anything else, we have a lot of things we could sell at very attractive prices. That is not our plan. Not in our '14 budget, that's not in our '15 outlook, but we do have a lot of valuable assets in this company.

James Jampel - HITE

And the second question from 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?

Danny Oliver

I have to calculate the percentage, but the numbers I gave you of what we're going to do.

James Jampel - HITE

Could you briefly review the numbers?

Curtis Anastasio

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

James Jampel - HITE

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

Curtis Anastasio

No, there are no people -- that doesn't entail any layer-offs or reductions of headcount.

James Jampel - HITE

I see, so the source of the saving is coming from wherever?

Curtis Anastasio

It's coming from overhead generally, some compensation related expenses and just really right sizing our benefits, so that they are comparable to our midstream composition, while still being best-in-class, but it doesn't affect any people, it doesn't headcount.

Operator

And your next question comes from the line of Eric Mandelblatt with Soroban Capital.

Eric Mandelblatt - Soroban 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 NuStar to accelerate their drop-down process rather than conducting their own IPO of their midstream assets, potentially combining with another low cost of 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, a Kinder Morgan, or ONEOK that would realize significant synergies with their own assets, plus capitalize on the tremendous tax benefits afforded by C-corps buying and LP, GPs.

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, possibly available to the NuStar family given the current consolidation trends in the industry?

Curtis Anastasio

Well, basically what you're talking about is selling the company and the company is not for sale and that's a board decision, it's not my decision. It's the decision of Board of Directors. The board, they looked at our plan and they've approved our plan. So if the board decides to sell the company, that's their prerogative, but that's not what we're working on. We're working on our plan to improve our results. We've got a great company with great asset. We found a way to grow at other recent provinces over the last year or two and that's what we're going to execute.

Eric Mandelblatt - Soroban Capital

But 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 low cost of capital MLPs that would not be a sale to 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.

Curtis Anastasio

If we execute on our plan we will have a lower cost of capital and we'll able to grow this company very nicely. And I'm afraid you're going to have to accept that as my answer for now.

Eric Mandelblatt - Soroban Capital

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 9% or 10% yield at NuStar and turn it into 5% or 6%. 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.

Curtis Anastasio

I think I've 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.

Eric Mandelblatt - Soroban Capital

I just want to make sure that we don't miss on what's your 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 unitholders.

Curtis Anastasio

I think I have given you the best answer I can give you on this.

Operator

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

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 about what you mean by that and what you were doing previously?

Curtis Anastasio

What we meant by that is when we first got into the bunkering at Eustatius that the supply was from 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 responsible for the supply ourselves for our own bunker marketing operation and now we've 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 reduced your working capital, you have less price risk, you are buying only what you know you're going to sell and you know what your margins are going to be to high degree of certainty right there at the dock or right around the terminal facility, in the proximity of the terminal. So that's what I mean by this 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.

Operator

Your next question comes from the line of Paul Jacob with Credit Suisse.

Paul Jacob - Credit Suisse

Curt, the first question I had is just trying to gauge the level of confidence that you have that you'll be able to divest the remainder of the asphalt business of 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 commitments that you have and perhaps retain your exposure to that business?

Curtis Anastasio

We have a deal that we're working on to exit. This 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's on the table. We're in advance negations to do that. And that's we're all working on right now. We're not contemplating doing something different from that. I mean that's our goal and we should know more about this in near future.

Paul Jacob - Credit Suisse

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

Curtis Anastasio

Well they at the asphalt JV are already railing Canadian crude into the plant at Paulsboro. So that's an operation that's already in existence, so I'm sure the JV will be looking at opportunities not just to continue to do that, but see if there is a way they can expand to that. And I wouldn't rule out any Venezuelan either just because the term contract is expired. There maybe times either because of cost or quality or logistics considerations where they want buy some stock cargo from Venezuela or other heavy crude, but the term obligation to do that will end effective January 1.

Paul Jacob - Credit Suisse

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

Curtis Anastasio

Margin improvements, actually. You might remember that when the Brent, TI spread blew out you had a lot of inland refineries buying relatively cheap WTI-related crude and Canadian crude compared to the international grades like Brent-related pricing. So that was a big advantage for them to run hard and produce among other things, asphalt. So the asphalt JV endeavoring to reduce their feedstock costs compare to the international waterborne grades like the Venezuelan heavy crude, so that they can capture some of that relative pricing advantage and improve their margin. And so this latest development pushes them in that positive direction.

Paul Jacob - Credit Suisse

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

Curtis Anastasio

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

Operator

Your next question comes from the line of Norman Kramer with Kramer Investments.

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're 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 to 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?

Curtis Anastasio

Well, obviously we're aware that that is a possibility. We didn't work on that at all. The distribution payment is a board matter -- the level of distribution payment is a board matter. And we came up with the 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 restrictions 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's 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's our plan going forward. Steve, do you want to comment further on that.

Steven Blank

No.

Operator

And your question is a follow-up question from the line of Stephen Maresca with Morgan Stanley.

Stephen Maresca - Morgan Stanley

Just had a couple of quick follow-ups. One, what is your interest expense assumption for 2014?

Steven Blank

What's our spread, it's about 2% over LIBOR. We borrow at about 2% over LIBOR. So about 2% in a quarter and then we've just taken the forward curved for '14 and '15, certainly for '14 that's embedded in our budget, so it shows that quarterly increase in base LIBOR remain at 2% on top of that, but I don't know exactly what the interest rate as per quarter, but its moving on the forward curves moving on.

Danny Oliver

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

Curtis Anastasio

So that's an important point, so we're mostly hedged against that increase.

Stephen Maresca - Morgan Stanley

So I can just take the quarter-end debt at September 30. And then, like you said before, Steve, you're 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?

Steven Blank

Debt will be up a little bit in the next quarter and the fourth quarter, because of strategic spend. We're 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, that was between $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 EBITDA will be fundamentally improved, because number one, if we get the Lindsay Goldberg deal done, we're 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 DCF, if there is a distribution. But just all of the other guidance we've given for the segments will really cause a meaningful jump in EBITDA from what we have forecasted for this year.

Stephen Maresca - Morgan Stanley

And then final one for me, it's 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 for the full year 2014. Is that a fair statement, you expect to cover for the full year in 2014?

Curtis Anastasio

Yes.

Stephen Maresca - Morgan Stanley

So lighten the first half, but enough in the second half to cover for the full year?

Curtis Anastasio

Yes, stronger in the second half, that's right.

Steven Blank

Not terribly light.

Operator

And your next question will come from the line of Selman Akyol with Stifel.

Selman Akyol - Stifel

Real quickly, in terms of the fuels marketing segment and I appreciate everything you've 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?

Curtis Anastasio

Well, no. We really are proactive, not just on this, I mentioned the 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 you want to comment more about what steps are we taking beyond just ones that he mentioned.

Douglas Comeau

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're 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 and with 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 had about $7 million operating expenses by shedding some marine vessel equipment that we have in Eustatius. Same way with the Gulf Coast, the Gulf Coast we reduced 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 mark-to-market is strengthening on the margins and that this business provides us a way to rent all our tanks, which is a good way for tank usage and also go ahead and provide us a good margin above that.

Curtis Anastasio

Let me remind everybody, just picking up on that last point that Doug just made, is that we talk about losses, particularly in the bunkers. Bunkers and fuel 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 in St. Eustatius, there was a period, probably goes back more than six, seven years ago now, Danny, where once again, we were 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, in 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 pickup revenue, third-party revenue covering those expenses from the guys who are then trying to make a margin on top of that. And they've done that very, very well to 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 all. But they are continuing to cover those costs as well as I said in a relatively weak market.

So the piece is that it's within a small part of our business. Remember now, the whole fuels marketing segment, which includes very profitable blending operation and a small bit of crude trading, that's 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 pieces were being in to begin with.

Selman Akyol - Stifel

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 there should be any costs associated with that?

Curtis Anastasio

Cost from the exit? No.

Selman Akyol - Stifel

And then my last question, in terms of, we've got your capital programs that you've outlined for '14 and '15. But are there other opportunities you're looking at that maybe 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?

Steven Blank

I mean we're compiling a list of projects right now, it could be additive to what we've guided to on 2014. And there is lots of interest from people to help us to finance that, if we decided to pursue it. So we're going to be developing that. It's all in the equipments next few weeks, really.

Curtis Anastasio

It's all in the fee-based pipeline and storage business.

Steven Blank

It is in the fee-based business and I would tell you that some of the opportunities that 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're also looking at facilities on the East Coast and West Coast to do the same.

The Mexican market for export of white products. The LPGs 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're really trying to participate in every way, shape or form, how these oil shale plays are reshaping the energy market in the United States. 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.

Curtis Anastasio

And I'm very confident on that. We've done a great job on our growth project. So we're just backcasting for the board, and the performance was excellent. And so I'm very confident that we're going to have a pipeline of new growth projects, not reflected in anything we said today, as we roll forward into '15 and beyond, that we can execute on and continue to drive growth and distributable cash flow.

Steven Blank

And I think Curt mentioned earlier, we're not done in Eagle Ford either.

Operator

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

Christopher Russell

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

Operator

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

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