NuStar Energy, L.P. Q2 2010 Earnings Call Transcript

Aug. 2.10 | About: NuStar Energy (NS)

NuStar Energy, L.P. (NYSE:NS)

Q2 2010 Earnings Conference Call

August 02, 2010 03:00 pm ET

Executives

Chris Russell - VP of IR

Curt Anastasio - President & CEO

Steve Blank - SVP & CFO

Danny Oliver - SVP, Marketing and Business Development

Mike Hoeltzel - SVP, Strategic Planning

Analysts

Michael Cerasoli - Goldman Sachs

Darren Horowitz - Raymond James

Brian Zarahn - Barclays Capital

Xin Liu - JPMorgan

Ross Payne - Wells Fargo

Barrett Blaschke - RBC Capital Markets

Michael Blum - Wells Fargo

Louis Shamie - Zimmer Lucas

Andrew Gunlock - ASP

Joseph Siano - Credit Suisse

Operator

Good afternoon, my name is Sarah and I will be your conference operator today. At this time, I'd like to welcome everyone to the NuStar Energy, L.P. and NuStar GP Holdings LLC second quarter earnings conference call. (Operator Instructions)

Thank you. Mr. Chris Russell, Vice President, Investor Relations; you may begin your conference.

Chris Russell

Good afternoon everyone and welcome to our conference call to discuss NuStar Energy, L.P. and NuStar GP Holdings L.L.P. second quarter 2010 earnings results. If you have not received the earnings releases and would like copies of each, you may obtain them from our website at NuStarenergy.com and NuStargp.com. Attached to the earnings releases, we have provided additional financial information for both companies including information on NuStar Energy, L.P. business segments.

In addition, we have posted operating highlights and fundamental data for our asphalt operation under the investor's portion of the NuStar Energy, L.P. website. If after reviewing the attached tables and operating highlights, you have questions on the information as presented, please feel free to contact us after the call.

With me today is Curt Anastasio, CEO and President NuStar Energy L.P and NuStar GP Holdings L.L.P, Steve Blank our CFO 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 certain statements concerning the future performance of NuStar and other statements that will be forward-looking statements as defined by securities laws. These statements reflect our current views with regard to future events and are subject to various risks, uncertainties and assumptions described in NuStar Energy, L.P. and NuStar GP Holdings and the reports on Form10-K for the year ended December 31, 2009 and some of the filings with the Securities and Exchange Commission.

Actual results may materially differ from those discussed in these forward-looking statements and we undertake no duty to update any forward-looking statements to conform these statements of actual results or changes in our expectations.

During the course of this call, we will also make reference to certain non-GAAP financial measures. We have provided additional schedule under the investor's and financial reports and SEC filings portion of the NuStar Energy, L.P. website reconciling these non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with US Generally Accepted Accounting Principles or GAAP.

Our non-GAAP financial measures should not be considered as alternatives to GAAP measures such as net income, operating income, net cash flows provided by operating activities or any other GAAP measure of liquidity or financial performance.

Now let me turn the call over to Curt.

Curt Anastasio

Thank you, Chris and welcome to our conference call. NuStar Energy just completed a quarter that saw us increase our asset base in our storage segment, improve our balance sheet and realized increased year-over-year growth and EBITDA in all three of our business segments. During the month of May we acquired three storage terminals in Mobile County, Alabama with a storage capacity of around 1.8 million barrels.

These facilities purchased for $44.1 million are a great addition to our fee based business and are already generating additional EBITDA for our storage segment. In addition, during May, NuStar received about $240 million of proceeds from the public offering of 4.4 million common units of NuStar Energy.

Short-term, these proceeds were used to reduce outstanding borrowings under our revolving credit facility and to pay for the May terminal acquisition. But longer term these proceeds will be used for future acquisitions meant to fund our internal growth capital spending program.

As a result of EBITDA growth in all three business segments, EBITDA was a second quarter record $157 million and higher than the $142 million of EBITDA earned in the second quarter of 2009.

Our storage segment EBITDA benefited from new customer contracts, higher renewal rates on the existing contracts, increased customer demand for storage services and additional EBITDA from our recent acquisition. As a result, revenues increased 10% or around $11.5 million.

Operating expenses in the segment increased about $7.5 million due largely to our decision last year to defer hiring and maintenance and repairs at some our facilities, given the distressed, financial and capital market situation. A 9% year-over-year increase in second quarter throughputs excluding the impact of pipeline asset sales we completed in second quarter last year, contributed significantly to higher EBITDA in the transportation segment.

Increased US demand for gasoline and distillate have caused crude oil pipeline and refined product pipeline throughputs to increase. In addition, favorable weather conditions in the Midwest US have allowed the planting season to start earlier this year, causing throughputs on our ammonia pipeline to be higher than they were in the second quarter of 2009. Higher tariffs as a result of last year's 7.6% increase on July 1, 2009 also benefited our transportation segment revenues in the second quarter of 2010.

Operating expenses in the transportation segment increased 7% or $1.9 million due to increased power cost as a result of higher throughput volumes and less benefit from pipeline product imbalances as a result of market fluctuations that we enjoyed in the second quarter of 2009.

EBITDA in the asphalt and fuels marketing segment increased mainly due to improved gross margins in our fuels marketing operation. A $9 million increase in fuels marketing gross margins was partly offset by a $1.9 million decrease in margins in our asphalt operations. Higher margins in our fuels marketing resulted from improved margins from our bunker fuel sales, fuel oil sales and refined products trade.

Higher asphalt operations, gross margin per barrel of $9.66 compared to the second quarter 2009 gross margin per barrel of $9.10 was more than offset by reduced light product sales volumes. Second quarter 2010 asphalt sales volumes were basically flat with last year's levels, only slightly ahead. However light product sales volumes were around 600,000 barrels less the same quarter of 2009, but most of which constituted sales then will be made in the third quarter.

Lower light product yields at both our plants and delays in the timing of some of our light product sales transactions contributed to the lower light product sales volumes. Crude runs and yields were lower than last year at both refineries due to some logistical delays associated with purchasing and shipping crude oil during the second quarter. As I mentioned, light product sales transactions delayed in the second quarter will occur in the third quarter.

Operating expenses in the asphalt and fuels marketing segment increased 2% or $600,000. Second quarter 2010 OpEx included $3.9 million of lease and power cost associated with additional asphalt terminals leased last year and early this year. Those additional costs were partly offset by lower operating cost with several different categories.

Second quarter 2010 G&A expenses were $22.2 million, which is down $3.7 million compared to last year due to lower stock-based compensation expense. Interest expense for the quarter was $18.9 million, down $1.4 million from last year due to lower interest rates and reduced debt balances as a result of our November 2009 and May 2010 equity issuances.

The second quarter of 2010 included a $13.5 million pre-tax gain recorded for property insurance proceeds received due to damage caused by Hurricane Ike and our Texas City terminal in the third quarter of 2008. The second quarter of 2010 was still a record quarter and exceeded 2009 results after excluding this gain.

Income tax expense of $636,000 was lower than the $2.3 million incurred in the second quarter of 2009. The $4.7 million of additional income tax expense incurred on the gain associated with the property insurance proceeds for Texas City was more than offset by $8.6 million tax adjustment related to the recognition of future tax deductions that we previously expected to expire unused.

Distributable cash flow available to limited partners for the second quarter was $107.2 million or $1.72 per unit. Distributable cash flow available to limited covers the distribution to the limited partners by 1.62 times for the second quarter of 2010. Distributable cash flow was impacted by $32 million swing between second quarter 2010 and second quarter 2009 in the mark-to-market adjustment on our hedging transactions.

Non-cash losses of $23 million increased our distributable cash flow in the second quarter of 2009, while $9 million of non-cash gains decreased second quarter 2010 distributable cash flow, a $9 million of non-cash realized gains should become realized cash gains generating additional distributable cash flow during the last half of 2010, when the inventory’s sold, and that's when it occurs, most of this inventory is associated with our Contango plan.

With regard to NuStar Energy's quarterly distribution for the second quarter of 2010, the L.P. Board declared a $1.065 per unit distribution payable August 13.

I am pleased to announce that for a second consecutive quarter, the Board of NuStar GP Holdings approved an increase in the quarterly distributions. The second quarter distribution of $0.46 per unit payable August 18 represents a 2.2% increase over the $0.45 per unit for the first quarter and a 7% increase over the $0.43 per unit for the second quarter of 2009. This increase is driven by the higher general partner distributions and higher incentive distribution rights paid to GP as a result of the L.P. equity offering completed in May of 2010.

Looking ahead to the remainder of the year, we expect our storage segment to continue to perform very well. EBITDA in our storage will be $22 million to $26 million higher than the $242 million generated in 2009. Stores will continue to benefit from higher renewal rates and additional income from our recent terminal acquisition.

In the fourth quarter, the storage segment will begin to benefit from the completion of the early phases of our St. Eustatius terminal reconfiguration project.

In 2011, our storage segment EBITDA should increase by an additional $20 million to $40 million due to the completion of the terminal reconfiguration project at St. Eustatius, the completion of early phases of two tank expansion projections at our St. James Louisiana terminal, and the completion of various ethanol projects at several terminals in the storage segment.

One of the tank expansion projects at St. James will support the Bakken crude oil railcar handling project, we announced this past April. The initial phase of this project has been such a success, that our board just approved a capital project that allows us to construct these tanks and increase the Bakken crude handling facility capacity from its current 5,000 to 10,000 barrels a day to 60,000 barrels per day.

360,000 barrels of tank capacity will be constructed to support the Bakken crude unloading facility. The second expansion project at St. James involves the construction of 3.2 million barrels that will be leased to various third parties. After completion of both of these projects, our shelf capacity at St. James will increase from 4.8 million barrels to 8.3 million barrels.

Our storage segment should also benefit from an additional $15 million to $35 million of EBITDA in 2012 due to the completion of the two tank expansion projects at St. James.

In addition to our internal growth opportunities in storages, I am excited to announce that we signed an agreement to acquire a 75% controlling interest in a joint venture in Mersin, Turkey. The joint venture will own an existing 606,000 barrel terminal; a new 740,000 barrel terminal opening for business later this month and a two third's interest in an offshore ship platform. The joint venture will also own land that could be used with the construction of additional terminal locations. We expect to close on this transaction by October.

The Turkey acquisition adds to our international fee based storage business and allows us to expand our terminal presence in a new market where petroleum demand is growing faster than in most of Europe. The purchase price of our joint venture interest is expected to be in the range of 50 to $60 million and we expect the transaction to be immediately accretive to our distributable cash flow.

Our transportation segment should continue to benefit from an improving US economy and increasing throughput volumes for the remainder of 2010. Throughput for the last half of the year are projected to be 2% to 3% higher than the same period in 2009. Full year throughputs are projected to be higher by 1% to 2% over 2009 excluding the impact on the pipeline asset sales that we did in the second quarter last year.

Revenue per barrel will be lower in the last half of the year due to tariff rates on interstate pipelines being reduced by 1.3% effective July 1, 2010. However, even with the 1.3% reduction, full-year revenue per barrel should be higher than last year, since tariffs in the first half of 2010 were 7.6% higher than the first half of 2009. We expect these increased full-year revenues to be offset by increased operating expenses due to higher power, maintenance and other operating costs causing 2010 transportation EBIDTA to be comparable to last year.

As we move into 2011, our transportation segment should continue to benefit from increased throughputs as the economy continues to improve. With regard to future tariff increases, the Federal Energy Regulatory Commission is currently in the process of reevaluating the next five-year index and any possible index adjustor for the period July 1, 2011 through June 30, 2016. We do not expect for it release the index or any adjustor until well into 2011.

We still expect our asphalt and fuel marketing segment to do better than it did last year, though asphalt earnings are expected to feel the pressure of weaker sales prices for the remainder of the year. Soft asphalt demand, particularly in the private sector construction markets is not allowing asphalt prices to rise and commensurate with higher crude oil input costs. In addition, higher refinery utilization rates which are helping our transportation segment are causing supplies of asphalt to increase while overall demand is very weak.

Federal stimulus spending has increased this year as expected. Through July 22, the Federal Highway Administration reported that about $10.7 billion of the $27.5 billion available for highway projects had been spent. We are projecting that around $11 billion will be spent in 2010, much higher than the $5.6 billion spent last year. However, the increase in federal stimulus spending in the public sector has been unable to compensate for the higher than expected decline in private sector asphalt demand.

NuStar 2010 asphalt total sales volumes and rack sales volumes should exceed last year's volumes. But due to our projections, that asphalt prices will decrease faster than usual this season, we now expect 2010 gross margins to be lower than 2009. As a result, EBITDA generated from asphalt in 2010 is now expected to be lower than the $70 million earned last year.

However, our fuels marketing operations should post results that are higher than the $10 million of EBITDA generated last year. Strong result in our bunker fuel sales, fuel oil sales and refined products trading should contribute to these improved results. Looking ahead to 2011, we feel that asphalt demand could be comparable to 2010 levels.

However, total asphalt supply should decrease slightly due to a coking unit coming online during the year. As we have always said, supply should continue to decline in 2012 and beyond as more coking units come online. 2011, our fuels marketing operations should benefit from an additional $5 million to $15 million of EBITDA from crude oil handling and railcar offloading projects at St James. The majority of the capital projects that we have mentioned coming online in 2010 through 2012 are part of our $500 million internal growth program. We expect to spend around $165 million of strategic capital under this program in 2010, around $200 million in 2011 and the balance in 2012. The large majority at this spend will be on fee-based projects.

Taking a look at NuStar Energy's projections for the third quarter, due largely to our forecast of soft asphalt demand, lower asphalt prices and the July 1 reduction in interstate pipeline tariffs, we are predicting third quarter 2010 EBITDA to be in the range of $100 million to $120 million. Earnings applicable to limited partners for the third quarter are expected in the range of $0.50 to $0.70 per unit.

Third quarter 2010 operating expenses are expected to be approximately $125 million to $130 million. G&A expense is in the range of $26 million to $27 million, depreciation and amortization expense around $38 million to $39 million and interest expense $17 million to $18 million. Reliability capital spending is expected to be the range of $50 million to $60 million for the full year of 2010.

In closing, we are very pleased with the strong results from each of our three business segments in the second quarter. However, due to expected weak asphalt demand in the last half of this year, our full-year EBITDA projections for NuStar are currently lower than we anticipated earlier in the year. We are now projecting that EBITDA results for the full year of 2010 will be only slightly higher than 2009's results.

As we move into 2011 and 2012 our internal growth projects are expected to increase our EBITDA by an additional $25 million to $55 million in 2011 and an additional $15 million to $35 million in 2012. We should also see EBITDA growth from our May terminal acquisition and our recently announced terminal acquisition in Turkey.

At this time, I'll turn it over to the operator so we can open up the call to Q&A. Sarah?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Michael Cerasoli with Goldman Sachs.

Michael Cerasoli - Goldman Sachs

Can you talk just a little bit more about the Mersin, Turkey acquisition? Is this an area you are specifically targeting or do you expect acquisition growth to be more geographically diverse, the look going forward?

Curt Anastasio

It wasn't an area where we're targeting. We've mentioned that I think a couple of times publicly that we saw because of the product flows and the relative lack of statistical solutions in the Mediterranean region that that was the region we thought that was prime for an acquisition. We found one here in the Eastern Med that not only is going to end up being done at a more attractive, meaning at lower multiple than the typical United States MLP terminal acquisition, but also has upside potentially associated with the existing assets and then the raw land is good locations for future grassroots projects.

We liked this region, we had targeted the region but in our future acquisitions internationally, we're not limited to that region. We're looking in other areas as well but it may be more than we can do in the Mediterranean before we're done.

Michael Cerasoli - Goldman Sachs

Okay and this transaction, I mean you guys have been pretty public about going after international assets but is this symbolic of the weakness in the domestic acquisition market, do you see opportunities out there or has this area become -- has domestic acquisition market become a little frothy?

Curt Anastasio

There are opportunities in the United States and North America too but the best deal wins, and right now this would be the best deal we had on our slate. Steve, do you wan to comment?

Steve Blank

Well, I'll just add that we did do an acquisition in Alabama [ph] for 44 million roughly comparable size in Turkey so there’s still things getting done in US.

Michael Cerasoli - Goldman Sachs

Okay, and then just on Asphalt, can you just talk a little bit about the Asphalt trends at Paulsboro versus Savannah in other words if demand is more resilient in the South versus in the Northeast?

Steve Blank

Yes, we've seen our sales in the South hold up relatively strong this year compared to the Northeast so the South has been doing very well this year.

Curt Anastasio

Yeah, year-to-date our North is just slightly under last year's figures and in South we are about 70% above [ph] so compared to our year-to-date number for sales for 2009, but it’s primarily because of South.

Operator

Your next question comes from the line of Darren Horowitz with Raymond James.

Darren Horowitz - Raymond James

Thanks guys, couple of quick questions for you, first Curt on the storage side is we are trying to get a sense of how much of that 22 million to 26 million year-over-year improvement you do to higher rates on lease capacity that's coming up for renewal versus both the organic capacity additions in the Alabama terminal that you acquired. And then, secondly, geographically, are you still seeing a lot of strength in the West Coast renewals?

Curt Anastasio

Well on the first one, let me point that over to Danny and let him answer.

Danny Oliver

I might be going backwards here but on the West Coast we saw a real step change last year and some of that followed through into this year, but I don’t think we will continue to see that kind of step change in values every year but we are seeing some incremental revenue still from the West Coast this year.

In terms of the overall revenue increase, by and large it was all from renewals, I think there was a 1.5 million of EBITDA from the Mobile Alabama acquisition.

Curt Anastasio

It’s a combination of renewals and also increased customer demand from services. They were roughly equal maybe mainly renewals but those last two factors were roughly equal.

Darren Horowitz - Raymond James

Okay and then second question from me, Curt, on the transportation side, within your remarks about the guidance or volumes to be up 2% to 3% in the back half of this year versus the back half of last year, can you give us a little bit more color on refined petroleum product versus crude oil throughput? Specifically, your crude oil volumes were up almost 10% sequentially and I am wondering if that momentum is expected to continue and is really the driving force may be offsetting some lower than expected refined product transport volumes?

Curt Anastasio

Refineries are running hard, they are running at a higher utilization rates in light of improved margins. And also the reason that improved margins is because demand for refined products is up in the United States. So did you want to comment further?

Steve Blank

US refineries are running over 90% utilization rates and that has a direct correlation to our top line utilization.

Darren Horowitz - Raymond James

Okay and then last question from me if I could Curt. When you reconcile your EBITDA guidance down to cash flow assuming that your maintenance CapEx is going to land within the fairway that you outlined. It seems like you might be a little south of that 1.1 to 1.2 times coverage on a full-year basis. Can you just give us some insight there?

Curt Anastasio

Well I think our current forecast clearly shows us reduced on the coverage ratio but still in excess of, but it will probably be one of the lower coverage ratios we have. Last year was 1.25, a year before it was about 1.25, but the asphalt shortfall particularly in the second quarter will lead to a tighter coverage ratio than we had in the past. And that’s still based on a budget distribution increase that we always have for the second half of the year.

Operator

Your next question comes from the line of Brian Zarahn with Barclays Capital.

Brian Zarahn - Barclays Capital

Just a follow-up on last question, you do expect the distribution bump in the second half of 2010?

Steve Blank

Well, what I'll say is we budgeted one. Our coverage ratio for the first six months was right at one-times and then we had very weak cover in the first quarter, very strong cover in the second quarter, and it was right at one, for the first six months. I think we'll just wait to see what the results are in the third quarter and the fourth quarter before we give any color on this.

Curt Anastasio

The standard answer really is this is a Board matter and the company's results will dictate the amount of the increase. But, as Steve says, we still have that in our plans, distribution increase.

Brian Zarahn - Barclays Capital

And then can you give us some update on 2010 CapEx including acquisitions and then assuming the Turkey JV goes through?

Curt Anastasio

Yes, 2010 CapEx, Mike?

Mike Hoeltzel

Yes, we're looking at a total CapEx of about $214 million on the strategic side and of course that excludes the acquisition which is about $44 million for the Mobile, Alabama terminals and $56 million for the partial interest in the Turkey assets. 2011 is the going closer to $250 million.

Curt Anastasio

Yes, that’s still an early estimate 2011. I think I said in my remarks to be approximately $200 million in 2011, just to leave ourselves a little bit of sway up or down there.

Brian Zarahn - Barclays Capital

For 2010, that seems lower than your prior guidance. You said $214 million?

Mike Hoeltzel

Yes, this is what our current forecast is because some of the projects start stretching into 2011 now.

Brian Zarahn - Barclays Capital

That $214 million include the acquisitions?

Mike Hoeltzel

No, it excludes acquisitions and it excludes reliability capital as well.

Curt Anastasio

$214 million was strategic, $44 million for GAO, $56 million for Turkey, We’ve got reliability assets, 50 (inaudible).

Brian Zarahn - Barclays Capital

So about $314 million on growth CapEx?

Curt Anastasio

And then we have an office building project which is also going to be about $30 million this year on top of the $214 million that Mike had for strategic.

Brian Zarahn - Barclays Capital

Okay, and then can you give us the availability on your revolver?

Curt Anastasio

$500 million.

Steve Blank

Yes.

Brian Zarahn - Barclays Capital

$500 million, okay. And the final question given the pipeline spill in Michigan and other related events, do you expect maintenance CapEx to be pushing higher than you probably expected, maybe not this year, maybe next?

Mike Hoeltzel

No, on our reliability, our run rate is on a pretty continuous -- we've got a pretty aggressive schedule that we imparted. We're seeing the benefits of that aggression in that schedule now so we're seeing reduction in some of our reliability CapEx associated with pipeline.

Curt Anastasio

Yes, I mean we do much more, yes, than the industry average in terms of smart picking all the miles of our pipelines.

Operator

Your next question comes from the line of Xin Liu with JPMorgan.

Xin Liu - JPMorgan

I'm trying to reconcile your guidance for the third quarter. If I look at year to date, you are little bit lower, say in last year, first half of the year. And third quarter seems to be going to the $10 million to $15 million lower than last year in terms of EBITDA. Are you expecting a big ramp up in the fourth quarter?

Curt Anastasio

Yes, we are expecting fourth to be stronger than the third.

Xin Liu - JPMorgan

Then what drove that?

Curt Anastasio

Well, to some extent its projects coming online. The internal growth projects and the storage segments come [ph] online in the fourth quarter. Plus we've got a pretty good forecast for the fuels marketing side of the business in the fourth quarter.

Xin Liu - JPMorgan

Okay, fuels and marketing, okay, got you. And your asphalt and fuel marketing, your OpEx this quarter seems to be ratably low compared to previous two quarters. I remember you guys had some additional OpEx leasing, some additional terminals. Can you explain why quarter-over-quarter there is a decline?

Steve Blank

We leased additional terminals and they didn't make us money. However just like he rest, the whole rest of the asphalt business, including the new terminals, because of the softer demand in second half of the year, they are going to make less profit than we would have anticipated as well. So really, the story comes back to the asphalt demand softness not allowing us to raise prices to recoup as much of our cost as anticipated. But those terminals are still profitable, just not as profitable as we're all hoping it would be, which is generally true of asphalt as we move into latter part of the season.

Xin Liu - JPMorgan

Okay, so it's because of the throughput is less than…

Steve Blank

The profitability of the sales is less, so it comes back to margin, it’s really not throughput, it's the profit margin.

Xin Liu - JPMorgan

Yes, I am looking at OpEx. I assume majority of those are fixed or is it because the throughput is lower this quarter, you had lower…

Steve Blank

Are you talking about terminal throughput now?

Xin Liu - JPMorgan

No, operating expense on the asphalt and fuel marketing side?

Curt Anastasio

Yes, that's higher. We did lease additional terminals which drives up the cost, but I guess what I am telling you is at those sites we're also making money, because we are making the revenue to cover that higher cost, not as much unfortunately as we were hoping we would which is generally true of the asphalt business this year.

Xin Liu - JPMorgan

Okay, good. And on your JV in Turkey, what's the duration of the contract you have there and who are the counterparties?

Curt Anastasio

Well, we have – there are existing contracts in place. In our press release of today you saw who our JV partners are. I am really not at liberty to disclose exactly who the customers are but these are customers who are interested in being there on long-term contracts. So those would normally be sort of in the five to 10 year range for those contracts but they are big reputable outfits. Including our JV partner does some business out of the terminal who has a major position within the Turkey market. For example, our JV partner is affiliated with a 180 gas station service station there within the country and a growing network there too. So well known brand there. So our partner also contributes to the profitability and on top of that we'll have international traders and national oil companies just like we have in our storage business generally.

Operator

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

Ross Payne - Wells Fargo

My first question is this adjustment for the hurricane was that, what specific segment was that enclosed in?

Curt Anastasio

I couldn't hear you Ross, what? What segment it was?

Ross Payne - Wells Fargo

Yes, what segments did the hurricane impact come in place?

Curt Anastasio

Based on that the original damage now?

Ross Payne - Wells Fargo

Yes, I mean did it get loaded back into the segment data for this quarter?

Curt Anastasio

No, that is in other income.

Ross Payne - Wells Fargo

That's in other, okay.

Curt Anastasio

Yes, you mean the insurance proceeds we were paid is in other income.

Ross Payne - Wells Fargo

Okay got you, very good.

Curt Anastasio

Yes, so I am sorry. It hit Texas City, but it’s not operating income.

Ross Payne - Wells Fargo

Got you. Also can you just speak more specifically to what you saw volume was for just the individual products of gasoline, diesel, et cetera during the quarter?

Curt Anastasio

Yes, we've got that broken out, Danny is pulling it out.

Danny Oliver

Sure in terms of I guess our transportation segment, we've got…

Curt Anastasio

Generally while’s he’s turning the page on that, as you've seen, Ross, really the increased refinery production and refining profitability has really been on the distillates, primarily right. It is really distillate driven. Gasoline's up too, but distillate has really driven the more favorable outlook for refineries.

Danny Oliver

And year-to-date 2010 versus '09, our throughputs in our transportation segment net of the asset sales would have been up about 10,000 barrels a day and on those lines crude accounts for about 40% of the volume, gasoline for about 30, distillate's 20% and then other for 10%.

Ross Payne - Wells Fargo

And most of the volume increase was on the distillate side, gasoline was pretty…

Danny Oliver

Yes, on the distillate side.

Ross Payne - Wells Fargo

Pretty flat as well?

Danny Oliver

Yes, I mean really you are talking about a percent or two change in each of those. They really didn't change that much quarter-to-quarter or year-versus-year.

Curt Anastasio

The new event is you're getting a increase, not a decrease, 2008 and 2009 you saw demand collapse and now you see it coming back.

Ross Payne - Wells Fargo

Okay, so it’s stable, but slightly increasing, it sounds right. And also any expectations on how far it will come out on the inflation adjuster for future years?

Curt Anastasio

It's really, really too early to tell. I'll tell you part of what the industry is trying to do though is take account of the fact that the industry has spent a lot of money on integrity management under the existing regulatory issues and all that cost is not getting captured, in the current work regime. So, we're going to work with the industry to make sure that the true cost, not just running these pipelines but in some cases having to shut them down because they are no longer cost justifying.

We're going to make sure that all of that gets properly accounted for because what happens in these debates sometimes is shippers complain about higher costs on the lines that are still running. They are not paying attention to the lines that are not profitable to run anymore because of these higher costs. So, we're going to make sure that all of that costs gets captured as the FERC considers what to do.

So, we're pretty optimistic that they will facts driven, if we give them the facts, they are going to make a decision based on the facts.

Operator

Your next question comes from the line of Barrett Blaschke with RBC Capital Markets.

Barrett Blaschke - RBC Capital Markets

Just a couple of quick questions on asphalt, with the refinery utilization increases, what does that look like for the yield at Savannah and Paulsboro going forward?

Curt Anastasio

That's different, I was referring to our refinery utilization increasing. I wasn't talking about the more complex, the industry in general. Actually our utilization rates are running lower than last year in our plants due to the softer margins. Paul, do you want to comment further on that?

Paul Brattlof

The yields are about the same, but the throughputs are down slightly.

Barrett Blaschke - RBC Capital Markets

So it's really more of a issue, your refineries are not so much a global thing. It’s not going to hit them.

Curt Anastasio

Yes, I think that's fair.

Barrett Blaschke - RBC Capital Markets

And then on the Turkey terminal acquisition, you brought up some expansion opportunity there? Of about…

Curt Anastasio

Definitely, yes.

Barrett Blaschke - RBC Capital Markets

Can you kind of give us a little color on expansion costs and timing there?

Curt Anastasio

Yes, I'll give you a little color knowing the bounds of the confidentiality that we're bound by with our partners. First, just starting off, the EBIDTA multiple we paid is very attractive. So, if you think of a typical MLP terminal acquisition deal being in the range of, depending on what it is like eight times to plus multiple higher than that. This is a lower multiple than that and then beyond that, we have expansion capital.

We can expand quite substantially the EBITDA from the asset, so that if we spend the money between now and 2012, by 2012 I think we’d double. We have the potential to double the EBITDA annualized from this asset and that's really before we get to some of the expansion opportunities that we think are out there with this available land I mentioned. So it's going to be from a financial point of view, it's really a home run, I wish it was 10 times in size. But given the size that it is, it's really going to be a financial homerun for us.

Barrett Blaschke - RBC Capital Markets

Now in terms of cost, would it be basically spending what you have already spend again to double the capacity?

Curt Anastasio

No, less than that. Maybe half of that.

Barrett Blaschke - RBC Capital Markets

Maybe more like $30 million?

Curt Anastasio

Yes $25 million to $30 million in that range, we haven't figured that out, but that's right, that's about the range, around $25 million.

Barrett Blaschke - RBC Capital Markets

And probably all spent by -- the terminals are with new tanks online by the end of 2012?

Curt Anastasio

Yes.

Operator

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

Michael Blum - Wells Fargo

Can you just talk about your assumptions that I think Curt, if I heard you correctly on the asphalt for 2011, you talked about demand being basically flat and supply a bit tighter. Can you talk about what your assumptions are on demand because I’d think that potentially the economy could be improving, what is your assumption on stimulus et cetera?

Curt Anastasio

I am going to point it over to one of the Mikes in the second, but there is one comment I'd make about it is this is just sort of an early blush for us looking ahead at 2011, say, what do we think is going to happen? We are obviously in an improving economy. You read a lot nowadays about disappointment with the rate of improvement, but if you just concentrate on the facts, this economy is improving. I think you are going to continue to see recovery, but it's going to be a modest recovery. It's not going to be a blowout recovery within the timeframe you are talking about in our opinion by 2011.

So, we are going to see improvement, but our story is very much supply driven, remember the coker projects that are coming in, the major coker projects concentrated in the middle part of the country which have made us very bullish about the supply and demand fundamentals, that's really a 2012 story and beyond.

So, we are only going to see a slight effect on supply from those cokers in 2011. The supply reduction that we've been touting since we did the CITGO Asphalt acquisition, really kicks in in 2012 and beyond. Now on the demand side, Mike, did you want to comment some about 2011 demand?

Mike Hoeltzel

Yes, on the demand side we are showing 2010 and 2011, both being about the same as 2009. The public-funded highway and street construction is about the same. What we are seeing is a rebound in the private residential construction, but that's almost offset by a decline in the commercial construction. It seems the commercial contraction lags the GDP by about 18 months. So, that stays down through 2011. However, we see all three sectors coming back strong in 2012 looking more to a 7% to 8% overall increase.

Curt Anastasio

Just to give a little contextual comment if I may on this CITGO Asphalt acquisition we did in early ’08 when it became available, what we've been very pleased about is we made one hell of a lot money during the first two and the third year or so that we formed this asset. The first year adjusted EBITDA was about $150 million. We had what, 220 through the first two years and this year, the first half of the year, we've made around 40 or so on a $450 million acquisition.

So it’s true, we are heading into a soft patch this year for the reasons we outlined but all of this period running up to 2011 to the coker story that kicks in 2012, I think this has been excellent acquisition for us in terms of what it's already returned for us during this period of time. Actually much higher profit margins during the 2008 through 2010 period than you would have expected looking at the history of the business. So we haven’t been displeased with that at all. Mike?

Mike Hoeltzel

Naturally when the cokers coming on stream mid year next year, that's expected to reduce its supply by about 10% of the total US supply and that will start picking up.

Curt Anastasio

Maybe get off on that account a little bit. Someone sort of made an aside a moment ago about also the lower utilization applies only to your plants not to other refiners. During this whole period of time that I just mentioned, we're not the only refinery to think of that made money. I mean they’ve lost billions of dollars over the last couple of years and I don't take any joy in that because a lot of them are good customers of ours.

So it’s not -- I don't want to leave the impression, there is something uniquely negative about our plans which really are about the only ones that have made money in refining in the last couple of years.

Operator

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

Louis Shamie - Zimmer Lucas

Curt, you've provided some guidance as to EBITDA contributions from growth CapEx in '11 and '12, it's a pretty wide range. I think you said $25 million to $55 million for '11, what accounts for the wide range there?

Curt Anastasio

It really just ties to be specific guidance we gave per segment, arguably it’s a very wide range.

Louis Shamie - Zimmer Lucas

So what would cause it, the contribution to be on the low-end versus on the high-end of the range?

Curt Anastasio

Could be construction delays.

Louis Shamie - Zimmer Lucas

Okay.

Curt Anastasio

It's really not going to be on the storage side related to the fees, most of this is contractual and the fees have already been arranged.

Steve Blank

We’re probably being pretty conservative because we don't have a history of construction delays, we are on the conservative side.

Curt Anastasio

It was concluding -- I noticed that as well. It's a pretty big range but really most of it is on the storage side, most of that range, yes (inaudible) it's really a tighter range because we are pretty much saying we expect it to be fairly comparable.

Steve Blank

The way you sound about projects anyway, so.

Louis Shamie - Zimmer Lucas

Could you say that, let's say its construction delays, what the cumulative amount for, each in '11 and '12 would be, assuming you know…?

Curt Anastasio

We don't have that.

Louis Shamie - Zimmer Lucas

Oh, you don't have that?

Steve Blank

We don't have that for you now. We could help if you want to call separately and give you some feedback on it, if it got delayed for a quarter without the mean. It is just a range.

Louis Shamie - Zimmer Lucas

Okay. And then my other question was regarding fuels marketing and Contango trade there. What do you guys expect to earn from that this year, how much of the out performance in fuels marketing is coming from that?

Steve Blank

You mean just the Contango trade?

Louis Shamie - Zimmer Lucas

Yes, exactly.

Steve Blank

I think it’s about $4 million, $5 million this year.

Louis Shamie - Zimmer Lucas

Okay, and that's expected to be realized later in the year, basically like Q3 or Q4?

Steve Blank

Fourth quarter, yes.

Operator

Your next question comes from the line of Andrew Gunlock with ASP.

Andrew Gunlock - ASP

What was your inventory at the end of the quarter in terms of if you can break it out to kind of crude import versus refined product, finished goods?

Curt Anastasio

Now, this is of course the height of the inventory curve (inaudible).

Steve Blank

We got about 7.8 million of barrels of which about 2 million barrels or so was crude.

Andrew Gunlock - ASP

It is Asphalt.

Curt Anastasio

And the rest is asphalt and other derivatives?

Steve Blank

Right, yes, really it's -- the bulk of it is asphalt [ph].

Andrew Gunlock - ASP

Okay, and then the second thing is that the numbers that you gave earlier in response to the question on Turkey eight times, 25 million to 30 million of spend to double the capacity, is that referring to your ownership stake of 75% or is that the gross numbers?

Curt Anastasio

Let me make one clarification. I wasn't using eight times for our acquisition of Turkey, I kind of threw that out as sort of a hypothetical standard multiple. We bought at a lower multiple than that.

Andrew Gunlock - ASP

Are you referring to the enterprise value on a gross basis or just your 75% stake?

Curt Anastasio

I am talking about our stake, the purchase price that we paid versus our share.

Andrew Gunlock - ASP

Understand. So if you would pay $25 million to double the capacity which you're saying is that the full spend on the JV is going to be $33 million, am I understanding it correctly?

Curt Anastasio

The $25 million additional was we think about double the EBITDA. And $25 million would be our share or 75% of the total capital required, but our share of the EBITDA would double from our initial share of the EBITDA. Let me try and put it that way.

Andrew Gunlock - ASP

And then can you talk a little bit about the Bakken? I guess you talked about it in this release but also couple of days ago or maybe a couple of weeks ago, you did the municipal bond or the quasi-municipal bond where you in effect borrowed at 50 basis points and I assume all that money is going to expanding the St. James facility to take Bakken, I mean through paying 50 basis points from money, I assume you are spending it all down there. This is going to be a pretty higher return.

Steve Blank

Yes, well, typically we're running on levered IRRs but it’s great it's great to get money that cheap, no question about that. And so we had $56 million for the first expansion project, we just closed on another $100 million of GO Zone bonds on July 15 and we've just got an approval for another $100 million, which apply to basically the second project that Curt mentioned with St. James, which is building a 3.2 million barrels in total of tanks. So, yes it’s great. These bonds don't pay – investors don’t pay state or federal tax, so it's very, very cheap money.

Andrew Gunlock - ASP

So you expect that $256 million that you just highlighted to be spent this year and next in effect?

Steve Blank

Yes. 55 million of that’s already been spent, Andrew; the other 200 million will be spent this year and next year completing those two historic projects in St. James, The Bakken project and the 3.2 million barrel project.

Chris Russell

About two-thirds of which were third-party storage, not related to the Bakken.

Curt Anastasio

It’s around $125 million to $130 million capital, that’s the third-party piece.

Andrew Gunlock - ASP

That’s the third-party piece, okay. And that will take you to 360,000 a day of capacity?

Curt Anastasio

That 360,000 barrel tank was going to be targeted for use in the Bakken project and the Bakken unit train project is about…

Mike Hoeltzel

That will allow you to get to 60,000 barrel a day.

Curt Anastasio

Allows you get to 60, and that’s about a $52 million of capital.

Mike Hoeltzel

And then a separate project is building 3.2 million barrels of storage.

Andrew Gunlock - ASP

And big do you ultimately see -- I hadn't realized that St. James could service the Bakken in this way. How big potentially do you see St. James being?

Curt Anastasio

Well, we're building it so you can do up to a capacity of 60,000 barrels a day at St. James, but the terminal itself has got a lot going on now because it's a hub location particularly for crude but also other products. You know when we first bought this, this was a $3 million barrel terminal or so I think with a lot of land, and we bought it saying, you know this is pretty good acquisition based on a multiple of how it turned in the past but we bought it for future growth. So now, we're going from 3 to 8.3 and we think we'll find even more than that to deal with this terminal. It's a huge success story for us. It's kind of like Eustatius. When we bought in 2005, we expanded that tremendously, or Amsterdam where we tripled the size of what we started out with there when we brought it in 2005. This one we bought in 2006 and we are on the way to tripling, more than doubling anyway under the current capital. And I am sure we will end tripling it over the next couple of years. So, that's the kind of thing we look for in an acquisition and that's what we just told you about Turkey, where we said we can expand it rather substantially at a relatively lower cost. So, it's a success.

Mike Hoeltzel

And we're not through, Andrew. We're still working some projects. Those are just the ones that we've brought to completion so far.

Andrew Gunlock - ASP

I understand. Last question, Sunoco seems to be spending some time turning operating or applying operating assets into storage operating assets, Philadelphia, where they want to service the New York Harbor or something like that. Do you see any of that ultimately putting pressure on New York Harbor and other East Coast types of storage operations or is it logistically complicated and there will always be kind of you know not on the lowest end of the cost curve with such a strategy.

Mike Hoeltzel

There is still a significant amount of unserved demand for storage on the East Coast and I know what Sonoco was doing. We've got some projects to expand, others have expanded and yet there is still un-served interest. But I don't see that putting a dampening effect on, we've seen a lot of storage projects in the last couple of years and yet rates go up every quarter.

Operator

Your next question comes from the line of Joseph Siano with Credit Suisse.

Joseph Siano - Credit Suisse

On the $500 million growth CapEx program, the breakout with $165 million in 2010, $200 million in 2011 and the rest in 2012, can you just give us a little more detail on the specific projects that comprises those numbers?

Curt Anastasio

Well, Mike got the list here. Actually we’ve talked to a you a lot on this call, the way it ended up about St. James expansion. Go ahead Mike.

Mike Hoeltzel

It’s about 18 separate projects but most of the spending is on the same St. James project, both the third-party storage and the Bakken crude handling, plus a project that's pretty far along at St. Eustatius and one that's close to being finished at Texas City. It also includes the project we mentioned with the acquisition of the Turkey refinery. Just about all of it is in the storage segment, very little of it is in the asphalt and fuels marketing and transportation. There is only about 10 million of the 500 in transportation and even less than that in the asphalt refining. There are a few ethanol blending projects as well I mentioned that in my remarks.

Joseph Siano - Credit Suisse

Okay great. And on the -- turning to the transportation, can you give us a general sense of what percent of the tariffs are based on PPI?

Curt Anastasio

The brokerage related tariffs, well they all are. I mean some are governed by Texas Railroad, some are governed by FERC and the ammonia pipeline is subject to change too. So really, virtually everything on the pipeline side, the transportation segment and the storage segment get moved every year based either on government regulation or contracts.

Danny Oliver

The contract are usually CPI [ph].

Curt Anastasio

Originally storage, so what we always point out with the exception of the asphalt fuels marketing segment, really a great thing about our business is if inflation ever does come back, we'll be able to ride higher on the fees structure and the tariffs.

Joseph Siano - Credit Suisse

Then looking at the volumes in the transportation segment, can you just remind us again the volumes in 2009 associated with the sold pipelines data?

Mike Hoeltzel

It was in 2Q, 2Q versus 2Q, it was 50, almost 53,000 barrels a day.

Curt Anastasio

Now remember, there was a lot of volume and no money that's why we sold it. It’s a volume hit but hardly any money hit.

Mike Hoeltzel

And year to date, '09 versus '10 it was almost 58,000 barrels a day.

Joseph Siano - Credit Suisse

Okay, and then turning to the fuels marketing, how repeatable do you view the profit there?

Curt Anastasio

Well, we've invested money in one of the projects Mike mentioned is coming to its last stage is in Texas City. And part of what we did was to invest money there because we think there is a long term opportunity in fuel oil trading, not just at that facility but that's where we've invested in the projects that Mike mentioned. So we think that's sustainable. Bunkers has been consistently profitable, even in times of poor shipping market and that will recover with -- that would be supported by economic recovery as well. And now you know crude trading in that segment is something we just told you we're expanding because we see it as a profit opportunity with the Bakken and frankly other crude grades that we can blend and remarket to the industry from that location.

So we think, we didn't invest capital, we didn't think these were sustainable opportunities over the long term.

Joseph Siano - Credit Suisse

One final question just on the G&A, that was pretty low compared to -- I think last quarter you had put out 27 to $28 million expectation. It looks like it came in at $22, if you could provide anymore color on that?

Curt Anastasio

I think the biggest single factor was the stock -- unit compensation expense. Chris, you're look at the…

Chris Russell

Yes, that was down almost $4 million year-over-year and probably about $3 million versus projections back in April for the second quarter. Our unit price was down, $3 in the quarter.

Curt Anastasio

The quarter a year ago was up nearly $8.

Chris Russell

So it's just a timing of those swings in prices.

Operator

Your next question comes from the line of Barrett Blaschke with RBC Capital Markets.

Barrett Blaschke - RBC Capital Markets

One follow-up question on asphalt spending, the outlook is that commercial private sector and government will kind of even out in 2012, is there any expectation for kind of what the government spending level is going to be by 2012?

Curt Anastasio

Well, we have a couple of things going there. We had the Highway Trust Fund reauthorization actually at an increased level for the balance of this year. What the industry has been pushing for is long-term reauthorization, so that the contractors can plan. So, it's nice that we've got more money on the basic federal spending program this year, but it really needs to be authorized on a multi-year basis to give the industry more confidence.

But let's assume that happens which at current levels is a shortfall. The infrastructure in this country will continue to deteriorate at the current levels of road funding that our Congress looked at in this year. It's already too low, and that's part of what all of us involved with this industry are going to be pushing for, again, presenting the facts to our politicians.

Then with regard to stimulus, it continues into 2012. And I think that what happened in the markets -- we are concentrated on the East Coast and the East Coast states have tended to lag the spending as compared to the obligated amounts, in other words the amounts that they put to specific projects, the amount that was originally apportioned to them. So, we may see, as this continues into 2012, we may see a little bit more of that in our markets on the East Coast states, like New Jersey, Pennsylvania, New York, so on and so forth, a little bit more of that being done in 2012 than we see would nationally. Mike, you want to comment further on that because we are saying $11 billion this year, was $5.5 billion last, that's still leaves, on $27 billion that still leaves another $11 billion. So there will be something that carries on.

Mike Hoeltzel

And that’s on the stimulus and we expect the Highway Trust Fund to be reauthorized for a six-year period starting around 2012 at about $337 million dedicated for highways and bridges. But the big factor is, we expect the non-federal funding to start coming back in the states and municipalities.

Curt Anastasio

That's the really the swing factor here.

Operator

At this time, there are no further questions.

Chris Russell

Thank you, operator.

Operator

Presenters, do you have any closing remarks? This does conclude today's conference call. You may now disconnect.

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