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NuStar GP Holdings, LLC (NYSE:NSH)

Q2 2012 Earnings Call

July 27, 2012 10:00 AM ET

Executives

Chris Russell – VP, IR

Curt Anastasio – President and CEO

Steve Blank – EVP, CFO and Treasurer

Danny Oliver – SVP, Marketing and Business Development

Analysts

Brian Zarahn – Barclays

Cory Garcia – Raymond James

Ross Payne – Wells Fargo

James Jampel – HITE

Michael Blum – Wells Fargo

Kevin Cashman – Assurant

Brett Reilly – Credit Suisse

Jeremy Tonet – JP Morgan

Louis Shamie – Zimmer Lucas

Selman Akyol – Stifel Nicolaus

Dennis Coleman – Bank of America

Operator

Good morning. My name is Christy, and I will be your conference operator today. At this time, I would like to welcome everyone to the NuStar Energy LP and the NuStar GP Holdings LLC Second Quarter 2012 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions) Thank you.

I will now turn the conference over to Mr. Chris Russell, Vice President of Investor Relation. Please go ahead, sir.

Chris Russell

Thank you, Christy. Good morning, everyone, and welcome to our conference call to discuss NuStar Energy LP and NuStar GP Holdings LLC second quarter 2012 earnings results. With me today is Curt Anastasio, CEO and President of NuStar Energy LP and NuStar GP Holdings LLC; Steve Blank, our CFO; and other members of our management team.

Before we get started, we’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 the various uncertainties and assumptions described in our filings with the Securities and Exchange Commission and will not be updated to conform to actual results or revised expectations.

During the course of this call, we’ll also make reference to certain non-GAAP financial measures. Our non-GAAP financial measures should not be considered as alternatives to GAAP measures. Reconciliations of these non-GAAP financial measures to U.S. GAAP may be found either in our earnings call press release or on our website.

Now let me turn the call over to Curt.

Curt Anastasio

Good morning, and thanks for joining us. The recently completed second quarter and the few weeks that followed were very active period for NuStar.

In April we completed a unit train offloading facility at our St. James, Louisiana, terminal. That facility constructed jointly with EOG Resources can offload at least one 70,000 barrel unit train per day. To date, the facility is operating better than we had anticipated and should provide EBITDA to our storage segment in 2012 and for years to come.

In early May, NuStar closed on a new five-year $1.5 billion credit facility that replaced our previous $1.25 billion facility. The larger revolver gives us access to additional capital to fund our increasing internal growth capital program. Late in May, we put hedges back on in our heavy fuel oil and bunker fuel inventory that had been on hedge for about two months during the quarter. We estimated that second quarter results would have been about $32 million or $0.44 per unit higher if these hedges had remained in place.

Shortly after the inventory hedges were put back in place, we unwound the remaining $470 million of fixed-to-floating rate interest rate swaps that were in place on a portion of our 2020 and 2022 senior note maturities. With 10-year treasury rates falling to near record low levels, we decided to unwind the swaps. $22 million in cash proceeds were received as a result of unwinding the swap.

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

On July 6, we announced plans to sell 50% of our asphalt business to Lindsay Goldberg and create a joint venture. This transaction is moving ahead as planned and is expected to close no later than September 30. After closing, we expect to deconsolidate the asphalt operation.

These July transactions are part of our plans to change the strategic direction of NuStar by reducing our exposure in the margin-based portion of our business and becoming more focused on optimizing and growing the fee-based storage and pipeline transportation segments of the company. I’ll talk more about future plans for the fee-based side of the business later in this call.

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

Our storage and transportation segments continued to benefit primarily from additional EBITDA being generated as a result of the capital we’ve invested in internal growth projects over the last couple of years. Storage second quarter EBITDA of $77 million was $13 million or about 20% higher than the second quarter last year. The third quarter 2011 completion of a storage expansion project plus the April 2012 completion of the unit train project both at St. James, Louisiana as well as higher storage rate on new and existing storage contracts, all had positive impacts on this segment’s EBITDA.

Included in the segment second quarter results was an asset impairment charge of about $2 million from one of our refined products storage terminals. Pipeline transportation segment EBITDA of $45 million was higher than the $43 million earned second quarter last year. Higher pipeline revenue as a result of the 6.9% 2011 tariff increase and additional EBITDA generated by the Eagle Ford shale projects completed for pipeline and Valero in the second and third quarters of 2011 were the main drivers for the increase in the EBITDA. This segment’s result would have been even higher if not for a 45-day second quarter turnaround at one of our customers’ refineries.

While our storage and pipeline segments performed well, our asphalt and fuels marketing segment generated negative EBITDA of $285 million during the quarter compared to plus $78 million earned in the second quarter last year. The asphalt portion of the segment was $279 million of EBITDA during the quarter compared to $55 million generated last year. Again mainly due to the $266 million or $3.69 per unit non-cash charge related to an asset impairment adjustment on NuStar’s asphalt refineries that I’ve mentioned earlier.

In addition to being burdened with the asset impairment, continued weak demand for asphalt and gross margins, which were significantly lower than last year’s second quarter margins, also contributed to asphalt’s poor performance during the quarter. Our fuels marketing operations was $6 million of EBITDA during the quarter, mainly as a result of our heavy fuel oil and bunker fuel inventories being unhedged for a portion of the quarter. Those operations generated $19 million of EBITDA in the same quarter last year.

The San Antonio refinery EBITDA was breakeven for the quarter and $4 million less than EBITDA than the second quarter 2011 as a result of lower crack spreads. As of the end of the second quarter, NuStar had hedges in place on all our heavy fuel oil and bunker fuel inventory. We still have some hedges in place for a portion of the 2012 and 2013 volumes to be produced at the San Antonio refinery. And as has been the case since late 2008, no hedges are in place for any of the crude or asphalt inventory associated with asphalt operations.

With regard to second quarter corporate expenses, G&A expenses were $23 million, $3 million lower than last year, primarily due to lower compensation expense. Interest expense for the quarter was $24 million, up $3 million from last year. Increased debt levels required to fund internal growth programs, higher borrowing costs associated with our new credit facility and reduced savings from fixed-to-floating interest rates swaps were the main reasons for the increase.

NuStar’s borrowing costs increased by about 1.25% per year under the new facility, and that cost increase is consistent with the change in the bank credit facility market over the last five years.

NuStar’s debt-to-EBITDA ratio as of June 30 was 61 times, as the result of the expected weak second quarter results in asphalt and fuels marketing. On June 29, we obtained an amendment to our $1.5 billion credit facility which increased the leverage ratio covenant for the second and third quarters of 2012 to 6.5 to 1 times and 6 to 1 times, respectively. The covenant requirement had been 5.5 to 1 in the second quarter and 5 to 1 in the third quarter.

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

Moving on to the outlook for the last half of 2012, the Storage segment should continue to benefit from the expansion projects completed at St. James in the past year, plus the fourth quarter completion of a 1 million barrel storage expansion project at our St. Eustatius terminal. Third quarter 2012 results in storage are expected to be slightly lower than third quarter of 2011 because increased operating expenses, namely maintenance expenses at several of the terminals, will more than offset the additional project income for that quarter.

However, EBITDA for storage for the last half of the year is expected to be higher than the last half of 2011, while full-year EBITDA should be $25 million to $35 million higher than it was last year. Results in our pipeline segment in the third quarter and the last half of the year are expected also to be higher than 2011. This segment should benefit from the FERC tariff adjustment, effective July 1 of 2012, as well as additional EBITDA generated by our Eagle Ford shale projects with TexStar and Valero.

As mentioned earlier, the Eagle Ford pipeline connection project with TexStar Midstream was completed earlier this month. The construction of the new 12-inch line from Valero should be completed and in service late this quarter or early in the fourth quarter.

A fourth quarter turnaround by one of our customers is expected to reduce pipeline throughput more than we initially anticipated. After adjusting our forecast with the turnaround, we now expect 2012 transportation segment EBITDA to be $10 million to $20 million higher than 2011.

Third quarter results in asphalt and fuels marketing are expected to be lower than third quarter of 2011 as results in fuels marketing, specifically bunkering crude oil trading operations are expected to be lower than last year.

However, results for the last half of the year are expected to be higher than the last half of 2011. Reduced exposure to asphalt as a result of the expected 50% sales as well as improved results in heavy fuel oil and bunkers should contribute to a stronger last half of the year in that segment.

Full-year results in asphalt and fuel marketing are, of course, down significantly lower than last year even excluding – excluding the impact of the large non-cash asset impairment adjustment.

As I said earlier, we plan to close on the sale of 50% of our asphalt business to Lindsay Goldberg by the end of the third quarter. Negotiations on an ABL facility which is financed about two-thirds of the joint venture’s working capital requirements are in progress. We expect the ABL to be syndicated and closed by mid-September, allowing the final sales transaction to close shortly thereafter. The initial proceeds from this transaction will be used to pay down NuStar’s revolving credit facility. We expect to reduce our debt levels by $400 million to $500 million, depending on the JV’s working capital requirements as a result of this transaction.

The joint venture transaction allows NuStar to reduce its earnings volatility by reducing our exposure in the margin-based portion of our business, allows us to pay down debt and will provide additional opportunities to invest in stable high-return pipeline and terminal assets while simultaneously, given the asphalt JV, the flexibility it needs to prosper in a more robust margin environment.

Turning briefly to guidance for third quarter corporate expenses. G&A expenses are expected to be in the range of $29 million to $30, depreciation and amortization around $40 million to $41 million, and interest expense $25 million to $26 million. As we change the strategic direction of NuStar, we plan to invest more strategic capital on the fee-based side of the business, grow our annual EBITDA, increase our distribution growth and significantly reduce the company’s debt.

In terms of capital spending for 2012, the liabilities totaled $45 million to $50 million, while strategic capital should now be in the range of $425 million to $475 million. Due to strong customer demand in the St. James area, we plan to construct a second railcar offloading facility at our St. James terminal. The estimated cost for that project are the main reason for the increase in our strategic capital guidance. We continue to pursue and identify new strategic growth projects not included in the current strategic capital guidance, as well as look at acquisition opportunities as they arrive.

On the pipeline transportation side of the business, we’re pursuing additional strategic growth in the Eagle Ford shale region and other shale areas where our pipelines are located. In storage, we’re pursuing growth opportunities at our St. Eustatius terminal in the Caribbean.

Based on the projects we’re currently pursuing, we feel our 2012 spending could be higher than $425 million to $475 million range if some of these projects are finalized in the next couple of months. Strategic capital for 2013 could range from $400 million to $500 million, again depending on the number of new projects we finalize this year and next.

As a result of these capital spending projects, 2013 EBITDA should be higher than 2012 in all of our business segments. Storage EBITDA is expected to be $30 million to $50 million higher while transportation EBITDA should be $40 million to $60 million higher.

Excluding the $266 million charge related to the non-cash asset impairment from 2012’s results, the asphalt and fuels marketing segment EBITDA should be $30 million to $50 million higher as well. Based on our current plans for strategic capital and EBITDA growth for the remainder of the year and all of 2013, we feel NuStar will be able to restore distribution growth to the higher levels more consistent with our past performance.

But this time, let me turn it over to the operator so we can open it up for Q&A. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) We’ll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Brian Zarahn of Barclays.

Brian Zarahn – Barclays

Good morning.

Curt Anastasio

Good morning, Brian.

Brian Zarahn – Barclays

Appreciate all the color on the segment performance for the – and also for guidance. On guidance for the 2013 on asphalt, is that on an apples-to-apples basis with your deconsolidated results such as fuels marketing and your 50% stake or how do you – the $30 million to $50 million of expected growth in that segment. Can you talk about that a little bit?

Curt Anastasio

By then, of course, as you know, the asphalt will be deconsolidated, it’s in the joint venture. So, the numbers we’re giving you are predominantly the relative performance of the fuels marketing piece which is the bunker and fuel oil marketing and the crude oil trading.

Steve Blank

All right. Just a further clarification, bear in mind that guidance takes into account the fact that you had a $32 million hit as they’ve taken off the hedges in 2011.

Curt Anastasio

Right.

Steve Blank

2012.

Curt Anastasio

In 2012, right. But it is apples-to-apples because that’s what happened in 2012.

Brian Zarahn – Barclays

Okay. And then can you talk a little about the process for arriving at a JV versus the asset sale or versus complete asset sale?

Curt Anastasio

Yes. I mean, we were approached on this by this private equity firm, Lindsay Goldberg, and we got into discussions with them on it. And obviously, this is the worst that our asphalt operations had performed since we’ve got into this in 2008. We’ve made money every calendar year except for this one.

And selling at a low – somebody once told me, it’s not a great idea selling out totally. So, we wanted to try to find a deal, if we could, that work where we stay exposed to an upturn of this business while not selling it at a fire sale price. But at the same time, basically get it out of our strategic direction and out of story, and really out of our numbers because of this de-consolidation.

And also, it was an opportunity to substantially de-lever it, de-lever the company, give us a breathing room to invest in a fee-based side because we’ve got all these opportunities in the fee-based side, they were talking about Eagle Ford and all the best of it. But still retain some extra closure to our turnaround in the business going forward.

Brian Zarahn – Barclays

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

Steve Blank

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

Brian Zarahn – Barclays

Last question for me. Now that your income tax is relatively high in the quarter, can you talk about that and your expectations for income tax for the remainder of the year?

Steve Blank

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

Brian Zarahn – Barclays

Okay. Thank you.

Operator

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

Cory Garcia – Raymond James

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

Curt Anastasio

The St. Eustatius terminal capacity has really been primarily driven by new crude production and new – the way in which the crudes are flowing now in the world. Crude oil used to come west of the United States, that used to come west of the United States like Middle Eastern crude what used to utilize these breakable facilities like St. Eustatius. Now, you’ve got more and more Latin American and Brazilian in particular and (inaudible) that’s not flowing that way, it’s flowing to the U.S. and to east bound destinations. And so, you still have – you’ve got an asset being utilized but for a completely different customer base and a completely different trade flow than in the past.

So, that’s really what’s driving the expansion. And we have other customer interest there too. We have refine product interests. We have trader interests, but really sort of the predominant driving factor on the strong interest in St. Eustatius is this new crude production that’s flowing in a different direction globally. And Danny Oliver is here, our development guy, you want to add anything to that, Danny?

Danny Oliver

Oh, I’ll just say, (inaudible) in the perfect location to meet that new customer demand with that crude oil off the coast of Brazil. So, there’s no reason to acquire new facility to improve our position geographically, and clearly, building new storage is cheaper than acquisition. So...

Cory Garcia – Raymond James

Sure, sure. I guess, I was just looking at it more from a product flow angle to the capacity alluded to, the flows of the product side, and that’s sort of then flipped as the U.S. Gulf Coast refining capacity. It now seems to be sending products more than Latin America. Is there any opportunity to build out product terminal capacity in those sort of Latin American areas?

Curt Anastasio

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

Steve Blank

Most of our demand is – as Curt mentioned, we do have some products, light products demand that most of it is on the crude and fuel side.

Cory Garcia – Raymond James

Okay, okay. I appreciate the color. And just wanted to sort of come back to your maintenance CapEx on a go-forward level. Clearly, the impact of the JV will take that down a bit and cost that, I guess, a bit by the huge project backlog that you guys are bringing on line over the next years or so. But any color that you guys can provide on a good run rate going forward as you look into sort of the 2013 timeframe? Is $40 million to $50 million a good number to use or could it be lower than that?

Steve Blank

I’d say, it’s probably just a little higher than that, maybe in the $50 million to $60 million range.

Cory Garcia – Raymond James

Okay. I appreciate it, guys.

Operator

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

Ross Payne – Wells Fargo

How are you doing, guys?

Curt Anastasio

Hi, Ross.

Ross Payne – Wells Fargo

First question is on this working capital. It looks like it’s $400 million to $500 million, but also in the press release, it says minus – less joint venture working capital requirements. It sounds like two-thirds is going to be funded by the JV, or is the other third going to be a reduction from the $400 million to $500 million you’re expecting here or can you explain that a little?

Steve Blank

No. Yeah. No, it’s not. Basically, we’re getting $175 million from Lindsay Goldberg for the PP. We’re assuming we’d get another $300 million advanced to us by the AVL facility. That’s put in place at the JV which is totally non-recourse to us.

And then we assume we plug the one-third balance that’s needed for JV to buy from us. So, that $150 million, okay, assuming $450 million of total working capital, $300 million coming to us from the JV loan. We have the other one-third, so $150 million on our balance sheet after that. So, we’re just plugging at estimated one-third difference, the AVL loan advance, given the collateral position they seek to take.

Ross Payne – Wells Fargo

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

Curt Anastasio

Yeah, they range kind of from a year to two or three years out.

Ross Payne – Wells Fargo

(Inaudible)

Steve Blank

Yeah.

Ross Payne – Wells Fargo

Okay. How are the economics looking now on, I guess, moving Canadian crew to East Coast refiners?

Curt Anastasio

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

Ross Payne – Wells Fargo

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

Steve Blank

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

Ross Payne – Wells Fargo

Okay. Thanks.

Steve Blank

We’ll fight a good fight.

Ross Payne – Wells Fargo

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

Steve Blank

I think probably about 4.5 times at the end of this year. And then, next year, it should be working its way down to 4 as the EBITDA shows up more and more.

Ross Payne – Wells Fargo

Okay.

Steve Blank

That’s the plan.

Ross Payne – Wells Fargo

Thanks, guys.

Curt Anastasio

Okay. Thanks, Ross.

Operator

Your next question comes from the line of James Jampel of HITE.

James Jampel – HITE

Hi. Just following up on the debt metrics. Is that assuming no equity issuance moving from down to 4.5 end of the year and 4 next year?

Steve Blank

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

Curt Anastasio

Yeah. And that what he is alluding to and then...

Steve Blank

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

James Jampel – HITE

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

Curt Anastasio

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

James Jampel – HITE

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

Steve Blank

No.

Curt Anastasio

No. I would say – I didn’t say that.

Steve Blank

No, no. I think we just need to give meaningful guidance on what the distribution increase could be next year. It depends on the same factors that I just kind of outlined (inaudible).

Curt Anastasio

Yeah. I mean, we’re in a middle of a house cleaning there.

Steve Blank

Yeah.

Curt Anastasio

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

Steve Blank

And when we were up at the MLP Conference in May, I guess it was – over the next two or three months we would be making some major announcements in a couple of different areas. And once other shoes drop and we have – maybe the whole picture and better that we can communicate, we’re going to come out and layout what we think 2013 could look like and certainly should be able to indicate what an acceptable distribution target might be.

Curt Anastasio

Correct.

Steve Blank

For next year.

Curt Anastasio

More detailed guidance than 2013.

James Jampel – HITE

Okay, fair enough. Can you comment a little bit about the decline in barrels per day on the refined products side first and on the crude side second? There’s quite a decline in the refined products side.

Steve Blank

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

James Jampel – HITE

All right. And the crude side?

Steve Blank

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

Curt Anastasio

Yeah.

Steve Blank

You know that’s the second time the question has come up. Last week, it was the same thing. We should look at breaking that out in our throughput schedule to make that more clear about the terms of this code contract and because the proofs are there. It’s just capacity at least. We’ll better clarify that in the future.

James Jampel – HITE

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

Curt Anastasio

Well, we’ll have an investment in joint venture, find item on our balance sheet and then we’ll pick up equity earnings in of that joint venture for purposes of distributable cash flow (inaudible) cash that was actually distributed to us. So, you back out the equity earnings and add cash for purposes of DCF and that’s the same way our financial covenant works with our bank group.

The principal advantage of deconsolidation as you’re not having all that working capital on your balance sheet, and that’s the principal advantage of doing the joint venture. I would say it’s in addition to retaining exposure to a business which we think is absolutely going through, you’re also having two-thirds of the working capital being financed in a nonrecourse way by bank group which we’re currently reaching out to you to put the ABL facility in place.

So, it’s really a big deleveraging exercise. It’s the big first benefit. Second benefit of course is you continue to have exposure to improve that business.

James Jampel – HITE

Then will we – should we expect to – a less disclosure on the results of the joint venture?

Steve Blank

Probably you’re not going to see every line item in our numbers, and we won’t have it broken out segmentally, of course. Obviously, we’re perfectly happy to communicate out the how the business is doing too but – yeah and there will be less financials.

Curt Anastasio

Yeah, financial. Right (inaudible).

Steve Blank

At about 100%.

Curt Anastasio

It’s different the way Steve just described it. So..

Steve Blank

We must follow SEC and GAAP.

James Jampel – HITE

All right. Thank you.

Curt Anastasio

Thanks.

Operator

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

Michael Blum – Wells Fargo

Hi. Good morning, guys.

Curt Anastasio

Good morning, Mike.

Steve Blank

Good morning.

Michael Blum – Wells Fargo

Just one – really two quick questions from me. One, Curt you talked about sort of strategically focusing the company more in fee-based investments. Are you planning to run your fuels marketing business any differently going forward just in terms of reducing the exposures there, growing that, just any change in the way you’re going to run that given the change in the strategy?

Curt Anastasio

First, keep it hedged. That’s number one. The hedges were effective for four years. Yeah, we took them off right before the market dropped because our guys had a bullish feel on prices. They’re back on. That’s not going to happen again at least as long as I’m around. So, that’s one big difference. But no, I mean, the business – we wanted to do this business where really it’s mainly leveraged to our existing storage business.

We did – redeveloped the Texas city and the U.S. Gulf where we’re able to bring from inland refiners kind of bottom of the borrowing material, blend it up for the bunker market where that’s the best option. And that’s worked very, very well. And the inventories we carry are carried over pretty rapidly. It’s not like the asphalt business. It’s a much rapid – more rapid turnover of inventory, and they’re very effectively hedged. Same thing in St. Eustatius, doing business out of our St. Eustatius terminal bunkering operation that’s worked well for years. Wherever we go with this, we’re looking for minimum risk, rapid turnover for the inventories and where we can effectively hedge.

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

Michael Blum – Wells Fargo

Okay. Thanks for that. Just the other question I had. Just in terms of the San Antonio refinery, so the plan going forward is, excluding the legacy hedges that you have in place, effectively your plan is to run that refinery on an unhedged basis going forward, is that right?

Steve Blank

Yes. Yeah. The hedging we did was not really as effective as we hoped it would be. So, as we go forward, we expect we’ll be – we’ve already unwound or taken off some of these hedges. And over time, we’ll pick our spot to get the rest of it done. But it’s positively cash flowing and it’s been making money. So, that’s the plan there.

Michael Blum – Wells Fargo

Okay. Thank you.

Steve Blank

Okay.

Operator

Your next question comes from the line of Adam Lindberg of (inaudible).

Unidentified Analyst

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

Steve Blank

Oh, it’s very little, very little. I mean, the large bulk of this is the stuff we’ve highlighted in our remarks today. We don’t have the St. Eustatius project that separates being work done but it’s not in the (inaudible).

Unidentified Analyst

Okay. Second, when you mentioned your leverage targets, 4.5 times at year-end, presumably that’s on, kind of, more of a run rate basis as opposed to the last 12 months per year-end, full 2012 look, is that safe to say?

Steve Blank

That’s a snapshot at December 2012 looking back at the trailing.

Unidentified Analyst

Okay.

Steve Blank

The yearly, yeah. Obviously, it presumes Lindsay Goldberg’s been closed. It presumes some other things.

Unidentified Analyst

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

Curt Anastasio

No, we don’t have anything on the table for divestiture for the transport or storage. There may be little eyes inside here and there like some idle pipeline somewhere that I’m not thinking of, but basically, there’s no divestiture program in mind for pipelines in storage.

Unidentified Analyst

Okay. Thanks. That’s it for me.

Operator

Our next question comes from the line of Kevin Cashman of Assurant.

Kevin Cashman – Assurant

Hi, guys.

Curt Anastasio

Hi.

Kevin Cashman – Assurant

A question on gross debt reduction plans, I guess, for the next year. It looks like with the two 2013 maturities kind of offsetting, I guess, proceeds expected from Lindsay Goldberg. And then, looks like with CapEx projects and the distribution that you’d be short free cash, so I’m just kind of what’s the – is there a target kind of for gross debt? It seems like more of the leverage coming down from the EBITDA growth expectation versus the total gross debt reduction. Just kind of what...

Steve Blank

Yeah. I mean, the – obviously, we’ll be getting in some process from Lindsay Goldberg. We’ve got about $670 million, I think, available under the revolver as of June 30. So, we’ll be getting in – depends on what the working capital level is and what not when we close the transaction, but we’ve kind of modeled with Lindsay Goldberg and receiving about $475 million in from that. We’ve got $100 million of credit revolver and paid off (inaudible) the revolver.

Also, we’ve got some – about a little less than $500 million coming due in the first half of next year. We could accommodate that under the revolver. We believe to take that out that way and that depends upon bond opportunities. I mean our preference would be to take it out in the bond market and probably a big one single transaction to take out both the lease margin on a June maturity next year. Probably we would look at taking that under the revolver or do a single-bond offering in advance as those maturities (inaudible) to repay them.

Kevin Cashman – Assurant

Okay. Given the ratings so that’d be marketed to both IG and high-yield investors or, I guess, it would depend?

Curt Anastasio

Oh, yeah.

Steve Blank

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

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

But anyway...

Kevin Cashman – Assurant

Okay. I appreciate the comments. Thanks.

Steve Blank

Okay.

Operator

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

Brett Reilly – Credit Suisse

Good morning, guys.

Curt Anastasio

Good morning.

Brett Reilly – Credit Suisse

Could you help us frame the opportunity on the pipeline side a little bit more, just kind of specific opportunities you’re pursuing and when maybe we can expect some announcements from a timing perspective?

Curt Anastasio

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

Brett Reilly – Credit Suisse

So, that’s just a function of negotiating with the customers and signing long-term contracts and what are the factors limiting the announcement of those projects?

Curt Anastasio

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

Brett Reilly – Credit Suisse

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

Curt Anastasio

Well, it’s obviously recommended by our trade but everybody was aware of it. Including all the board was aware of it. There wasn’t a rogue trader instance or anything like that.

Brett Reilly – Credit Suisse

And the plan is obviously that’ll be a one-time thing and pursued again?

Curt Anastasio

Yes.

Brett Reilly – Credit Suisse

Okay. All right, that’s all for me. Thanks, guys.

Curt Anastasio

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

Operator

Your next question comes from the line of Jeremy Tonet of JP Morgan.

Jeremy Tonet – JP Morgan

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

Curt Anastasio

Well, the JV is going to have its own CEO and its own board. And they’re going to develop the strategy for that business. And the advantage for them is they’ll be able to do it, look at it at as a standalone business, look at all their options, optimizing what they have, and look at whether acquisitions are the right way for them to go. And I’m sure that they’ll come up with their own strategy. And it won’t necessarily be the same strategy that we have. I would expect some of the things to be the same. We try to – right now, it seems better to run more Canadian and minimize your crude costs and all the rest of it. But beyond that, they will have their, as I said, their own management team, their own board. And those are the people who will devise the strategy.

Jeremy Tonet – JP Morgan

That’s it for me. Thank you.

Operator

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

Louis Shamie – Zimmer Lucas

Hi. Good morning. Actually, my question’s already been asked. Thank you.

Curt Anastasio

Thanks, Louis.

Operator

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

Selman Akyol – Stifel Nicolaus

Good morning. Thanks. On the refined products terminals, you had the write-down there. Can you talk a little bit more about that for the $2 million, and is there any more to come?

Curt Anastasio

Oh, yeah. That was part of – it’s a small underutilized terminal on our Houston 12-inch line which is – it’s really part of the strategic redirection of that line. You might remember that a very underutilized refined products line from Corpus Christi used in – which – because somebody mentioned earlier about refineries exporting products to, like, Latin America and beyond. That’s really – we’ve talked about this in past call. That’s where you heard the throughputs on that line and we’re redirecting it into Eagle Ford, probably a Y-grade NGL line to Houston. And so, as a result of that, repositioning of that line, that little terminal really has no play anymore in that – in the use of that line. So, that’s what that write-up was about.

Selman Akyol – Stifel Nicolaus

Fair enough. I appreciate that. And then lastly from me since everything else has pretty much been asked.

Curt Anastasio

Yeah.

Selman Akyol – Stifel Nicolaus

In terms of the joint venture, are they going to have future capital cost on you, or would you expect to – if there were capital costs, can you just talk a little bit about that?

Steve Blank

Well, there’s nothing hard-wired in the agreement that would require us to put capital expenditures for growth. Again, the board will have their own board, as Curt outlined. And if they want to do something and they need additional capital, they’ll go to us and ask, and then we’ll consider it.

Curt Anastasio

Yeah. They’ll clearly have the option to participate in that or not.

Steve Blank

Or not, yeah.

Selman Akyol – Stifel Nicolaus

All right. Thanks for the call.

Operator

(Operator Instructions) Your next question comes from the line of Dennis Coleman of Bank of America.

Dennis Coleman – Bank of America

Yes. Thanks. Good morning.

Steve Blank

Hi.

Dennis Coleman – Bank of America

A couple from me. Can you talk a little bit about the – well, I’m thinking of the Eagle Ford, but the larger picture is the NGL price action that we’ve seen in the last quarter were – that was sharp. So, obviously, there was some bigger-picture things with the turnarounds and things going on at some – at (inaudible) but any potential impact of slowing, drilling in some of these liquids prone areas?

Curt Anastasio

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

Dennis Coleman – Bank of America

Okay. Okay. Thank you. Couple other just, if I can, I’m sorry to circle back to this working capital question that Ross asked, but I just wanted – make sure I understand exactly what’s going on with the balance sheet. So, the net result is you get 475 million proceeds in and reduce that by that amount and there’s no other add back, the 150 million of inventory, I was a little unclear, is that still on the balance sheet there?

Curt Anastasio

Yes.

Dennis Coleman – Bank of America

It is. Okay. So, it’s sort of the 475 plus 150 is the net effect on that?

Steve Blank

No, instead of having – think of it this way, instead of having all of that debt because you own 100% of it, you’re going to have now 150 assuming that’s one-third of the total working capital need of the joint venture. So, 175 comes in as payment for half of PP&A and 300 million comes in, that’s clear when you get that 475 that pays down debt, but you’re left with150 that you would have already had including the other than that. Okay. Yeah, I know...

Dennis Coleman – Bank of America

So the net reduction is that 475?

Steve Blank

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

Dennis Coleman – Bank of America

Perfect. Okay. Last one for me. Just to make sure I understand it. The hedge gain from unwinding the interest rate hedge, is that – where is that flowing through the income statement, is that in these sort of one-time items that you’ve – two or three in the income statement there, they’re clearly the one-time items here, but just want to know where that’s flowing through?

Curt Anastasio

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

Steve Blank

So, obviously it doesn’t have much of an impact in the current quarter unlike going on hedged and we’re selling high-cost inventory in a foreign market, that $32 million gets hedged (inaudible).

Curt Anastasio

Accounting technique.

Dennis Coleman – Bank of America

Yeah. It doesn’t offset. Okay, very good. That’s very helpful. Thanks very much.

Operator

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

Chris Russell

Thank you, operator. Once again I’d like to thank everybody for joining us on the call today. If anyone has additional questions, please feel free to contact NuStar’s Investor Relations. Thank you.

Operator

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

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