NuStar's CEO Discusses Q2 2012 Results - Earnings Call Transcript

Jul.27.12 | About: NuStar Energy (NS)

NuStar Energy L.P. (NYSE:NS)

Q2 2012 Results Earnings Call

July 27, 2012 10:00 AM ET

Executives

Chris Russell – VP, IR

Curt Anastasio – President and CEO

Steve Blank – Chief Financial Officer

Analysts

Brian Zarahn – Barclays

Cory Garcia – Raymond James

Ross Payne – Wells Fargo

James Jampel – HITE

Michael Blum – Wells Fargo

Brett Reilly – Credit Suisse

Jeremy Tonet – JPMorgan

Louis Shamie – Zimmer Lucas

Selman Ekyol – Stifel Nicolaus

Dennis Coleman – Bank of America

Operator

Good morning. My name is Christie and I will be your conference operator today. At this time I would like to welcome everyone to the NuStar Energy L.P and NuStar GP Holdings LLC 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 question-and-answer session. (Operator Instructions).

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

Chris Russell

Thank you, Christie. Good morning everyone, and welcome to our conference call to discuss NuStar Energy L.P. and NuStar GP Holdings LLC second quarter 2012 earnings results.

With me today is Curt Anastasio 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 would like to remind you that during the course of this call, NuStar management will make statements about our current views concerning the future performance of NuStar, that are forward-looking statements within the meaning of the federal securities laws. These statements are subject to the various uncertainties and assumptions described in our filings with the Securities and Exchange Commission, and will not be updated to conform to actual results or revised expectations.

During the course of this call, we will also make reference to certain non-GAAP financial measures. Our non-GAAP financial measures should not be considered as alternative to GAAP measures. Reconciliations of these non-GAAP financial measures to U.S. GAAP maybe 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 periods 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 inventories, that had been unhedged 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 swaps.

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 in 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. At the closing we expect to deconsolidate the asphalt operations.

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 will 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 impairments, mainly related to the write down of the company's asphalt refineries, as a result of the expected sale of 50% of its asphalt business to an affiliate of Lindsay Goldberg.

Gross impairment charges were partially offset by $29 million pre-tax non-cash gain on a legal settlement. Excluding these and other items, second quarter 2012 adjusted EBITDA would have been $88 million.

Our storage and transportation segments continue to benefit primarily from additional EBITDA being generated, as a result of the capital we have invested in internal growth projects over the last couple of years.

Storage second quarter EBITDA of $77 million was $30 million or about 20% higher than the second quarter last year. A 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 rates on new and existing storage contracts, all had positive impacts on this segments EBITDA.

Included in the segment's second quarter results, was an asset impairment charge of about $2 million for one of our refined product storage terminal.

Pipeline transportation segment EBITDA, $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 Coke Pipeline and Valero in the second and third quarters of 2011, were the main drivers for the increase in EBITDA. This segment's results 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 lost $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 the asset impairment adjustment on NuStar's Asphalt refineries that I mentioned earlier.

In addition to being burnt 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 were $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 in EBITDA than the second quarter 2011 as a result of lower frac spread.

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 that 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 require to fund internal growth program, higher borrowing costs associated with our new credit facility, and reduced savings from fixed-to-floating rate interest rate swaps were the main reason for the increase.

NuStar's borrowing cost increased by about 1.25% per year under the new facility and that cost increases 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 6-to-1 times as a 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 requirements 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 the 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 201 results in Storage are expected to be slightly lower than third quarter of 2011, because increased operating expenses mainly 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 lawn 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 throughputs more than we initially anticipated. After adjusting our forecast for 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 a result in Fuels and Marketing, specifically bunker and 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% sale to Lindsay Goldberg 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 Fuels Marketing are, of course, down significantly lower than last year, even 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 should finance about two-thirds of the joint ventures 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 the third quarter corporate expenses, G&A expenses are expected to be in the range of $29 million to $30 million, depreciation and amortization around $40 million to $41 million, and interest expense $25 million to $26 million.

As we changed 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 liability should total $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 costs for that project were 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 arise.

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 clearly pursuing, we feel our 2012 spending could be higher than the $425 million to $475 million range and 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 finalized 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 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.

At 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) 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

I appreciate all the color on the segment performance and then also for guidance. On guidance for '13 on asphalt, is that on a apples-to-apples basis with your deconsolidated results such as fuels marketing and your 50% stake or how do you -- $30 million to $50 million of expected growth in that segment, can you talk about that a little bit?

Steve Blank

By then, of course as you know the asphalt would have been deconsolidated in the joint venture. So the numbers we're giving you are predominately the relative performance of the fuels marketing piece, which is the bunker and fuel log marketing and the crude [alternated].

Curt Anastasio

Brian, just to -- for future clarification bear in mind net guidance takes into account the fact that you had a $32 million hit taken off the hedges in 2011.

Brian Zarahn - Barclays

Right.

Curt Anastasio

Of 2012

Steve Blank

2012, so but it is apples-to-apples because that's what happened in 2012, so --

Brian Zarahn - Barclays

Okay. And then can you talk a little bit about the process for arriving at a JV versus the assets sale versus complete assets sales.

Curt Anastasio

Yeah, I mean we were approached on this by this private equity firm Lindsay Goldberg. We got into discussions with them on it and obviously this is the worse that asphalt operations have performed since we got into this in 2008. We made money every calendar year except for this one. And selling at a low -- somebody once told me is not a great idea, selling out totally. So we wanted to try to find a deal if we could that would -- where we stay exposed to an upturn in this business while not selling it at a buyer sales price. But at the same time, basically get it out of our strategic direction and out of our story and really out of our numbers, because of this peak consolidation. So -- and there was an opportunity to substantially delever the company, give us some breathing room to investment in the fee based set because you got all these opportunities in the free base side, when we're talking about Eagle Ford and all the rest of it. But still retain some exposure to our turnaround in the business going forward.

Brian Zarahn - Barclays

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

Curt Anastasio

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

Brian Zarahn - Barclays

The last question from me, I know it's your income tax expenses relatively high in the quarter can talk about that and your expectations for income tax for remainder of the year?

Steve Blank

But (inaudible) some of the income tax expenses related to an assessment we received, it was a little bit high this time because of there was some, we've set up some depreciation and I'll involved in that. So it was kind unusually high, it was kind of a onetime thing and that was about $5 million related to that that will, that I would call kind of a onetime 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

I have just sort of the a broader view point question, we've seen a small growth but growing number of these lower margin international sort of refining assets that have been shut down particularly in the Caribbean area. I 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 that as a building out St. Eustatius terminal capacity?

Curt Anastasio

It's the St. Eustatius terminal capacities you know it is really being primarily driven by new crude production and new, the way in which the crudes are flowing now in the world. You know crude oil used to come in the west of United States that used to come in Western United States like Middle Eastern crude, you know when they used to utilize this, break bulk you know facilities like St. Eustatius. Now you've got more and more Latin American, you know, Brazilian is particular [option] that's not flowing that way, it's flowing to the US and to east bound destinations. And so you still have, you got an assets being utilized but for a completely different customer base and completely different trade flow than in the past.

So that's really what's driving the expansion and we have other customers interest there too. We refined product interest, we have trader interest, 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. As Danny Oliver is there, our development guy, you want to add anything to that Danny?

Danny Oliver

Well, I'd just say, you know, St. Eustatius is 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 a new facility to improve our position geographically and clearly building new storages cheaper than acquisition.

Cory Garcia - Raymond James

Sure. Sure, I guess I was just looking at it more from a product flow angle to, because as you alluded to the flows of even the products side has a sort of been flipped as US Gulf Coast refining capacity now seems to be sending product more to Latin America, is there any opportunity to build out product terminal capacity in those sort of Latin American areas?

Curt Anastasio

Yeah. I think there will be more terminal capacity, absolutely.

Steve Blank

Most of our demand is, as Curt mentioned we do have some products like products demands most of its on the crude and fuel oil side.

Cory Garcia - Raymond James

Okay. I really appreciate the color and just want 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 offset I guess a bit by the huge project backlog that you guys are bringing online over the next year or so, but any color that you guys can provide on a good run rate going forward as we look into sort of the 2013 timeframe. Is $40 million to $50 million a good number to use or could it be even lower than that?

Curt Anastasio

That's probably (inaudible) higher than that, maybe in the $50 million to $60 million range.

Cory Garcia - Raymond James

Okay. I appreciate it again.

Operator

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

Ross Payne - Wells Fargo

How you doing guys?

Curt Anastasio

Hi, Ross.

Ross Payne

First question is on this working capital, it looks like it's 400 to 500 but also in the press release it says minus -- less joint venture working capital requirements. Are there going to -- 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 to 500 you're expecting here? Can you explain that a little?

Steve Blank

No, it's not. Basically we're getting 175 from Lindsay Goldberg for the PP and we're assuming we get another 300 advance to us by the ABL facility, and that's put in place as (inaudible) which is totally nonrecourse to us. And then we assume we clubbed the one-third balance that's needed JV to buy from us. So that 150, okay, assuming 450 of total working capital; 300 coming to us from JV alone. We have the other one-third, so 150 on our balance sheet [of that]. So we're just plugging that estimated one-third difference of the ABL on advance given the collateral position they seem to take.

Ross Payne

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

Curt Anastasio

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

Ross Payne

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

Curt Anastasio

They're good. There's still a substantial, a discount compared to our alternatives. So, we want to do as much of that as we can manage.

Ross Payne

Okay. And then finally, obviously you're overviewed by Moody's or 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 the investment grade rating on the Moody's side?

Curt Anastasio

We hope that it's good. I think they put out their commentary as you've read I'm sure in saying the steps we take here over the next few months are very important to look for us to delever. 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 as [we need] additional EBITDA and the steps we're taking first and foremost delever provides us financial flexibility to kind of do the stuff in Eagle Ford and 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

Okay.

Curt Anastasio

We'll fight the good fight.

Ross Payne

Okay. And Steven, 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

Okay.

Steve Blank

That's the plan.

Ross Payne

Thanks guys.

Curt Anastasio

Okay, thanks Ross.

Operator

You 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 into 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 is [an alternate] for equity or there may be a need for equity. And we've outlined, we 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 these strategic initiative we're pursuing.

Curt Anastasio

Yeah, and that's what Steve's alluding to.

Steve Blank

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

James Jampel - HITE

I see, okay. Now you spoke about resumption of distribution growth, about the range of timeframe one -- we should be start thinking about that?

Steve Blank

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 will have to see the entirety of the results of 2013?

Steve Blank

No, I didn't say that. 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 --

Curt Anastasio

Yeah, we're in the middle of the housecleaning that part of which or a big part of which we're talking to you about today. When we get past all of that and we get these projects coming online starting like in the next Eagle Ford one in September, October and all the rest of it, that EBITDA -- the 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, we said that over the next two or three months we were making some major announcements in a couple of different areas. And once other shoes dropped and we have maybe the whole picture better that we can communicate, we're going to come out and lay out what we think 2013 can look like and certainly should be able to indicate what an acceptable distribution target might be for next year.

Curt Anastasio

Right, more detailed guidance on 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 on the refined products side?

Curt Anastasio

Yeah, the refined products were affected mostly by a turnaround, one of our customers in the second quarter. One of the things you don't see though in our throughput is that 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 throughput since it's a capacity lease, but those volumes would have offset [the like] product shortfall because of the turnaround

James Jampel - HITE

All right. And the crude side?

Curt Anastasio

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 fill it on both sides.

James Jampel - HITE

Yeah.

Steve Blank

And that's the second time the question's come up [basically], the same thing. We should look at breaking that throughput schedule to make that more clear about the terms of this contract and it'd be just the throughput more in there. It's just -- it's a capacity lease. We'll better clarify that in Q3.

James Jampel - HITE

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

Steve Blank

Well we'll have an investment in joint venture, you know, line item on our balance sheet and then we'll pick up equity earnings in of that joint venture for purposes of distributable cash flow we would only account cash that was actually distributed out to us. So you back out the equity earnings and add cash for purposes of DCF and that's the same way our financial covenants works with our bank group.

The principal advantage of the deconsolidation, you know, as you're not having - hold that working capital on your balance sheet and that's the possible advantage of doing the joint venture, I would say as, you know, in addition to retaining exposure to a business which we think is absolutely going to improve.

You're also, you know, having two-thirds of the working capital (Inaudible) management and non-recourse play by bank group, which would currently - reaching out to put the [ABL] facility plan 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 improving the business.

James Jampel - HITE

Should we expect to a less disclosure on the results of the joint venture?

Curt Anastasio

Oh, you're not going to see every line item, you know, in our numbers and you won't have a - we won't have it broken out say mentally of course. Obviously, we're perfectly happy to communicate how the businesses doing to you, but yeah, with less financial disclosure.

Steve Blank

Yeah, financial advice…

Curt Anastasio

We all did 100% (Inaudible), yeah, different the way Steve just described it so it's…

Steve Blank

We must follow SEC and GAAP.

James Jampel - HITE

Thank you.

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? Are you - just in terms of, you know, 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, the hedged. That's number one, the hedges were effective for four years, yeah, we took them off right when right before you know, the market drop because you know, our guys had a bullish view on crisis. They're back on, that's not going to happen again, at least, as long as I am around. But that's one thing different. But no, I mean the business, you know, we want to do this business, we're - really it's mainly leveraged towards an existing storage business. We did a redevelopment in Texas city in the [US Gulf] where we're able to bring from inland refiners, kind of bottom of the (Inaudible) material, you know 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, you know, are turning over pretty rapidly it's not like the Asphalt business, it's a much more rapid turning over of inventory and they were very effectively hedged.

Same thing in St. Eustatius, doing business out of our St. Eustatius terminal bunking operation that's worked well for years, wherever we go with this - you know, we're looking for minimum risk, rapid turnover for inventories and where we can effectively hedge.

So, as I try to convey in my remarks still, you know, we see our big expansion opportunities right now, really on the pipeline and storage side. You know, not so - not as much, although it's been a very good profitable business for us in bunker and fuel op. The growth opportunities, look much more substantial. You know, particularly on the pipelines, because you have all - not just 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 newbuild opportunities as well so - that's where the big bang for our buck is right now.

Michael Blum - Wells Fargo

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

Curt Anastasio

Yes, yeah, you know, the hedging we did was not really as effective as we hoped it would be, so you know, as we go forward we expect we'll be already unwound or taken off some of these hedges and overtime, we'll pick our spots to do - get the rest of it done. But, you know, it's positively cash flowing and it's been making money, so that's the point there.

Michael Blum - Wells Fargo

Okay, thank you.

Curt Anastasio

Okay.

Operator

Your next question comes from the (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 $415 million, roughly how much of that would be directed towards your international operations?

Steve Blank

Oh, it's very little. Very little I mean that the large bulk of this is the stuff we highlighted in our remarks today. We don't have big St. Eustatius project in those numbers, that's separate, it's being worked on, but it's not in those figures.

Unidentified Analyst

Okay, second when you mentioned your leverage targets four and a half times at year end, presumably that sound kind of a more of a run rate basis as opposed to the last twelve months, or yearend, you know full 2012, look is that safe to say?

Steve Blank

That's a snapshot at December 12th, looking back at the trailing.

Unidentified Analyst

Okay.

Steve Blank

The yearly - yes.

Curt Anastasio

Obviously it presumes Lindsay Goldberg, it's been closed. It presumes some other things, which…

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, odds in size here and there, like some idle type ones somewhere that I'm not thinking of but basically no. There's no divestiture program in mind for pipelines and storage.

Unidentified Analyst

Okay thanks, that's it from me.

Operator

Our next question comes from the line of [Kevin Cashman] of (Inaudible).

Unidentified Analyst

Hi, guys. A question on gross debt reduction plans, I guess, for the next year. It looks like it. with the 2013 maturities, kind of offsetting I guess proceeds expected from Lindsay Goldberg and then looks like what -- CapEx projects and the distribution at your (Inaudible) free cash. I'm just kind of what's the - is there a target, kind of for gross debt. You know it seems like more of the leverage coming down from the EBITDA growth expectation versus a total gross debt reduction and just kind of (Inaudible).

Steve Blank

I mean the obviously we'll be getting in some proceeds from Lindsay Goldberg. We've got that about $670 million, I think, available on our revolver as of June 30th. 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 receiving about $475 million in from that. You know we've got $100 million let's see the $100 million in revolver.

Curt Anastasio

[Paid off]

Steve Blank

Revolver from paid off under the revolver, we've got -

Curt Anastasio

Little less than $500 million coming due in the first half of next year. We could accommodate that under the revolver, we believe, take that out that way. And that depends upon bond opportunities. I mean, our preference would be to take it out into bond market and probably a big one single transaction to take out both the weak margin and a June maturity next year. Probably we would look at taking that under the revolver or do a single bond offering in advance of those maturities, get set to repay that.

Unidentified Analyst

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

Curt Anastasio

I mean we would obviously seek counsel from underwriters, we haven't selected yet and we'll get their thoughts. And so we're going to be talking to the rating agencies because once we start getting these steps taken instead of just announced in closing, as you go -- I mean we're going to be going in and saying, this here, 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 leak on the inventory in the tanker and in the pipe. I mean this is a rock solid business that we're going to once again have and concentrate on.

And so obviously we're going to be preaching our case with the rating agencies and try to minimum hold the line. We're going to 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 that 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 --

Unidentified Analyst

Okay, I appreciate the comments. Thanks.

Curt Anastasio

Thanks.

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 have another deal or two to announce this year. But we're still working on that.

Brett Reilly - Credit Suisse

So is that just a function of negotiating with customers and signing long-term contracts, whether the factors limiting the announcement of this project?

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 the decision to leave the fuels marketing segment on hedge for the first time in four years last quarter. Whose decision was that? And besides the bullish crude outlook, why was that decision made?

Curt Anastasio

It's obviously recommended by our traders but everybody was aware of it, including all the Board was aware of it. So, there was -- it wasn't a rogue trade or instance or anything like that.

Brett Reilly - Credit Suisse

And the plan is obviously of a one-time thing and not pursued again?

Curt Anastasio

Yes.

Brett Reilly - Credit Suisse

Okay. All right, that's all from me. Thanks guys.

Curt Anastasio

In fact we even changed our risk 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 JPMorgan.

Jeremy Tonet - JPMorgan

Good morning. A lot of my questions been asked so far, but I just want 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 is 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. The advantage for them is they'll be able to do it, look at it 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 to the same strategy that we have. I would expect some of the things to be the same, try to -- right now this incentive to run more Canadian and minimize your crew costs and all of 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 would devise the strategy.

Jeremy Tonet - JPMorgan

That's it from 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 questions already been asked. Thank you.

Curt Anastasio

Thanks Louis.

Operator

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

Selman Ekyol - Stifel Nicolaus

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

Curt Anastasio

Yeah, that was part of a -- it's a small underutilized terminal on our -- using 12-inch line which is -- it's really part of the strategic redirection of that line. You might remember that, and a very underutilized refined products line from corporates to Houston which --because somebody mentioned early about refineries exporting products to like Latin America and beyond, that's really -- we've talked about this in past calls, that's what hurting the throughputs on that line and we're redirecting it into an Eagle Ford, probably a Y-grade NGL line to Houston. And so as a result of that, the 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-off was about.

Selman Ekyol - Stifel Nicolaus

Fair enough. I appreciate that. And then lastly from me since everything else has pretty much been asked. In terms of the joint venture, are they going to have future capital calls on you or would you expect to, if there were capital calls, can you just talk a little bit about that?

Steve Blank

Well, there's nothing hardwired in the agreement that would require us to put in capital expenditures for growth. Again, the Boards all have their own Board as Curt outlined and if they want to do something and they need additional capital, (inaudible) asking them, we'd consider it.

Curt Anastasio

NuStar all have the option to participate in that or not.

Selman Ekyol - Stifel Nicolaus

All right. Thank you for the color.

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. Can you talk a little bit about -- 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 where there was a sharp selloff. Obviously there was some bigger picture things with turnarounds and things going on at some ethane crackers, but any potential impact of slowing and growing in some of the these liquids prone areas?

Curt Anastasio

We don't see any of that. Most of the NGLs that we've talked about ending up on 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 an MMBtu. So there is 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 byproduct of the crude oil drilling process.

Dennis Coleman - Bank of America

Okay. Thank you. Couple other just -- if I can, I am sorry to circle back to this working capital question that Ross asked, but I just wanted to 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 is no other add back, the $150 million of inventory, that was a little unclear. Is that still on the balance sheet then?

Steve Blank

Yes.

Dennis Coleman - Bank of America

It is. Okay. So it's sort of the $475 million less a $150 million is the net impact 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 are going to have now $150 million, assuming that's one-third of the total working capital need of the joint venture. So $175 million comes in, that's payment for half of the PP&A and $300 million comes in, that's clear. You get that $475 million that pays down debt, but you are left with $150 million that you would have already had, including…

Dennis Coleman - Bank of America

I got you.

Steve Blank

Okay.

Dennis Coleman - Bank of America

So the net reduction is that $475 million?

Steve Blank

That's right, but we will have always while we are in this joint venture period of time, where we have this obligation to finance the amount estimated at one-third, which the (inaudible) 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. Where is that flowing through the income statement? Is that in these sort of onetime items that you've or there is two or three in the income statement there, they are clearly the onetime items here, but just wanted to know where that's flowing through?

Curt Anastasio

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

Steve Blank

So obviously, it doesn't have much of an impact in the current quarter. Unlike, going unhedged and we are selling high cost inventory in affordable markets, that's $32 million (inaudible) 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?

Curt Anastasio

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

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!