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Executives

Chris Russell - VP, IR

Curt Anastasio - President and CEO, NuStar Energy LP, and NuStar GP Holdings LLC

Steve Blank - CFO

Danny Oliver - SVP, Marketing and Business Development

Analysts

Brian Zarahn - Barclays Capital

Cory Garcia - Raymond James

James Jampel - HITE

Ross Payne - Wells Fargo

Selman Akyol - Stifel Nicolaus

Andrew Ebersole - National Life

NuStar Energy L.P. (NS) Q3 2012 Earnings Call October 25, 2012 10:00 AM ET

Operator

Good morning. My name is Marley 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 Third 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).

I would now turn the conference over to Chris Russell, Vice President of Investor Relations. Sir, you may begin your conference.

Chris Russell

Thank you, Marley. Good morning, and welcome to our conference call to discuss NuStar Energy L.P. and NuStar GP Holdings LLC's third quarter 2012 earnings call.

With me today is Curt Anastasio, CEO and President of NuStar Energy LP, and NuStar GP Holdings LLC; Steve Blank, our Chief Financial Officer; 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 may be found either in our earnings press release or on our website.

Now, let me turn the call over to Curt.

Curt Anastasio

Good morning and thanks for joining us today. During the third quarter results in our Pipeline, Transportation and Storage segment continued to improve over last year as both segments benefited from additional EBITDA being generated as a result of the capital we've invested in internal growth projects the last couple of years.

However, the Asphalt and Fuels Marketing segment reported negative EBITDA of $14 million during the quarter, down from the $31 million of EBITDA earned in the third quarter last year. The segment continued to be negatively impacted by the large Brent to WTI and LLS to WTI spreads, as well as continued weak demand for asphalt. While asphalt did generate $2 million of EBITDA during the quarter, the results were $7 million lower than the third quarter of last year.

Lower gross margin as a result of our asphalt refinery buying the majority of their crude oil based on Brent related market prices and continued weak asphalt demand were the main drivers for the decrease in EBITDA.

As you are probably aware, on September 28, we closed on the sale of a 50% in our asphalt operation and deconsolidated asphalt from NuStar's financial statements going forward. That transaction was the first step of our plan to change the strategic direction of NuStar by shifting away from the margin based portion of our business to fee-based storage and pipeline.

The San Antonio refinery lost $8 million in EBITDA during the quarter, lower than the $4 million of EBITDA earned in the third quarter of 2011. Again, wide LLS to WTI spreads negatively impacted the refinery's crude cost during the quarter. Losses were also incurred on hedges that remained in place on some of the refinery's production.

Our fuels marketing operations lost $9 million of EBITDA during the quarter lower than the $19 million generated last year. A principal reason for the loss was we decided this quarter to reduce the scope of bunkering business by exiting two markets, Los Angeles and Portland, where results had been weak and liquidating the related inventory.

In addition, our heavy fuel operations (inaudible) due to some timings differences on the company's hedge fuel oil inventories which will be recouped as the related physical sales are realized. This inventory is 100% hedged, so the loss again is only a timing difference. We expect our remaining bunker businesses and heavy fuel businesses to continue to be good profitable businesses for us for the rest of 2012 and beyond.

As I mentioned earlier, results in both our pipeline transportation and storage segments continue to improve. In the first week of July, our transportation segment began benefiting from the connection of our Corpus Christi to Three Rivers, Texas, 16 inch crude oil pipeline to a pipeline constructed by TexStar Midstream Services. These two interconnected pipeline systems are transporting Eagle Ford Shale region crude oil from Frio County in South Texas to Corpus Christi.

Primarily as a result of the completion of this project, crude oil pipeline throughputs were 16% or 50,000 barrels a day higher than in the third quarter of 2011. That is why the transportation segment's throughputs were 6% higher compared to last year's third quarter even though refined product throughputs were close to flat. Those increased throughputs plus higher pipeline tariffs as a result of the 2012 (inaudible) tariff increases contributed to transportation segment EBIDTA increasing to $56 million, $5 million higher than the third quarter of 2011.

Storage segment third quarter EBIDTA of $74 million was $3 million higher than the third quarter of last year. The third quarter 2011 completion of a storage expansion project put the April 2012 completion of the unit train project both at our St. James, Louisiana, terminal facility, as well as higher storage rates on new and existing storage contracts all had positive impacts on the segment's EBIDTA.

With regard to third quarter corporate expenses, G&A expenses were $25 million, $7 million higher than last year. Third quarter 2011 G&A expenses benefited from a lower compensation expense. In conjunction with the closing of the asphalt JV transaction we recognized a loss of about $22 million primarily associated with the sales of inventory of the asphalt operation, which is included in other income and expense in our third quarter financial tables.

Interest expense for the quarter was $25 million, up $3 million from last year. Increased debt level for the majority of the quarter required to finance our growth program, higher borrowing costs facilitated with a new credit facility that closed in May and reduced savings from fixed to floating rate interest rate swaps were the main reasons for the increase.

In September, we received $344 million in proceeds by issuing about $7.1 million common units of NuStar Energy. Those equity proceeds and the proceeds received upon closing the asphalt joint venture transaction were used for working capital purposes and to reduce outstanding borrowings under our revolver. As of September 30, 2012, our debt balance was $2 billion down almost $500 million from September 30, 2011, and our debt EBIDTA ratio was 4.3 times.

With regard to our third quarter distribution, NuStar Energy's board of directors declared our distribution of $1.095 per unit. That distribution will be paid on November 14. The board of NuStar GP Holdings declared a third quarter distribution of $0.545 per unit which is $0.05 per unit or 10% higher than the third quarter of 2011 distribution. Increased cash flows as a result of NuStar Energy's equity issuance in September allowed NuStar GP Holdings to increase the third quarter distribution. The GP Holding's distribution will be paid on November 16.

As we move into the fourth quarter, our storage and transportation segment should benefit from the start up of two more internal growth projects. Earlier this month, we completed construction on a 55 mile 12 inch pipeline that would transport Eagle Ford crude through the Corpus Christi area. This is the fourth project we completed in Eagle Ford Shale in the last 18 months giving us now the ability to transport approximately 300,000 barrels per day of Eagle Ford crude to the US gulf coast.

We also expect to complete a $1 million barrel expansion project at our St. Eustatius terminal later this quarter. This will expand the storage capacity of St. Eustatius to close to 14 million barrels.

Fourth quarter EBIDTA on the transportation segment should be higher than the $56 million earned in the fourth quarter last year. The increase is mainly a result of increased throughput from our internal growth projects in the Eagle Ford Shale.

(inaudible) segment EBIDTA for the fourth quarter should be comparable to fourth quarter of 2011. The EBIDTA benefit from the 1 million barrel St. Eustatius expansion project should be offset by increased maintenance expense we are taking at some of our terminals during the quarter.

Effective September 28, the asphalt operations were deconsolidated from NuStar's financial statements. Future earnings results from the JV will be recorded within equity and earnings from joint ventures on the income statement. We expect total EBIDTA for asphalt and fuels marketing to be positive in the fourth quarter. Our fuels marketing operations EBIDTA should be higher than last year's fourth quarter, while the San Antonio Refinery's fourth quarter 2012 EBIDTA should be close to breakeven.

In terms of guidance for our fourth quarter corporate expenses, G&A expenses are expected in the range of $29 million to $30 million, depreciation and amortization around $42 million to $43 million, and interest expense $23 million to $24 million. 2012 full year reliability capital should be $45 million to $50 million while our strategic capital should be around $400 million.

In the coming weeks, we’re going to be providing more details on 2013 and 2014. For today’s call, we’re saying that 2013 strategic capital will be at least in the $225 million to 250 million range. However, we continue to pursue and have identified new strategic growth projects that are not included in this strategic capital spending guidance, as well as acquisition opportunities. If those projects were to come to fruition, our guidance for 2013 would increase significantly.

On the pipeline transportation side of our business, we’re pursuing additional projects in the Eagle Ford Shale region and other shale areas where our pipelines are located. Last week we launched a 30-day open season to access shipper interest for the transport of crude oil from the Niobrara Shale near Platteville and Watkins, Colorado, to Wichita Falls, Texas. This project called the Niobrara Falls Project could include the construction of two new crude oil gathering pipeline. In addition, two of NuStar’s existing pipelines could also be utilized in the project. The 30-day open season will end on November 15.

We also continue to pursue additional opportunities in the Eagle Ford that we should be able to publicly announce within the next few weeks. We continue to pursue storage expansion opportunities of both St. James and St. Eustatius.

So based on today’s low case strategic capital spending guidance for 2012 and 2013, we expect transportation segment EBITDA to be $10 million to $20 million higher in 2012 than in 2011 and then to increase another $40 million to 60 million in 2013. Storage segment EBITDA is expected to be $20 million to $30 million higher in 2012 when compared to 2011. In 2013 in this low case, we expect storage segment EBITDA to be comparable to the amount into 2012.

2012 EBITDA for asphalt and fuels marketing is expected to generate $10 million to 30 million of negative EBITDA for the year after excluding the $266 million non-cash asset impairment recorded in the second quarter to write down the value of the company’s asphalt refineries and other intangible assets including goodwill.

In 2013, we expect EBITDA from asphalt and fuels marketing to be $40 million to $60 million higher than it was in 2012.

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

Question-and-Answer Session

Operator

(Operator Instructions).

Your first question comes from Brian Zarahn with Barclays.

Brian Zarahn - Barclays Capital

Appreciate the update on 2013 guidance, just more curious on the storage segment. It seems like the guidance has come down a little bit from your last quarter's comments. Can you talk a little bit about that as more related to CapEx in this segment?

Danny Oliver

Yeah, Brian, this is Danny Oliver. Basically one of the biggest item in that change is we’ve taken a fairly conservative approach to forecasting profit sharing formula that we have on our unit train facility at St. James where we make more money if the WTI/LLS spread above a certain level. We’ve just not forecasted any benefit for that since it’s hard to predict but that was worth about $17 million to us in 2012. And then we had a couple of projects just delayed into later in the year that would move some of the EBITDA but the main portion was the WTI/LLS spread.

Brian Zarahn - Barclays Capital

And then, I’m curious on your Niobrara Falls Project. How do you view the competitive landscape given yesterday’s announcement of the competing expansion moving forward and there is also a rail capacity coming online?

Danny Oliver

We were certainly aware of that competing project that this one is very different; it spirals down to the Gulf Coast instead of just to cushion. Our responses, we’ve been very pleased with. We’ve got --

Brian Zarahn - Barclays Capital

Should I say strong interest?

Danny Oliver

Strong interest in the responses so far just a week into the open season, so it’s moving along very well.

Brian Zarahn - Barclays Capital

Given the project moves ahead will utilized quite a bit of the existing pipe, I mean, is your service 6 to 8 times EBITDA multiple for your average projects could potentially be on the lower end of that multiple range?

Danny Oliver

That kind of what we looked on the internal growth objects is something in that six to eight --

Steve Blank

Four to eight.

Danny Oliver

Four to eight I think.

Steve Blank

It should be on the lower end of that.

Danny Oliver

Yeah, should be.

Brian Zarahn - Barclays Capital

And last one from me, what was total CapEx in the third quarter?

Steve Blank

Bear with me a second here. Total for the third quarter was $109 million.

Brian Zarahn - Barclays Capital

Thank you.

Steve Blank

$109.7 million looks like.

Operator

And you next question comes from Cory Garcia with Raymond James.

Cory Garcia - Raymond James

Just had a quick question regarding the San Antonio refinery. Could you clear up how much and really sort of quantify the hedging losses in the quarter? Trying to get what a sort of the real run rate would be for that refinery.

Steve Blank

The hedging loss was $8.9 million during the quarter.

Cory Garcia - Raymond James

Okay. $8.9 million, so it was essentially breakeven in the quarter, is the way to look at or not on the EBITDA basis?

Steve Blank

Yes.

Cory Garcia - Raymond James

And then, moving to your storage segment, would you able to provide any color on the rates that you are expecting from storage capacity coming up for renewal by year-end? And then, also looking for the 2013 timeframe, how much your existing capacity will actually be up for renewal as well?

Steve Blank

Sorry, we just had a little problem on the question, but I think you said, storage rate anticipated on the storage that is coming up for renewal by year end, correct?

Cory Garcia - Raymond James

Yes, sir.

Steve Blank

Okay.

Danny Oliver

We are not seeing any drastic change in the rates. I will tell you that we have about, like about a third of our storage contracts 34%, 35% are due for renewal in the next year. And then, another 35% revenue and then another 35% in the one to three year category and then about 20%, three to five and still another 10% or 15% beyond five years. So, we have got a lot of long dated contracts out there. But the near-term stuff we are seeing renewed, pretty much at the levels say we are originally contracted at.

Operator

Our next question comes from Lin Shen with HITE.

James Jampel - HITE

Hi. It's actually James Jampel from HITE.

Steve Blank

Hello.

James Jampel - HITE

Did I hear you say that the G&A expense in the fourth quarter is actually going to be higher than it was in the third quarter?

Steve Blank

No. What I was doing is comparing third quarter 2011 to third quarter 2012, and I said it was about $7 million higher. And that mainly resulted from, we had a -- in third quarter of 2011 we had a sharper decline in our stock price, and we compared this to third quarter 2012. So, therefore, you get compensation expense had the result in the variance of that that item. So that was a principal reason shown in the (inaudible).

Curt Anastasio

Yeah. That was pretty much the bulk of it there.

Steve Blank

Just stock price moving. Chris has something on it.

Chris Russell

Yeah. We did guide G&A cost to be up in the $29 million to $30 million range in the fourth quarter. And a good chunk of that is that we did benefit in the third quarter again, on the compensation expense from the year price coming down. So we are not forecasting that --

Steve Blank

Much of (inaudible) in that projection in the fourth quarter, yeah.

Chris Russell

So , it's all stock price related really.

James Jampel - HITE

And the distribution coverage was 0.68 for the quarter. And I am wondering, given what you have told us about, at least orally what you think about 2013? I mean, when can we expect distribution coverage to get near one again?

Curt Anastasio

Well, that is what we are -- we don’t have any plans to reduce the distribution at all, we just went through all of this with the board and that is part I absolutely, what we are going to be covering. When I allude to, in sort of a strategic press conference a few weeks from now, that is certainly one of the items that will be covered in detail for 2013 and 2014. And what you will see from that is there is, we increased coverage as time goes by. So, we'll have more detail on that.

James Jampel - HITE

Do you think why coverage will be one in 2013?

Curt Anastasio

I am going to wait for that call but Steve do you want to say something?

Steve Blank

Oh, no. That is fine.

Curt Anastasio

Yeah. I am going to wait for that to cover that detail with you in that call, what I just alluded to.

James Jampel - HITE

Okay.

Curt Anastasio

But no -- there is no, there is nothing in that you will see that it needs to any reduction in the distribution in fact, with storage (inaudible) distribution increases.

James Jampel - HITE

But do you see that --

Curt Anastasio

Those are all the details. We will cover all the detail and the underlying assumptions behind that within the next few weeks.

James Jampel - HITE

I missed the second (inaudible) you said.

Curt Anastasio

Oh, no. All I am saying is what you will see and as part of that call is that we increase the distribution coverage is healthier as time goes by and that we begin to look at distribution increases over the course of the period I am going to cover in that call, so. And we will cover all the underlying assumptions and how we get there.

Operator

(Operator Instructions). Your next question comes from Ross Payne from Wells Fargo.

Ross Payne - Wells Fargo

Hey Steve, quick question for the EBITDA. Assuming that number it does not add back $21 million in non-cash inventory items and the marked market is $6.5 million, is that correct?

Steve Blank

Ross, certainly for purposes for our debt to EBITDA calculation, yeah.

Ross Payne - Wells Fargo

Okay. But just trying to get to an EBITDA number, a cash EBITDA number, I need to add those back?

Steve Blank

Well, that is what I -- again, for purposes of calculating from debt to EBITDA and our financial covenant with our bank group, those would be excluded from EBITDA. I mean, you would -- yeah, you would add them back.

Ross Payne - Wells Fargo

Okay. All right. Great.

Steve Blank

Okay. And when we were at 4.28 times at the end of the quarter.

Operator

Your next question comes from Selman Akyol with Stifel Nicolaus.

Selman Akyol - Stifel Nicolaus

A couple of quick questions. A follow-up on the storage in terms of your outlook for 2013 and again I appreciate the color. I think you said storage rates are looking to be flat sort of for your planning for next year or inline with where they are. Just thinking back to three, six months ago, would we have been expecting to see modest increases on the storage rates? Is that basically flattened or just weakened out in comparison to where we were maybe six months ago?

Curt Anastasio

I think it’s a regional question. We have some markets where we will expect to see nominal increases, and some markets mostly in Europe where storage rates are a little bit softer. So, there's kind of a mix of the two, but I think overall we'll see rates comparable to where they were this year.

Selman Akyol - Stifel Nicolaus

And then, the second one, again as we look to 2013 and again appreciate the initial guidance of the $40 million to $60 million at the fuels and asphalt. Is there anyway to dissect it in terms of what you think the JV is going to throw off as opposed what the marketing and refinery is going to throw off?

Steve Blank

Well, the JV we've just completed our budget for NuStar Energy. We're going to have our first board meeting for the asphalt JV next week and we'll be reviewing that budget with our partners on Wednesday, the first board meeting. But we've assumed in our budget no cash coming out of the joint venture. So, we pickup equity in earnings or equity in loss below the line on NuStar's earnings but we've assumed no cash distribution because we think demand will continue to be weak next year and we're still in that business going to be affected by the WTI/Brent differential.

Curt Anastasio

As you probably heard, I just gave 2013 guidance on EBITDA from the asphalt and fuels marketing segment to be $40 million to $60 million higher than it was in 2012. So, based on what Steve just said for asphalt compared to the rest of it, it's really the rest of it that’s generating the $40 million to $60 million higher, which is the fuels oils, the bunker and the crude oil trading.

Operator

Your next question comes from Andrew Ebersole with National Life.

Andrew Ebersole - National Life

Yes, I was hoping you could repeat again your EBITDA forecast for both storage segment and the transportation segment for 2013.

Steve Blank

Yes. What we said, on the storage, was that 2013 we expect the storage segment EBITDA to be comparable to the amount earned in 2012 and that’s what Danny Smith said. But in the pipelines, we expected a rather substantial increase. We expected transportation segment EBITDA to increase another $40 million to $60 million in 2013 compared to 2012. And that’s with -- again I emphasize and I know we're being a little queued on this call about this, that’s sort of the low case strategic capital expenditures guidance. So, if you listen to what I'm saying we're planning -- we have an imminent announcement here. We're planning to talk a lot more and obviously a big portion of that is going be on shale opportunities and it's mainly going to be in the pipeline. So, there is the potential for substantial upside on the pipeline business when you talk about the next two years.

Curt Anastasio

There is nothing in there for the Colorado shale play for our capital --

Steve Blank

No.

Curt Anastasio

Or EBITDA next year.

Steve Blank

Right.

Curt Anastasio

But there may well be --

Steve Blank

Yes.

Curt Anastasio

We will wait for this open season to conclude and better form our thoughts.

Andrew Ebersole - National Life

Now, regarding the storage business and looking at my notes and my rate, and that’s during the second quarter after your second quarter call you guys had indicated that your storage segment will be up $30 million to $50 million from 2012?

Steve Blank

A big part of that is what Danny said about. We've taken out now the assumption of the benefit at St. James of the spread, the crude oil spread that Danny was talking about. That could add substantial and in fact based on current crude price if it were to add substantially for the storage, but we don’t control that. That’s a market matter outside of our control. So, we started to take that benefit out and that one was at least $17 million --

Curt Anastasio

For a partial year.

Steve Blank

Yeah, for a partial year that we took out. Most of that guidance changed because we've decided to take out the benefit of that spread which we -- it’s a benefit that we share with our partner on the unit train, EOG. And we expect gathered as of today but we took it out for forecasting because we don’t control it.

Andrew Ebersole - National Life

Okay. So that would mean that it's still kind of $10 million to $30 million differential from the original forecast and was -- the fee is essentially flat. Can you just provide a little more color as to the difference in your forecast now versus three months ago?

Steve Blank

Well, again, it's almost $20 million just because we're taking this conservative approach on the WTI/LLS profit sharing on the unit train. And then there's another $10 million and just some -- the several different projects that were just delayed, the start up was delayed from at some point 2013 or a later date towards the back of the year.

Operator

(Operator Instructions).

Your next question comes from the line of John (inaudible) with Elite Investors.

Unidentified Analyst

I just want to confirm that you are still targeting four times leverage by year end 2013?

Curt Anastasio

It would be, did you say four times?

Chris Russell

Four times, yes.

Steve Blank

Four times by '13.

Unidentified Analyst

Oh, by the end of 13?

Unidentified Company Speaker

Yeah.

Unidentified Analyst

Yeah, I think that’s fine.

Operator

(Operator Instructions). Your next question comes from the line of Ross Payne with Wells Fargo.

Ross Payne - Wells Fargo

Yes, just a follow up to that. If you guys do achieve your 4.0, Steve, in the expectation on when and how you might get back into being fully IG?

Steve Blank

That's something we are going to work hard on, Ross, starting with in December right, but at the same time for your conference up there in New York the scheduled visits with the rating agencies to share the budget and our strategic plan with them. By then we will know more about the Colorado shale play and some of these Eagle Ford projects, which has been a factor and real big in terms of our capital spend over the next couple of years, which obviously is a concern of rating agencies how much capital we spend, but we think these are terrific projects. So, we fully embrace doing them. And we will just have to have a discussion with all three of the agencies and see our leverage is pretty manageable next year (inaudible).

This year, as I mentioned, in September we were at 4.28. We will probably be about 4.5 at the end of this year, because we will be spending a fair amount of capital in the fourth quarter, but then it will be coming down next year as EBIDTA starts getting generated. We should have a pretty good pickup in EBIDTA next year, but much better in 2014 when all the projects come on board.

Operator

(Operator Instructions). And at this time there are no further questions.

Chris Russell

Thank you operator. We once again I would like to thank everyone for joining us on the call today. If anyone has any additional questions, please feel free to contact NuStar Investor Relations. Thanks, and have a good day.

Operator

And that concludes today's conference. You may now disconnect.

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