NuStar Energy L.P.
Q2 2009 Earnings Call Transcript

Published: 4 Aug 2009

[Operator:]

Good afternoon. My name is Kara, and I’ll 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 2009 earnings conference call. (Operator Instructions) Thank you. Mr. Meador, you may begin your conference.

[Mark Meador:]

Good afternoon and welcome to our conference call to discuss NuStar Energy L.P., and NuStar GP Holdings LLC second quarter 2009 earnings results. If you have not received the earnings releases and would like copies of each, you may obtain them from our websites at nustarenergy.com and nustargp.com. Attached to the earnings releases, we have provided additional financial information for both companies, including information on NuStar Energy L.P.’s business segments. In addition, we have posted operating highlights and fundamental data for our asphalt operations under the investor’s portion of the NuStar Energy L.P. website. If after reviewing the attached tables and operating highlights, you have questions on the information that is presented there, please feel free to contact us after the call. With me today is Curt Anastasio, CEO and President of NuStar Energy L.P. 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 certain statements concerning the future performance of NuStar and other statements that will be forward-looking statements, as defined by securities laws. These statements reflect our current views with regard to future events and are subject to various risks, uncertainties, and assumptions. Actual results may materially differ from those discussed in these forward-looking statements, and you should refer to the additional information contained in NuStar Energy L.P. and NuStar GP Holdings, Annual Report on Form 10-Ks for the year ended December 31, 2008 and subsequent filings with the Securities and Exchange Commission. During the course of this call, we will also make reference to certain non-GAAP financial measures. We’ve provided additional schedules, under the investors and financial reports and SEC filings portion of the NuStar Energy L.P. website, reconciling these certain non-GAAP financial measures to the most directly comparable financial measure, calculated and presented in accordance with U.S., Generally Accepted Accounting Principles or GAAP. Our non-GAAP financial measures should not be considered as alternatives to GAAP measures; such as net income, operating income, net cash flows provided by operating activities, or any other GAAP measures of liquidity or financial performance. I’ll now turn the call over to Curt.

[Curt Anastasio:]

Good afternoon and thanks for joining us. I’m very excited to say that NuStar Energy and NuStar GP Holdings both reported record second quarter earnings. These results were also the second highest earnings of any quarter in NuStar’s history. The L.P.’s results not only exceeded the high end of our previous guidance range of $1.10 to $1.25 per unit, but also beat analyst predictions. At the L.P., we reported second quarter earnings of $75.1 million or $1.38 per unit while the GP reported earnings of $21.4 million or $0.50 per unit. The L.P.’s second quarter earnings included the benefit of an $18.8 million or $0.34 per unit net gain primarily related to the sale of two non-strategic pipelines, Ardmore-Wynnewood products line in Oklahoma and Trans-Texas pipeline. Excluding the impact from the sale of those pipelines and other items, second quarter 2009 adjusted earnings would have been $56.7 million or $1.04 per unit. That still represents a record for the second quarter and it’s the second highest quarterly earnings in NuStar’s history. In addition, it is a nearly 600% increase over the $8.1 million or $0.15 per unit earned in the second quarter last year. I was really pleased with the performance of our storage and asphalt businesses which were the main drivers for our record second quarter results. Earnings for both of those businesses significantly exceeded last year’s results and so far this year, our results reflect a strong financial performance during a period of challenging market conditions. The L.P.’s distributable cash flow applicable to limited partners of $123.4 million or $2.27 per unit was also a record for the second quarter and nearly four times higher than the $31.5 million or $0.58 per unit reported last year. We left the second quarter of 2009 distribution unchanged from the prior quarter, but we still expect to recommend to each Board of Directors a distribution increase for both the L.P. and the GP this year. For the second quarter of 2009, the L.P. Board declared a $1.05.75 distribution payable August 13, 2009 and the GP Board declared a $0.43 per unit distribution payable August 18. These distributions were both increases over the second quarter of last year with the L.P. distribution representing a 7.4% increase and the GP distribution representing a 19.4% increase. We also had very strong distribution coverage ratio of 2.14 times applicable to the limited partners for the second quarter of ‘09. We expect to continue to maintain a higher coverage ratio to account for the seasonality of our asphalt operations. However, we don’t expect the coverage ratio to remain this high through to the end of the year. Now I’d like to review the second quarter results for each of our business segments. The biggest driver for our increased second quarter 2009 earnings compared to last year was our asphalt operations. Those operations generated EBITDA of $46 million compared to negative 4.1 million last year or an increase of over $50 million. Last years second quarter earnings were burdened with the $61.3 million or $1.10 per unit hedge loss, we incurred in the asphalt and fuels marketing segment. Our asphalt operations primarily benefited from a significantly higher margin per barrel of $9.10, compared to $1.37 last year. $9.10 per barrel is also higher than the $8.89 per barrel last year after adjusting for the hedging loss. Our strategy of producing and storing asphalt inventory at lower costs during the winter months and selling those inventories at higher prices during the asphalt season allowed us to capture a generous margin in the second quarter. We also benefited during the second quarter from a wide light-heavy discount in the crude oil we buy from the Venezuelans. While light-heavy crude oil discounts have been poor for complex refiners the differentials on the Venezuelan crude we purchase to produce asphalt continue to be attractive. For example, the discount to WTI for both the Boscan and Bachaquero 13 grades we purchased averaged around $10 per barrel for the second quarter of 2009. That compares very favorably to for example, the Maya heavy sour crude oil versus WTI of around $4.50 per barrel in the second quarter. So our discount was over double of that of other comparable heavy sour crude, which benefited our margin. While our asphalt sales volumes were negatively impacted at the start of the second quarter as a result of unseasonably wet weather on the U.S. East Coast. We saw a marked improvement by the end of the quarter. Companies were unable to pave roads during wet weather, because it can have a harmful effect to the quality of the finished pavement. Compared to last year, our second quarter total sales volumes were lower by around 14%, but the impact from the weather has only resulted in a deferral, not a cancellation of road work projects. As a result I expect asphalt sales volumes in the third quarter of ‘09 to be significantly higher than in the second quarter, as well as the third quarter of last year. In addition, we’re seeing sales volumes increase in the second half of this year now that the weather has improved, deferred projects have been starting up and the stimulus funds are finally being put to work. I’d like to point out that while it’s been a slow start to stimulus spending, we should start to see project spending ramp up in the second half of this year and even more so in 2010, and that’s right on target with what we expected and what I’ve said previously. In other words, some of the stimulus spending would incur in 2009, but most of it would be expected to occur in 2010 and even 2011. Keep in mind a large portion of the stimulus funds are around 50% of the $26.8 billion available for highways have been a portioned to states in which NuStar markets rack asphalt volumes. So, it’s not a matter of whether it’s going to have a positive impact on our demand, it’s just a matter of when. Operating income in our fuels marketing operations was slightly positive. As operating income from the bunkering business of $3.7 million was mostly offset by a $3.1 million loss in our product supply and trading, wholesale and fuel oil trading operation. Because of increases principally in refined product prices that resulted in mark-to-market adjustments of some of our NYMEX hedges, against physical storage positions that we have taken. The margin we earned in our product supply and training and wholesale operations was negatively impacted. We fully expect to capture the physical appreciation associated with these products that we hold in storage, as the products are sold and the associated hedges removed and the profit booked later this year. Turning to our storage segment, we continue to see very solid results from that part of our business. Operating income increased over $6.5 million or nearly 20%, compared to last years second quarter. Most of the increase was related to higher revenues associated with tank expansion projects, completed under our 400 million construction program, but we also benefited from renewals of lease storage contracts at higher rates due to continued strong demand for our storage. Lower operating expenses due to a decrease in power costs from lower natural gas prices also boosted our bottom line in the storage segment. I expect we will continue to see strong results from our storage business for the remainder of the year, as previously completed projects and rate increases will have a positive impact to earnings. Based on our latest forecast, we’re targeting incremental EBITDA of around $38 million in 2009. Of the $38 million, approximately 20% is related to rate increases and the remainder about 80% is related to completed projects, which is consistent with what we’ve been saying all along and finally operating income on our transportation segment. Despite being around $5.3 million or around 16% lower than the second quarter last year; actually did about $3 million better than we had anticipated at the beginning of the second quarter, primarily due to lower than expected power cost. This is another great example of how our transportation business is effectively hedged in ways that go beyond just tariff adjustments. When the economy is weaker and throughputs are down, pipeline energy costs tend to be lower as well. The majority of the volume and revenue decline second quarter to second quarter was principally related to the impact of planned turnarounds at two of our customers’ refineries and a number of unplanned operational outages at two other refineries we serve. Of the $8.3 million decline in revenues, about $5.7 million or 69% was related to the refinery downtime and of the 200,000 barrel per day decline, approximately 98,000 barrels per day or 49% was also due to these outages. Our pipeline volumes were also impacted by lower volumes on our El Paso to Santa Fe pipeline space, because as you will recall a shipper acquired our JV partners interest last year and is now shipping product on its purchase base rather than our space and that resulted in volumes being lower by around 34,000 barrels per day. However, the revenue associated with that volume decline is minimal or only around 400,000 of the overall $8.3 million revenue decline. In addition, throughputs on our ammonia line were approximately 6,000 a day lower versus last year, unseasonably wet and cold weather in the Midwest in the first half of ‘09 affected throughputs together with high inventory levels carried over from a late 2008 planting season. With therefore expect throughputs on our ammonia line to improve in the second half of this year. Corn plantings are still high and the renewable fuels mandate will continue to support throughputs on this system long term; and finally while we are pleased with the sales price for the Ardmore-Wynnewood and Trans-Texas lines in the second quarter of ’09. The sale also resulted in second quarter throughputs being lower by around 7,000 barrels per day. So, of the 200,000 per day decline for the second quarter of ‘09, around 145,000 barrels per day of that 200 or 73% was related to one-off issues. Excluding the impact of those items, our second quarter throughputs were really down around 5% compared to last year inline with or better than the national average in this deeply recessionary year. While transportation revenues were less, we did benefit from around $3 million in lower operating expenses versus last year primarily due to lower power costs as a result of both reduced natural gas prices and reduced throughputs. The good news is that we’ve started benefiting now from the 7.6% tariff increase, which went into effect July 1, for approximately 95% of all transportation segment revenues and even with lower throughputs in ‘09, we continue to expect operating income for the transportation segment to be slightly higher than 2008, as the tariff increase, the lower operating expenses and the completion of the East Pipeline expansion project should offset the impact of lower throughputs. Turning to some of our expenses for the second quarter, operating expense came in at $110 million, around $15 million to $20 million lower than our previous guidance, but approximately $3.5 million higher than second quarter last year. The reason for the large variance versus guidance was primarily due to lower than expected power costs and lower maintenance costs. Due to the unplanned outages and extended turnaround at the refineries we serve as we as lower than expected natural gas prices our power costs came in much lower than forecast. Lower than expected maintenance costs were the results of some of these cost slipping to the third and fourth quarters. G&A expenses were $6.3 million higher than the second quarter of last year and slightly higher than previous guidance. The majority of the increase compared to last year was due to the impact of an increase in the unit price in the second quarter of 2009 that increase had on our unit compensation expense versus a decrease in price in the second quarter of 2008. To a lesser degree, hiring additional employee is associated with the former CITGO Asphalt Refining and Marketing business as well as to support the companies other businesses also resulted in higher G&A. Depreciation and amortization was roughly flat compared to the second quarter of last year and almost $2 million lower than our previous guidance. We benefited from significantly lower interest expense compared to last year or almost $5 million lower. This was mainly due to lower interest rates on our revolving credit facility. The average interest rate on our revolver was over 200 basis points lower than last year. We also benefited from a lower revolver balance, because of reduced working capital requirements as crude oil prices were more than $40 per barrel less than last year. The last income tax expense was slightly lower compared to last year and around $3 million lower than our guidance. The variance versus guidance was mainly due to lower than expected insurance proceeds received for the damage incurred at Texas City from Hurricane Ike and a larger than expected foreign exchange loss related to our Canadian subsidiary due to the decline in the US dollar. Both of these are considered taxable items. We continue to make very good head way on our 2009 strategic capital program. As you might recall, earlier this year we were cautious on our capital spending given the challenging economic and capital market conditions. As a result, we lightened our growth program to approximately $80 million. However, with Markets improving, our growth program currently stands higher at nearly $98 million and we continue to identify more projects. So far, through the second quarter of ‘09, we have spent $51 million on high return growth projects. One of the major projects just recently completed is a $16 million pipeline expansion on the Southern end of the East Pipeline. That project will allow us to increase the capacity and flexibility to accommodate new and existing customers and should contribute an incremental $4.2 million of operating income annually. Keep in mind, our East line benefits from market areas that are more agricultural versus population center based since it primarily serves farming communities. As a result it has held up well in the midst of a weak economy and should benefit from the expanded capacity. For the remainder of the year and into 2010, we’ll be primarily focused on completing various tank expansion and pipeline projects at Texas City, St. James, Louisiana, and Savannah, Georgia, and other high return projects at our asphalt plants in Paulsboro, New Jersey and Savannah. Overall the $98 million of capital spending should contribute an incremental $27 million of operating income annually. Our Balance Sheet, liquidity position continues to be strong and we’re still targeting a debt-to-EBITDA ratio in the range of 3.5 to 4 times by the end of the year. I’m excited to report that Moody’s just recently raised their outlook on our public bonds from negative to stable, with both Fitch and Moody’s at a stable outlook for NuStar. We’re nearly at the finish line from getting the negative outlook removed from all three agencies. At the end of the second quarter we had $363 million available under the revolving credit facility even with higher seasonal inventories and higher crude prices. As inventories start to seasonally decline during the second half of the year our working capital requirements should decline as well, assuming the price of crude doesn’t increase significantly from here. As a result we are currently targeting our revolver availability to be in excess of $500 million by the end of the year. With improving capital markets and ample liquidity, we are well positioned to pursue additional acquisition and internal growth opportunities. The outlook for the second half of the year looks especially strong now that we’re getting an asphalt season that has been essentially deferred because of wet weather and because our storage segment should benefit from tank expansion projects completed last year. With respect to our asphalt operation, asphalt markets continue to be tight as supply remains at historically low levels and asphalt sales volumes were increasing. A number of factors continue to keep asphalt inventories at historically low levels. U.S. refiners have continued to cut crude oil runs to avoid driving already weak light product margins lower. As a result, all refinery production including asphalt is being reduced. With narrow light-heavy crude oil spreads, complex refiners are running less heavy crude and more light crude resulting in less bottom of the barrel being produced, including asphalt. Through May 2009, asphalt production was more than 5% lower versus last year and nearly 15% lower than the five year average and on top of that the continued lack of asphalt imports is also resulting in lower supply. Imports are almost 20% lower than last year and more than 26% lower than the five year average and while some coker projects have been delayed or cancelled as a result of weak margins we continue to see a significant amount of coker capacity coming online over the next few years and that should also constrain asphalt supply going forward. We have seen only one coker project cancel since our June update. This was a project that the Pasadena Refining System refinery in Texas which is one of the smallest coker projects and one that we had not categorized as a firm project anyway, in other words they were not fully committed to the project, none of the firm coker projects we are tracking have been cancelled or delayed since that time. Turning to highway funding, Congress just last week voted to stabilize the Highway Trust Fund for the 2009 fiscal year by passing legislation to transfer $7 billion into the account, which is another indication that Congress is fully committed to funding highways. With safety lose September 2009 expiration date upon us Congress is currently considering multiple options to allow the Federal Government to continue and possibly to substantially increase long term transportation infrastructure investments. We continue to see positive discussion around a Bill that would authorize significantly larger multi year program with safety Bill. This Bill is currently called the surface transportation authorization act of 2009 and would authorize $500 billion for fiscal years 2010 to 2015, including approximately $337 billion for highways. That would be quite a substantial increase over the approximately $200 billion under the current highway program. While there has been a push for swift passage of this Bill, the Obama administration of the Senate are considering a different approach that would extend current Federal Highway and Public Transportation Programs and funding levels for another 18 months. In addition the plan would infuse the highway trust fund with enough funding to cover any shortfalls during the extension period. During the time of this 18 month extension, Congress would continue to work toward passing a long term reauthorize of safety loop. Regardless of which path they choose both are good for NuStar. As Congress has shown its clear commitment to continue investing in transportation infrastructure and the trend of federal spending in this area appears to be upward. Based on our current forecast, we are still projecting the EBITDA contribution for the asphalt operations to be in the range of $100 million to $140 million for the full year of 2009. While we expect a significant contribution from our asphalt operations in the third quarter, it will likely nearly as large as the third quarter of last year, because the rapid increase in crude oil prices in last years second quarter resulted in unusually strong asphalt margins concentrated in the third quarter. So most of the contribution last year was compressed into the third quarter as asphalt and product prices ran up following the dramatic increase in crude prices in the second quarter. The fourth quarter of 2008 was then negatively impacted by the subsequent steep decline in product prices, which lagged a drop in crude oil prices and negatively impacted our gross margin. This year we expect a contribution from asphalt to be more evenly spread over the third and the fourth quarters. With respect to our results for the third quarter of 2009, we expect earnings per unit to be in the range of $1.10 to $1.50. As far as planned turnarounds scheduled for the second half of ‘09 that would impact our pipeline. We’ve known for some time of a plant wide turnaround schedule that Valero’s Three Rivers, Texas refinery and some additional maintenance work scheduled for Valero’s Ardmore, Oklahoma refinery. Looking at some expense estimates for the third quarter of ‘09, operating expenses are expected to be in the range of $130 million to $135 million. G&A expense in the range of $24 million to $25 million, depreciation and amortization around $36 million to $37 million, interest expense $19 million to $20 million, and income tax expense of $2 million to $3 million. Our guidance for reliability capital expenditures has not changed, as we continue to target around $70 million for reliability capital. As I’ve mentioned, we’re now targeting around $98 million for internal growth projects for the full year of 2009. In the second quarter of ‘09, we spent $10.5 million for reliability and $29.9 million for internal growth projects. The majority of that related to our storage business. In closing we continue to be well positioned to execute our game plan. Our solid balance sheet, investment grade rating and emphasis on financial discipline in a period of weak economic times will allow us to continue to grow all three of our segments and more importantly grow the distribution. We have a large portfolio of growth projects that we’re working through for this fall’s budget and strategic plan. We’ve made tremendous strides in making NuStar one of the best places to work, as we continue to excel in safety and environmental, take care of our employees and give back to the communities in which we operate. At this time operator, I will open it up for Q-and-A.

[Operator:]

(Operator Instructions) Your first question comes from Brian Zarahn - Barclays Capital.

[Brian Zarahn:]

Excluding the gain from the asset sale, what was the EBITDA and DCS in the quarter?

[Curt Anastasio:]

You just back out the $29 million. What was the gain Mark?

[Mark Meador:]

Same as the $18.8 million, so if you exclude it from EBITDA it was roughly $123.1 million for adjusted EBITDA and DCS was around $113 million.

[Brian Zarahn:]

So the coverage ratio…?

[Curt Anastasio:]

Coverage ratio would have been $1.8 million.

[Brian Zarahn:]

Can you give us an update on the conversations you’re having with S&P to remove the negative outlook?

[Curt Anastasio:]

Well I haven’t spoken to them in a while. They did talk to me after the first quarter and said at that time they would at that time had decided to keep the negative outlook on, but would revisit it after our second quarter results and that’s about as much as I want to say on that. I don’t want to speak for them, but we’ll be following up with them pretty soon to see where they are.

[Operator:]

Your next question comes from Ross Payne - Wells Fargo.

[Ross Payne:]

First question is, where are you on building increased flexibility for your supplies for the asphalt business, relative to your plans when you first got into the asphalt side of the business?

[Curt Anastasio:]

You’re talking about crude supply.

[Ross Payne:]

Correct.

[Curt Anastasio:]

We’re doing this in small steps, because we don’t perceive any risk to our crude supply. So, there’s no point in us going high hogged into a capital investment program to run alternative crews when we don’t need to, but we’ve done something already. We put in a crude oil blending system at one of the plants, which enables us to run an Ecuadorian feedstock earlier in the year. We have several million more of capital going in this year that will increase our crude flexibility. So, we’re doing it in small steps overtime, increasing our flexibility overtime. Rick, do you want to add anything to that?

[Rick Bluntzer:]

The only thing that I would add is that all of our capital projects that we are reviewing on the refining side also include our ability to expand and take advantage of crude flex going forward.

[Ross Payne:]

Also, from a volume standpoint, how big is the fourth quarter relative to the third or the second on a typical basis?

[Curt Anastasio:]

Well, the season tails off in the fourth, the high point is the third. It slows down in the fourth, but I got Mike Stone here, fourth compared to second, I guess it’s a question on asphalt volume.

[Mike Stone:]

Compared to the second, this year what we have planned is about the same, it’s a second quarter. I don’t think that's typical, but it will be this year because we’re saying that it’s the season is being delayed into the fourth quarter.

[Ross Payne:]

So, if things are going to be somewhat even for earnings for Q3 and Q4 for asphalt, just better margins in the fourth quarter or …?

[Curt Anastasio:]

Yes. The margins are better.

[Ross Payne:]

What drives that?

[Curt Anastasio:]

That compared to last year was really the, remember the extreme volatility we had with crude prices fell a lot. They ran-up a lot in the second quarter and then as they started to come off in the third, you remember asphalt prices tend to be sticky on the way down. So we benefited from a wide margin, the feedstock plummeted, product prices were sticky on the way down. So, you had a very generous margin in the third. Then, by the time you get to a fourth, the product price decline started accelerating. So, we gave back a lot of that margin. We don’t see that same extreme volatility this year, it’s not to say oil prices aren’t volatile. I expect them to be jumping around all over the place, where they do almost everyday, but that sort of extreme volatility is not our expectation for this year and the futures markets don’t reflect that either.

[Steve Blank:]

I mean, to put some numbers against what Curt said; last year our margin, asphalt and light products, but on the asphalt refineries, the margin was $16.44 in the third and it was negative $1.66 in the fourth, because of the collapse in pricing structure. We don’t see anything like that this year. As a matter of fact, we expect the margin to be sort of comparable in the third quarter and the fourth quarter.

[Curt Anastasio:]

It has an $18 swing in a margin that runs $8, $9 for the whole year.

[Ross Payne:]

So, margins per barrel or per ton are going to be about the same, but the tonnage will be higher in the third quarter relative to the fourth quarter, so we can expect an increased number Q3 relative to Q4 for asphalt, but more flat relative to the prior year.

[Curt Anastasio:]

Yes, due to volume, not margin volatility.

[Ross Payne:]

Also on the sale of Ardmore, have you guys put a multiple on that in terms of what you sold that for?

[Curt Anastasio:]

Yeah. It might depend I guess with the last 12 months going forward.

[Steve Blank:]

It was about 10. About 10 times EBITDA.

[Ross Payne:]

You mentioned that a lot of the sophisticated refiners are running lighter crudes. Are they simply switching off the cokers or what exactly are they doing?

[Curt Anastasio:]

Well the last time we looked at it, Mike Hoeltzel, you’re asking him to jump in, but it looks like overall cokers are running at about 70% of their capacity so that’s down, but it doesn’t mean they’re making a lot more asphalt, because their feedstocks are lighter too. Mike, do you want to comment further on the effect of the…

[Mike Hoeltzel:]

Just going over the data the first five months of the year, the crude utilization was 82.3% compared to 85.5% in 2008. Coker was down from 776.4% in 2008 to 73.6% in the first five months of this year. Now, not all refineries that make asphalt have cokers and vice versa. So the reduction in utilization had an effect in that those are generally the barrels that make incremental asphalt and we’ve seen that as utilization goes down 1%, asphalt production generally goes down 2.5% to 3%.

[Curt Anastasio:]

This is really the big point. The lower utilization rate more than offsets the effect as it relates to asphalt production of cokers running at lower rates. The lower overall refiner utilization rate more than offsets that decline in coker runs.

[Ross Payne:]

Finally, the last question I’ve got is if you can go appoint on your thoughts on why the differential between heavy and sweet has shrunk in and what might change that going forward?

[Steve Blank:]

It seems like the heavy crudes are hard to come by. We’re in the fortunate position of having a long term contract for the most heaviest most sour crude you can buy just about so we have a committed supply, but to the extent refiners are sort of depending on spot barrels trying to get the right mix of spot versus term, they’re finding those spot barrels extremely hard to come by. Mike.

[Mike Hoeltzel:]

The biggest thing is the decline of the Cantarell Field in Mexico. It’s somewhat offset by the KMZ field, but still the overall heavy crude production in Mexico is down 8% year-on-year and when you look at the amount they use internally the exports were down 14% to 15% year-on-year so that lack of primarily the Maya crudes coming into the U.S. market is what’s causing these differentials to shrink.

[Ross Payne:]

Is that turns were entered any point here in the near future?

[Mike Hoeltzel:]

No. Probably, going to get worse because the KMZ field that has been replacing the Cantarell is about to hit its peak and the other thing is we show our coker projects for the U.S. on our website but one thing that we don’t have is that the PEMEX refinery is scheduled to come on stream with a coker that’s going to reduce Maya exports by 150,000 barrels a day and we hear that’s going to be the fourth quarter of this year or the first quarter of next year. So, that’s making the heavy crude’s even tighter.

[Operator:]

Your next question comes from Michael Blum - Wells Fargo.

[Michael Blum:]

One, do you have expectation for how much debt you think you’ll be able to pay down this year now that we’re a little further along in the year?

[Steve Blank:]

Yes, the current forecast and we do a forecast once a week but the current forecast shows about $150 million of debt reduction principally coming out of quite a bit of that is just freed up working capital as you come out of the seasonal asphalt business and the rest is just typical debt pay down from excess cash flow coming from the business really.

[Michael Blum:]

Then you mentioned in the release that as you’re recontracting storage you’re seeing higher rates. Can you put a number on that? What’s the magnitude of increase you’re able to push through and can you give a sense of how much of that storage is rolling over every year or quarter?

[Curt Anastasio:]

Yes, it’s been good, but Danny Oliver will answer that.

[Danny Oliver:]

Yes, for our renewals in the storage segment during the first half of the year, we have in 2009 we’ll see an incremental $6.3 million EBITDA and I’m sorry, that’s revenue, and annualized that would be $10.4 million. Now those are just the renewals that have happened in the first half of the year, we’ve still got six months to go and expect to see more of the same type numbers going forward.

[Steve Blank:]

Your other question about frequency of rollovers as we’ve said previously more than 70% of our contracts are long term meaning more than one year and a lot of those are very long term, so if you figure something like let’s say 29% are one year or less, coming up for renewal annually those are the ones with the most frequency. Danny and his people are renewing at much higher rates now and a lot of those short terms it’s a little misleading because a lot of those customers have been with us for year’s and their habit is to sign up one year contracts at a time, so short term as you might think, but the storage business has just been really, really strong and again, it’s mainly because we have enough attractive locations. We have some very good locations and that’s the main reason. They have long term value.

[Michael Blum:]

My last question is just do you plan or do you have a plan in terms of increasing the distribution for the third quarter, the fourth quarter, or both and then the second part of that is in the past, you’ve given sort of a target growth rate for the year and I realize you haven’t done that this year, but I’m just curious if you’re thinking in the future of going back to that. Thanks.

[Curt Anastasio:]

Well, I think for this year really when we put the budget together things were so different last October so we declined to put out a growth target, which historically we’ve always done as far as I can recall so we still haven’t said anything and would prefer not to say anything yet and not comment on whether we plan one increase or two increases this year. It’s really a Board matter and we’re increasingly confident that we can do one and it’s appropriate to do one, but would rather wait until we announce the third quarter results.

[Operator:]

Your next question comes from John Tysseland - Citi.

[John Tysseland:]

Can you give us a sense of what you’re seeing in the asphalt market in the third quarter? I guess some of your assumptions are for your guidance you put out today? I guess when I talk about that you can use like to second quarter as a base in terms of margins and volumes and kind of what you’ve seen in July versus June?

[Curt Anastasio:]

I’ll pass that over to Mike Stone, who is sitting here. Though, how you see the market shaping up in the third quarter? What we said already is that sales volumes are going to be significantly higher in the third compared to the second. We’ll going to have a more even profit distribution between third and fourth quarter compared to last year because of the margin story we just told you. Mike, do you want to add more color on that?

[Mike Stone:]

That’s exactly right. What we said earlier is that a lot of the season has been delayed this year because of the rain. The rain does not destroy demand. It just simply delays it and as soon as the weather breaks on the East Coast, we’ll see those sales materialize. Also, I don’t think we have in our forecast any information on the stimulus money and that’s also expected to come in some time late in the third quarter during the fourth quarter.

[Mark Meador:]

Very little of the stimulus money is actually spent, it’s all been obligated and committed to projects that for the actual spending is really only now just getting to started.

[Curt Anastasio:]

Even though the states were required to obligate or release funding for 50% of the projects by the end of June through mid July only 1.5% had been spent and it’s quite a bit by states in which we market. For example, Oklahoma had disbursed 8.7% of their money through mid August and our sales were 139% of plan at our Tennessee terminal. Contrasting that on the Northeast, that supplied by our Paulsboro refinery, those states only released 1.3% of their funding or disbursed 1.3% and our sales there were around 70%. So we expect these states to start ramping up on their spending, we should see it in our asphalt sales.

[Mike Stone:]

Just to give you more numbers, again we’re forecasting about a 40% increase in sales in the third quarter versus second quarter just from the delay, about the same margins.

[John Tysseland:]

When you look at the amount of spending that the states have actually gone through with. Is that 1.3% for some of the East Coast markets? What do you actually expect them to be able to spend? Is that something they did not going to obviously spend 100% it doesn’t seem like from 1.3%? Is there a range that you do expecting to spend? [Multiple Speaker]

[Curt Anastasio:]

Yes, they released half of the contracts already. So we expect it to start ramping up, but the whole $27.5 million in the base program, we expect to be spent over about a two year period.

[Mike Stone:]

Yes, here we see the big spending going on in 2010.

[Curt Anastasio:]

This is really not a surprise or new to us. I’ve been trying to say this right from the beginning, when people want to ask me about the federal spending. We’ll start seeing some of it second half of the year, but more so in 2010, the impact on our asphalt demand.

[John Tysseland:]

Then if you could give me a sense of where you seen the asphalt market in July relative to June, has it been a steady increase or is there weeks? So you just kind of see a steady steer step up?

[Mike Stone:]

As far as volumes concerned?

[John Tysseland:]

Yes, volumes activity spending, all of it.

[Mike Stone:]

The volume is the big indicator. It’s just a gradual upwards since the last two weeks of June.

[Curt Anastasio:]

On the federal spending if that’s what you’re asking, I mean spending of federal money, I think now, Mike probably month of August, you’ll going to see a big jump. It really was a minor factor in July, but you really start to see it ramping up in August, but again I think it’s going to a bigger impact in 2010 the way it’s shaping up.

[Operator:]

Your next question comes from Andrew Gundlach - ASB.

[Andrew Gundlach:]

Just in relation to the last question, when you say that your Q3 sales will be 40% higher at the same margins referring to asphalt sales, is that correct or old of the yield?

[Curt Anastasio:]

It’s actually the asphalt rack sales.

[Andrew Gundlach:]

Of the production in Q2, how much was sold and how much was inventoried for Q3 and Q4 sales?

[Mike Stone:]

We sold a lot; it’s not all through a rack, [Multiple Speaker].

[Curt Anastasio:]

When you say inventory, I means a lot of it wasn’t inventory for long. It’s going to be sold with the next couple of months.

[Mike Stone:]

We actually peaked in our inventories at the end of June and we’ve kind of held them steady to, we are drawing them just very slightly, right now.

[Curt Anastasio:]

We’re slightly drawing. So, yes we do peak in mid June and we are drawing down inventories in July with production at full capacity.

[Steve Blank:]

But, if you’re asking about rebuilding inventory, we’re right on target for where we want our year end inventory to be. We are drawing it now.

[Mike Stone:]

We’ve drawn about 200,000 barrels in the last couple of weeks.

[Andrew Gundlach:]

Curt, when do you expect the mark-to-market loss to show up as profit from the physical sales?

[Curt Anastasio:]

We’re expecting all of that this winter. We’ve got an exit strategy on that, where we’re going to deliver almost all of that product to the NYMEX and that will be spread between probably December, January and February.

[Steve Blank:]

Fourth and first quarter.

[Andrew Gundlach:]

It will affect a little bit the fourth quarter and mostly the first quarter. Is that the way to think about it?

[Curt Anastasio:]

Yes.

[Andrew Gundlach:]

In the meantime those hedges can move around from now until the end of the year; is that right?

[Curt Anastasio:]

Yes. They got to be mark-to-market.

[Operator:]

Your next question comes from Darren Horowitz - Raymond James.

[Darren Horowitz:]

Curt just a quick question for you, kind of putting the pieces of the puzzle together based on what you said. If we’re looking at the third quarter capacity utilization at Savannah and Paulsboro respectively; is it fair to assume the Savannah probably should be running in terms of total yield somewhere around 90%, 95% and closer to 95% at Paulsboro is that right?

[Curt Anastasio:]

I don’t think that’s high, but we have the utilization rates.

[Steve Blank:]

Utilization, I think it’s capped down at right about 85% to 87%.

[Operator:]

Your next question comes from [Jeff Dariac - George Weiss Association].

[Jeff Dariac:]

On Valero and Tesoro’s calls, they mentioned that they are now bidding on some Venezuelan crudes. So I’m just wondering, how your contracts are structured to kind of insulate you guys from the increased competitive pressures to source those crudes?

[Curt Anastasio:]

We have a price protection formula in our contract. Mike [Inaudible] so maybe he wants to address it.

[Mike Stone:]

Yes, we have the first call on an annual average of 50,000 barrels a day at the Boscan production and 25,000 barrels a day at the Bachaquero production. Like Curt said, we’ve got a price protection formula on that as well.

[Jeff Dariac:]

How does the Valero mentioned, they were about 85% utilization and they saw 78% for the second half of the year? What’s your anticipation for pipeline volumes?

[Curt Anastasio:]

I think we’ve factored in kind of the worse case on pipeline volumes. The story we’ve been telling from the beginning is that we’re looking at a situation on our pipeline segment of lower volume, but the same is slightly higher profit by the end of the year versus last year. For the reasons we’ve given, lower OpEx, tariff adjustment, all the things that we’ve told you about and it really is, you take a step back, what we’ve always said about the pipeline segment is that it’s a very stable segment. No matter what the oil price is, no matter the economic conditions, you get a lot of stability out of that segment, but not a whole lot of growth. The growth in our company has been in the storage segment and in the asphalt and fuel segment and that’s how we’ve always portrayed ourselves. So, you’re getting stability there and growth in the other segments. I tell you in this market, where I guess its the worst economy now they’re saying since World War II. It really has proven out again in space, the high degree of stability again in the transportation segment and I just want to comment further on volumes?

[Steve Blank:]

Well I was going to say in the first half, we have five planned turnarounds and three unplanned events all of those eight fairly significant. In the second quarter we have modeled our volumes based on what happened, I’m sorry in the second half we’ve modeled our volumes based on what we saw in the first half. Although in the second half we only have two events on the schedule, so it looks like the turnaround activity is going to be much lighter in the second half, but we’ve still based our volumes based on what we saw on the first half.

[Curt Anastasio:]

The idea besides the growth in pipeline, but we’re able to do things there like the El Dorado expansion like we did on the Southern end of the East Pipeline system. So those opportunities will come along, but it’s not the main driver of our growth. It’s more a stable asset.

[Operator:]

Your final question comes from [LWK - K3 Management Company].

[LWK:]

In case the weather and especially in the Northeast really is not cooperative for using asphalt. Are the federal projects or the federal rather programs going to be there for funding for road repair and laying new roads next year especially or in case it really gets bad is it going to be sort of a last season. The next part of the question would be, is this even a realistic thought process?

[Curt Anastasio:]

The federal program is going to be there next year in answer to the first part of the question but Mike. First of all it’s going to stop raining. I got it from a reliable source so you don’t have to worry about it.

[Mike Hoeltzel:]

Even if it doesn’t whatever is delayed by rain can be delayed in the next year so it’s not like if it doesn’t happen this year it doesn’t happen. The projects have already been left and the money is made available and just a matter of the weather clearing for them to do the work. It will just build up as a backlog is what the contractors call it.

[Steve Blank:]

Plus we’ve implemented the war makes technology, which should allow us to sell a little deeper into the winter season than we have before.

[LWK:]

All the funding will still be there?

[Curt Anastasio:]

Absolutely, and that’s part of what I was trying to cover in my remarks is now we’ve got greater assurance in that regard. They beefed up the federal highway trust fund recently and they put in another $7 billion. They’ve got pending legislation to greatly enhance in going forward. We spend a lot of time talking the politicians. There is a general recognize, you might have further road repair maintenance for a while and we are way behind where we should be. Every study shows that even the studies they Commission on the subject shows that, so this is boats too. This is an important vote getting activity so people will put up with it for a while, but not forever. So it’s not a matter of if but when.

[Operator:]

There are no further questions in the queue. You may proceed with your presentation or any closing remarks.

[Curt Anastasio:]

If you have any closing or further questions please feel free to contact us at NuStar. Thank you for joining us today.

[Operator:]

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