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Edited Transcript of NS earnings conference call or presentation 24-Apr-17 3:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 NuStar Energy LP and NuStar GP Holdings LLC Earnings Call

SAN ANTONIO Aug 12, 2017 (Thomson StreetEvents) -- Edited Transcript of NuStar Energy LP earnings conference call or presentation Monday, April 24, 2017 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bradley C. Barron

NuStar Energy L.P. - CEO of NuStar GP LLC, President of NuStar GP LLC and Director of NuStar GP LLC

* Chris Russell

NuStar Energy L.P. - VP of IR for NuStar GP LLC and Treasurer of IR for NuStar GP LLC

* Thomas R. Shoaf

NuStar Energy L.P. - CFO of Nustar Gp LLC and EVP of Nustar GP LLC

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Conference Call Participants

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* Andrew M. Weisel

Macquarie Research - Analyst

* Brian Joshua Zarahn

Mizuho Securities USA Inc., Research Division - MD and Senior Analyst

* Gabriel Philip Moreen

BofA Merrill Lynch, Research Division - MD

* John David Edwards

Credit Suisse AG, Research Division - Director in United States Equities Research

* R. Christopher Errico

* Robert Francis Balsamo

FBR Capital Markets & Co., Research Division - SVP and Senior Research Analyst

* Ryan Michael Levine

Citigroup Inc, Research Division - Equity Analyst

* Selman Akyol

Stifel, Nicolaus & Company, Incorporated, Research Division - VP

* Theresa Chen

Barclays PLC, Research Division - Research Analyst

* Sunil K. Sibal

Seaport Global Securities LLC, Research Division - MD

* William Paul Kawas

JP Morgan Chase & Co, Research Division - Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the NuStar Energy L.P. and NuStar GP Holdings, LLC First Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Chris Russell. Sir, you may begin.

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Chris Russell, NuStar Energy L.P. - VP of IR for NuStar GP LLC and Treasurer of IR for NuStar GP LLC [2]

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Thank you, Crystal. Good morning, everyone, and welcome to today's call. On the call today are Brad Barron, NuStar Energy L.P. and NuStar GP Holdings, LLC's President and CEO; and Tom Shoaf, Executive Vice President and CFO, along with other members of our management team.

Before we get started, we'd like to remind you that during the course of this call, NuStar management will make statements about our current views concerning the future performance of NuStar that are forward-looking statements. These statements are subject to the various risks, uncertainties and assumptions described in our filings with the Securities and Exchange Commission. Actual results may differ materially from those described in the forward-looking statements.

During the course of this call, we will also make reference to certain non-GAAP financial measures. These non-GAAP financial measures should not be considered as alternatives to GAAP measures. Reconciliations of certain of these non-GAAP financial measures to U.S. GAAP may be found in our earnings press release with additional reconciliations located on the Financials page of the Investors sections of our websites at nustarenergy.com and nustargpholdings.com.

Now I'm going to turn the call over to Brad Barron.

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Bradley C. Barron, NuStar Energy L.P. - CEO of NuStar GP LLC, President of NuStar GP LLC and Director of NuStar GP LLC [3]

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Good morning. Thanks for joining us today. Before turning to our first quarter results, I'm going to take a few moments to provide an overview of the $1.475 billion acquisition we announced last week to those who were unable to tune in our recent conference call. First, in context around what makes the Navigator system a great growth platform and a strategic fit for NuStar. For those of you who've been following us, it's been no secret that we've been actually searching for a way to break into the Permian Basin, which currently represents approximately 40% of all U.S. onshore rig activity. In fact, over the past 18 months or so, we've been actively looking for opportunities in the Permian as assets came up for sale. One reason or another, nothing met our acquisition criteria. Some had components outside our areas of expertise like natural gas processing. Others had elements of risk like first purchasing that we don't feel fit to our model in the current environment.

In contrast, we recognized right away that the Navigator system is a different story from the other asset packages we've reviewed in the Permian. Navigator's assets are in the core of the core of the country's most prolific basin. Beyond that, these assets are well built and backed by solid fee-based customer contracts, with a business model and approach that falls right in our wheelhouse. Now you have a bit of background, let me dive right into the details on this truly world-class set of Permian assets. The Navigator system is located in the 5 most active counties in the Midland basin, one of the most economic, resilient and fastest-growing basins in the United States. These counties have some of the lowest breakeven values of any counties in the country.

The system has a fully integrated crude platform, with over 500 miles of pipeline and 412,000 barrels per day of capacity and 1 million barrels of storage. The system also has pipeline gathering of over 500,000 dedicated acres and an additional 500,000 of undedicated acreage opportunities adjacent to the system. In addition, there's also 4.7 million acres of AMI, or areas of mutual interest, for certain producers. If you're unfamiliar with that term, AMI simply refers to an agreement with certain producers whereby any acreage that is subsequently acquired by that producer within the geographic boundaries of the AMI that haven't already been dedicated to other systems would automatically become dedicated to our system.

System also has attractive downstream market delivery access to the Midland, Colorado City and Big Spring. The mainline pipeline system is structured with long-term fixed fee contracts that recently have been increased to 92,000 barrels per day of ship-or-pay volume commitments. These contracts have a nearly 7-year average contract life. The 9 customers on this part of the system are super majors, majors or large refiners, and about 70% are rated investment grade. The pipeline gathering contract portfolio has an average life of over 10 years, with a diverse group of 16 customers, of which about half are publicly held companies and about 70 are pure-play Permian producers. Of the 1 million barrels of storage in the system, approximately 440,000 barrels are available for leasing to third parties while the remainder of the tanks are used to optimize the operations of the system. All 440,000 barrels of third-party storage is currently contracted with 4 credit-worthy customers with an average contract life of nearly 7 years. We expect existing customers to drive rapid volume growth in the system later this year, in 2018 and beyond. We also expect further upside potential as the industry continues to improve its technology and drilling results.

Although we also plan to expand the system organically, we're currently projecting only modest growth CapEx to increase the capacity of the system over the next 5 years. In addition, we can pursue bolt-on future acquisitions and possibly develop larger takeaway capacity projects, including a solution that could link the Navigator system all the way to our docks in Corpus Christi, Texas, by way of our existing Eagle Ford operations.

To briefly summarize, this acquisition provides us a strong growth platform and coupled with our Eagle Ford system will solidify our presence in 2 of the most prolific basins in the United States. Furthermore, the business model is right down our fairway and complements our existing portfolio. Given these assets are located in the core of the core of the Midland basin, there is no first purchasing or gas processing exposure. And that these assets are diversified with a high-quality producer portfolio and attractive, long-term fee-based contracts, this acquisition couldn't be a better fit for NuStar.

To finance this acquisition, we've already closed on upsized equity offering of 14,375,000 common units, with gross proceeds of approximately $665 million. Last Thursday, we also launched a $550 million bond offering of 10-year 5.625% senior notes, which was oversubscribed. The proceeds from these offerings will be used to partially fund the purchase price for this acquisition when we plan to finance the remainder of the transaction with one more capital market transaction.

Our general partner, NuStar GP Holdings, LLC, has demonstrated its strong support for the transaction by agreeing to forgo the incentive distribution rights, or IDRs, to which it would otherwise be entitled or any NuStar Energy L.P. common equity that we issue from the date we signed the acquisition agreement and through the 10 quarters thereafter beginning in the second quarter. The waiver will be capped at $22 million.

Turning to our first quarter, this morning, we released our results and we had another strong quarter driven by solid performance by our base business, improved results in our fuels marketing segment and a decrease in overall operating expenses.

Absent the impact of the equity offering we closed last week, we would've covered our distribution by 1.06x, which would have marked our 12th consecutive quarter of distribution coverage. The difference between this coverage ratio and the 0.87x coverage ratio reported this morning is due solely to the fact that the equity we issued last week to finance the Navigator acquisition will be outstanding as of the ex-dividend date for NuStar Energy's May 12 first quarter distribution.

With that, I'm going to turn the call over to Tom Shoaf, NuStar's Executive Vice President and CFO, to provide you with some additional detail on our first quarter results and 2017 projections. Tom?

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Thomas R. Shoaf, NuStar Energy L.P. - CFO of Nustar Gp LLC and EVP of Nustar GP LLC [4]

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Thanks, Brad, and good morning, everyone. As Brad mentioned earlier, we had another strong quarter. Our first quarter results were driven by high renewal rates at several of our terminal facilities, incremental throughput fees associated with our Martin terminal acquisition and an increase in ammonia throughput volumes due to a warmer and earlier spring season. In addition, we experienced solid bunkering margins and a decrease in overall operating expenses due to the successful efficiency measures that were executed in many of our operating regions.

For the first quarter of 2017, we reported EBITDA of $154 million, net income of $0.49 per unit, and DCF available to common limited partners of $89 million, which resulted in a distribution coverage ratio of 0.87x. Due to the timing of our recent equity offering of approximately 14 million units, which closed on April 18, prior to the first quarter's distribution ex-dividend rate, these new units will be paid the first quarter distribution on May 12. Absent the impact of these newly issued units on the first quarter distribution, our net income per unit would have been $0.51 per unit and DCF available to common limited partners would have been 91 million, which would have generated a 1.06x distribution cover and marked our 12th consecutive quarter above 1x.

During the segment -- turning to the segment results. First quarter 2017 EBITDA in our pipeline segment was $88 million, $2 million higher than the first quarter of 2016. Throughputs in our crude oil pipeline assets were comparable to our throughputs in our first quarter 2016. We continue to experience volumes below our minimum volume commitments on the South Texas Crude Oil Pipeline System that serves our Eagle Ford customers, but we are optimistic that volumes will begin to bounce back later this year due to increased drilling activity in the area.

Throughputs on our refined product pipelines were also comparable to the first quarter of 2016. However, our revenues associated with these lines was higher in the first quarter 2017 as we experienced a significant uptick in ammonia volumes due to a warmer and earlier spring season this year in the Mid-Continent. First quarter 2017 EBITDA in our storage segment was $85 million, down $1 million compared to the first quarter of 2016. Higher renewal storage rates, increased fees related to our recent Martin acquisition and lower operating expenses were offset by weaker throughput revenues in a few of our international terminals.

I want to remind you that starting this year on January 1, our agreement to provide refinery storage at Corpus Christi, Texas City and Benicia changed from a throughput arrangement to a lease, which meant that the associated revenue is now characterized as storage terminal revenue in our financial statement. So while reported first quarter storage throughput volumes were down 62% or 513,000 barrels per day compared to the first quarter of 2016, that decline represents an apples-to-oranges comparison. When the impact of converting to the refinery storage leases excluded, that decline drops to about 6,000 barrels per day or 6% attributable in large part to a turnaround at one refinery.

First quarter 2017 EBITDA in our Fuels Marketing segment was $5 million, $6 million higher than the first quarter of 2016, mainly due to improve margins and decreased operational expenses and fuels trading business. On March 31, debt balance was $3 billion while our debt-to-EBITDA ratio remained at 4.3x. During the quarter, we received $110 million in cash from Axion Specialty Products for a settlement of the note receivable, and we have been relieved of all credit support obligations related to our former asphalt business.

This morning, NuStar Energy announced a 2016 Series A preferred unit distribution of $0.53125 per unit which will be paid on June 15 and a first quarter common unit distribution of $1.095 per unit, which will be paid on May 12. NuStar GP Holdings also announced a first quarter distribution of $0.545 per unit, which we pay on May 16.

Now let me spend a few minutes talking about our projections for 2017. Due to the fact that we have not closed on the Navigator acquisition, we have not included the benefit of Navigator in our 2017 guidance. Without layering in the EBITDA that we anticipate from Navigator acquisition, we expect NuStar 2017 total EBITDA to be $600 million to $650 million. This EBITDA estimate assumes near-minimum take-or-pay contract volumes for our South Texas Crude Oil Pipeline System for the entire year, and $100 million to $110 million of general and administrative expenses in 2017 that are not allocated to our segment EBITDA's results. Additionally, our 2017 guidance includes incremental EBITDA from strategic capital projects completed in 2016 and 2017.

The benefit of higher renewal rates recently negotiated some of our terminals combined with additional EBITDA from the recently acquired Corpus Christi terminal assets from Martin Midstream. Our 2017 internal growth spending is estimated to be in the range of $380 million to $420 million. And we expect our 2017 reliability spending to continue to be in the range of $35 million to $55 million. Once we have closed on the Navigator acquisition, we plan to provide further economic details on the acquisition and its impact on our full year 2017 EBITDA projections and 2017 capital spending projections.

However, based on our 2017 pro forma projections, including Navigator, the large amount of equity issued and professional fees incurred in the second quarter to complete the Navigator acquisition, we expect these costs to have a disproportionate impact to the second quarter and our distribution coverage to drop below a 1x coverage for the year.

Also, if not for the Navigator acquisition and the associated equity issuance and financing costs, we would have expected to cover our distribution for the full year based on the continued solid performance of our base business. As we move into 2018 and begin to realize the benefits of increasing throughputs on the Navigator system, we expect these assets to generate an EBITDA multiple in the low teens for 2018, and in the next couple of years, we expect the Navigator assets to generate EBITDA at the multiple in the high single digits.

And with the anticipated ramp-up in Navigator EBITDA, our current forecast indicates that we would return to a distribution coverage as early as the second half of 2018. And most importantly, we believe this is a transformative transaction that will provide a substantial growth platform and better position us for distribution growth in the future.

And with that, I will turn it back -- the call back over to Brad for any closing remarks.

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Bradley C. Barron, NuStar Energy L.P. - CEO of NuStar GP LLC, President of NuStar GP LLC and Director of NuStar GP LLC [5]

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Thank you, Tom. Like Tom, I'm very pleased with our strong first quarter results. I'm extremely proud that this would have marked our 12th consecutive quarter of distribution coverage, excluding the impact of our recent equity offering. We now have a track record of 3 straight years of distribution coverage and a healthy balance sheet poised for growth. For the last 3 years, we've been singularly focused on growing our base pipeline and storage businesses, while at the same time derisking our balance sheet, storing our distribution coverage ratio and exiting the margin-based businesses. I'm proud to report that we've done all those things and our results speak for themselves. We have returned to growth.

We believe that the Navigator acquisition is a platform that will position us to continue that growth. This is a big acquisition for us and we believe these are the right assets and the right place at the right time. I'm sure you can tell that we're all very excited about this acquisition and NuStar's future, and we look forward to closing and welcoming Navigator employees and customers to the NuStar family. One additional note, as Tom said, we're still in the midst of closing the Navigator acquisition. We will not be able to provide any additional projections beyond what's been discussed this morning. At this time, I'll open it up for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Gabe Moreen from Bank of America.

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Gabriel Philip Moreen, BofA Merrill Lynch, Research Division - MD [2]

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Just on the growth CapEx guidance, it looks like it's changed a little bit x Navigator. Can you just talk a little bit about what may have fallen out there or gotten delayed.

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Thomas R. Shoaf, NuStar Energy L.P. - CFO of Nustar Gp LLC and EVP of Nustar GP LLC [3]

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Yes, Gabe. Yes, that's going to be predominantly the Pemex project and delays that we've been experiencing there, so. And as we told you guys, the thing -- we haven't gotten it signed up yet and as that thing gets delayed, it just keeps pushing CapEx from '17 now to '18, so that's predominantly what that was.

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Gabriel Philip Moreen, BofA Merrill Lynch, Research Division - MD [4]

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Got it. That's what I figured. And then in terms of kind of, I guess, the Navigator contractual arrangement, I think you mentioned that the take-or-pay commitment had shifted of late. Is that something where you're looking for this to have more take-or-pay commitments over time? Or are you just kind of going to assume the volume ramp and that's going to be the primary contributor going forward?

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Thomas R. Shoaf, NuStar Energy L.P. - CFO of Nustar Gp LLC and EVP of Nustar GP LLC [5]

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We like MVCs, but I don't know that a lot of the customers are focused on moving that way. We're happy to live with the acreage dedications, but if a customer wants the MVCs, we're happy to do that as well.

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Gabriel Philip Moreen, BofA Merrill Lynch, Research Division - MD [6]

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Got it, okay. And then last one for me just in terms of understanding the multiples around this, just to be clear, the 2018 multiple for Navigator cited of low teens, that is for the whole year? That's not an exit rate? Is that right?

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Bradley C. Barron, NuStar Energy L.P. - CEO of NuStar GP LLC, President of NuStar GP LLC and Director of NuStar GP LLC [7]

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Probably closer to an exit rate than it is for the whole year. By the end of that time, by the time you factor in 2018 EBITDA, all that, then you get to an exit multiple of that.

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Operator [8]

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Our next question comes from Brian Zarahn from Mizuho.

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Brian Joshua Zarahn, Mizuho Securities USA Inc., Research Division - MD and Senior Analyst [9]

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Just looking at the first quarter, the crude pipeline volumes down slightly year-over-year, but looking sequentially, they were up. Was that just more refinery downtime in the fourth or anything else that you want to highlight?

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Thomas R. Shoaf, NuStar Energy L.P. - CFO of Nustar Gp LLC and EVP of Nustar GP LLC [10]

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Refinery downtime.

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Brian Joshua Zarahn, Mizuho Securities USA Inc., Research Division - MD and Senior Analyst [11]

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Okay. And then just circling back to the take-or-pay, just does that increase from 74,000 barrels a day to 92,000 barrels a day?

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Bradley C. Barron, NuStar Energy L.P. - CEO of NuStar GP LLC, President of NuStar GP LLC and Director of NuStar GP LLC [12]

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Correct, correct.

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Thomas R. Shoaf, NuStar Energy L.P. - CFO of Nustar Gp LLC and EVP of Nustar GP LLC [13]

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Yes.

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Brian Joshua Zarahn, Mizuho Securities USA Inc., Research Division - MD and Senior Analyst [14]

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And does that take effect this year or next year?

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Bradley C. Barron, NuStar Energy L.P. - CEO of NuStar GP LLC, President of NuStar GP LLC and Director of NuStar GP LLC [15]

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Yes, it will ramp up this year.

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Brian Joshua Zarahn, Mizuho Securities USA Inc., Research Division - MD and Senior Analyst [16]

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So would you expect that 92,000 to be the end of this year or sometime in '18?

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Bradley C. Barron, NuStar Energy L.P. - CEO of NuStar GP LLC, President of NuStar GP LLC and Director of NuStar GP LLC [17]

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Probably closer to '18.

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Brian Joshua Zarahn, Mizuho Securities USA Inc., Research Division - MD and Senior Analyst [18]

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And as you think about potential bolt-on opportunities, where do you think discussions are currently to potentially connect your Navigator to your Eagle Ford assets?

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Bradley C. Barron, NuStar Energy L.P. - CEO of NuStar GP LLC, President of NuStar GP LLC and Director of NuStar GP LLC [19]

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We're talking to several customers in the Permian basin who are interested in that project and have been for some time. So we haven't launched an open season, and I don't expect that we will until we have a little more closure on those conversations.

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Brian Joshua Zarahn, Mizuho Securities USA Inc., Research Division - MD and Senior Analyst [20]

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And then understanding the volume ramp for Navigator, how do you assess your leverage currently and going forward?

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Thomas R. Shoaf, NuStar Energy L.P. - CFO of Nustar Gp LLC and EVP of Nustar GP LLC [21]

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Well, what we've been telling everybody, I mean, as we announced on the call today, currently we're at about a 4.3x leverage ratio for our bank covenant. And obviously, with the ramp up in EBITDA, the amount of financing we've put out there and all that, we would expect that to go up in 2017. And then our goal is to get that back down to its current level hopefully by mid-'18.

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Operator [22]

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Our next question comes from Theresa Chen from Barclays.

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Theresa Chen, Barclays PLC, Research Division - Research Analyst [23]

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Following up on your comment about getting more closure on the conversations with the shippers to announce an open season, what exactly does that mean? What has to happen for you to feel more confident about such projects?

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Thomas R. Shoaf, NuStar Energy L.P. - CFO of Nustar Gp LLC and EVP of Nustar GP LLC [24]

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We want to know that the customers are there to do the project as opposed to launching an open season as a fishing expedition or interest.

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Theresa Chen, Barclays PLC, Research Division - Research Analyst [25]

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Okay, got it. And would it makes sense to partner with somebody for this project?

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Bradley C. Barron, NuStar Energy L.P. - CEO of NuStar GP LLC, President of NuStar GP LLC and Director of NuStar GP LLC [26]

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It might, and we're open to that.

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Theresa Chen, Barclays PLC, Research Division - Research Analyst [27]

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Okay. And given plans of recent announcement about the basin twin, does this change competitive dynamics and signing up shippers to go to Corpus? Can you talk about what the puts and takes to why a shipper would want to take additional barrels to Corpus versus additional barrels to the market outlets that a basin twin would provide?

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Bradley C. Barron, NuStar Energy L.P. - CEO of NuStar GP LLC, President of NuStar GP LLC and Director of NuStar GP LLC [28]

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Well, if you want to get to the water, people want to go to Corpus, and they prefer Corpus over Houston, and certainly you can't get to the water through fishing or you wouldn't expect to go that route just to go all the way to Houston through Cushing. So most of the interest that we have are people that want the access to water.

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Theresa Chen, Barclays PLC, Research Division - Research Analyst [29]

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Okay. And then just given your focus on adding or maintaining stability and ratability in your business and cash flows, I'm guessing that would preclude bring on a marketing business. And if so, how do you plan to compete for barrels versus other players that are willing to bring that volatility to their cash flows for this project?

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Thomas R. Shoaf, NuStar Energy L.P. - CFO of Nustar Gp LLC and EVP of Nustar GP LLC [30]

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Much like we do in the Eagle Ford, we let our customers do that, the gathering and the marketing. And we don't compete with them in that regard. And I think we'll continue to do what we do in the Eagle Ford and the Permian.

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Theresa Chen, Barclays PLC, Research Division - Research Analyst [31]

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Okay. And the guidance of low-teens exit rate for the Navigator acquisition, does that include incremental CapEx that needs to be spent?

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Thomas R. Shoaf, NuStar Energy L.P. - CFO of Nustar Gp LLC and EVP of Nustar GP LLC [32]

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Yes, it does.

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Operator [33]

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Our next question comes from John Edwards from Credit Suisse.

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John David Edwards, Credit Suisse AG, Research Division - Director in United States Equities Research [34]

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Yes, just following up. In terms of the incremental CapEx, I think you used the word modest CapEx. I mean, can you give us a little more color on the definition of modest CapEx?

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Thomas R. Shoaf, NuStar Energy L.P. - CFO of Nustar Gp LLC and EVP of Nustar GP LLC [35]

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I mean, I think what we have been telling people, it's about a couple of hundred million over about a 5-year period.

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John David Edwards, Credit Suisse AG, Research Division - Director in United States Equities Research [36]

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Okay, that's a couple of hundred million in aggregate?

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Thomas R. Shoaf, NuStar Energy L.P. - CFO of Nustar Gp LLC and EVP of Nustar GP LLC [37]

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In aggregate over the 5 years, correct.

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John David Edwards, Credit Suisse AG, Research Division - Director in United States Equities Research [38]

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Okay, okay. And then in terms of Navigator, in terms of getting to the multiples you're indicating, when do you expect to fill up the Navigator system volumetrically?

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Bradley C. Barron, NuStar Energy L.P. - CEO of NuStar GP LLC, President of NuStar GP LLC and Director of NuStar GP LLC [39]

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Well, some of that $200 million is being spent to avoid that, right? You can continue to expand and loop lines as you increase volumes on certain segments of that system.

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John David Edwards, Credit Suisse AG, Research Division - Director in United States Equities Research [40]

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Okay, let me put it another way. With regard to the current capacity, when do you think you would reach that level? I think it's 455,000 barrels or so a day, if memory serves, but correct me if that's wrong.

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Bradley C. Barron, NuStar Energy L.P. - CEO of NuStar GP LLC, President of NuStar GP LLC and Director of NuStar GP LLC [41]

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Well, we've got -- I mean, in about 3 years, I know we've got some plans to, based on these volumes, to loop some of the lines in another year or 2.

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Thomas R. Shoaf, NuStar Energy L.P. - CFO of Nustar Gp LLC and EVP of Nustar GP LLC [42]

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Yes, we would expect to reach those volumes probably around sometime in 2019 to get that -- I think it was 412,000 barrels per day, right?

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John David Edwards, Credit Suisse AG, Research Division - Director in United States Equities Research [43]

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Yes, okay, all right. So okay, okay, because I think we were modeling sometime in the first half, is what we thought you would get to. Okay, and then in terms of the CapEx, so just if you could help us out in terms of the backlog of CapEx beyond the spending this year, if you could help us out and maybe what that is looking like currently?

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Bradley C. Barron, NuStar Energy L.P. - CEO of NuStar GP LLC, President of NuStar GP LLC and Director of NuStar GP LLC [44]

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You mean like, okay, so you're not talking about the spending we have for 2017. You're talking about the...

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John David Edwards, Credit Suisse AG, Research Division - Director in United States Equities Research [45]

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No, no, and I'm talking beyond that, so over the next few years. I mean, is what -- just trying to get an idea of what kind of different level of projects you are considering at this point.

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Thomas R. Shoaf, NuStar Energy L.P. - CFO of Nustar Gp LLC and EVP of Nustar GP LLC [46]

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I would say, you should look at the kind of the run rate that we already announced. So I would target in the $400 million range.

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John David Edwards, Credit Suisse AG, Research Division - Director in United States Equities Research [47]

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Per year? Okay?

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Bradley C. Barron, NuStar Energy L.P. - CEO of NuStar GP LLC, President of NuStar GP LLC and Director of NuStar GP LLC [48]

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Yes.

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Operator [49]

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Our next question comes from Robert Balsamo from FBR.

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Robert Francis Balsamo, FBR Capital Markets & Co., Research Division - SVP and Senior Research Analyst [50]

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I was wondering if you can just -- you gave some good color on the storage business. But can you just go back, there's a few details you gave there pretty quickly, going back on the changes in reporting and how those volumes over 60% is not apples-to-apples and how that's being reported moving forward?

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Thomas R. Shoaf, NuStar Energy L.P. - CFO of Nustar Gp LLC and EVP of Nustar GP LLC [51]

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Yes, those converted from throughput agreements to lease arrangements and so we've done that in the past with some of our agreements. And when you do that, obviously, your throughputs are going to decline but it's not an apples-and-apples comparison because you're no longer reporting those as throughput volumes; you're reporting them as leased volumes. So when you look at revenues on a total basis, you get there. But when you're trying to break it apart, you're really comparing 2 different things, so...

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Robert Francis Balsamo, FBR Capital Markets & Co., Research Division - SVP and Senior Research Analyst [52]

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Okay, so then that adjustment moving forward be comparable to the next few quarters, I guess?

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Bradley C. Barron, NuStar Energy L.P. - CEO of NuStar GP LLC, President of NuStar GP LLC and Director of NuStar GP LLC [53]

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Right, right, exactly.

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Robert Francis Balsamo, FBR Capital Markets & Co., Research Division - SVP and Senior Research Analyst [54]

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Okay. And then you also made a comment on some adjustments especially with the Navigator. You said adjusting for, I think, fees, expenses related to the acquisition that the full year distribution would be around 1x. Were those adjustments you mentioned? Is that just for the (inaudible) and equity issuance, or is that...

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Bradley C. Barron, NuStar Energy L.P. - CEO of NuStar GP LLC, President of NuStar GP LLC and Director of NuStar GP LLC [55]

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Well, the first quarter, the thing that drove us below 1 is the fact that we issued equity after the beginning of the quarter but before the record date of the second quarter. So that's what's causing that in the first quarter. And going forward, you have the financing costs for the acquisition plus expenses, in particular in the second quarter, related to the actual acquisition itself.

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Robert Francis Balsamo, FBR Capital Markets & Co., Research Division - SVP and Senior Research Analyst [56]

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Adjusting those 2 items out, the full year '17 would've been closer to 1x?

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Bradley C. Barron, NuStar Energy L.P. - CEO of NuStar GP LLC, President of NuStar GP LLC and Director of NuStar GP LLC [57]

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That's correct.

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Robert Francis Balsamo, FBR Capital Markets & Co., Research Division - SVP and Senior Research Analyst [58]

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Okay, just wanted to check.

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Bradley C. Barron, NuStar Energy L.P. - CEO of NuStar GP LLC, President of NuStar GP LLC and Director of NuStar GP LLC [59]

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Yes, that's correct. We would expected to cover this, this year had it not been for these expenses we're taking in the Navigator acquisition.

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Operator [60]

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Our next question comes from Selman Akyol from Stifel.

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Selman Akyol, Stifel, Nicolaus & Company, Incorporated, Research Division - VP [61]

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Can you guys just discuss a little bit on your outlook for the Eagle Ford and sort of the recontracting environment you're seeing answer and sort of MVCs starting, I guess, to roll off next year, and that combined with your recent acquisition in the Martin Midstream assets?

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Bradley C. Barron, NuStar Energy L.P. - CEO of NuStar GP LLC, President of NuStar GP LLC and Director of NuStar GP LLC [62]

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Yes. We're seeing some promising things here. We just started, in the last month or 2, starting to see some our nominations slowly make a turn from declining each month to increasing. We've had some favorable acquisitions in the Eagle Ford specifically with Sanchez buying into some acreage down there. So they're more active than Anadarko was. So we're starting to see things like that make a positive turn in the Eagle Ford. As far as recontracting goes, we're not really having -- that's July of '18, I think, is when about -- give or take, about 25% of our contracts there are up for renewal, and nobody's talking about those renewals yet.

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Selman Akyol, Stifel, Nicolaus & Company, Incorporated, Research Division - VP [63]

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Okay, all right. And then, I guess, just turning to the Fuels Marketing, and nice quarter there. Can you talk about sort of what your outlook is for there?

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Thomas R. Shoaf, NuStar Energy L.P. - CFO of Nustar Gp LLC and EVP of Nustar GP LLC [64]

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Yes. It's -- really that whole business is based on 2 things, a butane-blending program we have in some of our pipeline systems, which is very-low risk and kind of back-to-back type business. It does depend on what the margin is between butane and gasoline, but we back to back it so there's no risk there. And I don't think we're going to see anything that's different this year than what we saw last year going forward.

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Operator [65]

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Our next question comes from Jeremy Tonet from JPMorgan.

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William Paul Kawas, JP Morgan Chase & Co, Research Division - Analyst [66]

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This is Bill on for Jeremy. To confirm, the IDR waiver is in effect after the Navigator acquisition closes?

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Thomas R. Shoaf, NuStar Energy L.P. - CFO of Nustar Gp LLC and EVP of Nustar GP LLC [67]

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Yes, it starts in the second quarter. We're presuming it's going to start in the second quarter.

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William Paul Kawas, JP Morgan Chase & Co, Research Division - Analyst [68]

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Okay. And just one follow-up. Do you have any options besides a pipe linking Navigator to the Eagle Ford and then down to Corpus to attract barrels to that Corpus facility?

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Thomas R. Shoaf, NuStar Energy L.P. - CFO of Nustar Gp LLC and EVP of Nustar GP LLC [69]

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Do we have an option?

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William Paul Kawas, JP Morgan Chase & Co, Research Division - Analyst [70]

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Or is there anything you could do versus your competitors who might have pipes going down there to direct barrels to that facility?

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Bradley C. Barron, NuStar Energy L.P. - CEO of NuStar GP LLC, President of NuStar GP LLC and Director of NuStar GP LLC [71]

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Just to be clear, that facility that we acquired sits adjacent to our existing North Beach facility, which is the terminus of our entire South Texas crude system, and so there's a lot of NuStar pipes directed at that facility as well.

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William Paul Kawas, JP Morgan Chase & Co, Research Division - Analyst [72]

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Okay, I was asking more so in the Permian side, sorry.

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Thomas R. Shoaf, NuStar Energy L.P. - CFO of Nustar Gp LLC and EVP of Nustar GP LLC [73]

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Yes. I'm not sure I'm following your question, but we could -- either we have a pipeline solution coming down from the Permian to the Corpus area or somebody does we could participate that -- participate in that with our facilities one way or another. I'm not sure if that's what you were asking.

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Operator [74]

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Our next question comes from Chris Errico from UBS.

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R. Christopher Errico, [75]

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Just a quick question. Strategically, how are you thinking about the NSH? It just seems like we are one of the only MLPs out there that still have that GP that's publicly traded?

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Thomas R. Shoaf, NuStar Energy L.P. - CFO of Nustar Gp LLC and EVP of Nustar GP LLC [76]

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Well, I mean, I think there's others as out there as well, but there's been some movement, I guess, lately for some of these companies to buy -- collapse the 2 entities. And with us, I don't think we have the same problems we're trying to solve. I mean, what we have been saying all along, we continually to look at that and trying to decide if that's the timing and whether or not it's something we want to do. But the GP is such a small drag on the company. It only takes about 13% of the distribution. It's capped at 25%. It doesn't really add a whole lot to our cost of capital, and it is somewhat dilutive to take that in, but it's something we continually evaluate in trying to decide whether or not it would be appropriate to do or not.

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Bradley C. Barron, NuStar Energy L.P. - CEO of NuStar GP LLC, President of NuStar GP LLC and Director of NuStar GP LLC [77]

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Like Tom said, it's something we continue to evaluate, but the knock on the GP is it adds to your cost capital, makes you uncompetitive in an acquisition scenario. And what we've shown with this acquisition is that we have a great working relationship with our GP, they're strongly supportive of our growth and, hence, the IDR waiver, which helps this transaction.

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Operator [78]

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Our next question comes from Ryan Levine from Citi.

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Ryan Michael Levine, Citigroup Inc, Research Division - Equity Analyst [79]

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In terms of long-term accretion from this transaction, would you be able to provide some color as to what your goals are?

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Thomas R. Shoaf, NuStar Energy L.P. - CFO of Nustar Gp LLC and EVP of Nustar GP LLC [80]

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For accretion?

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Ryan Michael Levine, Citigroup Inc, Research Division - Equity Analyst [81]

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Yes.

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Thomas R. Shoaf, NuStar Energy L.P. - CFO of Nustar Gp LLC and EVP of Nustar GP LLC [82]

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Not at this time. We're really not giving out numbers at this time. We need to close on the transaction first. But it does -- obviously, it does flip into accretion in the future but we hope to be able to give more color on that in the coming weeks.

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Ryan Michael Levine, Citigroup Inc, Research Division - Equity Analyst [83]

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Okay. And just to clarify, in terms of the high single-digit multiple target for this transaction, that excludes any Permian to the Gardendale line?

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Thomas R. Shoaf, NuStar Energy L.P. - CFO of Nustar Gp LLC and EVP of Nustar GP LLC [84]

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Yes, it does. That's a stand-alone acquisition.

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Operator [85]

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Our next question comes from Andrew Weisel from Macquarie.

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Andrew M. Weisel, Macquarie Research - Analyst [86]

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Just a quick question, a follow-up on the financing of the acquisition. If I heard you right, you said there'll be an additional capital market raise. Any thoughts on the timing of that? Would that be in the second quarter in conjunction with the closing? Any thoughts on that if that would be debt or equity or some combination?

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Thomas R. Shoaf, NuStar Energy L.P. - CFO of Nustar Gp LLC and EVP of Nustar GP LLC [87]

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Well, we're not really going to talk about the timing of the next capital markets, but we do have another piece to get out there. We've got several financing sources we can use to fund this. We've got the lion's share of it already out through the equity offering and the bond offering we did. So anything else we do will be to be determined.

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Andrew M. Weisel, Macquarie Research - Analyst [88]

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Okay, so not necessarily tied to the closing but all options on the table, it sounds like?

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Thomas R. Shoaf, NuStar Energy L.P. - CFO of Nustar Gp LLC and EVP of Nustar GP LLC [89]

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Correct.

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Andrew M. Weisel, Macquarie Research - Analyst [90]

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Okay. Then longer term, as you get back to a position of covering the distribution in the coming years, how does the potential change of the portfolio mix impact your decision on longer-term growing the distribution? In other words, would there be a specific target for coverage or EBITDA dollars or DCF dollars? What might it take to get the conversation like distribution growth on the table?

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Thomas R. Shoaf, NuStar Energy L.P. - CFO of Nustar Gp LLC and EVP of Nustar GP LLC [91]

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Yes, it's all of the above. I mean, it's going to take a combination of those things. And we're not really giving any distribution guidance at this time in terms of when we think we may be able to increase that distribution. But I will tell you, it's our opinion that this acquisition will position us better in the future to get there. So we're very pleased with this acquisition. We're glad we're getting it and I think it just puts us in a better position to start thinking about that.

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Andrew M. Weisel, Macquarie Research - Analyst [92]

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Okay. Then one last one for me. On Pemex, you mentioned ongoing delays pushed back some of the organic spending. In -- does the acquisition change your thinking on the Pemex project at all? Is there any point where you might want to divert your focus more toward the Permian and less toward Mexico? High-level thoughts on the latest thinking around Pemex?

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Bradley C. Barron, NuStar Energy L.P. - CEO of NuStar GP LLC, President of NuStar GP LLC and Director of NuStar GP LLC [93]

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High-level thinking, I mean, the 2 things are not mutually exclusive. And the demand in Northern Mexico is still there, and we still have the best system to supply that demand. And so ideally we'll be able to view both of those things. It's not proceeding as fast as I would like it to proceed, but we'll continue to pursue it.

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Andrew M. Weisel, Macquarie Research - Analyst [94]

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And any update on conversations? Or is it sort of more wait and see?

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Bradley C. Barron, NuStar Energy L.P. - CEO of NuStar GP LLC, President of NuStar GP LLC and Director of NuStar GP LLC [95]

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No, it's -- we're going back and forth, that's all I can say.

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Operator [96]

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Our next question comes from Sunil Sibal from Seaport Global Securities.

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Sunil K. Sibal, Seaport Global Securities LLC, Research Division - MD [97]

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Just a couple of housekeeping questions for me. First of all, how much was your total liquidity at the end of Q1?

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Thomas R. Shoaf, NuStar Energy L.P. - CFO of Nustar Gp LLC and EVP of Nustar GP LLC [98]

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That's $725 million on our revolver.

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Sunil K. Sibal, Seaport Global Securities LLC, Research Division - MD [99]

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Okay, and then when you think about the leverage metrics, obviously, I think on the covenants side will probably get a bump up on that in that department. So what exactly has the leverage covenant changed to in this interim period while you're absorbing Navigator?

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Thomas R. Shoaf, NuStar Energy L.P. - CFO of Nustar Gp LLC and EVP of Nustar GP LLC [100]

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Well, we think it's, obviously, like we said before, we think the leverage is going to go up as a result of Navigator temporarily and probably for 2 to 4 quarters we'll be running a higher leverage than what we currently are and then getting back down to our current levels again in 2018.

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Sunil K. Sibal, Seaport Global Securities LLC, Research Division - MD [101]

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Okay. And then what do you think is the right leverage level when you think of more longer term beyond that for your business mix and all that once you have absorbed Navigator?

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Thomas R. Shoaf, NuStar Energy L.P. - CFO of Nustar Gp LLC and EVP of Nustar GP LLC [102]

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Yes, longer term, it's the same as what it is now and that's probably at about 4x to 4.5x per our debt covenant.

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Operator [103]

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(Operator Instructions) And our next question comes from John Edwards from Credit Suisse.

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John David Edwards, Credit Suisse AG, Research Division - Director in United States Equities Research [104]

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Just a follow-up, so you had mentioned about the switch from volume base to lease base for part of the storage revenues. And just if you could clarify, what -- how do you view the mix now between the 2 so -- when we're thinking about modeling going forward?

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Bradley C. Barron, NuStar Energy L.P. - CEO of NuStar GP LLC, President of NuStar GP LLC and Director of NuStar GP LLC [105]

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Throughput versus lease with the mix.

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Thomas R. Shoaf, NuStar Energy L.P. - CFO of Nustar Gp LLC and EVP of Nustar GP LLC [106]

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The lease will be much more stable, right? So these are refinery storage tanks. And in the past, we got a little bit of volatility when a refinery would go down unexpectedly. This should flatten out the earnings.

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Bradley C. Barron, NuStar Energy L.P. - CEO of NuStar GP LLC, President of NuStar GP LLC and Director of NuStar GP LLC [107]

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Yes, we can get back to you on the mix on that between the 2, but it does create more stability like...

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John David Edwards, Credit Suisse AG, Research Division - Director in United States Equities Research [108]

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Right, I mean, is it now 50-50 leased versus volumetric? Is it 2/3 -- just help us out, kind of ballpark it. Maybe I can follow up with you off-line.

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Chris Russell, NuStar Energy L.P. - VP of IR for NuStar GP LLC and Treasurer of IR for NuStar GP LLC [109]

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Yes, no. It used to be 80-20 fixed to at least to throughput so this will take it even higher.

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Thomas R. Shoaf, NuStar Energy L.P. - CFO of Nustar Gp LLC and EVP of Nustar GP LLC [110]

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Higher than that. It's a big -- yes.

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Chris Russell, NuStar Energy L.P. - VP of IR for NuStar GP LLC and Treasurer of IR for NuStar GP LLC [111]

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Yes, John, we'll give you the exact number.

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Operator [112]

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Thank you. And I'm showing no further questions from our phone lines. I would now like to turn the conference back over to Chris Russell for any closing remarks.

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Chris Russell, NuStar Energy L.P. - VP of IR for NuStar GP LLC and Treasurer of IR for NuStar GP LLC [113]

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Okay, thank you, Crystal. Once again, we'd like to thank everybody for joining us on the call today. If anybody has any questions, please feel free to reach out to our Investor Relations group. Thank you.

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Operator [114]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a wonderful day.