NuStar Energy L.P.
Q4 2007 Earnings Call Transcript

Published: 25 Jan 2008

[Operator:]

Good morning. My name is Jennis and I will be your conference operator today. At this time I would like to welcome everyone to the NuStar Energy L.P. and NuStar GP Holdings, LLC Fourth Quarter 2007 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. [Operator Instructions] Thank you.

[Mark Meador:]

Thank you, operator and good morning and welcome to our conference call to discuss NuStar Energy L.P. and NuStar GP Holdings, LLC fourth quarter 2007 earnings results. If you have not received the earnings releases and would like have copies of each, you may obtain them from our websites at nustarenergy.com and nustartgp.com. Attached with our earnings releases we have provided additional financial information for both companies including information on NuStar Energy L.P.'s business segments. If after reviewing the attached tables you have questions on that 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.'s and NuStar GP Holding LLC's Form 10-K for the year ended December 31st, 2006 and subsequent filings with the Securities and Exchange Commission. I will now turn the call over to Curt.

[Curt Anastasio:]

Good morning and thank you for joining us today for the fourth quarter 2007 earnings conference call. I want to say a few words about the year before we delve into the quarter. 2007 was a transition year for NuStar as we completed our separation from Valero and laid the groundwork for future growth. In 2007 we changed our name to NuStar, moved to a new headquarters and made significant investments in people and equipment to transition a large number of support services previously provided to the partnership by Valero. And all the while we were in the midst of the largest capital expenditure campaign in the company's history. This was a monumental effort that was made possible by the dedication and the hard work of our talented employees. We said at the beginning of the year... beginning part of the year that we expected to make about $30 million more of EBITDA in 2007 than in 2006 and we did. We said we would increase the distribution at NuStar Energy by about 7% with a corresponding higher rate of increase, 12.5% at NuStar GP Holdings and we did. And our distributable cash flow also increased nicely, above our budgeted target. So, we were able to maintain our healthy coverage ratio. In December 2006, we closed on the acquisition of a large crude oil terminal at St. James, Louisiana and its performance during 2007 has exceeded our expectations, generating $15.8 million of EBITDA. An additional 1.5 million barrels of storage will be coming on stream this year at St. James. Remember that we made this acquisition with expansion in mind given the large amount of undeveloped land at a facility with an advantage location and that strategy is paying off well for us. We again had an excellent year in safety and environmental performance and we are honored with several national safety awards. On top of handling the complex challenge presented by becoming an independent company and executing our growth projects in various parts of the world we also had to overcome the impact of a major fire at Valero Energy's McKee refinery in February, which caused the refinery to shut down for an extended period, and then to run at reduced rates. You will recall that this refining system typically contributes around 15% to 20% of annual cash flow much less than in past years as our business has grown and diversified away from the McKee system but still significant. When the McKee fire occurred, we quickly assembled a first response team of engineers and operational personnel to identify and implement alternatives to running our pipelines and terminals in that region until our insurance people could initiate a claim. That really helped soften the financial blow in the time period before we started receiving insurance proceeds in the second quarter. And while our fourth quarter was a bit below where we had guided you on earnings, because insurance payments that had been promised in the fourth quarter will now be received in the first quarter instead. We nonetheless will have collected more than 90% of our total claim by the end of this quarter. In connection with becoming a separate independent company we capitalized on a short-term opportunity to hire a lot of very talented people who will perform functions that are critical to our future strategic direction. These people will market volumes of asphalt, trade fuel oil and other products, risk manage our much larger inventories going forward, run refineries and related assets and support all of these activities and more. The cost of staffing up these essential resources impacted our 2007 results, but enables us to hit the ground running in 2008 so that we can reap the benefit of our growth strategy. As a result of this, we're well positioned not only for the upcoming closing of the CITGO Asphalt acquisition, but for the additional growth we anticipate in the future. We made significant progress in 2007 on our roughly $400 million construction program having completed close to a $100 million of terminal and pipeline projects. We expect most of the remaining projects of around $260 million of terminal expansion projects to be completed by the end of this year, and nearly all of the projects that we have completed and that will be completed this year have been and are still expected to be on time and on budget. Bear in mind that these projects are highly accretive with IRRs in the range of 15% to 20% and EBITDA multiples of six to seven times. So, just looking at our base business in 2008, excluding the CITGO Asphalt acquisition, we are forecasting EBITDA to be nearly $40 million more than 2007 primarily due to our higher return construction projects continuing to come on stream during the year. And based on the latest forward curve, we believe the CITGO Asphalt acquisition is expected to add around another $100 million to that assuming we closed the deal on or about February 1. So, you can see 2008 is really shaping up to be a strong year for NuStar Energy and NuStar Energy GP Holdings. With respect to distribution growth, we are forecasting the LP's distribution growth on the base business, in other words excluding the CITGO Asphalt acquisition to be around 7% and about 12% for NuStar GP Holdings. We believe the distribution growth would be significantly higher once we realize the benefit of the CITGO Asphalt acquisition. And even with all of the growth we have coming online we continue to maintain a healthy balance sheet and have one of the lowest debt-to-capitalization ratios in our peer group at 42% at the end of 2007. With our recently upsized $1.25 billion revolver we are well positioned to finance the CITGO Asphalt acquisition and our ongoing strategic growth program. While we continue to work diligently on completing our construction program as well as the acquisition, we are also spending a lot of time evaluating other potential acquisitions and strategic growth projects. In our recently approved strategic plan we identified an additional $500 million worth of strategic projects that will come to fruition over the next two to three years. Several of these projects focus on tank expansion opportunities with customers who have already indicated interest for additional crude oil, refined products, fuel oil and [inaudible] storage at our Texas City and St. James Terminals. And all of these projects have returns similar to those that we’re working on right now. In addition, we’re working on a unique opportunity to capture additional tariff and fee barrels to market San Antonio, Austin, South Texas and further West, all regions that are showing substantial growth. And this obviously doesn’t include the numerous projects we’ve recently identified on the CITGO Asphalt acquisition, which I will talk about in a moment. I’d now like to comment on the planned acquisition of the CITGO Asphalt Refineries. There have been several recent comments in the media speculating on whether the originally anticipated asphalt supply contract could potentially derail the acquisition. So I want to stress that the asphalt supply agreement has in no way deterred either party from closing this deal. In fact we remain very confident that it will close shortly. We've already received clearance from the Federal Trade Commission and have concluded the negotiation of the Crude supply agreement. When we originally agreed to the terms of the deal, one of the conditions that CITGO requested for closing was that new star enter into an asphalt supply agreement, which would obligate us to purchase specified quantities of Asphalt exported from Venezuela. However, although we have actually received no official notification, recent news accounts and conversations indicate that the Venezuela National Oil Company, PDVSA may no longer wish to export Asphalt. So as a result, we are working with them on a new agreement that simply provides in essence that if they do export Asphalt, NuStar would have the right of first offer. I want to emphasize that we are very flexible on this issue and could close the transaction under either the original understanding or this new more flexible agreement. I therefore see no reason why we will not be able to satisfy the needs of both parties. With respect to the asphalt business, we remain just as bullish on the fundamentals, although asphalt weakened seasonally in the fourth quarter, inventories are tightening and the forward curve has improved significantly from 2007 levels. Keep in mind that most of the coker projects coming online over the next few years should further tighten asphalt supplies resulting in higher margins. As I have mentioned, we are now forecasting around a $100 million EBITDA contribution for the business in 2008, assuming a February 1 closing. We are also excited about additional projects that we’ve begun to identify at both refineries that are not reflected in the $100 million. Some of the high return projects that we can complete quickly focus on increasing the capacity and operational efficiency of the refineries, other projects focus on increased flexibility and year-end operation of the refineries to diminish the typical seasonality of the asphalt business. In fact, with our goal of maintaining year-around production, we can reduce downtime by extending the length of the time between plant maintenance activities by as much as five years instead of annually. We have already identified around $35 million of projects with very quick payouts. And since we didn't take those projects into consideration in the original economics, the acquisitions proved to be even more profitable than the original assumptions. And we have only just begun to identify capital opportunities at the two refineries. These refineries are located in large markets with deepwater access, which gives them supply and marketing flexibility and the potential for considerable expansion and upgrading once we take over operations. So this is clearly the right strategy at the right time for NuStar. Our new operations are expected to complement our existing business, give us exposure to one of the best asphalt markets in the U.S., diversify our customer base and further expand our geographic presence. We also continue to expect the acquisition to be accretive to cash flows and earnings, enhancing our ability to make further distribution increases. And our timing couldn't be better to purchase these assets for significantly less than their replacement values. If you build a full coking refinery today to process the asphaltic crudes laid at these refineries, we're estimating the replacement cost would be around $2.5 billion. So even if we are able to get a fraction of the full coker margins, this asphalt acquisition is a great investment for the purchase price that we've agreed to. Simply stated, we could capture some benefit from the attractive coker margins without having to invest in a coker. I'd also like to briefly comment on our recent disappointing unit price performance before turning to the results for the fourth quarter. Obviously, MLPs in the broader markets have been in turmoil. I understand that and NuStar has declined significantly in recent weeks. But I have really been surprised and disappointed by this because NuStar Energy and NuStar GP Holdings are defensive in nature during times of economic slowdowns since we operate stable cash flowing businesses. This will be true of a large majority of our business even after the CITGO Asphalt acquisition. Our expansion projects are all backed by long-term contracts and we are toll takers on our pipelines and storage. We also benefit during times of increased inflation since the Federal Energy Regulatory Commission allows us to index tariffs each year to the Producer Price Index plus 1.3%. During the six-and-a-half years we have been a public company at NuStar Energy, we have operated with oil prices ranging from about $10 a barrel to close to $100 a barrel. We have been through economic expansions and we have been through economic slowdowns. And throughout that entire period we have increased our cash flow, increased our distribution payments and grown and strengthened this company significantly. If you look at the base business at NuStar Energy, we are well diversified with about half of our business coming from the refined products and crude oil pipelines and the other half from our terminals and crude oil storage. And around 90% of our contracts for our new expansion projects are backed by contracts ranging from five to ten years in length. With all the growth that we have planned over the next several years that I have just discussed, it's surprising that our yields from both the GP and the LP companies are approaching a level close to some of our competitors that don't have a fraction of the growth we have planned. And with our strong fundamental outlook for our businesses and continued distribution growth, it's in line with our peer group. We believe the level of the unit price is absolutely unwarranted at this time. I would now like to briefly review the fourth quarter and the full-year 2000 results. NuStar Energy L.P. reported earnings of $22.6 million or $0.47 per unit, which compares to $33 million or $.70 reported last year. Results for the fourth quarter were a bit lower than the guidance range of $0.50 to $0.60 that we provided in the third quarter conference call, as we were forecasting at that time that we would receive most of the remaining insurance proceeds for the business interruption claimed by the end of the year. In addition, we increased environmental reserves in the fourth quarter in the amount of $1.3 million or $0.03 per unit. Unfortunately, we did not receive any insurance proceeds in the fourth quarter. However, we do expect to receive around $2.5 million or $0.05 per unit in this quarter. Had we received the proceeds from the insurance claim in the fourth quarter, as we originally anticipated and not had the additional expense from the environmental reserves, earnings would have been around $0.55 per unit or within our guidance range. Distributable cash flow available to limited partners from continuing operations were $34.9 million, or $0.72 per unit for the fourth quarter compared to $45.3 million, or $0.97 for the fourth quarter last year. For the year, we reported higher distributable cash flow available to limited partners of $198.6 million, or $4.22 per unit, compared to $195.7 million, or $4.18 per unit reported last year. With respect to NuStar Energy's distribution the Board declared a quarterly distribution of $0.985 per unit payable February 14th, to unit holders have record on the 7th. This distribution represents an increase of $0.07 per unit or nearly 8% higher over the $0.915 per unit distribution for the fourth quarter of 2006. And we had a healthy coverage ratio of 1.1 times for the full-year of 2007. The NuStar GP Holdings Board declared a quarterly distribution of $0.36 per unit payable February 19th to unit holders of record on February 7, which represents a $0.04 or 12.5% increase over the $0.32 per unit paid in the fourth quarter of 2006. Looking ahead to the first quarter of 2008, we expect earnings to be in the range of $0.60 to $0.70 per unit excluding the impact of the CITGO Asphalt acquisition. As soon as we closed the acquisition, we expect to provide updated guidance on the quarter and on the full-year. In closing, I am confident we will close on the CITGO Asphalt acquisition shortly and I continue to remain very optimistic about the other opportunities we have to grow the partnership and increase unit holder value. We look forward to sharing with you more information on the deal economics of the Asphalt acquisition and the opportunities we have to grow this part of the business as soon as we complete it. So at this time I'll open it up for Q&A. Question and Answer

[Operator:]

Thank you sir. Thank you sir. [Operator Instructions] Your first question comes from the line of Darry Chlysher [ph] with... he is a private shareholder.

[Unidentified Analyst:]

Hi, how are you Curt?

[Curt Anastasio:]

I am good, thanks, how are you?

[Unidentified Analyst:]

Very good, I want to ask you a question about the Venezuela situation. If we are unable to get raw materials being the crude, the heavy crude from Venezuela, what would be the alternative sources of getting the crude?

[Curt Anastasio:]

Okay, the first thing I want to emphasis is that we have negotiated the crude contract with them. And I believe they are committed to selling us the crude, because it's the best netback for them as well as a good deal for us. But, having gotten that out of the way, in the unlikely event that at some point that does not happen, we do have alternatives. This is not the only heavy crude in the world. There are other heavy crudes that really with some modest investments at these two refineries, we could run alternative crudes and capture a good profit and a good return on these refineries. But, I don't expect that, I don't expect that to happen at all. The other thing that sort of perversely would happened in the unlikely event that this came down, would be that we produced somewhat less asphalt at these refineries. If you look at the most likely alternative crudes we had run. And that of course would tighten up the supply-demand situation already, which you already think is bullish. So, you'll likely see a higher asphalt margin consequence of that happening. But, I think that I really have to emphasize and reiterate that I don't see that happening.

[Unidentified Analyst:]

Thank you.

[Curt Anastasio:]

Okay.

[Operator:]

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

[Louis Shammy:]

Hi everyone. It seems like everything is on track. I just have two questions, first was regarding the capital expenditure plans that you have for the next few years. What was the dollar amount that you had said you have on?

[Curt Anastasio:]

What I'd say, of course just to go back, in mid '06 we said, we'll spend about $400 million over the next couple of years. And we spent $100 million of it in '07. And we said there is another $260 million or so to go in that. Now, what I've just now said is, we've identified on top of that another $500 million, 500. That will be built out over the next two to three years.

[Louis Shammy:]

Okay. And is your expectation that you'll build out the full $500 million or is that an unrisk number?

[Curt Anastasio:]

Well, I mean that's what we've identified, when we go through projects, some drop off, some get added, some are better, some are worse. But, I think that is a, I wouldn't have put it out there, if I didn't think we had a, that was a reasonable estimate to good probability of having that level of investment opportunity.

[Louis Shammy:]

Great. The other thing I wanted to ask about was your bunkering business in the Caribbean.

[Curt Anastasio:]

Yes.

[Louis Shammy:]

It seems that you are no longer reporting that with your refined product terminals that’s now in the marketing segment. But..

[Curt Anastasio:]

Yes. Yes.

[Louis Shammy:]

Even with that effect the marketing segment didn't seem to produce that much in terms of EBITDA where as the bunkering was contributing about $11 million per quarter?

[Curt Anastasio:]

Yes. The bunkering did very, very well. Let me explain why we did that because there were some methods to our madness. Once we got the marketing and trading group established and we worked on getting them set up with all the back-office support they need in all of that. We decided that what made most sense for our company going forward is to put all of our sort of commodity risk type business in one place. So, you have one group under Paul Brattlof, our Head Trader, which is responsible for all of the sales, all of the risk-management, you know the hedging and so. And, bunkers I think... the reason it was separated out is because that's how we inherited that from when we did the Kaneb acquisition through the bunker marketing within a… in a different group at that time. And we have just carried that over to the way they were doing it and we really had no rationale for changing that at all, until we developed our marketing and trading groups. Now, all of that organization is in one place. And we think that will bring benefits not just for superior risk-management but we're having that all in one place. They will be able to co-ordinate for example their fuel oil trading with the bunker marketing, we will have one face representing to the marketplace before you had sort of different departments going out to the marketplace with regard to bunker and fuel oil. Now we will have a unified approach. We'll have a better chance of capturing synergies between those two activities. So, it's really because of that organizational change and our desire to put all this activity in one place that we put it there. Now with regard to the results, I’ll make a comment. Part of the reason, besides just all the startup time and cost involved in starting a training operation that they really haven't generated much as you correctly point out, is that the way the accounting works, they have to realize losses on hedge positions, on derivative positions before they can capture the benefit of the physical. So, lot of the positions they put on, they've taken the hit on the paper without from being able to book the corresponding gain that they have in the physical inventory positions that they have. So, you'll start to see more profit come through in the first quarter and throughout 2008 for that reason.

[Steve Blank:]

Okay. And also, Louis, just to be clear. I think you mentioned a number of 11 million a quarter. It is not the whole St. New Stashie's [ph] operation that's been transferred into marketing. The terminal aspect of that which is the bulk of the money we make in St. New Stashie is still in the terminal segment, it's just the bunkering...

[Curt Anastasio:]

Development marketing.

[Steve Blank:]

That's been moved into the marketing segment because it's very akin to what we are doing in that marketing segment now in wholesale marketing so on and so forth...

[Curt Anastasio:]

Yeah, we just split the marketing from the terminal. The terminal is still in terminal operation.

[Louis Shammy:]

Got it. Okay. And then as regards to the... that non-cash hedging loss, can you give an order of magnitude of how large that was?

[Curt Anastasio:]

Yeah. We do have it, I don't have it handy but it is approximately, is it six?

[Steve Blank:]

Yeah.

[Curt Anastasio:]

Yeah, it was about $6 million.

[Louis Shammy:]

Okay, great. And then the final question I had was regarding the... should you... once the Asphalt acquisition is completed, where do you stand on plans to possibly expand that with by installing a hydrotreater to that plant?

[Curt Anastasio:]

Yeah, we have people scoping that out. And I'll let, we have a couple people in the room here. Mike Pash [ph] and Mike Hoeltzel. Pash in charge of refining operations and Hoeltzel on Corporate Development who can comment further and they have been looking at that all throughout in my remarks was a sort of small, low hanging fruit quick pay back projects that we are, for sure, going to do in any event. But the larger product like a hydrotreater you can imagine, requires much more detailed scoping. So, Mike, you want to comment? Mike Hoeltzel.

[Mike Hoeltzel:]

Yes. We’ve just had access to the plan… they had plans in progress to put the [inaudible] improving and we are evaluating the analysis. Now, it is little premature to say what the actual cost would be. It would be in hundreds of millions of dollars to do this. So, we'll have to look very closely at the justification for it. But we are proceeding with that evaluation.

[Louis Shammy:]

Okay, what kind of return do you think that would generate?

[Steve Blank:]

I don't know if we are there yet.

[Curt Anastasio:]

I don't think we are there yet. We are not... obviously, I told you on the 500 million. We expect sort of... let's call it an average return in the range of 15% to 20%. So, we are not going to do a project like this if it's worse than that.

[Steve Blank:]

And this project not in that 500 to… 500 is really alternative construction.

[Curt Anastasio:]

Yeah, I hope that's clear. So, it's not going to get off the ground if it's worse than other capital opportunities.

[Louis Shammy:]

That makes sense, all right. Thanks a lot guys.

[Operator:]

[Operator Instructions]. Your next question comes from the line of Ross Payne with Wachovia.

[Ross Payne:]

How are you doing guys?

[Curt Anastasio:]

Hi Ross.

[Ross Payne:]

First of all, CapEx for 2008, what is that number? I know it's 500 for the next couple of years plus --

[Curt Anastasio:]

It's 153 approximately. It’s about 153.

[Ross Payne:]

Okay. In 2007 just for [inaudible].

[Curt Anastasio:]

Go ahead Steve.

[Steve Blank:]

For 2007, it was 250. Of which about 200, 190 or so is --

[Curt Anastasio:]

Yes, 192.

[Steve Blank:]

Strategic. And then we had reliability at 40 and separation costs from Valero Energy which really we are getting new head office in some IS, some really unusual items, I wouldn't put either as growth or reliability, those were about $18 million for the year. So total of 251 for the year of '07.

[Ross Payne:]

Okay. And out of the 153, is that inclusive of maintenance CapEx?

[Steve Blank:]

Yes.

[Curt Anastasio:]

Yes. That comes in at about 47.7 is our latest look at that.

[Ross Payne:]

Okay. And back to the asphalt operations, if you are able to...

[Curt Anastasio:]

Of course, that is without CARCO.

[Steve Blank:]

Yes, it’s without the single asphalt.

[Ross Payne:]

Okay.

[Steve Blank:]

Numbers we just gave. Okay, go ahead.

[Ross Payne:]

And what do you think by the way on that? What do you think maintenance CapEx on CITCO is going to be?

[Curt Anastasio:]

It doesn’t go up... go ahead.

[Steve Blank:]

It is about $25 million, first year.

[Ross Payne:]

Does it stay above that level going forward or is up a little bit or?

[Steve Blank:]

Just it is going forward because of the amount of one time capital...

[Curt Anastasio:]

IS conversions that we have got in that first year and in terms of first year growth CapEx, it is about $25 million or $30 million.

[Steve Blank:]

For now?

[Curt Anastasio:]

For now?

[Steve Blank:]

Just a quick payout projects that we immediately would jump on.

[Curt Anastasio:]

That's most of the 35 million we identified was the low hanging fruit and should be.

[Steve Blank:]

Going to spend in the first year?

[Ross Payne:]

On the imports, if imports stop all together, is it your expectations that you would find other sources that you'd be importing into the country or how do you --

[Curt Anastasio:]

There are other sources of the imports. But you know, the deal we have on the table, I just want to make clear, with PDVSA is that, if they do export, we have a right of first purchase, on those barrels, okay. So if they don't export at all, one of the consequences is that you will have a further tightening of supply in the marketplace, right, which is not an unfavorable consequence. However, we do think that if they do export, this is an advantage for us having those barrels and trying to optimize the profitability of those. But there are alternative source of imports, I mean, imports coming from Canada, they occasionally come in from Europe, they come in from elsewhere in Latin America. So, yes, there are alternative, but I really don't want to go there right now because, as I said, we do have a deal on the table that I expect to be concluded along the lines I described.

[Ross Payne:]

Okay. Also you mentioned crude. I do feel like, it's not likely at all that you are not going to get your crude from Venezuela, but you mentioned that you could do some alterations to your plants.

[Curt Anastasio:]

Right.

[Ross Payne:]

A, what kind of alterations would you have to do and second of all, how quickly could you do those if there were any interruptions sometime in the far distant future?

[Curt Anastasio:]

We think with a pretty modest investment, certainly under 10 million at each plant, you could run alternative heavy crude is kind of in this API range of 10 to 12. Now you'd have a slightly different product slate. In fact you probably have a product slate with a higher yield value, once you got those investments made and you'd probably try to stagger this investment so that you minimize the amount of downtime, but over the course of what would you say Mike like six to eight months or nine months?

[Mike Hoeltzel:]

Nine months. Let’s assume the level of the asphalt piece.

[Curt Anastasio:]

Yes you try to do it during the low and you'd stagger the investments to minimize the downtime. So, it would be a little disruptive but you'd end up with a plan with more crude flexibility and good product value yields. And but again, I really… because this is important that I don't send the wrong signal on this call. I really want to emphasize that I did not expect to be there. We have a deal negotiated on crude supply, but I've every reason to believe that both sides will honor it.

[Ross Payne:]

Okay. One last question, you mentioned that you might run these asphalt plants year round. How do you do that from an inventory stand point, are there any issues there and who you are selling it to in the off season?

[Curt Anastasio:]

One thing that is good about being a storage company with an asphalt marketing group is we have storage and we are in the storage business. We know how to lease, build and use our existing storage to the extent we need to, but part of this year round plan would be besides just winter filling storage of asphalt and moving it around to try and optimizing where it is inventoried. We also try to expand further into the fuel oil businesses. It's one of your advantages of having a fuel oil trading operation, so you would expect us to do more fuel oil blending and maybe bring some blends down to stay in the stations where we have a substantial bunker marketing operation and blended to take advantage of the fact that we do have bunker sales and bunker customers in the Caribbean and maybe enter some new bunker fuel markets on the East coast and elsewhere where we could make sales during the off season for asphalt. So you put all these things together, you leave yourself the opportunity to run the plants profitably year round rather then just being so concentrated on being on asphalt mode where you really start having to shut down for period of time in the winter. You want to comment any further Mike.

[Mike Hoeltzel:]

One other thing is the roofing flux is an asphalt product, it's a lot less seasonal and we will be looking at making roofing flux in the winter as well.

[Ross Payne:]

Very good guys. Thank you much.

[Curt Anastasio:]

Thank you.

[Operator:]

Your next question comes from the line of R. Sheikh [ph] with Cadence Capital.

[Unidentified Analyst:]

Hi guys it's Jade Donald [ph] at Cadence Capital. How are you?

[Curt Anastasio:]

Hi, good. How are you?

[Unidentified Analyst:]

Good. Just going back to the question about the asphalt supply agreement the... my understanding was that the asphalt under this agreement would be delivered in specialized heated tankers and that it, sounds like it is very integrated with the terminal and storage facilities that you have, so my question is if this agreement does not... is not signed and does not happen or if there is for some reason, if the contract is not honored and there is an disruption in asphalt supply, I have to imagine that these assets, these storage and terminal assets and the other infrastructure will be significantly underutilized, am I thinking about this... ?

[Curt Anastasio:]

Yes I think I'd have to correct you little on that because our own terminal assets would not be underutilized. We will be making asphalt at the plants and we've full expectation that we've good levels of utilization and good sales. So that aspect of material utilization is not dependent on having this contract. The advantage of having the contract, as we do have an asphalt marketing group who can go take control of these volumes and optimize how and where they get sold. So, there is that advantage to it. But on the other hand if this country of Venezuela is not exporting any Asphalt at all, then you get the beneficial effect if you will of a shorter supply in the markets where this is produced and as a results you’d expect higher profit margin, so all other things being equal. So, one way or another it's... there is going to be some advantage to this but as for the other comment...

[Steve Blank:]

The only thing I would say is a lot of the imports would be coming into like the Florida or the Georgia type markets and what we could do is diverge and bring barrels from the Gulf Coast to supply those in the event we didn't have supply coming from Venezuela and so it really wouldn't affect the operation that much other than tighten up the markets.

[Unidentified Analyst:]

Okay, great. Thank you.

[Operator:]

Your next question comes from the line of Darry Chlysher who is a private investor.

[Unidentified Analyst:]

Yes. This is my second question. What would be the effect on our pipelines if the politicians had their wish and there is a tremendous amount of ethanol produced in the future?

[Curt Anastasio:]

Well, the difficulty that all of the pipeline operators have is, they haven't really found a way to move ethanol by pipeline effectively just because if its corrosive effect and how easily it picks up water and it gets contaminated and all of that. So, what happens... what you have been seeing is as the pipelines keep... as the politicians keep increasing the mandate on ethanol, we are handling it more and more at our terminal, so that's a good thing because we are able to take that volume and you know collect blending fees and so on, so that's good for us. But they really... unless somebody comes up with a technical or a special situation when you can have a pipeline that's really dedicated to ethanol and there people are working on that. It hasn't really been that effective, the other beneficial thing for us is because ethanol is a renewable fuel and in the United States, it's corn-based ethanol, that's utilized. What you've seen is our ammonia pipeline has really benefited because as you know, ammonia is utilized as fertilizer in the Corn Belt, so as a result we’ve got a great year on the ammonia pipeline. And as the politicians keep increasing their mandates we will continue to benefit from that aspect of the business. So, I think we are okay on this front. In fact I see it really as an opportunity because of the volumes on the ammonia pipeline, the benefits you can get at the terminals and then in Europe we handle a lot of bio-diesel. In Europe it's a little bit ahead of the curve compared to United States on the use of diesel generally and on the use of bio-diesel in particular. So, on the Europe community is also interested in these renewable fuel, so as they increase their directives, they will handle more of those at our... at our European terminals as well.

[Unidentified Analyst:]

I have a follow-up question, with regard to the new pipelines that we are constructing our possibly new terminals also, FERC put in a proposed rate base change in July, what would be... are our new pipelines market based or would they to be affected by FERC proceedings?

[Curt Anastasio:]

The pipelines that we have that are FERC adjusted, we get the benefit of those and then the... most of the rest that are… Texas Railroad Commission for example, pipelines, there is indexation, a similar type of indexation allowed for those, and then on the market base I guess we have the East Line and on those it’s... that's not for FERC indexed.

[Steve Blank:]

Is it not FERC indexed but you do have some contractual terms?

[Curt Anastasio:]

Yes, we got contracts that have PPI type CPI adjustments in them. So our volumes are... our pipeline volumes are adjusted in that manner even though it is all not FERC per se.

[Unidentified Analyst:]

What percentage of our business would be adversely affected by the FERC proposed rule making, if any, that... when they made that major proposal in July that they were going to consider distributions in some absurd manner?

[Curt Anastasio:]

I'm not... actually the proposal I'm thinking of... and I just may not be thinking as the same one as you. The proposal I'm thinking of was actually beneficial to MLPs because what they are thinking of doing, is adding MLPs into the kind of the rate making methodology they use and allowing MLP type returns in the pipeline rate making methodology which is good, which is a good thing, because it clarifies that there is some base level of return including MLP type returns or NuStar type returns that should be allowable or permissible under the FERC rate making methodology. So the one I'm thinking of that's on the table is actually a positive for us, but there may be another one, I'm just... I will ask anybody here at the table if they are aware one that is a negative? No, they are all shaking their heads. I can't think of one that is a negative, instead that we've got one that is a positive that's pending.

[Operator:]

Your next question comes from the line of Joe Terrell analyst with Terrell & Co.

[Joe Terrell:]

Most of my questions were concerned with the asphalt thing and I think that has been beat to death. It sounds like you're not worried about the shoppers risk?

[Curt Anastasio:]

I'm not worried about closing the deal, that's for sure and we are dealing with responsible people on the other side, and so they are very sophisticated in the international business, and so they know how to get a deal done too. So we will continue to co-operate with them and get it done.

[Joe Terrell:]

But it sounds like if they stop your supplies, you are not worried about that?

[Curt Anastasio:]

No, I did… for the reasons I have stated. I guess...

[Joe Terrell:]

As I said beat the dead, let me search for u a different thing. The market seems to be incredibly worried about your risk and an economic slowdown, it doesn't seem to us here in our shop that that’s that big an issue? What's your...?

[Curt Anastasio:]

I think you're right. I don't think it is that big an issue, I mean if you look at... like I said if you look at the period that we have been public, you don't see a major impact of sort of the macroeconomic situation, like the margins that can affect us here and there, but not a whole lot. For a lot of reasons, we have, lot of our volumes are contacted, our asset supply markets that have to be supplied. People have service stations, they have commitments to customers, we are linked to refineries that here and there may slow down for a period of time, but overall they run really very steadily, because they have the economics to do so. Refiners run have a large sunk cost, they run on, on marginal economics, and if there is any profit to be obtained from the last barrel they run to get it. So by and large you may have little blips here and there, but over the course of time, really if you look at our history, it’s remarkable how steady... steadily we do regardless of whether GDP is high or lower.

[Joe Terrell:]

Along as I'm talking about risk, let me just ask one more if I can, you know every couple of years there is always a rogue trader that seems to ref the banks. How do you monitor our traders that are trading the various products to make sure somebody doesn't go goofy on this?

[Curt Anastasio:]

I'm not going to ask Paul to answer that because he is... but let me… our CFO Steve is here and has responsibility for risk management of the company in this respect, so...

[Steve Blank:]

Well, I think the most important thing we've done when we started this operation to make sure that our wholesale marketing supply and trading group, which Paul runs, doesn't have an incentive to be [inaudible] because their bonus and their compensation is based the same way that every other employee’s is based, which is we establish a distributable cash flow per unit target with our compensation committee of the Board and depending upon how we do against that number we get a bonus in varying degrees or we don't get one at all. So there is no trader that should be motivated to take a risk and swing for the fences because they are not going to be unduly compensated. So that's the best thing we can do. Now, in terms of controls we've got a committee, which meets regularly and monitors on a mark-to-market basis position, it looks at the GAAP reported numbers, which sometimes doesn't tell the whole story. As Curt mentioned we have to mark-to-market the paper but if you don't have hedge accounting you don't get to count the physical. So, even though we have 6 million paper loss when the business will get sold down in first quarter we will offset most of that paper loss as we are able to realize. So we look at it every day on a...

[Curt Anastasio:]

We have daily reporting.

[Steve Blank:]

And there are stop limits that gets triggered, the committee leaves and will either keep position on or take it off. So it is tightly controlled as best as you can but it has that soft channel road trader show, people can get around control. So again I will come back to my original point, but you do as you set up a system and a reward system, which does not incur for road trading.

[Curt Anastasio:]

Well so... our guys are really not doing speculative trading, pure trading for profit except to a very, very minimal degree. And what we're really having to do is more hedging and risk management of the company's inventories and the sales margins, to lock in the sales margins. So that's really the predominant activity that they are engaged in.

[Steve Blank:]

And I would like to say something else too, that we only have about eight to ten traders that sit very close, everybody is right there together and so it's not like we have this huge bank of traders sitting out there that it is very difficult to control. We are all tightly in the same area and you see exactly what is going on.

[Unidentified Analyst:]

Thank you and thanks for all your hard work for us unit holders.

[Curt Anastasio:]

We are going to work even harder this year.

[Unidentified Analyst:]

All right, thank you.

[Curt Anastasio:]

Thank you for your confidence in us.

[Operator:]

And your next question comes from the line of Darren Horowitz with Raymond James.

[Darren Horowitz:]

Good morning, thank you. Curt, just two quick questions for you, the first is on more of a risk mitigation strategy. When you were discussing on the asphalt side of the business inventories tightening and the food supply curve looking more bullish, obviously predicated on our February 1st close, what are your thoughts as to hedging output to mitigate risk even further? I mean, I know that you are obviously holding back 50% of your cash flow, but what are your thoughts there?

[Curt Anastasio:]

Yeah, it is a very big question, we have engaged in a lot of discussion about that. Asphalt does not have, per say, does not have an effective hedge. We've looked at a lot of different things on that. The correlations are really not good. However, there is good correlation of hedging the crude that quantity that we are going to be taking and there are also our good hedges for the light products that we are going to produce. So our plan is really to have kind of a normal operating inventory and hedge to that sort of targeted level of inventory. And then on the asphalt, we think we are better off really monitoring closely the fundamentals of what's happening and trying to take actions in the physical barrel world that will optimize the profit for the asphalt rather than trying to hedge it with instruments at the end of the day are ineffective anyway. So that's how we intend to play this. Now that having been said, we are paid to exercise judgment here. Ultimately if we do think there is a profit opportunity that we can in some manner lock in, for example, like on the light products, if we think that these intermediates that are produced at the refineries are at a margin level or really want to try to lock that in, we have every ability to do that. But on the asphalt I think it's ineffective to do and we think we are better off just running the business and marketing the asphalt ultimately. Paul do you want to comment further?

[Paul Brattlof:]

You said it very well.

[Curt Anastasio:]

Okay.

[Darren Horowitz:]

That's helpful. I appreciate it. And then my next question is really want to… of kind of connecting the dots, with the scenario that you have laid out you've obviously got some potential for the upside from the core operation asphalt business as well as a lot of synergistic opportunity that lend itself a more DCF accretion based on the projects that you have detailed. It should give you a lot of comfort in cash flow coverage given what you are withholding. So if everything unfolds like you think, that would probably lend itself to a bit more DCF growth than what you've kind of detailed at that 7% mortgage. By our math it looks like you could get close to a higher single digit or may be even a lower double-digit type year-over-year growth. Is that really stretching the model and still keeping pretty good cash flow coverage. Does that logic makes sense?

[Curt Anastasio:]

Yeah, I'm not going to reaffirm your numbers but I agree completely with what you've said and that I would expect significant ability to grow the distribution at a higher rate than I have laid out for the base business. Absolutely, it is just math. If I tell you we are expecting around 100 million more EBITDA and then quite obviously we can grow the distribution at a higher rate along the lines you're suggesting but we haven't put out that target yet. I am going to hold back on that until we get our arms around this business but I agree with what you've said. Just bottom line is I agree with what you have said.

[Darren Horowitz:]

Thanks, Curt. I appreciate it.

[Curt Anastasio:]

Yeah.

[Operator:]

[Operator Instructions] And there are no further questions at this time, sir.

[Mark Meador:]

Thank you, operator. Thank you again for joining us and if you have any further questions please feel free to call NuStar.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.