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NuStar Energy L.P. (NYSE:NS)

Q4 2009 Earnings Call

January 29, 2010 8:30 am ET

Executives

Mark Meador - Vice President, Investor Relations

Curt Anastasio - President, Chief Executive Officer and Director

Mike Hoeltzel - Senior Vice President Strategic Planning

Steve Blank – Senior Vice President, Chief Financial Officer and Treasurer

Danny Oliver - Vice President - Marketing and Business Development

Paul Brattlof - Senior Vice President, Marketing, Supply and Trading

Analysts

Darren Horowitz - Raymond James

Yves Siegel – Credit Suisse

Noah Lerner – Hartz Capital

Michael Blum - Wachovia Securities

Analyst for John Tysseland - Citigroup

Michael Cirasoli – Goldman Sachs

Andrew Gunlock - ASP

[Garret Latchkey] – RBC Capital Markets

Louis Shamie - Zimmer Lucas Partners

Ross Payne - Wachovia Securities

Operator

Welcome everyone to the NuStar Energy L.P. and NuStar GP Holdings LLC fourth quarter and full year 2009 earnings conference call. (Operator Instructions) I would now like to turn the conference over to Mr. Mark Meador, Vice President of Investor Relations. Sir you may begin your conference.

Mark Meador

Thank you, operator. Good morning and welcome to our conference call to discuss NuStar Energy L.P. and NuStar GP Holdings LLC's fourth quarter and full year 2009 earnings results. If you have not received the earnings releases and would like copies of each you may obtain them from our websites at nustarenergy.com and nustargp.com.

Attached to the earnings releases we have provided additional financial information for both companies including information on NuStar Energy L.P.'s business segments. In addition, we have posted operating highlights and fundamental data for our as held operations under the investors' portion of the NuStar Energy L.P. website. If after reviewing the attached tables and operating highlights you have question from information that is presented there, please feel free to contact us after the call.

With me today are 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 described in NuStar Energy, L.P. and NuStar GP Holdings Annual Reports on Form 10-K for the year ended December 31, 2008 and subsequent filings with the Securities and Exchange Commission. Actual results may materially differ from those discussed in these forward-looking statements and we undertake no duty to update any forward-looking statements to conform the statements to actual results or changes in our expectations.

During the course of the call, we will also make reference to certain non-GAAP financial measures. We have provided an additional schedule under the investors and financial reports and SEC filings portion of the NuStar Energy L.P. website reconciling these non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with the US generally accepted accounting principles or GAAP. Our non-GAAP financial measures should not be considered as alternatives to GAAP measures such as net income, operating income, net cash flows provided by operating activities or any other GAAP measure of liquidity or financial performance.

I will now turn the call over to Curt.

Curt Anastasio

Good morning and thank you for joining us. Last year certainly presented a challenging business landscape brought on by the global financial crisis that began in late 2008 and continued well into 2009. In light of the challenges we faced as a result of the crisis, mainly weaker demand for asphalt and other petroleum products, NuStar performed well and I am proud of what our people accomplished.

Fee based transportation and storage business segments were true to form, performing quite well during the worst recession since the Great Depression and partially offsetting weaker results from asphalt and fuels’ marketing segment. Combined, transportation and storage generated an incremental $39 million of segmental EBITDA in 2009 which together with significantly lower interest expense and reliability capital helped our distributable cash flows increase over 2008. This allowed us to increase the distribution in a period where many MLPs suspended their distribution, reduced it or just maintained the distribution at current levels.

At the L.P. we increased the distribution in 2009 by nearly 4% and still maintained a strong distribution coverage ratio of 1.33 times. At the G.P. we increased the distribution around 9.5% as the incentive distribution rights helped boost the distribution rate. While some investors were concerned last year that weaker asphalt results could jeopardize the distribution I am pleased to say that not only did we increase it but that all of the distribution in 2009 was covered by the non-asphalt distributable cash flows. So again this effectively provides NuStar investors optionality on the performance of the asphalt operations since our other operations and if required the 50% hold back on the asphalt cash flows are expected to cover all of the distribution.

While I was not surprised at how well storage performed last year since I expected the completion of the last phase of expansion projects under our $400 million construction program to benefit that segment, I was impressed with the results from our transportation segment. Excluding the impact of pipeline asset sales completed in the second quarter of last year throughput declined around 10.5% in 2009 compared to 2008.

However, our segmental EBITDA actually increased by $4.6 million. These results show the relative stability of this segment in a period of very weak demand that is mainly due to the dual benefit that interstate pipelines receive from tariff rates that are indexed to inflation and in a recessionary period lower operating costs.

Our asphalt and fuels marketing business generated $80 million of segmental EBITDA in 2009 of which $70 million came from asphalt. While this was lower than we originally expected in 2009 it was still a solid contribution. Our asphalt operations were primarily impacted by lower demand due to the recession and a slow start to stimulus fund spending. Even though we were right in our call about tightness in asphalt supply as production and imports declined significantly throughout the year, asphalt demand turned out to be even weaker than our conservative estimates resulting in lower margins and sales volumes.

I am still pleased however, with the cumulative performance of the asphalt operations since the adjusted EBITDA contribution for the nearly two years we have owned the former Citgo Asphalt Refining and Marketing business excluding the 2008 crude oil hedging loss, is now just over $220 million. That is in line with our acquisition economics and is a payback that is on track to be better than the typical MLP acquisition.

In addition, our thesis on growing tightness and supply continues to prove out as margins have already responded to favorable market fundamentals well before the full impact of the coker capacity expansions we expect in 2011 and 2012. The adjusted margin per barrel for 2008 and 2009 excluding the crude oil hedging loss incurred in 2008 averaged $7.55, significantly higher than what the average margin per barrel was for the first seven years of the decade prior to NuStar’s 2008 acquisition.

The early returns on the acquisition while volatile are very good and I am optimistic we will see improved results in 2010 and beyond. I am also pleased at how we positioned the company early last year to handle capital markets that were basically shut down or prohibitively expensive because of the financial crisis. If you recall, early in 2009 we were cautious on our capital spending and lightened our internal growth program to around $80 million, an amount that was significantly lower than what we would do normally.

As the capital markets improved throughout the year NuStar loosened its purse strings and started identifying and investing in new high return growth projects and ended the year at $131 million of internal growth projects, a $51 million increase over the $80 million target. We have now laid out plans for the next phase of growth, a program totaling over $500 million for the next 2-3 years that will help NuStar continue to grow. Approximately $310 million of the $500 million is expected to be spent in 2010 and will focus mainly on storage projects.

We continue to have excellent access to capital with currently around $625 million of availability under our revolver and in addition now that all three credit rating agencies have removed the negative outlook imposed at the time of the Citgo asphalt acquisition we are in a good position to access the debt markets should we need to since our cost of debt has declined significantly over the course of the year.

We ended the year where we said we would with a debt to EBITDA ratio of around four times. I am also proud of how once again we had an excellent safety and environmental performance. In fact, we finished 2009 with zero lost time injuries, a first for us and something that is rarely achieved by any company. Even though we already had an excellent performance in our total reportable injury rate, our TRIR, we showed a dramatic 59% improvement over 2008 to 0.31.

To put our TRIR of 0.31 in perspective, the pipeline industry average is 1.6. The terminal industry average is 6.4 and the refining industry average is 1.1. So no matter which industry segment you compare us to our average continues to be far better than industry. I am excited to say we recently learned Fortune Magazine again ranked us as one of the 100 Best Companies to Work for in America. In fact they now rank us at number 21 which is a considerable improvement over the number 44 position last year. We also again grabbed the number one spot among large companies as the best company to work for in the state of Texas and that list will be published in the February issue of Texas Monthly Magazine.

In addition we had another record year for the amount of time and money our employees contributed to communities where we live and work. As I have said many times before, while I am aware that Wall Street may consider these to be soft items, they very quickly lead to hard financially harmful consequences when not done well. We believe that a strong safety and environmental record and strong community involvement is critical to NuStar’s ongoing success as an energy logistics company.

Now I would like to talk about our fourth quarter 2009 results. For the fourth quarter of 2009 the L.P. reported distributable cash flow available for limited partners of $57 million or $0.99 per unit. EBITDA of $91.9 million and earnings to the limited of $28.8 million or $0.50 per unit. The G.P. reported distributable cash flow available to unit holders for the fourth quarter of $18.9 million or $0.45 per unit and earnings of $17 million or $0.40 per unit. The L.P.’s fourth quarter 2009 distributable cash flows and net income were considerably better than last year’s, particularly if you exclude the $22.7 million net gain resulting mainly from the sale of certain non-strategic pipeline and terminal assets we completed in the fourth quarter of 2008.

The main reason for the higher fourth quarter earnings compared to last year was because of significantly improved results from our asphalt and fuels marketing segment. Results in that segment improved by $23.2 million. If you recall, in the fourth quarter of 2008 the continuing and significant decline in crude oil, asphalt and product prices throughout the quarter outpaced the slower decline in our weighted average cost of goods sold which caused a negative margin of $1.66 per barrel and a loss of $33 million of EBITDA in the asphalt operations.

In the fourth quarter of this year crude prices held up, sales volumes picked up early in the quarter and we actually saw an uncharacteristic rise in asphalt prices. As a result rather than losing money, we earned a much better margin per barrel of $5.34 and generated just over $1 billion of EBITDA. We did, however, see the typical fall off in volumes by late November and early December as much colder weather slowed asphalt listing.

Although it was not a large impact we saw a large increase in 2009 in our polymer modified asphalt sales volumes. We started to benefit from our warm mix asphalt technology. Polymer modified asphalt sales volumes were 8% of total asphalt sales versus 4% last year. Our warm mix technology has continued to progress and we are beginning to see the impact in this year’s shoulder month paving. We are now up to four terminals that are able to sell warm mix asphalt and we are looking to expand further.

Turning to fourth quarter expenses, operating expenses came in at $126.9 million around $8 million lower than our previous guidance of $135 million. The reason for the variance versus guidance was mainly due to lower than expected power costs related to our asphalt and fuels marketing segments.

G&A expenses of $27.2 million were a little higher than our previous guidance of $24-25 million which was primarily due to an increase in our unit option expenses resulting from the increase in NuStar Energy’s unit price during the fourth quarter of 2009. Depreciation and amortization expense of $37.4 million and interest expense of $18.9 million were in line with our previous guidance.

I am pleased to say we achieved significant interest savings in 2009 as we mainly benefited from low rates on our revolver. Interest expense in 2009 was around $11.4 million lower than 2008. Finally we had an income tax benefit of $1.7 million in the fourth quarter of 2009 which was lower than the $4-5 million of income tax expense we were projecting. As part of our normal, ongoing procedures we determined we could utilize more of our tax loss carry forward in future years than we had previously expected.

With respect to our 2009 reliability capital expenditures, in the fourth quarter we identified certain specific discretionary items that did not relate to maintaining equipment and we reclassified those amounts to other capital instead of reliability. That resulted in total reliability capital of $45 million for the full year of 2009. Had we not made that adjustment our liability capital would have been around $60 million or at the low end of our previous guidance range. We have adopted this new policy going forward and have adjusted reliability capital accordingly. For 2010 we expect reliability capital to be in a range of $60-65 million. Previously we were targeting $70-75 million.

Looking ahead to 2010 I expect to see improved results compared to 2009 as we should benefit from new capital projects and higher renewal rates in our storage segment and also better results in our asphalt and fuels marketing segment. In our storage segment we are targeting an incremental $18-22 million of EBITDA in 2010 compared to 2009 as projects started last year and new projects under our significantly higher internal growth program will provide continued growth in this segment.

In addition, we also expect to benefit from renewal rates that we increased significantly last year. While we are not providing today 2010 guidance on our asphalt and fuels marketing segment this early in the year, we are optimistic we will see better results as we expect a higher margin per barrel and increased sales volumes in our asphalt operations.

Near the end of 2009 we have seen a healthy draw on US asphalt inventories from the latest data released from the government despite asphalt demand having declined nearly 14% from 2008 levels. Inventories are now around 14% below 2008 levels and 21% below the five-year average. This is reflective of an even larger decline in asphalt production and imports with production down almost 13% over 2008 levels and imports down over 20% compared to 2008.

As we predicted in 2009 weak refining economics due to narrow light heavy crude oil spreads have caused refiners to run at significantly lower utilization rates resulting in reduced refinery production including production of asphalt. We expect that trend to continue into 2010 as refiners rationalize their production due to weak margins. On top of that, net imports have continued to decline in 2009 and the US is currently exporting 7,700 barrels per day through November, a trend that is expected to continue and is quite bullish since the US was importing 20,000-37,000 barrels per day only a few years ago.

In addition, many suppliers who typically build asphalt inventories during this time of year have decided to hold off as a result of a seasonally uncharacteristic rise in asphalt prices and a lack of supply. All of those trend are pointing to continued tightness to supply in 2010 which should be beneficial to margins. The US refinery coker projects we track which are expected to further tighten asphalt supplies as they come online are proceeding as planned. One of the coker projects expected to start up in the first quarter of 2010 has already commenced operations. The larger impact to asphalt supply should occur next year and in 2012 as most of the big coker capacity additions are expected to come online at that time.

With regard to asphalt demand, we expect to see slightly higher demand in 2010 compared to 2009 even assuming continuing weakness in the private sector. Most of that benefit is expected to come from higher outlays of stimulus funds in the public sector which makes up the large majority of asphalt demand. Although stimulus fund outlays have ramped up recently it still represents only a small percentage of the total apportioned or roughly $5.8 billion of the $27.5 billion available for highway projects.

In addition, stimulus fund outlays have lagged in many of the states where NuStar markets asphalt. As of December 31, only 15% of the apportioned funds have been spent in the states where NuStar markets asphalt compared to 21% of all states. As a result, we expect to see a significant ramp up in stimulus fund outlays in 2010 particularly in those states where NuStar markets.

There is a lot of political uncertainty at this time. However, we could see further upside to our demand projection in 2010 and beyond if the economy recovers faster than expected, Congress reauthorizes the multi-year highway fund or if they approve a new jobs creation bill that has been talked about providing additional funding.

Our transportation segment’s performance in 2010 should be comparable to slightly lower than 2009. Although we expect 2010 transportation volumes to be a bit higher than 2009 volumes excluding the impact of the sales last year and we also expect a slightly higher tariff rate for the calendar year and therefore we expect higher revenues in this segment. Higher natural gas prices and power costs could negatively impact the transportation segment’s financial results.

The preliminary December 2009 producer price index was recently released and the good news is that December held up with the November levels. The July 1, 2010 modifier including the 1.3% adjustment is now estimated to be minus 1.24% which is much better than our earlier projection of minus 2-3%. Regardless, we still believe the 2010 calendar year rate will be higher than the 2009 calendar year rate since we should continue to benefit from last year’s 7.6% tariff increase for the first six months of 2010.

I would also like to reiterate that none of the closures or the proposed sale of refineries announced at this time are expected to impact NuStar’s results.

Having launched the $500 million plus internal growth program I mentioned earlier, our internal growth budget is significantly higher at over $310 million of which approximately $230 million will go towards storage facilities, $20 million to transportation and $60 million to asphalt and fuels marketing. Most of the projects are fee based opportunities to build new storage for large credit worthy customers under long-term contract at strategic domestic and international terminals. All of the contracts are anywhere from 5-8 years in duration.

Other fee based projects include developing and improving logistics at key terminals, expanding our pipeline systems in fast growing regions like South Texas and putting in place the necessary infrastructure to allow us to capture incremental ethanol and biofuel volumes at certain of our terminals. The majority of these projects have internal rates of return well over 20%.

Margin based projects include opportunities to optimize our asphalt operations, expand our fuel oil blending and bunkering and develop new crude supply logistics to capitalize on heavy oil imbalances. As we continue to see a shortfall in heavy crude supply we plan to build the necessary crude oil and heavy fuel oil blending infrastructure in certain key terminals to meet a need of the marketplace. Returns here are also very attractive with expected IRR’s well north of 20%.

For the first quarter of 2010 we expect the partnership’s EBITDA to be similar to the fourth quarter and in a range of $80-100 million. This is reflective of the typical seasonal pattern in asphalt operations as sales volumes and margins taper off and we start building inventories for the upcoming season. Business then should start to pick up in the second quarter of 2010 and more so in the third quarter as sales volumes and margins increase in response to warmer weather and the beginning of the asphalt season.

Looking at some expense estimates for the first quarter, operating expenses are expected to be around $120-125 million, G&A expense in a range of $27-28 million, depreciation and amortization expense around $38-39 million, interest expense of $18-19 million and income tax expense in a range of $5-6 million.

I am very excited about NuStar’s future. We have an attractive set of fee based storage and transportation assets that generate relatively stable cash flows during recessionary periods and are expected to cover our distribution during times when our margin based businesses are weaker just as it did this past year.

Our investors are also expected to benefit from the upside of our asphalt operations as the thesis on tightness of supply as a result of low utilization rates and coker projects coming online plays out. We have a strong balance sheet and we are one of about 15 MLPs out of 70 that have an investment grade rating and NuStar’s debt has now been upgraded to stable after all three ratings agencies removed the negative outlook last year.

Finally and most importantly we have a large and diversified asset footprint in the US and internationally that allows for ample synergistic acquisition and internal growth opportunities. At this time I will open it up for Q&A. Operator?

Question and Answer Session

Operator

(Operator Instructions) The first question comes from the line of Darren Horowitz - Raymond James.

Darren Horowitz - Raymond James

Last time we spoke I think you were tracking about $13 billion in projects that were slated. How do you think the benefit from those is going to be split between this year and next?

Curt Anastasio

I think the $13 billion is probably a fair estimate for outlays in 2010 from the jobs recovery act or the stimulus fund that has already been passed. So if they spent close to six in 2009 and another 13 in 2010 that means we have the balance of $8-9 billion to go in 2011. That is sort of the best current projection on that. We will see a lot more on that law being spent this year than last year and even a little more than will be spent in 2011.

Darren Horowitz - Raymond James

On the coker expansion projects in the prepared commentary you mentioned everything you were looking at was tracking in line with projections. Have you heard anything as we look to the out years that may lead you to believe there is going to be a revision to either the scale or scope of those projects?

Curt Anastasio

Not on the projects we are tracking. I guess the latest would be Marathon’s project is now in operations as we thought it would be during this first quarter. Then Mike do you want to comment further on the outlook on that? I don’t think we have any revisions in our outlook on that.

Mike Hoeltzel

Pretty close to the schedules we had reported before. The next ones coming on stream are Hunt and [Tescaloosa] in the fourth quarter of this year, [Atathena] in Port Arthur first quarter of 2011, Conoco Phillips Wood River towards the end of 2011 and BP in the early 2012.

Operator

The next question comes from the line of Yves Siegel – Credit Suisse.

Yves Siegel – Credit Suisse

Could you elaborate on the change in capital expenditures? It sounds like you moved some maintenance CapEx to gross CapEx?

Steve Blank

Actually what we did was we took some stuff that we had previously talked about in reliability and it was really building projects, office expansion projects and IS projects; things that really aren’t reliability. They are not associated with delivering reliable EBITDA if you will. But there is no return on that necessarily either that you can immediately identify. So they are not strategic. Before we had said if it has a return it is strategic capital and if it doesn’t just put it into reliability. We further fine tuned that assessment by saying wait a minute, $14 million of this stuff this year and $10 million next year let’s move it out of reliability and put into the “other” category.

Yves Siegel – Credit Suisse

Just to be clear that is not flowing through the income statement? That will just come out of the CapEx?

Steve Blank

Right.

Yves Siegel – Credit Suisse

When you think of the margin on the asphalt business can you talk about how important the mix is with the progress you are making on the warm asphalt and where do you think that mix might be going over the next couple of years?

Curt Anastasio

The bigger product and the bigger increase we had and the bigger sales volume overall is the PMA or the polymer modified asphalt so that is more significant. The growth in that is more significant to our bottom line results just because the numbers are bigger. Mike who runs asphalt marketing is here. I think the question is are we going to see more mix going? Is that right?

Yves Siegel – Credit Suisse

Yeah and if PMA is more important maybe you could discuss that as well?

Curt Anastasio

I had mentioned in my remarks it went from 4% to 8% of our sales so we had a big increase there proportionately.

Mike Hoeltzel

The PMAs are more approaching the maturing stage so I think our total we said was around 8% of our total sales and we are probably projecting anywhere from 15-20% as it fully matures. The warm mix is really in its infant stage. There are still just a lot of test projects that the states, cities and counties are doing. It is really in an infant stage and it is really hard to tell how hard that is going to get in the future. It will definitely grow.

Curt Anastasio

It does help extend the season during the winter months.

Mike Hoeltzel

We even saw a little bit of that this year.

Yves Siegel – Credit Suisse

Is it fair to say the growth in PMA does move the needle in terms of the margin?

Mike Hoeltzel

Yes. It is a premium, higher quality product.

Yves Siegel – Credit Suisse

As it relates to the CapEx spending in 2010, how much of that will impact 2010? In other words how much of that CapEx will be done in 2010?

Curt Anastasio

We gave the EBITDA range of increases we expected in storage and in asphalt marketing. As you can see the storage incremental EBITDA this year is not as high as last year’s because we are doing a lot of spending on projects, much more than last year. We have less coming on line producing a return this year than we had last year. Steve is pulling out the breakout on your question.

Steve Blank

We definitely expect some, I don’t have the split between the 310 this year versus what was spent in 2009 and 2008 just in aggregate. I would say probably about $40 million higher from CapEx previously spent and a little of it would come from what we would spend this year but because of the construction projects most of them will show up in 2011.

What we see this year is much more from the $400 million spend we have already done. That is up about $40 million across all the segments. That would capture to some extent the $18-22 million we talked about incrementally on storage but not necessarily all of that. Then the $500 million we identified of which $310 million this year we are going hammer and [tongue] on right now but that won’t start showing up until 2011.

Danny Oliver

A good chunk of that too is a result of our 2009 renewals seeing the full year benefit of that in 2010.

Yves Siegel – Credit Suisse

How much in renewals will you see in 2010 and what kind of increase in rates? Are they flattened out or are you still seeing increases?

Danny Oliver

The renewals we saw in 2009 should provide a total of about $20 million annualized revenue increase. We only recognized the partial year, part of that in 2009 of about $9 million.

Yves Siegel – Credit Suisse

That is revenue?

Danny Oliver

That is revenue. It is hard to comment on renewals over the course of 2010.

Curt Anastasio

The market is tight though. Our storage is basically fully leased up and that is why we have an opportunity to invest more growth capital mainly in storage. We are still very bullish on the storage business.

Operator

The next question comes from the line of Noah Lerner – Hartz Capital.

Noah Lerner – Hartz Capital

Yves kind of started this question but I will just ask a follow-up regarding renewals. Can you give any kind of indication on how much volume in package you have that the contracts are expiring in 2010 compared to what expired in 2009? Can you give a sense of how much of the portfolio will be rolling over this year?

Curt Anastasio

We will and before Danny answers that one big event that has been in the press about us is we have replaced a customer in a large amount of the tankage there at a better deal, on better deal terms. It is a long-term strategic customer for us. Going forward again we will only see part of that benefit in 2010 because what we are doing for this new customer and the terminal going forward is we are investing to make that terminal even more flexible than it is today to attract a wider array of customers. Danny was going through his notes I just wanted to mention that one is a big event for us. Danny do you want to go over it?

Danny Oliver

Maybe I will answer your question a little bit differently than you asked it. I have that information in terms of a percent of storage revenues as opposed to percent of [shale\ capacity. Right now we have 24% of our storage segment is up for renewal in one year or less. 26% in 1-3 years. 37% 3-5 years and 13% greater than five years. So it is a very small percentage that is up for renewal. Just a quarter here in the next year. I will tell you a big chunk of that 24% is on the West coast where we tend to go year to year just because it is a tighter market and we like having the opportunity to renew more often than feel the need to protect that on a longer-term contract.

Noah Lerner – Hartz Capital

From the early comments the market continues to be tight and you are very bullish on it. Is it safe for one to infer then the market prices out there basically are competitive at least competitive with the prices you were seeing last year when you were doing the rollovers?

Danny Oliver

I think so. Every time we have contracts up for renewal we not only have a long list of potential customers wanting that tankage. It is at least at the same number if not higher than at year-end.

Operator

The next question comes from the line of Michael Blum - Wachovia Securities.

Michael Blum - Wachovia Securities

Can you just in terms of refined product pipeline volume can you break it down by product from a trend perspective for the fourth quarter and then how do you see that playing out in 2010?

Curt Anastasio

We have some of that information. We will pull it out for you. Just to kick it off a little bit I think about 30% maybe 31% or so of our pipeline tenders are gasoline so most of our overall pipeline tenders are crude and other refined products. That has actually helped us in recent times to be not so heavily weighted towards gasoline transportation and just talking about you were asking specifically about fourth quarter and Danny has that table.

Danny Oliver

We are pretty stable on these volumes. Give or take a few percentage points maybe it is about 1/3 gasoline, 1/3 crude and 1/3 other. It really doesn’t change. 2-3 percentage points one way or the other.

Michael Blum - Wachovia Securities

Do you see in 2010, how do you see those different components in terms of volume growth or declines?

Curt Anastasio

We are projecting volume growth on our pipeline system in 2010. Danny do you want to comment on that?

Danny Oliver

We have got some very integrated systems. We own the crude lines into the refineries and the product lines out so as one grows the other grows as well. The growth we see would be fairly ratable on the transportation segment across those products.

Michael Blum - Wachovia Securities

Can you remind us what is in that other income line on the income statement?

Steve Blank

It is primarily foreign exchange fluctuations and then for the year there are some asset gains on there as well from sales of pipelines in the second quarter.

Mike Hoeltzel

There is also a little bit of business insurance because of the hurricane Ike issue to the extent that we collect insurance over the book value we put it into other income.

Operator

The next question comes from the line of Analyst for John Tysseland – Citigroup.

Analyst for John Tysseland - Citigroup

I was wondering is there anything to be read from it looks like the switch between vac gas oil and pipe for fuel oil. It seems like it is a line item you didn’t necessarily break out before and it looks like you are phasing out vac gas in favor of fuel oil?

Curt Anastasio

When you talk about what is the first thing you are saying for my clarification? I hear you saying fuel oil but you are saying nat gas?

Analyst for John Tysseland - Citigroup

Vacuum gas.

Curt Anastasio

I’m sorry, vacuum gas over high sulfur fuel oil. Go ahead Paul.

Paul Brattlof

What we did is during the end of the fourth quarter we saw wholesale prices of asphalt fall below fuel oil values so we blended some VGO into some of our asphalt and made fuel oil at that point in the fourth quarter.

Analyst for John Tysseland - Citigroup

Would this be related to some of the capital you have allocated towards asphalt to kind of increase your flexibility in that segment?

Curt Anastasio

To some degree. Not so much specifically that. I think this was more an opportunity to take advantage of a market arbitrage or market situation that we were able to do with the assets we have. It does reflect the value of having the assets we have. The tankage we have. The control over the marine tonnage we have and the traders we have we were able to execute the deals with customers. When that trade goes one way or the other we are able to timely capitalize on it. Paul and his people can do that.

Operator

The next question comes from the line of Michael Cirasoli – Goldman Sachs.

Michael Cirasoli – Goldman Sachs

How has your acquisition strategy changed if at all now that you are off the negative watch?

Curt Anastasio

Well it really hasn’t changed the acquisition strategy. We have acquisition opportunities that relate to really all three of the business segments we are in. I think what the negative watch does is if we do go to the debt markets the spreads are tighter to begin with but also we are going to have a better offering on better terms.

Steve Blank

You hit the nail on the head. Lower cost of capital.

Curt Anastasio

It enhances obviously the suite of things we can do from that standpoint but really it is the same type of deals we would look at.

Michael Cirasoli – Goldman Sachs

When you say all three segments that means you would also be interested in asphalt refining or you are more kind of focused on the transportation and storage?

Curt Anastasio

The answer is yes on asphalt refining and marketing if we found the right opportunity. We have talked before about either buying or building in markets where we are not today. We are kind of a big gorilla on the east coast and we have some spare capacity there so we would be more likely to buy or build asphalt capacity in a different region like the US gulf coast or the west coast or something like that. We are taking a hard look at the Gulf Coast right now. We might even have a project put together an asphalt plant at an existing terminal of ours on the US Gulf Coast. So we are studying that right now.

On the acquisition side I would tell you most of the opportunities we are working right now are on the storage side. Not just in the US but internationally as well. That is the biggest, in terms of volume of opportunity that is where it is coming from.

Michael Cirasoli – Goldman Sachs

Can you provide color on non-stimulus driven expectations for asphalt in 2010?

Curt Anastasio

The stimulus spending, when we tell you we expect slightly better demand that is really the main reason. The main reason is more of that stimulus spending. We also crank in some modest economic recovery. Not a lot. I know we had this big GDP number come out today but we don’t really believe that is reflecting of economic growth going forward in 2010. We also crank into our assumptions a further decline in private demand, in private sector demand for asphalt. We had a really weak 2009 and we crank in an even weaker 2010 from the private sector. When we factor all that in what we get is a slight uptick in asphalt demand. Mike Hoeltzel do you want to comment further on it?

Mike Hoeltzel

We think he big pushes in the federally funded with the stimulus package as Curt said to be $11 billion next year versus just $5.6 million in 2009 we expect that to be up in the teens as far as year-over-year percentage but it is offset by the non-federally funded being down probably in the low single digit numbers. Then as Curt said the private demand probably in the higher single digit numbers. When you put that all together we are looking at flat to single digit improvement overall.

Curt Anastasio

Our probable case going forward is low single digit increase in asphalt demand.

Mike Hoeltzel

We are still hopeful that there is a chance that it could be a remote change that the current administration passes a new 6-year highway bill which…

Curt Anastasio

That would be upside to what we have assumed. We have kind of assumed…Mike is right to raise that. We assume no real reauthorization long-term of the basic highway trust fund program that is in place. We assume that doesn’t happen and they just continue to extend the existing program. We also assume we do not get the second stimulus package if you will that President Obama has proposed which includes another $27.5 billion for road repair and maintenance. When we give you those projections we are assuming those things do not happen. If they do happen that is all upside to 2010 and beyond. Even if we get partial approval on those things.

Operator

The next question comes from the line of Andrew Gunlock – ASP.

Andrew Gunlock - ASP

The inventory both finished goods and refinery feedstock. Would you happen to have that number?

Curt Anastasio

You are talking about year-end or right at the moment?

Andrew Gunlock - ASP

Either one. Both?

Curt Anastasio

Year end we were sort of seasonably low on our inventories. We got our asphalt down to about the level you would expect. The same with crude. There shouldn’t be any big surprises there. We did have a fuel [inaudible] cargo in the fourth and first quarter so that might make it look like the intermediate inventories are slightly higher.

Steve Blank

I can tell you we ended the year at target on our asphalt. We didn’t have anything built but we were on target with all our asphalt and our intermediate like Curt said we did have one cargo slip over, about 400,000 barrels, but everything else was in line with expectations. It is 1.7 million for asphalt.

Andrew Gunlock - ASP

What is the dollar amount in inventory?

Steve Blank

About $112 million for asphalt.

Andrew Gunlock - ASP

Somewhat related to Yves’ earlier question on the 220 I think of the 310 going into storage the CapEx you mentioned the 18-22 incremental for this year is mostly related to your older spend. Then this spend would be more 2011. You continue to see 20% type returns on the cash you are investing in the business so basically kind of…

Curt Anastasio

Yes. On the subject of returns as I think every once in awhile it comes up over the years since we have become a public company. Obviously we have risk adjusted returns. If we have a long-term storage contract with a big national oil company or a major oil company or a big credit worthy customer in a strategic location we are willing to accept a lower rate of return to sign that deal up compared to one that has to be risk adjusted either because there is more of a margin element or we are less confident about the location or what have you. Then we get our project returns up well north of 20%. So when we throw these numbers out like 20% is kind of a blended overall return taking all of those various risk adjusted type projects into account.

Andrew Gunlock - ASP

On asphalt, the first is I saw that you have established new marketing facilities both in the south and in New Haven I think I saw. Are these incremental add ons to your distribution or are these kind of meaningful moves in what I had thought was quite concentrated markets already?

Mike Hoeltzel

The two in the south are incremental to what we had last year. The New Haven market that was a wholesale facility we had a customer in the north that we would wholesale to. We converted that to a [rack].

Curt Anastasio

That is a margin upgrade situation. Mike was already supplying a customer and now he gets to capture the [rack] noise.

Andrew Gunlock - ASP

The last thing, you mentioned on refineries none of the shut downs and other stuff we have been reading about has affected you including I guess the Bolero one nearby. On the positive side do you see any of the problems in complex refining land helping you? In other words not just the cokers coming on but the shut downs that can be expected and may start to happen?

Curt Anastasio

The lower utilization rates like we mentioned as part of the reason you see such low levels of asphalt production and of course shut downs can do that too when you have an asphalt producing plant. Even for example Shell recently shut down their Montreal refinery and they made several thousand barrels of asphalt a day into the North American marketplace that is not going to be there now. Your point is very well taken and it is right on. Do you want to comment further on it Mike?

Mike Hoeltzel

I had my group compile a list of about 23 refineries that are on the bubble. We don’t think they will all shut down because that represents 2.1 million barrels of capacity. We looked at that composite list and they represent about 60,000 barrels per day of asphalt capacity and only about 40,000 barrels of coker capacity so that makes us think in general the next round of closures are going to reduce asphalt production.

Andrew Gunlock - ASP

All of that 60,000 is in your east coast markets or is that a national number?

Mike Hoeltzel

No that is US total.

Curt Anastasio

That is the whole country. That is a big part of total asphalt production in the United States.

Andrew Gunlock - ASP

How much would be directly…I understand that it can move around but how much would be directly in Canada or down south or whatever that is more directly affecting your markets?

Mike Hoeltzel

Actually most of it is in the Midwest market because the inland refineries are dependent upon asphalt to get rid of the bottom of the barrel but that does impact our east coast market because they rail into the western edge of our market orbit.

Steve Blank

The east coast is a net imported of asphalt so…

Operator

The next question comes from the line of [Garret Latchkey] – RBC Capital Markets.

[Garret Latchkey] – RBC Capital Markets

With some of the reliability CapEx being pushed over into the growth CapEx side, how does that affect the reliability CapEx outlook for 2010 and beyond?

Steve Blank

I think the range was 60-65. We took 10 out of reliability because of reclassing it to other. Again it is like IS systems, admin buildings, safety, purchasing, cars, vehicles and things like that. There is not a return associated with it but it is stuff you don’t really have to do that for reliable operations. More consistent with how we have seen some other companies class these.

[Garret Latchkey] – RBC Capital Markets

So we are looking for more of a 60 level in 2010?

Steve Blank

Yes we said 60-65.

Curt Anastasio

I think Mark may have given previous guidance. I don’t know. 70-75 without the reclass.

Operator

The next question comes from the line of Louis Shamie - Zimmer Lucas Partners.

Louis Shamie - Zimmer Lucas Partners

I had a couple of housekeeping questions. First off how did you end the year in terms of cash balance?

Steve Blank

$65 million.

Louis Shamie - Zimmer Lucas Partners

Someone had asked about inventory levels on the asphalt side. Where did your crude inventories stand at the end of the year?

Paul Brattlof

One million barrels.

Louis Shamie - Zimmer Lucas Partners

What is the dollar amount associated with that?

Paul Brattlof

$74 million.

Louis Shamie - Zimmer Lucas Partners

Can you give us a full year let’s say for 2008 and 2009 how much asphalt you actually sold in terms of tons or millions of barrels or…

Curt Anastasio

We prefer not to get into that on this call.

Operator

The next question comes from the line of Ross Payne - Wachovia Securities.

Ross Payne - Wachovia Securities

If you look at the asphalt operating highlights you have on your web page it looks like imports were relatively flat from 2008 to 2009. Do you think imports stay pretty level to 2008 and 2009 as you look into 2010 or do you think domestic production is going to take more of that market share?

Mike Hoeltzel

The imports have been pretty level. As Curt mentioned, we expect that trend to continue into 2010. Imports to remain low. We have seen a trend the last couple of years where we have been basically exporting more asphalt where a few years ago we were importing 20,000 to 30,000 barrels a day.

Curt Anastasio

I don’t know what is on the website. But I can tell you this, we don’t expect any more imports. That is probably mainly Irving into Northern New England. Montreal that is gone. That will be gone actually that piece of it. We don’t see more imports coming in. We see it actually going the other way.

Mike Hoeltzel

We see more and more people asking for barrels to export out of the US so there is more activity there.

Unidentified Speaker

There are more markets that are pretty robust…

Ross Payne - Wachovia Securities

So well below the five-year average?

Steve Blank

About 50% below the five-year average. A pretty big drop.

Operator

There are no further questions at this time.

Mike Hoeltzel

Thank you operator. If you have any questions please feel free to call NuStar.

Operator

Thank you ladies and gentlemen. This will conclude today’s conference call. You may now disconnect.

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Source: NuStar Energy L.P. Q4 2009 Earnings Call Transcript
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