NuStar Energy LP (NS) 2007 Q4 法說會逐字稿

Good morning my name is Janus and I will be your conference operator today. At this time I would like to welcome everyone to the NuStar Energy LP and NuStarGP 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). Mr. Meador, you may begin your conference.

Thank you operator and good morning and welcome to our conference call to discuss NuStar Energy LP and NuStarGP Holdings LLC fourth-quarter 2007 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 LP's business segments. If after reviewing the attached tables you have questions on that information as presented there please feel free to contact us after the call.

With me today is Curt Anastasio, CEO and President of NuStar Energy LP and NuStarGP 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 LP's and NuStar GP Holding LLC's Form 10-K for the year ended December 31, 2006 and subsequent filings with the Securities and Exchange Commission. I'll now turn the call over to Curt.

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 -- the 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 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 in 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 onstream 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 advantaged location and that strategy is paying off well for us.

We again had an excellent year in safety and environmental performance and were 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 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 fired 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 to 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 our 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 are 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 $100 million of terminal and pipeline projects. We expect most of the remaining projects or around $260 million of terminal expansion projects be completed by the end of this year.

And nearly all of the projects 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're forecasting EBITDA to be nearly $40 million more than 2007 primarily due to our high return construction projects continuing to come onstream 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 close 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 GP Holdings.

With respect to distribution growth we're 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're 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 are working on right now.

In addition we're working on a unique opportunity to capture additional tariff and [feed] barrels to markets in 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 have recently identified on the CITGO Asphalt acquisition which I will talk about in a moment.

I would 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 have already received clearance from 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 NuStar enter into an asphalt supply agreement which would obligate us to purchase specified quantities of asphalt exported from Venezuela.

However, although we've actually received no official notification, recent news accounts and conversations indicate that the Venezuela National Oil Pedavesa may no longer wish to export asphalt. So as a result we're 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're 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're 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 have 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-round operation of the refineries to diminish the typical seasonality of the asphalt business.

In fact with our goal of maintaining year-round production we can reduce downtime by extending the length of the time between planned 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 acquisition should prove to be even more profitable than the original assumptions.

And we've 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 that 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 US, 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. 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 crude slate 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 we have agreed to. Simply stated we could capture some benefit from the attractive coker margins without having to invest in a coker.

I would also like to briefly comment on our recent disappointing unit price performance before turning to the results for the fourth quarter. Obviously MLPs and 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're 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 6.5 years that 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're well diversified with about half of our business coming from the refined products and crude oil pipelines and the other half from our terminals in crude oil storage. And around 90% of our contracts for our new expansion projects are backed by contracts ranging from five to 10 years in length.

With all the growth we have planned over the next several years that I have just discussed it's surprising that our yields for both the GP and the LP companies are approaching the 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 business and continued distribution growth that is in line with our peer group we believe, we believe the level of 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 ienergy LP reported earnings of $22.6 million or $0.47 per unit which compares to $33 million or $0.70 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 to $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 with $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 14 to unitholders of record on the seventh. 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 NuStarGP Holdings Board declared a quarterly distribution of $0.36 per unit payable February 19 to unitholders 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 close the acquisition we expect to provide updated guidance on the quarter and on the full year.

In closing, I'm 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 unitholder value. We look forward to sharing with you more information on the deal economics of the Asphalt acquisition and the opportunities we have to growth this part of business as soon as we complete it.

At this time I will open it up for Q&A.

(OPERATOR INSTRUCTIONS) [Barry Gleischer], private shareholder.

Hi, how are you, Curt?

I'm good thanks, how are you?

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

The first thing I want to emphasize is that we have negotiated the crude contract with them and I believe they're committed to selling us the crude because it is 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 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 to happen at all.

The other thing that sort of perversely would happen in the unlikely event that this came down would be that we would produce somewhat less asphalt at these refineries if you look at the most likely alternative crudes we would run and that of course would tighten up the supply/demand situation already which you already think is bullish. So you will 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.

[Lewis Shamie, Zimmer Lucas].

Hi everyone. It seems like everything is on track. I have two question. First was regarding the capital expenditure plans that you have for the next few years. What was the dollar amount that you said you have (multiple speakers)

What I said -- just to go back in mid-'06 we said we spent about $400 million over the next couple of years and we spent $100 million of it in '07 and we said there's another $250 million or so to go in that. Now what I have just now said is we have identified on top of that another $500 million that would be built out over the next two to three years.

And is it your expectation that you will build out the full $500 million or is that an [unrisk] number?

That's what we have 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 would not have put it out there if I did not think we had -- that was a reasonable estimate and a good probability of having that level of investment opportunity.

The other thing I wanted to ask about was your bunkering business in the Caribbean. It seems that you are no longer reporting that with your refined product terminals. It's now in the marketing segment. But even with that effect the marketing segment didn't seem to produce that much in terms of EBITDA whereas the bunkering was contributing about $11 million per quarter.

Bunkering did very, very well. Let me explain why we did that because there was some method 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 and 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 the risk management, the hedging and so forth.

And bunkers -- the reason it was separated out is because that -- we inherited that from when we did the Kaneb acquisition. The bunker marketing was in a different group at that time and we 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 having that all in one place they will be able to coordinate for example their fuel oil trading with the bunker marketing. We will have one face that we're presenting 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 will have a better chance of capturing synergies between those two activities.

(technical difficulty) the cost of that organizational change and our desire to put all of this activity in one place that we put it there. Now with regard to results I will make a comment. Part of the reason besides just all the startup time and cost involved in starting a trading 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 a lot of the positions they put on they've taken the hit on the paper without being able to book the corresponding gain they have in the physical inventory positions that they have. So you will start to see more profit come through in the first quarter and throughout 2008 for that reason.

Also just to be clear I think you mentioned a number of $11 million a quarter. It's not the whole St. Eustatius operation that's been transferred into marketing. The terminal aspect of that which is the bulk of the money we make in St. Eustatius is still on the terminal segment. It's just the bunkering (multiple speakers) that's been moved into the marketing segment because it's very akin to what we're doing in that marketing segment now in wholesale marketing (multiple speakers)

We just split the marketing from the terminal. The terminal is still in terminal operations.

As regards that non-cash hedging loss, can you give the order of magnitude of how large that was?

We do have it. I don't have it handy but it is approximately -- is it six? (multiple speakers) It was about $6 million.

Okay great. The final question I had was regarding the -- once the asphalt acquisition is completed where do you stand on plans to possibly expand that by installing a hydrotreater for that plant?

We have people scoping that out. We have a couple of people in the room here, [Mike Pesh] and Mike Hoeltzel, [Pesh] in charge of refining operations and Hoeltzel on corporate development who can comment further. They have been looking at that. All I threw out in my remarks was sort of small, low hanging fruit, quick payback projects that we are for sure are going to do in any event. But a larger project like a hydrotreater as you can imagine requires much more detailed scoping. So, Mike you want to comment?

Yes, we just had access to the plans -- they had plans in progress for the hydrotreater (inaudible) not (inaudible) and we are evaluating that now. It's a little premature to say what the actual cost would be. It would be in the hundreds of millions of dollars to do this. We will have to look very closely at the justification for it but we are proceeding with that evaluation.

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

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

And this project is not in that 500 (multiple speakers)

No, no --

The 500 is really the (multiple speakers) terminal construction.

Yes, no, I hope that's clear. So it's not going to get off the ground if it's worse than our other capital opportunities.

(OPERATOR INSTRUCTIONS) Ross Payne, Wachovia.

First of all, CapEx for 2008 what is that number? I know it's 500 for the next couple of years (multiple speakers)

Its 153 approximately -- about 153.

And 2007 just for book purposes here?

That's 100 -- go-ahead Steve.

Well 2007 was 250 of which about 200 -- 190 or so (multiple speakers) was strategic and then we had reliability at 40 and separation cost from Valero Energy which really were getting a new head office and 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.

Out of the 153 is that inclusive of maintenance CapEx?

Yes.

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

Back to the asphalt operations if you weren't able to --

Of course, that's without (inaudible). That's without the CITGO Asphalt numbers we just gave. Go ahead.

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

It's about $25 million first year (multiple speakers)

Does it stay about that level going forward or move up a little bit?

(inaudible) going forward because of the amount of onetime capital (multiple speakers) conversions (multiple speakers) conversions that we have got in that first year and in terms of first-year growth CapEx it's about 25 or $30 million for now. Just a quick payout projects THAT we immediately would jump on.

That's most of the 35 million we identified as the low hanging fruit should be --

Spent in the first-year.

On the imports if imports stop altogether is it your expectations that you would find other sources that you would be importing into the country or how do you --?

There are other sources of imports but you know the deal we have on the table -- I just want to make clear with Pedavesa is that if they do export we have a right of first purchase on those barrels. If they don't export at all one of the consequences is you'll have a further tightening of supply in the marketplace which is not an unfavorable consequence however we do think that if they do export there's an advantage for us having those barrels and trying to optimize the profitability of those.

But there are alternative sorts of imports. Imports coming from Canada, they occasionally come in from Europe, they come in from elsewhere in Latin America. So yes, there are alternatives 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 included along the lines I described.

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

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

Nine months puts us in the lull of the asphalt season.

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

Okay one last question. You mentioned that you might run these asphalt plants year round. How do you do that from an inventory standpoint? Are there any issues there? And who are you selling it to in the off-season? (multiple speakers)

One thing that's 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 fuel and storage of asphalt and moving it around to try to optimize where it's inventoried, we also try to expand further into the fuel oil business. This is one of the infant 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 St. Eustatius where we have a substantial bunker marketing operation and blend it to take advantage of the fact that we do have bunker sales and bunker customers in the Caribbean and maybe enter new bunker fuel markets on the East Coast and elsewhere where we can 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 than just being so concentrated on being on asphalt mode where you're really stuck having to shut down for a period of time in the winter. You want to comment any further, Mike?

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

[Aris Sheik, Cadmus Capital].

It's Jed Bonom at Cadmus Capital. How are you? (multiple speakers) just going back to the question about the asphalt supply agreement, my understanding was that the asphalt under this agreement would be delivered in specialized heated tankers and that it sounds like it's very integrated with the terminal and storage facilities that you have.

So my question is if this agreement is not signed and does not happen or if there is for some reason, if the contract is not honored and there is a 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 right?

Yes, I think I would have to correct you a little on that because our own at-terminal assets would not be underutilized. We will be making asphalt at the plants and we have a full expectation that we have good levels of utilization and good sales. That aspect of (inaudible) terminal utilization is not dependent on having this contract.

The advantage of having a contract you know is we do have an asphalt marketing group who can take control of these volumes and optimize how and where they get sold. There is that advantage to it. On the other hand if the 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 result you would expect higher profit margins all other things being equal. So one way or another there's going to be some advantage to this (multiple speakers)

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 divert and bring barrels from the Gulf Coast to supply those in the event we didn't have supply coming from Venezuela. So it really wouldn't affect the operations that much other than tighten up the markets.

Barry Gleischer, private investor.

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

The difficulty that all of the pipeline operators have is that they haven't really found a way to move ethanol by pipeline effectively just because of 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 -- as the politicians keep increasing the mandate on ethanol we are handling it more and more at our terminals so that's a good thing because we're able to take that volume and collect blending fees and so on. So that's good for us.

But really unless somebody comes up with a technical or a special situation where you can have a pipeline that's really dedicated to ethanol and people are working on that, it hasn't really been that effective. The other beneficial thing for us is plus ethanol is a renewable fuel and in the United States it's corn-based ethanol that's utilized. What you have 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 have had a great year on the ammonia pipeline. 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 is an opportunity because of the volumes on the ammonia pipeline, the benefits you can get at the terminals and then in Europe you know we handle a lot of biodiesel and Europe is a little bit ahead of the curve compared to the United States on the use of diesel generally and on the use of biodiesel in particular. So, and the European community's also interested in these renewable fuels. So as they increase their directives, we will handle more of those at our European terminals as well.

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

You know, the pipelines we have that are FERC adjusted we get the benefit of those and then the -- most of the rest are -- Texas Railroad Commission for example pipelines there is indexation -- a similar type of indexation allowed for those. And then on the market-based we have the east line and on those that's not FERC index.

(inaudible)

We have 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's all not FERC per se.

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

Actually the proposal I'm thinking of and I just may not be thinking of 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 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 and I'll ask anybody here at the table if they are aware of one that is a negative. They're all shaking their heads so I can't think of one that is a negative. Instead we've got one that is a positive that is pending.

Joe Terrell, Terrell & Co.

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

Well, 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 international business and so they know how to get a deal done too. So we will continue to cooperate with them and get it done.

But it sounds like if they stop your supplies you're not worried about that?

For the reasons I stated (multiple speakers)

As I said it was beaten to death. Let me put you to a different thing. The market seems to be incredibly worried about your risk in an economic slowdown. It doesn't seem to us here in our shop that that is that big an issue. What is your (multiple speakers)

I think you are right, I don't think it's that big an issue. If you look at -- like I said look at the period that we have been public. You don't see a major impact of the macroeconomic situation. You know at the margins it can affect us here and there but not a whole lot for a lot of reasons.

A lot of our volumes are contracted. Our assets supply markets that have to be supplied. People have service stations, they have commitments to customers, we're linked to refineries that here and there may be slow down for a period of time but overall they run really very steadily because they have the economics to do so.

Refiners run -- they have a large sum cost, they run on marginal economics and if there is any profit to be (inaudible) from the last barrel they run to get it. 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 steadily we do regardless of whether GDP is high or lower.

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

I'm not going to (technical difficulty) answer that because he -- our CFO, Steve, is here and has responsibility for risk management of the Company in this respect.

Well I think the most important thing we have done when we started this operation was to make sure that our wholesale marketing supply and trading group which Paul runs doesn't have an incentive to be rogue 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's no trader that should be motivated to take a risk and swing for the fences because they're not going to be unduly compensated. So that's the best thing we can do.

Now in terms of controls, we have got a committee which meets regularly and monitors on a marked-to-market basis the position, looks at the GAAP reported numbers which sometimes doesn't tell the whole story as Curt mentioned (technical difficulty) marked-to-market on the paper but if you don't have hedge accounting you don't get to cap the physical. So even though we have $6 million paper loss when the physical gets sold down in the first quarter that will offset most of that paper loss as (inaudible) to realize. So we look at it everyday on a daily reporting (multiple speakers)

We have daily reporting.

And there are stock limits that get triggered, the committee meets and will either keep the position on or take it off. So it is tightly controlled as best you can. But as that (inaudible) rogue trader showed people can get around control. So again I come back to my original point. What you do is you set up a system and a reward system which does not encourage rogue trading.

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

I'd like to say something else too. We only have about eight to 10 traders that sit very close. Everybody is right there together so it's not like we have this huge bank of traders sitting out there that's very difficult to control. We are all tightly in the same area and you see exactly what is going on.

Thank you and thanks for all your hard work for us unitholders.

We are going to work even harder this year.

Thank you for your confidence in us.

Darren Horowitz, Raymond James.

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

That's a very good question. We have engaged in a lot of discussion about that. Asphalt does not have per se does not have an effective hedge. We have looked at a lot of different things on that. The correlations are really not good. However there is good correlation (inaudible) hedging the crude (inaudible) quantities that we're going to be taking and there also are good hedges for the light products 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 that at the end of the day are ineffective anyway. So that's how we intend to play this.

That having been said, we're paid to exercise judgment here. Ultimately if we do think there's 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 we 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. We think we're better off just running the business and marketing the asphalt (inaudible). Paul do you want to comment further?

I think what you said it very well.

Yes, okay.

That's helpful I appreciate it. My next question is really one of connecting the dots. With the scenario that you've laid out, you have obviously got some potential for the upside from the core operation asphalt business as well as a lot of synergistic opportunity that lends itself to DCF accretion based on the projects that you've detailed. It should give you a lot more comfort cash flow coverage given what you're withholding.

So if everything unfolds like you think that would probably lend itself to a bit more DCF growth and what you kind of detailed at that 7% market. By our math it looks like you could get close to a higher single-digits or maybe even a lower double-digit type year-over-year growth without really stretching the model and still keeping pretty good cash flow coverage. Does that logic make sense?

Yes, I'm not going to reaffirm your numbers but I agree completely with what you have said in that I would expect a significant ability to grow the distribution at a higher rate than I laid out for the base business -- absolutely. It's just math.

If I tell you we're expecting around $100 million more EBITDA 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'm going to hold back on that until we get our arms around this business. But I agree with what you have said. The bottom line is I agree with what you said.

(OPERATOR INSTRUCTIONS) There are no further questions at this time, Sir.

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

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