NuStar Energy LP (NS) 2008 Q4 法說會逐字稿

Good morning. My name is Brandy 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 2008 earnings conference call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Thank you.

Mr. Meador, you may begin your conference.

Thank you, operator. Good morning and welcome to our conference call to discuss NuStar Energy LP and NuStarGP Holdings LLC's fourth-quarter and full-year 2008 earnings results.

If you have not received the earnings releases and would like copies of each, you may obtain them from our Web sites 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. In addition, we have posted operating highlights and fundamental data for our asphalt operations under the Investor's portion of the NuStar Energy LP Web site. If, after reviewing at the attached tables and operating highlights, you have questions on the information that is presented there, please felt 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. You should refer to the additional information contained in NuStar Energy LP and NuStarGP Holdings LLC's Form 10-Ks for the year ended December 31, 2007 and subsequent filings with the Securities and Exchange Commission.

During the course of this call, we will also make reference to certain non-GAAP financial measures. We have provided an additional schedule under the investors and financial reports and SEC filings portion of the NuStar Energy LP Web site reconciling certain non-GAAP financial measures to their most directly comparable financial measure calculated and presented in accordance with U.S. Generally Accepted Accounting Principles, or GAAP. Our non-GAAP financial measures should not be considered as alternatives to GAAP measures such as net income, operating income, net cash flows provided by operating activities or any other GAAP measures of liquidity or financial performance.

I will now turn the call over to Curt.

Good morning and thanks for joining us.

I am very pleased to say that while many companies struggled last year during a very challenging economic environment, NuStar shined, finishing 2008 with our best year ever in practically every single category. As you may have seen in the earnings release we issued this morning, NuStar reported record revenues, record earnings, distributable cash flow and EBITDA for 2008, all significantly higher than the previous record and higher than last year.

With our 2008 revenues more than 225% higher than last year, or $4.8 billion, we expect to be ranked on the Fortune 500 listing for the first time, which ranks the top 500 US public corporations. That is indicative of the significant scale NuStar has achieved. We're one of the largest and most geographically diverse MLPs with a liquid storage capacity that ranks as the second-largest in the United States and the world's third-largest. We expect to hear our Fortune 500 ranking within the next couple of months.

The single biggest contributor to the increase in our 2008 earnings was the addition of our asphalt operations which generated $90 million of EBITDA or $76 million of operating income for the nine months we owned it. This is about two-thirds of the nearly $140 million EBITDA increase year-over-year and that is after accounting for the onetime $61 million hedge loss we incurred in the second quarter. This business has already exceeded our expectations for just the short time we have owned it and with asphalt supply already tightening, the vast majority of U.S. coker projects proceeding as planned, which are expected to further tighten asphalt supply, and increasing support for a stimulus package that, if passed, will generate more demand for asphalt, the outlook for this business has never looked better.

We also benefited during 2008 from the completion of storage expansion projects under our $400 million construction program which contributed an additional $15 million of operating income for the year. While our $400 million construction program is coming to a close this year, we will benefit even more in 2009 as we expect to achieve a full year's contribution from the projects or around an incremental $30 million of EBITDA.

While we benefited in the fourth quarter from the sale of nonstrategic poor-performing assets that we have been looking to divest for some time, these deals were home runs for us. The assets we sold generated substantial sales proceeds compared to the minimal income they were contributing to NuStar. So they were sold at extremely high multiples. All in all, we received $44 million of proceeds from the assets we sold in the fourth quarter, $36 million of which came from the sale of our joint venture interest in the [Scaly Bellevue] pipeline in Texas. This was roughly a 36 times multiple to 2008 EBITDA, which is not bad considering multiples for it midstream assets have more recently been in the 9 to 12 times range. So I really have to take my hat off to our corporate development group, who did an excellent job marketing those assets.

While these particular onetime items helped the fourth-quarter results, special items for the full year, including those asset sales, actually hurt our 2008 results. If you add back $0.56 per unit of special items to the $4.22 per unit we reported for the full year of 2008, obviously our earnings would have been much higher at $4.78 per unit.

In 2008, we also delivered on the distribution growth target we had set for NuStar Energy and exceeded our target for NuStarGP Holdings. At the LP, we increase the NuStar distribution by around 7% and still maintained a strong coverage ratio of 1.33 times, far above the 1.2 times we were previously targeting. At NuStarGP Holdings, we increased the distribution by almost 15%, exceeding our previously stated goal of about 12% for 2008.

In addition, primarily due to lower capital working requirements as crude and product prices have declined, we reduced our debt balance at the LP by almost $300 million during the last six months of 2008 and currently have more than $600 million of availability under our $1.2 billion revolver. Importantly, our credit agreement does not come up for renegotiation until December of 2012, almost four years from now.

I don't have to tell you that 2008 was the worst year for the capital market since the Great Depression. As the credit crisis intensified later in the year and the economy stalled, the markets crashed, wiping out multi-year stock gains. Despite the tough market conditions, I am pleased to say that NuStar Energy and NuStarGP Holdings outperformed the S&P 500 and the O'Leary and MLP Index as well as the vast majority of our peers in 2008, based on total return. In fact, NuStarGP Holdings was the number one best performing publicly traded general partner in its peer group for 2008 based on total return.

In addition, we once again had an excellent year in our safety and environmental performance. In fact, we exceeded our 2007 performance, which was already a record year for us, and also outperformed our peers and the industry averages. As a result, we continue to win numerous awards for our safety and environmental performance.

I'm proud to say that, after just our first time applying, we recently learned that Fortune magazine ranked uses one of the 100 best companies to work for in America, specifically number 44. The results will appear in the February 2 issue of Fortune magazine.

We were also awarded the number one best company to work for in Texas by a group of business organizations which is spotlighted in the Texas Monthly magazine next month. Previously, we've been recognized as the number one best large company to work for in San Antonio by the San Antonio Business Journal.

These awards result from a culture that encourages giving back to the community, which make us a respected and admired company everywhere we operate. In other words, we are universally recognized as a good corporate citizen. These awards also result from treating every employee with respect and providing excellent pay and benefits, which help us attract and recruit the best people in the industry.

To top it off, we had a record year for the amount of time and money that our employees contributed in the communities where they live and work. A record year and the awards we received are a reflection of our philosophy at NuStar that, if you take care of the employees, they take care of the unitholders and the communities they work in. So as you can tell, this was really an outstanding year for us with many respects and we intend to build on that going forward.

Now, I would like to turn to our fourth-quarter results. At the LP, we reported net income applicable to Limited Partners of $25.3 million or $0.47 per unit, comparable to last year's results. At NuStarGP Holdings, we reported $10.7 million or $0.25 per unit higher than the $9.2 million or $0.22 reported last year.

Distributable cash flow applicable to Limited Partners was $28.8 million or $0.53 per unit for the fourth quarter of 2008 compared to $34.9 million or $0.72 reported last year. In addition, the LP and the GP boards declared quarterly distribution of $1.0575 per unit payable February 12, 2009 for the LP unitholders and a $0.43 per unit distribution payable February 17, 2009 for the GP unitholders.

As previously mentioned, included in the LP's fourth-quarter results is a net gain of around $23 million or $0.41 per unit primarily related to the sale of nonstrategic and underperforming assets. Obviously, if we had not made these special items totaling $0.41, our earnings would have been lower than the $0.47 we reported in the fourth quarter. However, remember that, for the full of year 2008, onetime items actually hurt our results and our results would have been much if you excluded all of those items, including those fourth-quarter assets sales.

While we expected the fourth quarter to be relatively weak, primarily due to the seasonality of the asphalt business, the rapid collapse of the entire energy market during this time further aggravated an already weak quarter. As you may recall, crude oil was around $100 per barrel at the start of the fourth quarter. That fell to $45 per barrel by the end of the year, a $55 per barrel or 55% decline. The collapse in oil prices in the fourth quarter was much faster than the decline in our cost of goods sold.

Within our Asphalt and Fuels Marketing segment, our asphalt business generated an operating loss of $37.5 million. Partially offsetting this were hedging gains primarily associated with our bumpering business. Asphalt sales were actually made during the quarter at prices well above current cost, resulting in a positive gross margin per barrel on a spot basis.

For example, our rack asphalt sales averaged around $515 per short ton, or $92 per barrel for the fourth quarter, while our average crude oil cost was about $40 a barrel, resulting in roughly a $50 per barrel spot gross margin. However, the continuing and significant decline in crude oil and asphalt and product prices throughout the fourth quarter outpaced the slower decline in our weighted average cost of goods sold, which cause the margins we actually book to compress.

Since there is typically a two to five-month lag depending on the time of year -- in other words faster in the summer, slower in the winter between when we buy the crude and when we sell the asphalt and intermediate products -- our cost of goods sold will reflect this lag. In this instance, our cost of goods sold carried a price that was higher at the start of the fourth quarter and continued to be high relative to product prices even though spot crude oil prices dropped substantially. Ultimately, this resulted in a slightly negative product margin of $1.66 per barrel for the fourth quarter. However, the margin for the full year of 2008 was $8.78 cents positive per barrel, excluding the impact of the hedge loss in the second quarter.

If we had used the LIFO inventory accounting method rather than weighted average cost, our operating income would have been significantly positive in the fourth quarter of '08 rather than a loss. But in a rising price environment like we experienced in the second and third quarters of 2008, LIFO accounting would have generated much worse results for those periods than we actually recorded using average costs. So while LIFO would've benefited us in the fourth quarter, average cost help us in the second and third quarters and tends to be the least volatile method for us over the full year.

As expected, our sales volumes were lower in the fourth quarter compared to the third due to the seasonality of the business and the planned shutdown of our refineries in December for maintenance. It's also impacted our cost of goods sold per barrel during the fourth quarter since the rate at which we turned over the higher-priced inventory was much slower than, for example, during the second and third quarters when asphalt sales are much stronger.

While we currently expect results from our asphalt operations to be seasonally weak in the first quarter of '09, we continue to work off higher price inventories, resulting in a much lower weighted average cost of inventory by the start of the asphalt season. We are expecting the results from the asphalt operations to be better for the full year of 2009 compared to 2008, including the hedging loss, with most of the benefit coming in the peak asphalt season or the second and third quarters.

Now, our other business segments, Transportation and Storage, actually performed remarkably well during the fourth quarter compared to the third quarter of '08 and the fourth quarter of last year despite lower volumes on pipelines and throughput related facilities. Both segments experienced higher operating income in the fourth quarter of '08 compared to the third quarter of '08 and the fourth quarter of last year.

On the Transportation segment, throughput volumes declined in the fourth quarter compared to the third by around 50,000 barrels a day. Compared to the fourth quarter of last year, volumes declined around 130,000 barrels per day. This decline was primarily due to turnarounds in October and November at two of the Valero energy refineries we serve. If you exclude the impact of those turnarounds, volumes on our pipelines would've been more than 3% higher than the third quarter of 2008 and comparable to the fourth quarter of the previous year. More importantly, the impact to our Transportation results in the fourth quarter from these turnarounds was minimal as we had higher revenues and higher operating income in this segment.

Fourth-quarter operating income on our Transportation segment increased by $10.1 million or nearly 35% compared to the third quarter of '08. It was actually the highest quarterly operating income for the year for this segment. While the positive variance was primarily due to about $7.5 million in lower operating expense, we also benefited from $2.6 million in higher revenues. Most of the higher revenues were from our East pipeline, as lower product prices spurred stronger demand for gasoline and diesel in this region.

Increased agricultural demand associated with a late harvest resulted in demand being higher in the year than it normally would, also increasing our propane and diesel volumes on this line. A late harvest also benefited our ammonia pipeline system, which saw higher volumes and revenues for the period. We saw higher throughputs on our South Texas pipelines that were impacted during the third quarter from the hurricanes but ramped up in the fourth quarter.

Again, because of the markets we serve and the commodities we handle, we are more insulated from weaker demand compared to many other refined product pipelines. This quarter again exemplifies that story.

Operating expenses on our Transportation segment were lower by about $7.5 million compared to the third quarter of '08 as we benefited from mainly lower power costs as natural gas prices declined during the period and also volume gains on our inventory product imbalances.

On our Storage business, throughputs were lower by around 11,600 barrels a day or 1.6% compared to the third quarter. This was mainly due to reduced crude oil storage at our facility on the West Coast as one of the refineries we serve cut back gasoline production. However, revenues and operating income were up. Operating income increased by $7.7 million or nearly 26% versus the third quarter of '08. It was much higher than the fourth quarter of last year by $12.7 million or 50%.

While we benefited from lower operating expense during the period, we were also the beneficiary of higher revenues primarily due to increased business at our St. Eustatius facility in the Caribbean and the completion of storage expansion projects under our $400 million construction program. During the fourth quarter of '08, we completed nearly $60 million of projects, including tank expansions at our facilities in St. James, Louisiana and Amsterdam in the Netherlands.

One last thing I'd like to point out about the storage business is that the majority of the almost 92,000 barrel per day or 12% shown as a decline in storage throughputs fourth quarter 2008 versus fourth quarter 2007 was really not a decline at all because it was simply due to a change in the contract at our storage facility in Corpus Christi, Texas at the beginning of '08. As we have mentioned previously, we changed from a throughput agreement to a tank rental agreement, so if you exclude the impact of that change in the nature of the agreement, our throughputs would've been down only about 2%. Again, while this therefore impacted our volumes, it had almost no impact on our revenues, which were higher overall by about 10% for the comparative period.

Looking at some of our other expenses for the fourth quarter, G&A expenses were flat compared to the third quarter of '08 and only slightly higher compared to the fourth quarter of last year. DD&A was roughly flat versus the third quarter and $6.1 million higher than the fourth quarter of last year. The increase over last year was mainly due to the acquisition of CITGO's Asphalt business and the completion of our growth projects.

Last, while interest expense was higher in the fourth quarter compared to last year by nearly $5 million as we partially financed the Asphalt acquisition and the associated working capital and growth projects with additional debt, it was lower than the third quarter of '08 by about $1.4 billion or 5.7%, mainly due to reduced borrowings on our revolver and a lower average interest rate.

With respect our capital expenditures for 2008, we were in line with our previous guidance for reliability capital, spending $55.6 million for the full year. However, we were a bit lower than the guidance we provided for strategic capital, or at $142.3 million, as some spending for our Amsterdam project slipped into 2009.

Looking ahead to 2009, we are optimistic on the outlook for all three business segments and expect all of them to perform better than they did in 2008. Based on current expectations, while we are currently projecting total EBITDA to be higher in 2009 versus 2008, we have not taken into account certain items which would further benefit our results for the year.

First, we have not included any impact in our forecast from the proposed economic stimulus package that provides for, among other things, additional highway funding. The current version of the $825 billion economic stimulus package out recently from the House Democrats, which is entitled the American Recovery and Reinvestment Act of 2009, pledges a total of $30 billion dedicated to highway and bridge projects. It will be distributed using the current safety [lieu], as they call it, funding formula. However, states will not have to put up matching funds as they normally would, and they will have to spend the stimulus money or risk forfeiting it.

While there are still several details that need to be sorted out as it makes its way through Congress, we could see upwards of 10% demand growth 2009 over 2008, depending on the dollar amount, timing and types of projects -- in other words, maintenance projects versus new build projects. This $30 billion would be a significant increase over the $42 billion of federal money that is currently funded through the safety loop for 2009 and certainly much more than we would have ever imagined, further benefiting our Asphalt operations.

Congress will debate this package over the coming days and weeks and other proposals will likely be offered. However, the major provisions, like the infrastructure spending portion, are expected to remain the same. Bottom line -- there is significant support to make this bill happen. However, for the time being, we have conservatively excluded this from our forecasts until we know more.

Our forecast also does not take into account what we expect to be a gradual recovery in refined product demand by the second half this year due to lower prices and improving economy. In fact, as I mentioned this morning, we have already partially benefited in the fourth quarter of 2008 from lower prices as our gasoline and diesel volumes were higher on the East pipeline. This could generate stronger demand than expected and benefit our pipeline and storage throughput volumes in 2009.

Without the benefit of stronger demand, we are currently projecting volumes on our transportation segment to be comparable in 2009 versus 2008. New pipeline business and anticipated reduced refinery maintenance schedule and a new pipeline project expected to start up in June should help us achieve this. Since the tariff increase effective for July 1 should be about 7.5% based on the latest 2008 PPI figures, this should help our results in 2009 to be better than 2008.

Keep in mind that the expected 7.5% increase will be the highest tariff increase since indexing started in 1995.

Our Storage segment should also see better results in 2009 as we benefit from a full year's contribution from the projects completed under the $400 million construction program. As I mentioned previously, we should see incremental EBITDA of around $30 million in 2009 from these projects. In addition, we do expect some benefit from contango markets to the extent that certain of our storage contracts are up for renewal. Currently, around 29% of contract revenues are up for renewal over the next year or so.

Turning to Asphalt operations, we believe EBITDA could be in the range of $100 million to $140 million for 2009. At the low end, that would be a roughly $10 million increase over the 2008 $90 million EBITDA contribution, and at the high end a $50 million increase. Again, we have not taken into account at this time any impact from the proposed economic stimulus package, so there could be further upside.

With respect to fundamentals, our view that tightening US asphalt supply driving better than historic margins has really not changed at all. In fact, the significant reduction of asphalt production at numerous refineries due to lower refinery utilization rates, anticipated higher demand driven from the proposed economic stimulus package and really minimal change to our coker story, leaves us to believe that our asphalt operations could be even better than we anticipated over the longer term.

Based on the latest data from the U.S. Energy Information Administration through October of '08, we are seeing US asphalt inventories more than 23% lower than 2007 and around 10% lower than the five-year average. This has been primarily driven by a decline in production of around 10% and a reduction in imports of nearly 45%. If you recall, the lack of imports from Venezuela since early last year has driven the sharp reduction in imports. As inventories continue this declining trend, a new five-year average low would be established by the start of 2009's asphalt paving season.

Keep in mind that the bulk of the U.S. refinery coker projects we are tracking, which are expected to further tighten asphalt supply as they come online, don't start until next year and 2011.

With respect to our results for the first quarter of '09, we expect earnings per unit to be in the range of $0.25 to $0.50 per unit. Our asphalt operations are typically weaker in the first quarter because of the seasonality of the asphalt business. A heavy planned refinery maintenance schedule is also expected to negatively impact our transportation segment in the first quarter. However, we anticipate a much lighter schedule for the balance of the year.

Looking at some expense estimates for the first quarter of '09, operating expenses are expected to be in the range of $110 million to $115 million; G&A expense in the range of $21 million to $22 million; DD&A expense around $36 million to $37 million; interest expense of $20 million to $21 million; and income tax expense in the range of $1 million to $2 million. Also, reliability CapEx for the full year of 2009 is expected in the range of $65 million to $70 million.

We continue to be cautious on our capital spending, given the challenging economic and capital market conditions, and continue to target around $80 million for internal growth projects in 2009. Despite this being significantly below what we normally would spend, we continue to believe this is prudent for the time being. I will say, however, that there's certainly no shortage of growth prospects for NuStar and we guarantee to evaluate attractive opportunities that may present themselves during this challenging time.

While the majority of the $80 million is made up of numerous small-dollar projects, there are some larger ones we intend to work on in 2009. For example, we intend to spend about $15 million on pipeline projects on our East pipeline, ammonia pipeline and at our St. James Louisiana facility to increase the capacity and flexibility of our two pipelines and to accommodate new and existing customers. Another $9 million is expected to be spent on finishing up tank expansion projects at our Texas City and Amsterdam facilities as part of the $400 million program. We also expect to spend about $30 million at our Texas City facility as we continue our plan to improve and upgrade it to make it a world-class terminal. Last, we expect to spend around $14.5 million at our Paulsboro and Savannah asphalt refineries on some of the near-term high return projects we've previously communicated. This includes projects to improve crude flexibility and rates, improve energy efficiency of the refineries and increase the production of higher quality, higher value polymer modified asphalt.

The weighted average IRR for these projects is expected to be around 45% to 50%. So again, we have prioritize our growth capital in 2009 to the very high-return projects.

In summary, I hope you have taken away from this call the great potential for NuStar to outperform this year and over the next few years. While we are proud of our many accomplishments in 2008, we know we have to continue to work even harder to do better in 2009 and going forward as we build NuStar into a great world class company.

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

(Operator Instructions). Darren Horowitz, Raymond James.

(technical difficulty) -- OpEx, particularly as we try and get more comfortable with the relationship of OpEx sequentially with any sort of lag in utilization or throughput?

Darren, the first part of your question was not -- we couldn't hear it. Could you please repeat it?

Yes, sure. Talking on the asphalt side of the business, just more color into OpEx as we get more comfortable with basically looking at how realized OpEx hits sequentially versus any sort of lag in the business?

I'm sorry. The question is (multiple speakers) are we getting more comfortable?

Well, what we're looking at, relative to what you put up historically on a quarterly basis or I think what a lot of us were modeling, is obviously larger than expected operating expenses. I think what we're trying to figure out, as we gauge the sequential progression of the business through this year, obviously there is a bit of a lag. If product sales and utilization is decreasing, how can we forecast the movements in OpEx? Is there anything that was experienced in this quarter that was abnormal or I guess if you could just give us a little bit more color around how we can forecast that?

Yes, not for asphalt OpEx. The lag really relates not to OpEx but our cost of goods. So in a very sharply declining price environment in Q4, that the prices declined more rapidly than we were to sell the inventory and the inventory declined at a slower rate. Now, that is setting up to benefit us of course as we go into the asphalt season this year because we are working off of that higher-priced inventory, that cost of goods is getting lower and lower as we speak. As the market turns up and you get into the asphalt season, we will be selling against that lower cost of goods. So I did not see anything unusual in asphalt OpEx but the cost of goods was really the driver there in connection with the lag that I was talking about.

Yes, no, that makes a lot of sense on the COGs side. I guess you know OpEx at least on a sequential basis was higher and we're just trying to figure out some rationale behind it.

In the 2008 first quarter, we did not have [Carko] and that may be reflected in this year's higher anticipated rates but that would be the only thing from OpEx. The usual run rate is what we are going to expect going forward.

Maybe that is the difference out of the numbers you're looking at. I'm just not sure what you're looking at.

I was just looking at the sequential reported OpEx 3Q to 4Q, that's all. Let me switch gears over to the transportation side. You mentioned, in some of your remarks, that you're going to see pretty refined maintenance, at least in the first quarter. Can you give us a little bit more color on your expectations for kind of flat year-over-year volumes? Can you split it down between [RBP] and crude? More importantly, do you see any additional demand destruction or any sort of impact in refinery utilization in the back half of this year?

Let me answer it this way. We are predicting our full-year volumes for the Transportation segment to be basically flat. Also, our operating income, our bottom-line results, will be up. The reason that is, although you have these first-quarter turnarounds and so forth, we do benefit from the tariff adjustments which hits like 92% of all of our pipeline revenues. When you look at our OpEx forecast and you look at some new revenues coming out in the Transportation segment from projects that will be kicking in, we are going to have -- we anticipate a higher bottom-line result for the Transportation segment going forward.

But you will see turnarounds in the first quarter that are reflective of reduced demand and we have got that baked into our forecast already. A couple of the Valero refineries we serve are going to be down for turnarounds. But also when you look at our throughput related stuff like our pipeline throughputs and pipeline throughput revenues, the lower prices do make a difference. These lower prices we think will be reflected in higher demand as we start moving through the year. You've already seen a little bit of that actually in the fourth quarter. We talked about it on the East line but really overall, even nationally, we saw the decline in gasoline demand even, which has been pretty sharp year-over-year. You saw that lessening as the prices came down. The amount of that decline got less and less and less as you move through the fourth quarter.

So the laws of economics, the laws of supply and demand still apply. The prices are lower, demand goes up for these products. So that affect we expect to see as well. Anyway, even without increased demand, your pipeline segment will do better year-over-year. That is what we are forecasting.

Do you think it could be a situation just based on what you see today that things might actually get worse volumetrically first quarter into the second quarter and then hopefully, as price kind of hits that inflection point where supply and demand balance out, that you get kind of a step change in volumes in the back half of the year? Is that fair to assume?

The big event for us in the first quarter is these turnarounds at a couple of Valero plants that we mentioned. They have announced Texas City; they have talked about Corpus. Yes, we do think lower prices lead to higher demand later. Danny, do you want to comment? We've got Danny Oliver here. Do you want to comment further on that or Paul?

We've got baked into our 2000 numbers in terms of volume the same type of decrease as we saw in 2008, which was roughly 2% across our system, much lower than the national average. We've got that baked in but nothing incremental to that in 2009.

I think it is important to note though that, in our Storage segment, which has -- about 10% of our revenue in the Storage segment is related to actual throughput contracts. Those throughput contracts only represent about 10% of our Storage segment's revenue. While these are affected by these run tests, we see in the first quarter about a 10% decline in volumes on these throughput related assets. But again, that only represents about 1% of the whole.

That is helpful. I appreciate it. Finally, just on the storage side of the business, can you give us the average lease duration on your legacy tankage and then how much higher in percentage terms your new lease rates are just so we can kind again a sense of how the incremental --?

Right. We have got about 29% I think of our contract revenue coming up for renewal -- in other words, less than one year. And so far, what we are seeing is higher rates on renewal either from the existing customers or from replacement customers. So, overall, the Storage segment, again, will be up. Like the pipeline segment, it will be up 2009 versus '08.

Danny, by the way, is our VP of Business Development and he deals with the third-party customers on the tank leases. Do you want to add anything to that, Danny?

I will just say that, given the weakness -- or ask Curt mentioned earlier, as quickly as crude has fallen off, it created a very steep contango market structure which is just adding to the interest in our Storage segment. While we are almost fully leased on our capacities, those contracts that are due within a year, as they come up, we are seeing, in general, rate increases.

So in total, what is the average lease duration for your tankage standing?

Well, we've got -- 29% is one year or less, so that means 71% is long-term, like more than one year. We have got -- much of that is in sort of the one to five-year range, and then we have got close to 20% of our contract revenue is greater than five years.

I appreciate it, guys. Thanks.

Michael Safranski, Onyx Capital.

Good morning. Just a couple of questions -- on the debt balance reduction, is that done by paying down your revolver or are you buying back some of your debt on the open markets?

Just paying down the revolver.

Any reason why you're doing it that way?

Well, we like the flexibility under the revolver. Going out, our bonds are pretty illiquid and we also like to have majority out there. So we've just kind of -- because it is a working capital (inaudible) really that targeted the revolver.

Okay. Now, turning to asphalt, how long do you anticipate the margins being wide and how much would this stimulus plan, in your opinion, impact the margins? If you can also factor in any Chinese infrastructure spending into asphalt margins?

The good margins we saw during the period we owned that business in no way we expect to continue into '09. Now, it could get better if the stimulus package, the economic stimulus package, comes into place because we are saying, if it gets adopted anywhere like you're talking, that could increased demand by 10% or more. So that has a major, major impact on what the potential for margins is, but we are not assuming that.

This is a political process. There's a lot of good talk around it and everybody seems to want to do it, but it is a political process. So until that works its way through, we are not assuming what is going to happen. There's a lot of devil in the details.

But to answer your question, we think good margins will continue in '09 and then we think they get a lot better as you going to 2010 and 2011 as the effect of the coker project starts to kick in.

Chinese demand really doesn't have -- there's a very indirect impact on what we see being a US eastern half of the country oriented asphalt manufacturer and marketer. So it is really not a factor, hardly at all, in our calculations. For us, it is like a pebble in the ocean, really.

Are you able to lock in those margins?

Not very effectively, no, because there is not really a good hedge for asphalt, unfortunately. Paul, do you want to comment? Paul is in charge of trading.

I agree. I think there is not a real good hedge. And at that these price levels, I think it is much more to the upside than the downside, so I do not think there is a need to hedge from that standpoint.

Can you hedge your costs?

By selling product, yes.

One last question, just looking at the distribution. Are you more inclined to use any access cash to increase the distribution or are you just looking to continually pay down debt?

Well, we have got in our plan and the plan we presented to the Board that we will increase the distribution in 2009. We have not put out a specific target yet. We're going to wait until we get further into the year. But that is our plan and we will increase the distribution. We have every year that we've been in existence and that is our plan for 2009 too.

Yes, the budget also does have us paying down some additional debt, maybe about $50 million or more of the debt over the course of the year, but the year has just started so we will have to see how it goes.

Great. Congratulations on a great quarter.

Thank you.

Michael Blum, Wachovia.

Hi, good morning. Just a couple of quick ones -- number one, Curt, you kind of alluded to this but can you talk a little bit more about the demand you are seeing for incremental storage projects, in other words to build more storage? I guess another way to think about that is, if you were not constrained by capital markets or liquidity, how much would -- what would your capital budget look like in '09?

When you look at what we have done for the last couple of years or say through (technical difficulty) '06, you know, you might have expected us to spend maybe twice that $80 million. So that is sort of one benchmark for us.

The demand is out there. I happen to come across a piece that was written by the head of Goldman Sachs' Commodity Group and it really was just a summary of some of the points we all see in this business but basically one of the points he made is the world is really energy infrastructure short and in particular is oil storage short. There is a great need for investment in oil storage really throughout the world. That is really reflected in the fact that we -- as contracts for us come up for renewal, we're able to renew them or replace them. Danny and his guys are able to do it at higher rates. So we still see that out there.

We have a business that is not just the United States but it is also international. We've got some very good locations. That is really where we benefit is from the advantaged locations like a St. Eustatius or a Gulf Coast like a St. James and how we are transforming Texas City, Amsterdam and the ARA range in some of these other places where there's lots of opportunity to invest. So t hat is one of the things I alluded to in my remarks. There is no shortage of opportunities. We could do a lot more, and I expect we will do a lot more, as we go through and we get a little more visibility into how the capital markets are resolving themselves.

On that score, there are some cracks in the ice already. You have seen some MLPs doing equity deals for good size, good execution. What you probably would not have seen -- and I do not have to tell you -- in the latter part of 2008. So things are looking better from that standpoint.

Okay. The second question is, when you look at the asphalt business, your EBITDA was $90 million in '08 for the nine months you owned it. What would that have looked like for the full year? Would that have been much different?

Well, you know, without the hedge loss, you would have added the $61 million but no. Actually, for example, you saw where we reported a loss in the asphalt business itself in the fourth quarter. As we come around to the first quarter, as these costs of goods sold drop, we are approaching -- instead of a loss, you are coming to roughly a breakeven first quarter.

So this is a business where you don't expect to make money in the fourth and first and you do make a lot of money in the second and third. That is the way it is. We are trying to improve that. We have talked in the past about things we can do to make more money in sort of the off-season, if you will. One of them that is a recent development is this so-called warm-mix asphalt. There has been better technology, which allows asphalt to be distributed and weighed at lower heat levels, which extends the season by two months; one month on each end is what our guys are estimating.

And so there is an effort in the industry, and we are part of it, to go to all of the state DOTs and get this product excepted. If you do that, you will see more income in the fourth and first quarters. Hopefully, we will see some of that this season as we get into the fourth quarter of '09, for example. There are things like that. There are some fuel oil possibilities for us as we make intermediate projects that can be blended into marketable fuel oils, but that market did not work for us in the fourth quarter but that could flip and be an opportunity as we move forward as well. So there are things we're looking at for '09 and beyond where we do better in the fourth and first quarter in that segment. It is a seasonal business; there's no question about it.

The last question -- clearly, the GP NSH is trading at a discount no matter how you look at it. Is there anything you as a management team are thinking about as a way to improve the valuation there?

We've given a lot of thought to what we can do on that and really have not found a very good solution because there are tax challenges and other challenges. And so we have just decided, for now, to keep it the way it is going and (multiple speakers).

I agree. (MULTIPLE SPEAKERS). It is just mathematically undervalued. As we continue to do well at the LP, valuation of NSH should go up and reflect that. But I agree with you. It is not reflective of where it should be, just on the math.

Ross Payne, Wachovia.

Curt and Steve, if you guys could comment a little bit on the crackers that are coming online, which ones are coming online in 2010, 2011? We have heard of some calculations. Any significant projects here being delayed?

I'm going to turn it over to Mike Hoeltzel, our Senior VP of Corporate Development. But basically, we have got a list of -- we track about 24 projects. There has been really very, very little change to that but if you want just the 2010s, Mike, you've got the list right there?

We have a few in 2009. In 2010, we have Hunt Tuscaloosa scheduled in the third quarter of 2010 for 18,500 today. The big ones come in 2011 with the Conoco Phillips Wood River project at 65,000 coming on the first quarter. Another big one is the BP Whiting Indiana at 95,000. Actually, it slipped, until the first quarter of 2012, but then there is also some Gulf Coast cokers coming onstream, both the 50,000 Fina Port Arthur and the 40,000 Motiva Port Arthur coming on in the first quarter of 2011, and another one on Pasadena refining system in the second quarter of 2011.

Hey, Ross, if you're interested, we have this list of projects in our (inaudible) presentation on our Web site. It is a December presentation, so you can see the full list there.

Since this is a supply related point, just another thing to add to, because you're talking about cokers and destroying the supply of asphalt, you know, we seem to be going into -- and I think I alluded to it -- into the asphalt season here with very, very low inventories, below five-year averages a below last year based on the EIA data that is most recently available. So it is a bullish supply picture shaping up here for '09, which is one of the reasons we get optimistic about the profitability of asphalt this summer.

Sorry, go ahead.

Any major cancellations that you guys are aware of?

There's some of the referrals of Valero Port Arthur has been -- I'm not sure if it is deferred or canceled. Marathon in Detroit has been deferred but we think only one to two quarters.

Alright. I also wanted to ask what percentage of asphalt out there is used in residential or commercial paving?

I'm sorry. Go ahead, Mike.

Paving is a big part of demand.

Yes, paving is about 85% of total demand. Dependent on what state you are in, it varies from 40% to 60% public and 40% to 60% private, so roughly half and half.

The paving is close to 90% of total demand. That is why the economic stimulus package is bullish for us.

I can see that on the public side and maybe just normal maintenance on the public side. How much of asphalt demand do you think is new build versus maintenance on the (multiple speakers)?

We talk about 90% as maintenance and about 10% is new road.

Okay, so not much of an impact here from lower building is what you guys are seeing or expecting?

It should be pretty muted, actually, for that reason.

You mentioned that overall inventories for asphalt are at very low levels. How did you guys end the year relative to your expectations and relative to prior years for your own company?

Pretty close. We carried forward some -- as the whole price structure collapsed in the petroleum complex, we carried forward a little more inventory than we would have just because we did not want sell it at what we thought where very low prices. We thought we had better prospects to carry it forward and go into the new year.

Paul, do you want to comment further on that?

Yes. We kind of have some flexibility of when we start our winter fill process. As Curt said, when the prices did collapse in November, we chose to quit selling at some of those discounted prices and did carry some over but that will be the beginning of our winter fill for next year.

Okay. Also, you gave us an EBITDA number of $30 million for the $400 million in projects.

Yes, that is the incremental, incremental to be realized in '09.

Oh, the incremental, okay.

Yes. The total is close to $60 million, about $59 million to 60 million that we expect from the projects but as we have been putting these projects into service in '07 and '08, we've been already realizing some of the EBITDA from it.

Right, okay. So you are under $7000 on those projects for sure.

Curt Anastasio Yes.

That sounds good. One last thing -- do you have an exact number on your availability? I know you gave us a round number but --.

On the --?

On the revolver.

On the revolver? I think it was $611 million at the end of December.

Brian Zarahn, Barclays Capital.

The asphalt guidance for '09, is that $100 million to $140 million of EBITDA?

Right.

Okay. It seems like -- what was in EBITDA in '08 for asphalt? With the hedging loss, it seems to be about $128 million.

No, it was $90 million under GAAP for the nine months, but if you add back the $61 million hedging loss, it would have been $151 million.

Are you expecting, excluding the federal stimulus, a decline in your volumes in asphalt?

No.

No?

A slightly lower margin.

Can you give us a little update on your discussions with the rating agencies regarding your outlook? The.

We met with them the first week of November and talked to them at that time about our approved budgeting and five-year outlook for the business. We'll be visiting with them here pretty soon for their annual review. We will go through these numbers with them and our outlook for the business.

(technical difficulty) for now. We just need to have the meeting.

Obviously, the PPI adjustment will be very favorable in '09, but looking at 2010, how do you think about that if the PPI is actually negative?

I think our costs are going to go down to reflect that. That is what happened, for example, in natural gas prices. You know, you saw that that $7.5 million. That's the kind of numbers that is going to be reflected in a lower PPI adjustment but we're getting into lower cost. That is the purpose of the PPI adjustment. If your costs go up, you're supposed to be covered on that, and when they are lower, they cover you less because you're benefiting from lower costs.

Okay, so you think it is sort of neutral?

It is a great hedge against inflation.

Paul Sankey, Deutsche Bank.

Just putting together some of the things you said, I'm thinking about your cash strategies. How far do you want to get your debt down before you are happy?

What we have talked internally and with the rating agencies about is now with the asphalt business adding some seasonality and volatility, that we would like debt to EBITDA to be below 4 times. So, I would see it in the 3.5 to 4 times range. That is pretty much where it is as we look forward this year with the exception of the first quarter because of the inventory build and also when you back at the trailing 12-month EBITDA, we have got the big burden of having that extraordinary $61 million hedging loss in the second quarter, which gets into the EBITDA and also into the debt side because you funded the payment with debt, right, you cash settled it. So, that is a particular unusual to that number, which makes it a little bit higher than forecast at the end of the first quarter. On balance, in that 3.5 to 4 range is what we're shooting for.

So the payment that you mentioned earlier, the debt payment for '09, will probably be the last one, all things equal?

I'm sorry the payment of?

You mentioned paying down some more debt was one of the elements of your '09 guidance that you gave earlier on this call.

Yes. We look -- with the budget that we presented to the agencies and to the Board in November, we had a budgeted distribution increase but we're also paying down about $50 million (multiple speakers).

Yes, that $50 million.

(multiple speakers) as we look out beyond that, you know, in the five-year plan, there would be further debt repayments because we would expect the asphalt business would continue to be generating pretty good free cash flow as these coker projects come in. It is highly predictable. It is kicking out something like $100 million, $110 million a quarter, the old legacy business, the Transportation and the Storage business.

Right. On the balance between the growth projects, you mentioned the growth in the distribution. An additional question for me regarding the level of coverage that you guys would aspire to for what is obviously a seasonal business, I guess you think about it annually. Can you talk a little bit about the balance between -- I think we've gone through debt paydown -- between the growth projects and the growth in the distribution and the level of coverage? That would be great.

Basically, what we have done in the budget and for this year and last year is we presumed that we would only pay out half of the distributable cash flow coming from the asphalt business. That is like running at two times cover and that is just to deal with that volatility.

The base business, we budgeted about 1.07 times cover, so on a blended average basis, we're probably in like the 1.3 range for coverage.

Now, last year, we actually held back all of the distributable cash flow from the asphalt business and we were able to do that because we got the nice payment on the asset sales in the fourth quarter. So, that really more than offset or about offset the lower than anticipated EBITDA we got from the asphalt business at the end of the year.

As product prices came down so rapidly and our average cost of goods sold lagged because of the weighted average, we lost EBITDA on the asphalt side of the business compared to what we saw in September or October, but we really fully offset that with getting $44 million in the door in the fourth quarter from those asset sales at the very high multiple. We hardly lost any EBITDA from those but got the cash in.

So when we looked at 2008, the entire distribution was funded from the base business at a 1.07 times cover. Saying it another way, we held back all of the distributable cash flow from the asphalt business and the asphalt fuels marketing business and used that to pay down debt. In '09, we will not have those special asset sales, or at least we have not budgeted for any but we always kind of look and see selling underperforming assets but we have not budgeted any sales. Similarly, we would expect about a 107 cover on the base business and modeling holding back half of the distributable cash flow from the asphalt business. That will allow us, if we do all of that, to fund all of our reliability, all of our strategic capital of $80 million, and pay down at least $50 million of debt. I don't know if that is more or less than you wanted.

No, that is extremely clear. That's great. Thank you. I think I will leave it there because we've kind of gone over the hour. Thanks a lot.

Mark Easterbrook, RBC Capital Markets.

I've got two quick questions which is -- any impact from the hurricanes? Secondly, you mentioned in the asphalt business that you had a hedge in there for the bunkering business. How much was that hedge for the fourth quarter?

The only real impact we had from the hurricanes was at Texas City and it is a good news/bad news story. I mean, we have insurance for that, less a $1 million deductible, so we're fully insured on the property damage. It is never good to have property damage but on the plus side, some of the older, smaller tanks which were slated for demolition under our strategy for that terminal were the ones that really got damaged. So this really gives us an opportunity to accelerate the rebuilding of the terminal to position it the way we want to position it going forward anyway. So that part of it is kind of -- that is the good news on a bad news story. We did not have any business interruption there. That was really the main place where we had a hurricane impact.

So, Rick Bluntzer, head of Operations, do you want to comment further on that?

The only comment would be, in our last conference call, we projected that we were around $20 million in damage. The infrastructure was actually damaged more significantly than we had anticipated so that has ramped up to where we are looking at $50 million to $60 million as far as the damage. But as you spoke to, we are at a $1 million deductible and we're reviewing that with our insurance carriers now.

On the hedge gain, I think it was $22 million?

It was $22 million in the quarter about $28 million for the year.

[Andrew Goodloch], [ASB].

Good morning. I have just a couple of quick questions. On the $100 million to $140 million asphalt guidance, what does that translate into in terms of a product margin expectation for the year?

Pretty similar to -- we have the $878 million full year margin this year and I think it is a slightly lower assumption for '09, but it is pretty close to that. I think, Mark, do you the exact number?

(MULTIPLE SPEAKERS) $825 or something like that that we have got at the moment in the latest forecast.

I'm sorry, Steve. You're at about $825 million?

I think it was $825 million that we have got. That is a bit higher than budget, Andrew. I think budget is about --

How much working capital do you need? I would expect this year you would need less than last year (multiple speakers).

It's about $225 million average inventories all products, crude, for the asphalt business alone, just the asphalt business, not fuels marketing or (multiple speakers).

Yes, that is the average. It goes from low to high.

What is the high? That is really my question. What is the high that you need in March or April, whenever the peak is?

It looks like it is June, a little over $300 million.

Which is quite a bit down from last year, right, so your interest expense ought to be a touch lower. Is that right?

Yes. Against our budget, which again we presented to the Board in October, we look like we're going to benefit pretty nicely from lower interest expense and lower inventory levels just because crude has collapsed so much since September.

Okay. The contribution from the asset sales, the three properties that you sold, are they negligible? Are they actually in the operating income or are they below the line?

They're in other income and they are -- the big-ticket item was the sale in the interest of the [Scaly Bellevue] pipeline. That was by far (multiple speakers).

I think, the last 12 months, it generated about $700,000 I think of (multiple speakers).

(multiple speakers)

That was [Scaly Bellevue] which (multiple speakers) all three is maybe about $1 million, yes, $1.1 million over the last 12 months.

I see, and I guess split somehow between EBITDA and other income or something like that?

All of the gain goes into the other income line.

No, no, I'm talking about the EBITDA.

EBITDA of $1 million, $1.1 million would have been in our operating income.

It is in the operating income, okay.

No, you have got [Scaly Bellevue] and equity (MULTIPLE SPEAKERS).

(multiple speakers)

So we would have backed out the EBITDA but shown the cash and the distributable cash flow. You eliminate the EBITDA but count the cash on the cash flow statement.

Let me ask you two other quick kind of strategic questions. With the price of tankers being so low, a total collapse basically, and the cost of storing crude in the United States being substantially lower than almost everywhere else in the world, is there any impact on your business from that traders taking advantage of the contango and storing oil here and shipping elsewhere in the world? Do you see any of that or is it too small to matter?

Yes, I mean the contango is supportive of demand. Of course, we have got a lot of our storage locked up in contracts, which we did intentionally to hedge against a downturn in the market.

Dan, do you want to comment further on the effect of contango and shipping?

Again, as Curt mentioned, 90% of our capacity is leased, so we have 10% remaining that is available on a throughput basis, but that is primarily attached to refineries and uses crude oil supply. So while we see this increased -- there is a steepness in the contango adding interest for storage and certainly helping us as contract renewals approach. We don't really have a lot in our system available to lease.

What it does help fuel is new projects. We talked about how we are being constrained on growth capital compared to what we could do. Having a big contango does gin up more interest in projects too. So there is a lot of potential out there.

Lastly, when you look at [SEM] Group and maybe it appears that Morgan Stanley needs to get out of the business now, there's got to be a lot of M&A dialogue, not to mention the distressed players. Is anyone willing to take your equity at these prices in return for providing you for interesting assets?

Yes, but that -- it always -- you know, there are potential acquisitions out there. On [SEN] Group we kind of expressed an interest in selected terminals. They are in the midst of a lot of issues they have to deal with right now, so I don't expect, short-term, anything to happen there. But yes, I mean, there are acquisition discussions going on. I suspect there will be more because there will be more people who are motivated to, maybe even forced to sell assets or even companies as we roll through what looks like for a lot of people a very negative 2009. I think you will see more of those activities.

Yes, the consideration could be stock, cash, or a combination of the two. We look at all of that all of the time and those opportunities are out there. As I said, I think they will increase as the months go by in 2009.

It sounds like price expectations have not come down to what you would consider appropriate.

It really depends. I think they have come down some, but I think they're going to come down more is what I would tell you.

There are no further questions at this time.

Thank you, operator. If you have any further questions, please feel free to call us at NuStar. Thank you for joining us today.

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