NuStar Energy LP (NS) 2009 Q4 法說會逐字稿

Good morning. My name is Michael and I will be your conference operator today.

At this time, I would like to welcome everyone to the NuStar Energy LP and NuStar GP Holdings, LLC's fourth quarter and full year 2009 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.

I would now like to turn the conference over to Mr. Mark Meador, Vice President of Investor Relations. You may begin your conference.

Thank you, operator.

Good morning. Welcome to our conference call to discuss NuStar LP and NuStar GP Holdings, LLC's fourth quarter and full year 2009 earnings results. If you have not received the earnings releases and would like copies of each, you may obtain them from our websites at nustarenergy.com and nustargp.com. Attached to the earnings release we will provide 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 portion of the NuStar Energy LP website. If after review the attached tables and operating highlights you have questions on the information present there, please feel free to contact us after the call.

With me today is Curt Anastasio, CEO and President of NuStar Energy LP and NuStar Holdings, LLC, Steve Blank, our CFO, and other members of the Management team. Before we get started we would like to remind you during the course of this call NuStar management will make certain statements concerning future performance of NuStar and other statements that will be forward-looking statements as defined by securities laws. These statements reflect our current views with regard to future events and are subject to various risks, uncertainties, and assumptions described in NuStar Energy LP and NuStar GP Holdings annual reports on form 10-K for the year ended December 31, 2008, and subsequent filings with the Securities and Exchange Commission. Actual results may materially differ from those discussed in these forward-looking statements, and we undertake no duty to update any forward-looking statements to conform the statement to actual results or changes in our expectations.

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

We'll now turn the call over to Curt.

Good morning, and thank you for joining us.

Last year certainly presented a challenging business landscape brought on by the global financial crisis that began in late 2008 and continued well into 2009. In light of the challenges we faced as a result of the crisis, mainly weaker demand for asphalt and other petroleum products, NuStar performed well, and I am proud of what our people accomplished. Our fee-based transportation and storage business segments were true to form, performing quite well during the worst recession since the great depression and partially offsetting weaker result from asphalt and fuels marketing segment. Combined transportation and storage generated an incremental $39 million of segmental EBITDA in 2009, which together with significantly lower interest expense and reliability capital helped our distributable cash flows increase over 2008. This allowed us to increase the distribution in a period where many MLPs suspended their distribution, reduced it, or just maintained distribution at current levels.

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

While I was not surprised how well storage performed last year since I expected the completion of the last phase of expansion projects under our $400 million construction program to benefit that segment, I was impressed with the results from our transportation segment. Excluding the impact of pipeline assets sales, completed in the second quarter of last year, throughputs declined around 10.5% in 2009, compared to 2008. However, our segmental EBITDA actually increased by $4.6 million. These results show the relative stability of this segment in a period of very weak demand that's mainly due to the dual benefit that interstate pipelines receive from tariff rates that are indexed to inflation and, in a recessionary period, lower operating costs.

Our asphalt and fuels marketing business generated $80 million of segmental EBITDA in 2009, of which $70 million came from asphalt. While this was lower than we originally expected in '09, it was still a solid contribution. Our asphalt operations were primarily impacted by lower demand due to the recession and a slow start to stimulus fund spending. Even though we were right on our call about tightness in asphalt supply, as production and imports declined significantly throughout the year, asphalt demand turned out to be even weaker than our conservative estimates, resulting in lower margins and sales volumes. i am still pleased, however, with the cumulative performance of the asphalt operations since the adjusted ebitda contribution for the nearly two years we have owned the former citgo asphalt and remaining marketing business, excluding the 2008 crude oil hedging loss, is now just over $220 million, and that's in line with our acquisition economics and payback that's on track to be better than the typical mlp acquisition. In addition, our thesis on growing tightness in supply continues to prove out as margins have already responded to favorable market fundamentals well before the full impact of the coker capacity expansions we expect in 2011 and 2012.

The adjusted margin for per barrel for 2008 and 2009, excluding the crude oil hedging loss incurred in '08, averaged $7.55, significantly higher than what the average margin per barrel was for the first seven years of the decade prior to NuStar's 2008 acquisition. So the early returns on the acquisition, while volatile are very good, and I am optimistic we'll see improved results in 2010 and beyond. I am also pleased at how we positioned the Company early last year to handle capital markets that were basically shut down or prohibitively expensive because of the financial crisis. If you recall early in '09 we were cautious on our capital spending and lightened our internal growth program to around $80 million, an amount that was significantly lower than what we would do normally. As the capital markets improved throughout the year, NuStar loosened its purse strings and started identifying and investing in new high return growth projects and ended the year at $131 million of internal growth projects, a $51 million increase over the $80 million target.

We have now laid out plans for the next phase of growth, a program totaling over $500 million for the next two to three years that will help NuStar continue to grow. Approximately $310 million of the $500 million is expected to be spent in 2010 and will focus mainly on storage projects. We continue to have excellent access to capital with currently around $625 million of availability under our revolver and in addition now that all three credit rating agencies have removed the negative outlook imposed at the time of the Citgo asphalt acquisition, we're in a good position to access the debt market should we need to since our cost of debt has declined significantly over the course of the year. We ended the year where we said we would with a debt to EBITDA ratio of around four times.

I am also proud at how once again we had an excellent safety and environmental performance. In fact, we finished 2009 with zero loss time injuries, a first for us and something that is rarely achieved by any company. Even though we already had an excellent performance in our total reportable injury rate or TRIR, we showed a dramatic 59% improvement over 2008 to 0.31. To put our TRIR of 0.31 in perspective, the pipeline industry average is 1.6, the terminal industry average is 6.4, and the refining industry average is 1.1 so no matter which industry segment you compare us to, our average continues to be far better than industry.

I am excited to say we recently learned fortune magazine again ranked us as one of the 100 best companies to work for in America. In fact, they now rank us at number 21 which is a considerable improvement over the number 44 position last year. We also again grabbed the number one spot among large companies as the best company to work for in the state of Texas and that list will be published in the February issue of Texas Monthly magazine. In addition, we had another record year for the amount of time and money our employees contributed to communities where we live and work. As I have said many times before, while I am aware that Wall Street may consider these to be soft items, they very quickly lead to hard financially harmful consequences when not done well. We believe that a strong safety and environmental record and strong community involvement is critical to NuStar's ongoing success as an energy logistics company.

Now I would like to talk about our fourth quarter 2009 results. For the fourth quarter of '09 the LP reported distributable cash flow available to limited partners of $57 million or $0.99 per unit, EBITDA of $91.9 million, and earnings to the limiteds of $28.8 million or $0.50 per unit. The GP reported distributable cash flow available to unit-holders for the fourth quarter of $18.9 million or $0.45 per unit and earnings of $17 million or $0.40 per unit. The LP's fourth quarter 2009 distributable cash flows and net income were considerably better than last year's, particularly if you exclude the $22.7 million net gain resulting mainly from the sale of certain nonstrategic pipeline and terminal assets that we completed in the fourth quarter of 2008. The main reason for the higher fourth quarter earnings compared to last year was because of significantly improved results from our asphalt and fuels marketing segment. Results in that segment improved by $23.2 million.

If you recall, in the fourth quarter of '08 the continuing and significant decline in crude oil asphalt and product prices throughout the quarter out paced the slower decline in our weighted average cost of goods sold, which caused a negative margin of $1.66 per barrel and a loss of $33 million of EBITDA in the asphalt operations. In the fourth quarter of this year crude prices held up, sales volumes picked up early in the quarter, and we actually saw an uncharacteristic rise in asphalt prices. As a result, rather than losing money, we earned a much better margin per barrel of $5.34 and generated just over a $1 million of EBITDA. We did, however, see the typical fall off in volumes by late November and early December as much colder weather slowed asphalt liftings.

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

Turning to fourth quarter expenses, operating expenses came in at $126.9 million, around $8 million lower than our previous guidance of $135 million. The reason for the variance versus guidance was mainly due to lower than expected power costs related to our asphalt and fuels marketing segment. G&A expenses of $27.2 million were a little higher than our previous guidance of $24 million to $25 million, which was primarily due to an increase in our unit option expenses resulting from the increase in NuStar energy unit price during the fourth quarter of '09. Depreciation and amortization expense of $37.4 million and interest expense of $18.9 million were in line with our previous guidance.

I am pleased to say we achieved significant interest savings in 2009 as we mainly benefited from low rates on our revolver. Interest expense in '09 was around $11.4 million lower than '08. Finally, we had an income tax benefit of $1.7 million in the fourth quarter of '09, which was lower than the $4 million to $5 million of income tax expense we were projecting. As part of our normal ongoing procedures, we determined we could utilize more of our tax loss carry forwards in future years than we had previously expected.

With respect to our 2009 reliability capital expenditures, in the fourth quarter we identified certain specific discretionary items that did not relate to maintaining equipment and we reclassified those amounts to other capital instead of reliability and that resulted in total reliability capital of $45 million for the full year of '09. Had we not made that adjustment, our reliability capital would have been around $60 million or at the low end of our previous guidance range. We have adopted this new policy going forward and have adjusted reliability capital accordingly, so for 2010, we expect reliability capital to be in the range of $60 million to $65 million previously we were targeting $70 million to $75 million.

Looking ahead to 2010, I expect to see improved results compared to 2009 as we should benefit from new capital projects and higher renewal rates in our storage segment and also better results in our asphalt and fuels marketing segment. In our storage segment, we're targeting an incremental $18 million to $22 million of EBITDA in 2010 compared to 2009 as projects started last year and new projects under our significantly higher internal growth program will provide continued growth in this segment. In addition, we also expect to benefit from renewal rates that we increased significantly last year. While we are not providing today 2010 guidance on our asphalt and fuels marketing segment this early in the year, we're optimistic we will see better results as we expect a higher margin per barrel and increased sales volumes in our asphalt operations.

Near the end of 2009 we have seen a healthy draw in US asphalt inventories from the latest data released from the government, despite asphalt demand having declined nearly 14% from 2008 levels. Inventories are now around 14% below 2008 levels and 21% below the five-year average. This is reflective of an even larger decline in asphalt production and imports with production down almost 13% over 2008 levels and imports down over 20% compared to 2008. As we predicted in '09, weak refining economics due to narrow light heavy crude oil spreads have caused refiners to run at significantly lower utilization rates resulting in reduced refinery production including production of asphalt. We expect that trend to continue into 2010 as refiners rationalize their production due to weak margins. On top of that net imports have continued to decline in 2009 and the US is actually currently exporting 7.7 thousand barrels per day through November, a trend expected to continue and is quite bullish since the US was importing 20,000 to 37,000 barrels per day only a few years ago. In addition, many suppliers who typically build asphalt inventories during this time of year have decided to hold off as a result of a seasonally uncharacteristic rise in asphalt prices and a lack of supply.

All of those trends are pointing to continued tightness to supply in 2010 which should be beneficial to margins. The US refinery coker projects we track, which are expected to further tighten asphalt supplies that come online are proceeding as planned. One of the coker projects expected to started up in the first quarter of 2010 has already commenced operations. The larger impact to asphalt supply should occur next year in 2012 as most of the big coker capacity additions are expected to come online at that time.

With regard to asphalt demand, we expect to see slightly higher demand in 2010 compared to 2009 even assuming continuing weakness in the private sector. Most of that benefit is expected to come from higher outlays of stimulus funds in the public sector, which makes up the large majority of asphalt demand. Although stimulus fund out lays have ramped up recently, it is still represents only a small percentage of the total apportioned or roughly $5.8 billion of the $27.5 billion available for highway projects. In addition, stimulus fund outlays have lagged in many of the states where NuStar markets asphalt. As of December 31, only 15% of the apportioned funds have been spent in the state's NuStar asphalt compared to 21% of all states. As a result we expect to see a significant ramp up in stimulus fund outlays in 2010, particularly in those states where NuStar markets.

There is a lot of political uncertainty at this time. However, we could see further upside to our demand projection in 2010 and beyond if the economy recovers faster than expected, Congress reauthorizes the multi-year highway fund, or if they approve a new jobs creation bill that has been talked about providing additional funding. Our transportation segment's performance in 2010 should be comparable to slightly lower than 2009. Although we expect 2010 transportation volumes to be a bit higher than 2009 volumes, excluding the impact of the sales last year, and we also expect a slightly higher tariff rate for the calendar year and therefore expect higher revenues in this segment, higher natural gas prices and power costs could negatively impact the transportation segment's financial results. The preliminary December 2009 producer price index was recently released, and the good news is December held up with the November levels. The July 1, 2010 modifier, including the 1.3% adjuster is now estimated to be minus 1.24% which is much better than our earlier projection of minus 2% to 3%. Regardless, we still believe the 2010 calendar year rate will be higher than the 2009 calendar year rate since we should continue to benefit from last year's 7.6% tariff increase for the first six months of 2010.

I would also like to reiterate none of the closures or the proposed sale of refineries announced at this time are expected to impact NuStar's results. Having launched the $500 million plus internal growth program I mentioned earlier, our internal growth budget is significantly higher at over $310 million, of which approximately $230 million will go towards storage facilities, $20 million to transportation, and $60 million to asphalt and fuels marketing. Most of the projects are fee-based opportunities to build new storage for large credit worthy customers under long-term contracts as strategic domestic and international terminals. All of the contracts are anywhere from five to eight years in duration. Other fee-based projects include developing and improving logistics at key terminals, expanding our pipeline systems in fast growing regions like south Texas, and putting in place the necessary infrastructure to allow to us capture incremental ethanol and biofuel volumes at certain of our terminals. The majority of these projects have internal rates of return well over 20%. Margin based projects include opportunities to optimized our asphalt operations, expand our fuel oil blending, and bunkering, and develop new crude supply logistics to capitalize on heavy oil imbalances.

As we continue to see a shortfall in heavy crude supply, we plan to build the necessary crude oil and heavy fuel oil blending infrastructure at certain key terminals to meet a need of the marketplace. Returns here are also very attractive with expected IRRs well north of 20%. For the first quarter of 2010 we expect the partnerships EBITDA to be similar to the fourth quarter and in the range of $80 to $100 million. This is reflective of the typical seasonal pattern and the asphalt operations as sales volumes and margins taper off and we start building inventories for the upcoming season. Business then should start to pick up in the second quarter of 2010 and more so in the third quarter as sales volumes and margins increase in response to warmer weather in the beginning of the asphalt season. Looking at some expense estimates for the first quarter, operating expenses are expected to be around $120 million to $125 million, G&A expense in the range of $27 million to 28 million, depreciation and amortization expense around $38 million to $39 million, interest expense of $18 million to $19 million, and income tax expense in the range of $5 million to $6 million.

I am very excited about NuStar's future. We have an attractive set of fee-based storage and transportation assets that generate relatively stable cash flows during recessionary periods and are expected to cover our distribution during times when our margin base businesses are weaker, just as it did this past year. Our investors are also expected to benefit from the upside of our asphalt operations as the thesis on tightness and supply is a result of low utilization rates and coker projects coming online plays out. We have a strong balance sheet, and we are one of about 15 of MLP out of 70 that have an investment grade rating. At NuStar debt has been upgraded to stable after all three rating agencies removed the negative outlook last year. Finally, and most importantly, we have a large and diversified asset footprint in the US and internationally that allows for ample synergistic acquisition and internal growth opportunities.

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

(Operator Instructions). We'll pause for just a moment to compile the Q&A roster. Your first question is from the line of Darren Horowitz with Raymond James.

Hey, guys, good morning. Curt, quick question regarding your comments on the stimulus fund outlays. Last time we spoke, I think you were tracking about $13 billion of projects that were slated. How do you think the benefit from those is going to be split between this year and next?

Well, I think that the $13 billion is probably a fair estimate for outlays in 2010 from the Jobs Recovery Act or the stimulus fund already passed, so if they spent close to $6 billion, in '09, another $13 in '10, that means we have the balance of $8 billion to $9 billion to go in '11, and so that's sort of the best current projection on that. We'll see a lot more on that bill being -- that law I should say being spent this year than last year, and even a little more that will be spent in 2011.

Okay. And then second question on the coker expansion projects. In the prepared commentary, you mentioned that everything you were looking at was tracking in line with projections, but have you heard anything as we look to the out years that may lead you to believe there is going to be a revision to either the scale or scope of those projects?

Not on the projects that we're tracking. I think we have the latest would be Marathon's Garyville project is now in operation.

That's in operation?

As we thought it would be during this first quarter, and then, Mike, do you want to comment further on the outlook on that? I don't think we have any revision in our outlook on that.

They're all pretty close to the schedule we had reported before. The next one 's coming on stream are Hunt in Tuscaloosa in the fourth quarter of this year, AtoFina in Port Arthur, first quarter of 2010, Conoco Phillips, Wood River, towards the end of 2011, and BP Whiting in early 2012.

Thanks, guys, appreciate it.

Thank you.

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

Good morning, everybody.

Good morning.

Can you elaborate on the change in the capital expenditures and -- sounds like you moved some maintenance CapEx to growth CapEx?

Actually, what we did was we took some stuff that we had previously talked about in reliability and it was really building projects, office expansion projects, some IS projects, things that really aren't reliability, they're not associated with delivering reliable EBITDA if you will, but there is no return on that necessarily, either, that you can immediately identify, so they're not strategic.

Before we had said if it has a return, it is strategic capital, and if it doesn't, just put it into reliability. We further fine tune that assessment by saying, wait a minute, much of this stuff or $14 million of this stuff this year and $10 million next year, let's move that reliability and put it into this other category.

That doesn't -- just to be clear, that's not flowing through the income statement?

Right.

That just comes out of CapEx.

Right.

And then if I could just a couple of other quick ones. When you think of the margin on the asphalt business, can you talk about how important the mix is with the progress that you're making on the warm asphalt and where do you think that mix might be going over the next couple of years?

The big -- obviously the bigger product and the increase we had and the bigger sales volume overall is the PMA or the polymer modified asphalt, so that's more significant. The growth in that is more significant to our bottom line results because the numbers are bigger, but Mike Stone who runs the asphalt marketing is here -- I think the question is where do you see warm mix going, is that right, Yves?

Yes. And PMA is more important, maybe you could just discuss that as well.

Yes. I mentioned in my remarks it went from 4% to 8% of our sales, so we had a big increase there proportionally. Go ahead.

The PMAs are more approaching the maturing stage. I think our total we said was around 8% of our total sales.

Yes.

And we're probably projecting anywhere from 15% to 20% as it fully matures. The warm mix is really in its infant stage. There are still a lot of test projects that the states, the cities, and counties are doing, so it is really in an infant stage, and it is really hard to tell how big that's going to get in the future. It will definitely grow.

It does help extend the season during the winter months.

We saw a little bit this year in November.

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

Oh, yes. It is a premium higher quality product.

Okay. Two others and I will leave it for the other folk. As it relates to the CapEx spending in 2010, how much of that will impact 2010? In other words, how much of that CapEx will be done in 2010?

We gave you the EBITDA range of increases that we expected in the storage, in the asphalt marketing. As you can see, the storage incrementally EBITDA this year is not as high as last year's because we're doing a lot of spending on projects, much more than last year, so we have less coming online producing a return this year than we had last year, but Steve is pulling out the breakout on your question. Steve's got it.

We definitely expect some -- I don't have the split between the 310 this year versus what was spent in '09 and '08 just in aggregate I would say probably about $40 million higher from CapEx previously spent, and a little of it would come from what we would spend this year, but because the construction projects most of it will show up in 2011, so what we see this year is much more from the $400 million spend we have already done, and again that's up about $40 million across all segments. That would capture to some extent the $18 to $22 million we talked about incrementally EBITDA on the storage but not necessarily all of that.

All right? And then the $500 million or so identified of which 310 this year we're going hammer and tongue on right now, but most of it was structural in 2011.

Okay. I'm going to stick to my promise. I'm sorry. Were you going to add something, Kurt?

No. Danny Oliver is here.

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

Yes. (Indiscernible).

And my last question was how much renewals will you see in 2010 and what kind of increase in rates -- are they flattened out or still seeing increases?

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

That's revenue.

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

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

That's great. Thanks so much.

You're welcome.

Your next question comes from the line of Noah Lerner with Hartz Capital.

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

We will. Before Danny answers that, one big event that's been in the press release about us is we have replaced a customer I think, [Estacious], in a large amount of the tankage there at a better deal on better deal terms. That's a long-term strategic customer for us, so going forward, again, only see part of that in 2010, part of that benefit because part of what we're doing for this new customer is -- and terminal really going forward is we're investing to make that terminal even more flexible than it is today and attract a wider array of customers, but while Danny was going through his notes I wanted to mention that one is a big event for us, and, Danny --

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

And I guess from the early comments that the market you're seeing continues to be tight and very bullish on it, is it safe for one to infer, then, that the market prices that are out there basically are competitive, at least competitive with the prices you were seeing last year when you were doing the rollovers?

Yes, I think so. I think so. Every time we have contracts up for renewal we not only have a long list of potential customers wanting take, it is at least at the same number if not higher depending on what market you're in.

Great. We appreciate it. Thanks a lot.

You're welcome.

Thank you.

Your next question comes from the line of Michael Blum with Wells Fargo.

Good morning, everyone.

Good morning.

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

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

We're stable on these volumes, and give or take a few percentage points maybe it is about a third gasoline, a third crude, and a third other. (Indiscernible). It really doesn't change a whole lot two or three percentage points one way or the other.

Okay. And do you see in 2010 -- how do you see those different components in terms of volume growth or declines?

We're going to see -- we're projecting volume growth on our pipeline system in 2010, and, Danny, do you want to comment on that?

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

Okay. And then can you just remind us what is in that other income line on the income statement?

I will get the schedule out. It is mostly foreign exchange, primarily foreign exchange fluctuations and then for the year there is asset gains in there as well, sales of pipelines in the second quarter.

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

Great. Thanks.

Your next question comes from the line of Seth Glickenhouse with Glickenhouse and Company.

I want to congratulate you on a very good quarter.

Thank you, Mr. Glickenhouse.

All of my questions have been answered.

Thank you, Mr. Glickenhouse. I wish you a good year this year.

Let's hope so.

Your next question will come from the line of John Tysseland with city.

This is Chen sitting in for John.

Hello.

I was just wondering is there anything to be read from -- looks like the switch between vac gas oil and high sulfur fuel oil? Seems like it is a line item you didn't necessarily break out before and looks like you're phasing out that gas in favor of fuel oil?

What's the first thing you're saying? Just for my clarification? I hear you saying fuel oil. You're saying nat gas.

Vacuum gas.

I am sorry, vacuum gas versus high sulfur fuel oil. Go ahead, Paul.

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

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

Well, it just some degree, but it is not -- not so much specifically that. I think this was more an opportunity to take advantage of a market arbitrage or market situation that we're able to do with the assets we have, but it does reflect the value of having the assets we have, the tankage we have, the ship control over the shipping marine tonnage that we have, and the traders that we have, we are able to execute the deals with customers, so we're able to -- when that trade goes one way or the other, we are able to timely capitalize on it. Paul and his people can do that.

Thank you.

Your next question comes from the line of Michael Cerasoli with Goldman Sachs.

Thanks. How is your acquisition strategy changed, if at all, now that you're off the negative watch?

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

You hit the nail on the head. That's it, lower cost to capital.

Enhances that, obviously the suite of things we could do from that standpoint, but really the same type of deals we would look at.

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

I tell you -- yes, the answer is yes on asphalt refining and market field goal we find the right opportunity. We've talked some before about either buying or building in markets where we're not today. We're I understand could of the big gorilla on the East Coast, and we have spare capacity there. So we would be more likely to buy or build asphalt capacity in a different region like the US Gulf Coast or the West Coast or somewhere like that.

We do have -- we're taking a hard look at the Gulf coast right now. We might have a project to put together an asphalt plant at an existing terminal of ours on the US Gulf Coast, so we're studying that right now, but on the acquisition side, I would tell you that most of the opportunities that we're working right now are on the storage side, not just in the US but internationally as well. That's where the biggest terms of volume of opportunities, that's where it is coming from.

Okay. That makes sense. Can you provide color on non-stimulus driven expectations for asphalt in 2010?

The stimulus spending really is -- when we tell you that we expect slightly better demand, that's really the main reason, the main reason is more of that stimulus spending. Now, we also crank in modest economic recovery, not a lot. I know we had this big GDP number come out today, but we don't really believe that's reflective of economic growth going forward in 2010.

Now, we also crank into our assumptions a further decline in private demand, in private sector demand, for asphalt. You had a really weak '09, a weak rank in and even weaker 2010 from the private sector. When we factor all that in, what we get is a slight uptick in asphalt demand. Mike Hoeltzel, do you want to comment further on it.

The big push is in the federally funded with the stimulus package as Curt said, at $11 million next year versus just $5.6 million in 2009. We expect that to be up in the teens as far as year-on-year percentage, but it is offset by the non-federally funded being down probably in the low single digits numbers and then as Curt said, the private demand probably in the higher single-digit numbers. When you put that altogether, we're looking at flat to single digit improvement overall.

Our probable case going forward is low single-digit increase in asphalt demand. Go ahead, Mike.

We're still helpful that there is a chance, and it could be a remote chance that the current administration passes a new six-year highway bill, which is really --

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

Okay. Thank you.

Thank you.

Your next question comes from the line of Andrew Gundlach with ASB.

A couple we'll quick questions. The inventory, both finished goods and refinery feed stock, would you happen to have that number?

We do. Give us one second here to pull it out. You are talking about year end or right at the moment?

Either one, both.

Year end we're seasonally low on our inventories. We got our asphalt down to about the level you would expect, same with crude. Pull out the exact numbers right now. Shouldn't be any big surprises there. We did have a fuel cargo slip fourth and first quarter so that might make it look like intermediate inventories are slightly higher.

I can tell you we end ended the year at target on our asphalts, so we didn't have anything built, but we were on target with all of our asphalts, and our intermediate like Curt said we did have one cargo slip over about 400,000 barrels, but everything else was in line with expectations.

Why don't you tell them the numbers on the --

I think it is 17 for asphalt.

1.7 million for asphalt.

What's the dollar amount in inventory?

About 112 million for asphalt.

Sorry?

112 million for asphalt.

112 million for asphalt.

Right. Okay. Second question is somewhat related to Yves earlier question. On the 220, I think you said of the 310 going into storage, the CapEx you mentioned that the $18 million to $22 million incremental for this year is mostly related to your older spend, and that this spend would be more 2011. You continue to see 20% type returns on the cash that you're investing in the business, so more recently in EBITDA --

On this subject of returns, as I think every once in awhile it comes up over the years since we have been a public company, and obviously we have risk adjusted returns. If we have a long-term storage contact with a big national loan company or credit or major oil company, big credit worthy customer, in a strategic location, we're willing to accept a lower rate of return to sign that deal up, compared to one that's has to be risk adjusted either because there is more of a margin element or we're less confident about the location or what have you. Then we get our project returns up well north of 20%.

So when we throw those numbers out, it is like 20%, a blended overall return taking all of those various risk adjusted type projects into account.

I understand. That's helpful. And then just two last questions on asphalt. The first is that I saw that you have established new marketing facilities both in the south and New Haven, I think I saw. Are these incremental add ons to your distribution or meaningful moves in what I had thought was quite concentrated markets already?

This is Mike. The two in the south are incremental to what we had last year. The New Haven market, that was a wholesale facility that we had a customer up in the north that we would wholesale to. We converted that to a rack facility now.

That's a margin upgrade situation. Mike was already supplying a customer and now he gets to capture the rack margin.

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

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

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

And on all of that 60,000 is in your East Coast markets or is that a national --

That's US total.

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

How much would the directly -- I understand that the asphalt can move around. How much would be directly in the as you said in Canada or down south or whatever that is more directly affecting your markets?

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

The East Coast is in that importer of asphalt, so it does directly impact us.

Great. Okay. Thanks so much.

Good question. Thanks.

Your next question comes from the line of Barrettt Blaschke with RBC Capital Markets.

Hey, guys, just with some of the reliability CapEx being pushed over into more of the growth CapEx side, how does that affect the reliability CapEx outlook for 2010 and beyond?

It is I think the range was 60, 65.

60 to 65. We took ten out of reliability because of re-classing it to other, and again it is like I S systems,s, admin administration buildings, safety, purchasing cars, vehicles, things like that. It is not -- there is not a return associated with it, but it is stuff you don't really have to do to have a reliable operations.

So this will be --

More consistent with how we have seen some other people in Class D's.

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

We say 60 to 65.

Thank you.

I think Mark may have given previous guidance. I don't know.

Would have been like 70 to 75 without the reclass.

Right.

Thank you.

Thank you.

Your next question is from the line of Louis Shamie with Zimmer Lucas.

Hi, everybody.

Hi, Louis.

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

65 million.

Okay. And then so I wanted to ask about inventory levels on the asphalt side. Where do your crude inventories stand at the end of the year?

You have it right there in front of you, at year end, December 31.

1,000 barrels. No. 1 million barrels. 1 million barrels.

What's the dollar amount associated with that?

$74 million.

$74 million.

And can you give us a full year let's say for 2008 and 2009 how much asphalt you actually sold in terms of tons or millions of barrels?

We prefer not to get into that on this call, Louis.

Thank you very much, guys, and good luck with 2010.

Thanks, Louis. Talk to you soon.

Your next question comes from the line of Ross Payne with Wells Fargo.

The question I have got really is if you look at the asphalt operating highlights that you have on your web page, looks like importeds were relatively flat from 2008 to 2009. Do you think that imports stayed pretty level to '08 and '09 as you look into 2010 or do you think domestic production is going to take more of that market share.

I mean, imports have been pretty low. We said, as Curt mentioned, we expect that trend to continue into 2010 and imports to remain low. We have seen a trend last couple of years where we have been basically exporting more asphalt where a few years ago we were importing 20,000 to 37,000 barrels a day.

Going forward we expect -- I don't know what's on the website, but I can tell you this. We don't expect any more imports, and it is probably mainly Irving into northern New England and some of the Shell Montreal that's gone, so that will be gone actually, that piece of it, but we don't see more imports coming in. We see it going the other way.

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

There is foreign markets that are pretty robust in that call right now.

Okay. Well below the five year average.

About over 50% below the five year average, pretty big drop.

Great. Thanks, guys.

Thank you.

There are no further questions at this time.

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

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