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NS > SEC Filings for NS > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for NUSTAR ENERGY L.P.

Form 10-Q for NUSTAR ENERGY L.P.


8-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

FORWARD-LOOKING STATEMENTS
This Form 10-Q contains certain estimates, predictions, projections, assumptions and other forward-looking statements that involve various risks and uncertainties. While these forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect our current judgment regarding the direction of our business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested in this report. These forward-looking statements can generally be identified by the words "anticipates," "believes," "expects," "plans," "intends," "estimates," "forecasts," "budgets," "projects," "will," "could," "should," "may" and similar expressions. These statements reflect our current views with regard to future events and are subject to various risks, uncertainties and assumptions. Please read our Annual Report on Form 10-K for the year ended December 31, 2011, Part I, Item 1A "Risk Factors," as well as our subsequent current and quarterly reports, for a discussion of certain of those risks, uncertainties and assumptions.

If one or more of these risks or uncertainties materialize, or if the underlying assumptions prove incorrect, our actual results may vary materially from those described in any forward-looking statement. Other unknown or unpredictable factors could also have material adverse effects on our future results. Readers are cautioned not to place undue reliance on this forward-looking information, which is as of the date of this Form 10-Q. We do not intend to update these statements unless it is required by the securities laws to do so, and we undertake no obligation to publicly release the result of any revisions to any such forward-looking statements that may be made to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.

OVERVIEW
NuStar Energy L.P. (NuStar Energy) is a publicly held Delaware limited partnership engaged in the terminalling and storage of petroleum products, the transportation of petroleum products and anhydrous ammonia, and petroleum refining and marketing. Unless otherwise indicated, the terms "NuStar Energy," "the Partnership," "we," "our" and "us" are used in this report to refer to NuStar Energy L.P., to one or more of our consolidated subsidiaries or to all of them taken as a whole. NuStar GP Holdings, LLC (NuStar GP Holdings) (NYSE: NSH) owns our general partner, Riverwalk Logistics, L.P., and owns a 15.1% total interest in us as of September 30, 2012. Our Management's Discussion and Analysis of Financial Condition and Results of Operations is presented in six sections:

Overview

Results of Operations

Trends and Outlook

Liquidity and Capital Resources

Related Party Transactions

Critical Accounting Policies

Operations
We conduct our operations through our subsidiaries, primarily NuStar Logistics, L.P. (NuStar Logistics) and NuStar Pipeline Operating Partnership L.P. (NuPOP). Our operations are divided into three reportable business segments: storage, transportation, and asphalt and fuels marketing.

Storage. We own terminals and storage facilities in the United States, Canada, Mexico, the Netherlands, including St. Eustatius in the Caribbean, the United Kingdom and Turkey providing approximately 83.0 million barrels of storage capacity. Our terminals and storage facilities provide storage and handling services on a fee basis for petroleum products, specialty chemicals and other liquids, including crude oil and other feedstocks.
Transportation. We own common carrier refined product pipelines in Texas, Oklahoma, Colorado, New Mexico, Kansas, Nebraska, Iowa, South Dakota, North Dakota and Minnesota covering approximately 5,480 miles, consisting of the Central West System, the East Pipeline and the North Pipeline. The East and North Pipelines also include 21 terminals providing storage capacity of 4.5 million barrels, and the East Pipeline includes two tank farms providing storage capacity of 1.2 million barrels. In addition, we own a 2,000 mile anhydrous Ammonia Pipeline located in Louisiana, Arkansas, Missouri, Illinois, Indiana, Iowa and Nebraska. We also own 953 miles of crude oil pipelines in Texas, Oklahoma, Kansas, Colorado and Illinois, as well as 1.9 million barrels of crude storage in Texas and Oklahoma located along those crude oil pipelines. We charge tariffs on a per barrel basis for transporting refined products, crude oil and other feedstocks in our refined product and crude oil pipelines and on a per ton basis for transporting anhydrous ammonia in our Ammonia Pipeline.


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Asphalt and Fuels Marketing. Our asphalt and fuels marketing segment includes our asphalt operations, fuels marketing operations and our San Antonio refinery. Our asphalt operations include two asphalt refineries with a combined throughput capacity of 104,000 barrels per day at which we refine crude oil to produce asphalt and certain other refined products. Within our fuels marketing operations, we purchase crude oil and refined petroleum products for resale. Additionally, this segment includes a fuels refinery in San Antonio, Texas, with a throughput capacity of 14,500 barrels per day at which we refine crude oil to produce various refined petroleum products. The results of operations for the asphalt and fuels marketing segment depend largely on the margin between our cost and the sales prices of the products we market. Therefore, the results of operations for this segment are more sensitive to changes in commodity prices compared to the operations of the storage and transportation segments. We enter into derivative contracts to attempt to mitigate the effects of commodity price fluctuations.

On September 28, 2012, we sold a 50% voting interest (the Asphalt Sale) in NuStar Asphalt LLC (Asphalt JV), previously a wholly-owned subsidiary, to an affiliate of Lindsay Goldberg LLC (Lindsay Goldberg), a private investment firm. Asphalt JV owns and operates asphalt refining assets that were previously wholly owned by NuStar Energy, including the asphalt refineries located in Paulsboro, New Jersey and Savannah, Georgia (collectively, the Asphalt Operations). Lindsay Goldberg paid $175.0 million for the Class A equity interests (Class A Interests) of Asphalt JV, while we retained the Class B equity interests with a fair value of $52.0 million (Class B Interests). The Class A Interests have a distribution preference over the Class B Interests, as well as a liquidation preference. At closing, we received $261.3 million from Asphalt JV for inventory related to the Asphalt Operations, pending a final inventory valuation. Since the fair value of the consideration we received was less than the carrying amount of the assets of the Asphalt Operations, we recognized a loss of $21.6 million in "Other (expense) income, net" in the condensed consolidated statements of comprehensive income for the three and nine months ended September 30, 2012.

Upon closing, we deconsolidated Asphalt JV and started reporting our remaining investment in Asphalt JV using the equity method of accounting. Therefore, as of September 30, 2012, we have presented our 50% interest in Asphalt JV as "Investment in joint ventures" on the consolidated balance sheet. The condensed consolidated statements of comprehensive income include the results of operations for Asphalt JV in "Equity in earnings of joint ventures" commencing on September 28, 2012. Because of our continued involvement with Asphalt JV, we have not presented the results of operations for the Asphalt Operations prior to closing as discontinued operations.

In anticipation of the Asphalt Sale, we evaluated the goodwill and other long-lived assets associated with the Asphalt Operations for potential impairment. We determined the fair value of the Asphalt Operations reporting unit was less than its carrying value, which resulted in the recognition of a goodwill impairment loss of $22.1 million in the second quarter of 2012. In addition, we recorded an impairment loss of $244.3 million in the second quarter of 2012 to write-down the carrying value of long-lived assets related to the Asphalt Operations, including fixed assets, intangible assets and other long-term assets to their estimated fair value. The goodwill impairment loss and the asset impairment loss related to the Asphalt Operations is reported in the asphalt and fuels marketing segment. Please refer to Note 2 of the Condensed Notes to Consolidated Financial Statements in Item 1. "Financial Statements" for a discussion of the Asphalt Sale. Please refer to Note 3 of the Condensed Notes to Consolidated Financial Statements in Item 1. "Financial Statements" for a discussion on the related asset impairments and the fair value measurements.

The following factors affect the results of our operations:
company-specific factors, such as facility integrity issues and maintenance requirements that impact the throughput rates of our assets;

         seasonal factors that affect the demand for products transported by
          and/or stored in our assets and the demand for products we sell,
          particularly asphalt;


         industry factors, such as changes in the prices of petroleum products,
          that affect demand and operations of our competitors;


         factors such as commodity price volatility that impact our asphalt and
          fuels marketing segment; and


         other factors, such as refinery utilization rates and maintenance
          turnaround schedules, that impact our refineries as well as the
          operations of refineries served by our storage and transportation
          assets.


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RESULTS OF OPERATIONS
Three Months Ended September 30, 2012 Compared to Three Months Ended
September 30, 2011
                              Financial Highlights
        (Unaudited, Thousands of Dollars, Except Unit and Per Unit Data)

                                                    Three Months Ended September 30,
                                                       2012                   2011             Change
Statement of Income Data:
Revenues:
Services revenues                               $        221,821       $        210,681     $    11,140
Product sales                                          1,522,945              1,613,669         (90,724 )
Total revenues                                         1,744,766              1,824,350         (79,584 )

Costs and expenses:
Cost of product sales                                  1,486,985              1,535,609         (48,624 )
Operating expenses                                       142,419                135,615           6,804
General and administrative expenses                       24,954                 17,731           7,223
Depreciation and amortization expense                     39,686                 42,418          (2,732 )
Total costs and expenses                               1,694,044              1,731,373         (37,329 )

Operating income                                          50,722                 92,977         (42,255 )
Equity in (loss) earnings of joint ventures                 (951 )                2,599          (3,550 )
Interest expense, net                                    (24,867 )              (21,565 )        (3,302 )
Other (expense) income, net                              (19,940 )                  767         (20,707 )
Income before income tax expense                           4,964                 74,778         (69,814 )
Income tax expense                                           622                  4,497          (3,875 )
Net income                                      $          4,342       $         70,281     $   (65,939 )

Net (loss) income per unit applicable to
limited partners                                $          (0.09 )     $           0.92     $     (1.01 )

Weighted-average limited partner units
outstanding                                           72,383,578             64,612,423       7,771,155

Highlights
Net income decreased $65.9 million for the three months ended September 30, 2012, compared to the three months ended September 30, 2011, primarily due to a decrease in segment operating income and an increase in other expense and general and administrative expenses. Segment operating income decreased $35.2 million for the three months ended September 30, 2012, compared to the three months ended September 30, 2011, primarily due to an operating loss from the asphalt and fuels marketing segment. Other expense increased for the three months ended September 30, 2012, compared to the three months ended September 30, 2011, mainly due to a $21.6 million loss related to the Asphalt Sale.


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                          Segment Operating Highlights
             (Thousands of Dollars, Except Barrels/Day Information)
                                                        Three Months Ended September 30,
                                                           2012                   2011             Change
Storage:
Throughput (barrels/day)                                     780,560                721,618         58,942
Throughput revenues                                 $         23,222       $         21,743     $    1,479
Storage lease revenues                                       125,708                120,146          5,562
Total revenues                                               148,930                141,889          7,041
Operating expenses                                            75,210                 71,386          3,824
Depreciation and amortization expense                         23,298                 21,725          1,573
Segment operating income                            $         50,422       $         48,778     $    1,644

Transportation:
Refined products pipelines throughput (barrels/day)          521,255                523,279         (2,024 )
Crude oil pipelines throughput (barrels/day)                 368,846                319,103         49,743
Total throughput (barrels/day)                               890,101                842,382         47,719
Throughput revenues                                 $         93,730       $         81,899     $   11,831
Operating expenses                                            37,788                 30,796          6,992
Depreciation and amortization expense                         13,345                 12,855            490
Segment operating income                            $         42,597       $         38,248     $    4,349

Asphalt and Fuels Marketing:
Product sales                                       $      1,523,044       $      1,618,693     $  (95,649 )
Cost of product sales                                      1,495,312              1,545,340        (50,028 )
Gross margin                                                  27,732                 73,353        (45,621 )
Operating expenses                                            42,010                 41,862            148
Depreciation and amortization expense                          1,404                  6,073         (4,669 )
Segment operating (loss) income                     $        (15,682 )     $         25,418     $  (41,100 )

Consolidation and Intersegment Eliminations:
Revenues                                            $        (20,938 )     $        (18,131 )   $   (2,807 )
Cost of product sales                                         (8,327 )               (9,731 )        1,404
Operating expenses                                           (12,589 )               (8,429 )       (4,160 )
Total                                               $            (22 )     $             29     $      (51 )

Consolidated Information:
Revenues                                            $      1,744,766       $      1,824,350     $  (79,584 )
Cost of product sales                                      1,486,985              1,535,609        (48,624 )
Operating expenses                                           142,419                135,615          6,804
Depreciation and amortization expense                         38,047                 40,653         (2,606 )
Segment operating income                                      77,315                112,473        (35,158 )
General and administrative expenses                          (24,954 )              (17,731 )       (7,223 )
Other depreciation and amortization expense                   (1,639 )               (1,765 )          126
Consolidated operating income                       $         50,722       $         92,977     $  (42,255 )


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Storage
Throughputs increased 58,942 barrels per day and throughput revenues increased $1.5 million for the three months ended September 30, 2012, compared to the three months ended September 30, 2011, primarily due to new contracts at our Corpus Christi crude storage tanks that became effective July 1, 2012 associated with Eagle Ford Shale projects. Throughputs and revenues also increased due to increased demand in markets served by our Texas City crude storage tanks.

Storage lease revenues increased $5.6 million for the three months ended September 30, 2012, compared to the three months ended September 30, 2011, primarily due to an increase of $12.1 million from completed expansion projects, including a new unit train offloading facility and tank expansion at our St. James terminal.

These increases were partially offset by:

         a decrease of $2.3 million due to the sale of five refined product
          terminals in April 2012;


         a decrease of $1.9 million due to the conversion of some lease-based
          contracts to throughput-based contracts at our Corpus Christi crude
          storage tanks effective July 1, 2012 associated with Eagle Ford Shale
          projects; and


         a decrease of $1.5 million at our Point Tupper terminal, mainly due to
          a decrease in throughputs.

Operating expenses increased $3.8 million for the three months ended September 30, 2012, compared to the three months ended September 30, 2011, mainly due to increased salaries and wages and less capitalized overhead as a result of fewer capital projects.

Depreciation and amortization expense increased $1.6 million for the three months ended September 30, 2012, compared to the three months ended September 30, 2011, primarily due to the completion of the St. James terminal unit train and tank expansion projects.

Transportation
Revenues increased $11.8 million and throughputs increased 47,719 barrels per
day, for the three months ended September 30, 2012, compared to the three months
ended September 30, 2011, primarily due to:
         an increase in revenues of $6.7 million and an increase in throughputs
          of 48,912 barrels per day on crude oil pipelines that serve Eagle Ford
          Shale production in South Texas, two of which were placed in service in
          the second and third quarters of 2011. In addition, we entered into a
          new customer contract and increased fees on certain pipelines in the
          third quarter of 2012;


         an increase in revenues of $1.7 million and an increase in throughputs
          of 5,340 barrels per day on the North Pipeline mainly due to increased
          output following the completion of an expansion project at the Mandan
          refinery in June 2012;


         an increase in revenues of $1.4 million and an increase in throughputs
          of 7,580 barrels per day on the East Pipeline mainly due to 2011
          turnaround activity and operating issues at refineries served by the
          pipeline;


         an increase in revenues of $1.3 million and an increase in throughputs
          of 7,878 barrels per day on refined product pipelines that serve the
          McKee refinery due to increased demand; and


         an increase in revenues of $1.2 million and an increase in throughputs
          of 11,782 barrels per day on the Elmendorf to San Antonio crude oil
          pipeline that was placed in service in April 2012.

These increases in revenues and throughputs were partially offset by a decrease in revenues of $2.0 million and a decrease in throughputs of 25,298 barrels per day on the Houston pipeline as it is being converted to new service.

Operating expenses increased $7.0 million for the three months ended September 30, 2012, compared to the three months ended September 30, 2011, mainly due to temporary barge rental costs to move a customer's product associated with Eagle Ford Shale projects and increased regulatory expenses on the Ammonia Pipeline.

Asphalt and Fuels Marketing
Sales and cost of product sales decreased $95.6 million and $50.0 million, respectively, resulting in a decrease in total gross margin of $45.6 million for the three months ended September 30, 2012, compared to the three months ended September 30, 2011. The gross margin from our fuels marketing operations decreased $22.0 million for the three months ended September 30, 2012, compared to the three months ended September 30, 2011, primarily due to hedge losses and a decrease in the gross margin per barrel and volumes sold associated with our crude oil sales. In addition, we reduced the scope of our bunker fuel operations this quarter by liquidating our inventory and exiting two markets where results had been weak, which contributed to the decrease in gross margin for our bunker fuel sales.

The gross margin from the San Antonio refinery decreased $14.5 million for the three months ended September 30, 2012, compared to the three months ended September 30, 2011, mainly due to hedge losses and a decrease in the gross margin per


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barrel, which resulted from higher weighted-average inventory costs and sales prices that either decreased, or remained flat, compared to the same period in prior year.

The gross margin from our asphalt operations decreased $8.7 million for the three months ended September 30, 2012, compared to the three months ended September 30, 2011, mainly due to weak demand for asphalt, resulting in a 17% decrease in volumes sold and a decrease in gross margin per barrel. The gross margin per barrel decreased to $5.55 for the three months ended September 30, 2012, compared to $5.96 for the three months ended September 30, 2011.

Operating expenses remained flat for the three months ended September 30, 2012, compared to the three months ended September 30, 2011. Operating expenses for our fuels marketing operations increased, mainly due to increased fuel and vessel costs associated with bunker fuel sales and increased railcar costs associated with fuel oil sales. Increases in operating expenses were offset by decreased costs associated with storage agreements that expired in 2012 related to our asphalt operations.

Depreciation and amortization expense decreased $4.7 million for the three months ended September 30, 2012, compared to the three months ended September 30, 2011, as a result of reclassifying depreciable assets related to our asphalt operations to "Assets held for sale" on the consolidated balance sheet and discontinuing depreciation of these assets as of June 30, 2012.

Consolidation and Intersegment Eliminations Revenue, cost of product sales and operating expense eliminations primarily relate to storage and transportation fees charged to the asphalt and fuels marketing segment by the transportation and storage segments.

General
General and administrative expenses increased $7.2 million for the three months ended September 30, 2012, compared to the three months ended September 30, 2011, primarily due to higher compensation expense associated with our long-term incentive plans, which fluctuates with our unit price.

Equity in (loss) earnings of joint ventures changed by $3.6 million for the three months ended September 30, 2012, compared to the three months ended September 30, 2011, mainly due to a $3.3 million loss from our investment in Asphalt JV.

Interest expense, net increased $3.3 million for the three months ended September 30, 2012, compared to the three months ended September 30, 2011, mainly due to higher interest rates and letter of credit fees on the new $1.5 billion five-year revolving credit agreement. In addition, we had reduced benefits from interest rate swaps for the three months ended September 30, 2012, compared to the three months ended September 30, 2011, as we had fewer fixed-to-floating interest rate swaps in 2012 compared to 2011, and in February 2012, we began recognizing the interest expense related to terminated forward-starting interest rate swap agreements.

Other (expense) income, net changed by $20.7 million for the three months ended September 30, 2012, compared to the three months ended September 30, 2011, mainly due to a $21.6 million loss associated with the Asphalt Sale.

Income tax expense decreased $3.9 million for the three months ended September 30, 2012, compared to the three months ended September 30, 2011, mainly due to lower taxable income.


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Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30,

2011
                              Financial Highlights
        (Unaudited, Thousands of Dollars, Except Unit and Per Unit Data)

                                                    Nine Months Ended September 30,
                                                       2012                  2011             Change
Statement of Income Data:
Revenues:
Services revenues                               $        636,548       $       608,689     $   27,859
Product sales                                          4,745,815             4,039,461        706,354
Total revenues                                         5,382,363             4,648,150        734,213

Costs and expenses:
Cost of product sales                                  4,638,011             3,797,424        840,587
Operating expenses                                       403,348               390,480         12,868
General and administrative expenses                       75,276                69,833          5,443
Depreciation and amortization expense                    129,943               124,354          5,589
Asset impairment loss                                    249,646                     -        249,646
Goodwill impairment loss                                  22,132                     -         22,132
Gain on legal settlement                                 (28,738 )                   -        (28,738 )
Total costs and expenses                               5,489,618             4,382,091      1,107,527

Operating (loss) income                                 (107,255 )             266,059       (373,314 )
Equity in earnings of joint ventures                       3,816                 6,997         (3,181 )
. . .
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