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NS > SEC Filings for NS > Form 10-Q on 8-May-2014All Recent SEC Filings

Show all filings for NUSTAR ENERGY L.P.

Form 10-Q for NUSTAR ENERGY L.P.


8-May-2014

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, 2013, 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) (NYSE: NS) is a publicly held Delaware limited partnership engaged in the transportation of petroleum products and anhydrous ammonia, the terminalling and storage of petroleum products and the marketing of petroleum products. 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 14.9% total interest in us as of March 31, 2014. 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

Dispositions
Asphalt JV Sale. On February 26, 2014, we sold our remaining 50% ownership interest in NuStar Asphalt LLC (Asphalt JV) to Lindsay Goldberg LLC (Lindsay Goldberg), a private investment firm (the Asphalt JV Sale). Lindsay Goldberg now owns 100% of Asphalt JV. Effective February 27, 2014, NuStar Asphalt LLC changed its name to Axeon Specialty Products LLC. As a result of the Asphalt JV Sale, we ceased applying the equity method of accounting. Upon completion of the Asphalt JV Sale, the $250.0 million unsecured revolving credit facility provided by us to Asphalt JV (the NuStar JV Facility) was converted into a $190.0 million term loan (the NuStar Term Loan). Also at the time of the sale, the parties agreed to: (i) terminate the terminal services agreements with respect to our terminals in Rosario, NM, Catoosa, OK and Houston, TX; (ii) amend the terminal services agreements for our terminals in Baltimore, MD and Jacksonville, FL; and (iii) transfer ownership of both the Wilmington, NC and Dumfries, VA terminals to Asphalt JV, which were categorized as assets held for sale at December 31, 2013.

Terminal Facilities Held for Sale. In addition to the terminals located in Wilmington, NC and Dumfries, VA, we have identified and plan to divest of several non-strategic, underperforming terminal facilities, and as of March 31, 2014 and December 31, 2013, we have reclassified the property, plant and equipment associated with these assets as "Assets held for sale" on the consolidated balance sheet. We presented the results of operations for these assets, previously in the storage segment, as discontinued operations for all periods presented.

San Antonio Refinery Sale. On January 1, 2013, we sold our fuels refinery in San Antonio, Texas (the San Antonio Refinery) and related assets for approximately $117.0 million (the San Antonio Refinery Sale). We have presented the results of


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operations for the San Antonio Refinery and related assets as discontinued operations for all periods presented. We recognized a gain of $9.3 million on the sale, which is included in discontinued operations for the three months ended March 31, 2013.

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: pipeline, storage and fuels marketing.
Pipeline. We own common carrier refined product pipelines covering approximately 5,463 miles, consisting of the Central West System, the East Pipeline and the North Pipeline. In addition, we own a 2,000 mile anhydrous ammonia pipeline (the Ammonia Pipeline), 1,180 miles of crude oil pipelines and approximately 10.0 million barrels of storage located along our 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 the Ammonia Pipeline.

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 84.0 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.
Fuels Marketing. Within our fuels marketing operations, we purchase crude oil and refined petroleum products for resale. The results of operations for the 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 results of operations of the pipeline and storage segments. We enter into derivative contracts to attempt to mitigate the effects of commodity price fluctuations.

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;


         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 fuels
          marketing segment; and


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


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RESULTS OF OPERATIONS
Three Months Ended March 31, 2014 Compared to Three Months Ended March 31, 2013
                              Financial Highlights
        (Unaudited, Thousands of Dollars, Except Unit and Per Unit Data)
                                                    Three Months Ended March 31,
                                                      2014                 2013            Change
Statement of Income Data:
Revenues:
Services revenues                               $      229,338       $      225,759     $     3,579
Product sales                                          619,875              772,427        (152,552 )
Total revenues                                         849,213              998,186        (148,973 )

Costs and expenses:
Cost of product sales                                  594,959              752,254        (157,295 )
Operating expenses                                     106,065              113,517          (7,452 )
General and administrative expenses                     20,856               27,494          (6,638 )
Depreciation and amortization expense                   46,230               41,563           4,667
Total costs and expenses                               768,110              934,828        (166,718 )

Operating income                                        81,103               63,358          17,745
Equity in loss of joint ventures                        (4,306 )            (11,143 )         6,837
Interest expense, net                                  (34,417 )            (30,991 )        (3,426 )
Interest income from related party                       1,055                1,122             (67 )
Other income, net                                        3,678                  344           3,334
Income from continuing operations before income
tax expense                                             47,113               22,690          24,423
Income tax expense                                       4,117                3,091           1,026
Income from continuing operations                       42,996               19,599          23,397
(Loss) income from discontinued operations, net
of tax                                                  (3,359 )              4,805          (8,164 )
Net income                                      $       39,637       $       24,404     $    15,233
Net income (loss) per unit applicable to
limited partners:
Continuing operations                           $         0.40       $         0.10     $      0.30
Discontinued operations                                  (0.04 )               0.07           (0.11 )
Total                                           $         0.36       $         0.17     $      0.19
Weighted-average limited partner units
outstanding                                         77,886,078           77,886,078               -

Highlights
Net income increased $15.2 million for the three months ended March 31, 2014, compared to the three months ended March 31, 2013, mainly due to an increase in segment operating income and decreases in the equity in loss of joint ventures and general and administrative expenses. Segment operating income increased $11.2 million for the three months ended March 31, 2014, compared to the three months ended March 31, 2013, primarily due to increased segment operating income from the pipeline and fuels marketing segments, partially offset by decreased operating income from the storage segment.

In addition, we recorded a loss from discontinued operations for the three months ended March 31, 2014, compared to income from discontinued operations for the three months ended March 31, 2013. Discontinued operations include the results of operations of the San Antonio Refinery and related assets, which we sold on January 1, 2013, and certain storage assets that were classified as "Assets held for sale" on the consolidated balance sheet as of December 31, 2013.


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                          Segment Operating Highlights
             (Thousands of Dollars, Except Barrels/Day Information)
                                                        Three Months Ended March 31,
                                                          2014                 2013            Change
Pipeline:
Refined products pipelines throughput (barrels/day)        472,971              471,294          1,677
Crude oil pipelines throughput (barrels/day)               359,418              351,193          8,225
Total throughput (barrels/day)                             832,389              822,487          9,902
Throughput revenues                                 $      102,959       $       93,277     $    9,682
Operating expenses                                          31,617               37,406         (5,789 )
Depreciation and amortization expense                       18,352               15,990          2,362
Segment operating income                            $       52,990       $       39,881     $   13,109
Storage:
Throughput (barrels/day)                                   821,338              669,604        151,734
Throughput revenues                                 $       27,470       $       22,361     $    5,109
Storage lease revenues                                     105,096              119,316        (14,220 )
Total revenues                                             132,566              141,677         (9,111 )
Operating expenses                                          65,267               64,653            614
Depreciation and amortization expense                       25,292               23,068          2,224
Segment operating income                            $       42,007       $       53,956     $  (11,949 )
Fuels Marketing:
Product sales                                       $      620,971       $      773,008     $ (152,037 )
Cost of product sales                                      599,475              758,732       (159,257 )
Gross margin                                                21,496               14,276          7,220
Operating expenses                                          11,931               15,862         (3,931 )
Depreciation and amortization expense                            7                    7              -
Segment operating income (loss)                     $        9,558       $       (1,593 )   $   11,151
Consolidation and Intersegment Eliminations:
Revenues                                            $       (7,283 )     $       (9,776 )   $    2,493
Cost of product sales                                       (4,516 )             (6,478 )        1,962
Operating expenses                                          (2,750 )             (4,404 )        1,654
Total                                               $          (17 )     $        1,106     $   (1,123 )
Consolidated Information:
Revenues                                            $      849,213       $      998,186     $ (148,973 )
Cost of product sales                                      594,959              752,254       (157,295 )
Operating expenses                                         106,065              113,517         (7,452 )
Depreciation and amortization expense                       43,651               39,065          4,586
Segment operating income                                   104,538               93,350         11,188
General and administrative expenses                         20,856               27,494         (6,638 )
Other depreciation and amortization expense                  2,579                2,498             81
Consolidated operating income                       $       81,103       $       63,358     $   17,745


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Pipeline
Revenues increased $9.7 million and throughputs increased 9,902 barrels per day
for the three months ended March 31, 2014, compared to the three months ended
March 31, 2013, primarily due to:
         an increase in revenues of $7.1 million and an increase in throughputs
          of 22,559 barrels per day on crude oil pipelines that serve Eagle Ford
          Shale production in South Texas, primarily resulting from continued
          growth in the region, the completion of a new dock at our Corpus
          Christi North Beach terminal and a crude oil pipeline that was placed
          in service in the third quarter of 2013;


         an increase in revenues of $2.1 million and an increase in throughputs
          of 7,901 barrels per day on the East Pipeline due to strong demand for
          distillates in the regions served by the East Pipeline; and


         an increase in revenues of $1.3 million, while aggregate throughputs
          remained flat, on crude oil pipelines serving the Ardmore refinery due
          to increased volumes under a higher tariff.

The higher revenues and throughputs were partially offset by a decrease in revenues of $2.1 million and a decrease in throughputs of 14,674 barrels per day on crude oil pipelines serving the McKee refinery due to a turnaround at the McKee refinery during the first quarter of 2014.

Operating expenses decreased $5.8 million for the three months ended March 31, 2014, compared to the three months ended March 31, 2013, primarily due to decreased rental costs associated with our South Texas crude oil pipelines, acquired in late 2012, and decreased payroll-related costs.

Depreciation and amortization expense increased $2.4 million for the three months ended March 31, 2014, compared to the three months ended March 31, 2013, mainly due to the completion of various projects that serve Eagle Ford Shale production.

Storage
Throughput revenues increased $5.1 million and throughputs increased 151,734 barrels per day for the three months ended March 31, 2014, compared to the three months ended March 31, 2013. Revenues increased $3.8 million and throughputs increased 54,390 barrels per day at our Corpus Christi North Beach terminal due to an increase in Eagle Ford Shale crude oil being shipped to Corpus Christi and the completion of a new dock. Also, revenues increased $2.1 million and throughputs increased 117,677 barrels per day as a result of turnarounds and operational issues during the first quarter of 2013 at the refineries served by our Corpus Christi and Texas City crude oil storage tank facilities.

Storage lease revenues decreased $14.2 million for the three months ended March 31, 2014, compared to the three months ended March 31, 2013, primarily due to:

         a decrease of $15.5 million, mostly at our West Coast terminals, as a
          result of reduced demand, resulting in lower throughputs, handling fees
          and storage fees. Also, a narrowing price differential on two traded
          crude oil grades (WTI and LLS) reduced profit sharing on one of our
          unit trains at our St. James terminal; and


         a decrease of $4.6 million at our St. Eustatius terminal facility,
          mainly due to idle tankage during January and February prior to being
          leased in March 2014.

The declines in storage lease revenues were partially offset by an increase of $5.0 million in storage lease revenues resulting from another completed unit train offloading facility at our St. James terminal.

Depreciation and amortization expense increased $2.2 million for the three months ended March 31, 2014, compared to the three months ended March 31, 2013, primarily due to the completion of various projects at our St. James terminal.

Fuels Marketing
Sales and cost of product sales decreased $152.0 million and $159.3 million, respectively, resulting in an increase in total gross margin of $7.2 million for the three months ended March 31, 2014, compared to the three months ended March 31, 2013. The increase in total gross margin was primarily due to an increase of $6.6 million in the gross margin from bunker fuel sales, mainly at our Texas City and St. Eustatius facilities. The gross margin at our Texas City facility increased mainly as a result of lower product costs, while the gross margin at our St. Eustatius facility was positively impacted by hedge gains.

Operating expenses decreased $3.9 million for the three months ended March 31, 2014, compared to the three months ended March 31, 2013, primarily as a result of decreased vessel lease and fuel costs from our St. Eustatius bunkering operations.


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Consolidation and Intersegment Eliminations Revenue and operating expense eliminations primarily relate to storage fees charged to the fuels marketing segment by the storage segment. Cost of product sales eliminations represent expenses charged to the fuels marketing segment for costs associated with inventory that are expensed once the inventory is sold.

General
General and administrative expenses decreased $6.6 million for the three months ended March 31, 2014, compared to the three months ended March 31, 2013, primarily as a result of lower compensation expense associated with our long-term incentive plans, a decrease in salaries and wages and decreased employee benefit costs.

Equity in loss of joint ventures decreased $6.8 million for the three months ended March 31, 2014, compared to the three months ended March 31, 2013, primarily due to the Asphalt JV Sale.

Interest expense, net increased $3.4 million for the three months ended March 31, 2014, compared to the three months ended March 31, 2013, mainly due to the issuance of the $402.5 million of 7.625% fixed-to-floating rate subordinated notes in January 2013, the issuance of $300.0 million of 6.75% senior notes in August 2013 and an increase in the amortization of costs associated with the termination of certain forward-starting interest rate swap agreements in 2013.

Other income, net increased $3.3 million for the three months ended March 31, 2014, compared to the three months ended March 31, 2013, mainly due to changes in foreign exchange rates related to our foreign subsidiaries.

Income tax expense increased $1.0 million for the three months ended March 31, 2014, compared to the three months ended March 31, 2013, mainly due to increased taxable income in U.S. corporate entities.

For the three months ended March 31, 2014, we recorded a loss from discontinued operations of $3.4 million, compared to income from discontinued operations of $4.8 million for the three months ended March 31, 2013. Income from discontinued operations for the three months ended March 31, 2013 includes a gain of $9.3 million related to the San Antonio Refinery Sale.


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TRENDS AND OUTLOOK

Overall, we expect our earnings for the second quarter of 2014 to be higher than the second quarter of 2013.

Pipeline Segment
We expect that our pipeline segment earnings for the second quarter of 2014 will exceed the comparable period in 2013 and the first quarter of 2014, mainly due to higher throughputs in the Eagle Ford Shale region. This increase in throughputs is due to continued growth in the region, a completed pipeline expansion project in the third quarter of 2013 and the completion of the expansion of our private dock at our Corpus Christi North Beach terminal in the first quarter of 2014. Both of these expansion projects increased our South Texas crude oil pipeline system's overall capacity to ship barrels into Corpus Christi.

In the second quarter of 2014, we also expect to benefit from increased throughputs following the completion of another pipeline expansion project in the Eagle Ford Shale region and reduced turnaround activity at our customers' refineries. We expect full-year earnings for 2014 to exceed 2013 mainly due to the benefit of increased throughputs described above and the July 1, 2014 tariff increase on pipelines regulated by the Federal Energy Regulatory Commission.

Storage Segment
We expect storage segment earnings for the second quarter of 2014 to be lower than the second quarter of 2013, mainly due to lower profit sharing benefits at our St. James, Louisiana terminal resulting from the narrowing of the LLS to WTI spread. We expect our storage segment to continue to benefit from the fourth quarter of 2013 completion of a second rail-car offloading facility at our St. James, Louisiana terminal and from additional storage throughputs associated with the completion of Eagle Ford Shale projects. However, reduced demand and lower profit sharing mentioned above has negatively affected our earnings in the storage segment. Therefore, we expect our second quarter earnings in the storage segment to be comparable to the first quarter of 2014. Also, the full-year earnings for 2014 are expected to be comparable to 2013, excluding the non-cash charges in 2013.

Fuels Marketing Segment
We expect second quarter 2014 results for our fuels marketing segment to be higher than the second quarter of 2013, primarily due to higher projected earnings from our bunker fuel operations. In the third quarter of 2013, we entered into a new bunker fuel supply agreement, which reduced our working capital requirements and allowed us to reduce operating costs. We expect these reduced operating costs to continue to benefit this segment in 2014 as compared to 2013. We expect earnings for the second quarter of 2014 to be lower than the first quarter of 2014 as the first quarter benefited from seasonal increased demand in the cruise line business. Although, we expect the full-year 2014 results in this segment to exceed 2013 results, earnings in this segment, as in any margin-based business, are subject to many factors that can raise or lower margins, which may cause the segment's actual results to vary significantly from our forecast.

This quarter, we reduced our earnings volatility and working capital requirements though the completion of the sale of our remaining 50% ownership interest in Asphalt JV. We expect our net income for the remainder of 2014 to benefit from positive equity in earnings of joint ventures.

Our outlook for the partnership may change as it is based on our continuing evaluation of a number of factors, including factors outside our control, such as the price of crude oil, the state of the economy and changes to refinery maintenance schedules, that affect demand for crude oil, refined products and ammonia, as well as demand for our transportation and storage services.


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LIQUIDITY AND CAPITAL RESOURCES
Overview
Primary Cash Requirements. Our primary cash requirements are for distributions to our partners, working capital (including inventory purchases), debt service, capital expenditures, including reliability capital, a financing agreement with Asphalt JV, acquisitions and operating expenses.

Our partnership agreement requires that we distribute all "Available Cash" to our partners each quarter, and this term is defined in the partnership agreement as cash on hand at the end of the quarter, plus certain permitted borrowings made subsequent to the end of the quarter, less cash reserves determined by our board of directors.

Sources of Funds. Each year, we work to fund our annual total operating expenses, interest expense, reliability capital expenditures and distribution . . .

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