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NS > SEC Filings for NS > Form 10-Q on 5-Aug-2014All Recent SEC Filings

Show all filings for NUSTAR ENERGY L.P.

Form 10-Q for NUSTAR ENERGY L.P.


5-Aug-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 June 30, 2014. Our Management's Discussion and Analysis of Financial Condition and Results of Operations is presented in seven sections:

Overview

Results of Operations

Trends and Outlook

Liquidity and Capital Resources

Related Party Transactions

Critical Accounting Policies

New Accounting Pronouncements

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 parties agreed to: (i) convert the $250.0 million unsecured revolving credit facility provided by us to Asphalt JV (the NuStar JV Facility) from a revolving credit agreement into a $190.0 million term loan (the NuStar Term Loan); (ii) terminate the terminal services agreements with respect to our terminals in Rosario, NM, Catoosa, OK and Houston, TX; (iii) amend the terminal services agreements for our terminals in Baltimore, MD and Jacksonville, FL; and
(iv) 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 several non-strategic, underperforming terminal facilities. As a result, we have classified the property, plant and equipment associated with these assets as "Assets held for sale" on the consolidated balance sheets. We presented the results of operations for these assets, which were previously reported in the storage segment, as discontinued operations for all periods presented. In June 2014, we sold three terminals located in Mobile, AL with an aggregate storage capacity of 1.8 million barrels for total proceeds of $13.7 million.


Table of Contents

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 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 six months ended June 30, 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 capacity 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 82.0 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.


Table of Contents

RESULTS OF OPERATIONS
Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013
                              Financial Highlights
        (Unaudited, Thousands of Dollars, Except Unit and Per Unit Data)
                                                    Three Months Ended June 30,
                                                      2014               2013            Change
Statement of Income Data:
Revenues:
Service revenues                                $     259,562       $     231,451     $    28,111
Product sales                                         490,183             670,563        (180,380 )
Total revenues                                        749,745             902,014        (152,269 )

Costs and expenses:
Cost of product sales                                 473,755             648,766        (175,011 )
Operating expenses                                    115,537             111,315           4,222
General and administrative expenses                    23,163              19,653           3,510
Depreciation and amortization expense                  47,936              45,308           2,628
Total costs and expenses                              660,391             825,042        (164,651 )

Operating income                                       89,354              76,972          12,382
Equity in earnings (loss) of joint ventures             3,294             (10,128 )        13,422
Interest expense, net                                 (33,122 )           (31,035 )        (2,087 )
Interest income from related party                          -               1,610          (1,610 )
Other (expense) income, net                              (474 )             2,184          (2,658 )
Income from continuing operations before income
tax expense                                            59,052              39,603          19,449
Income tax expense                                      1,865               4,891          (3,026 )
Income from continuing operations                      57,187              34,712          22,475
Loss from discontinued operations, net of tax          (1,788 )            (1,743 )           (45 )
Net income                                      $      55,399       $      32,969     $    22,430
Net income (loss) per unit applicable to
limited partners:
Continuing operations                           $        0.58       $        0.30     $      0.28
Discontinued operations                                 (0.02 )             (0.02 )             -
Total                                           $        0.56       $        0.28     $      0.28
Weighted-average limited partner units
outstanding                                        77,886,078          77,886,078               -

Highlights
Net income increased $22.4 million for the three months ended June 30, 2014, compared to the three months ended June 30, 2013, mainly due to an increase of $15.8 million in segment operating income resulting from improvements in all three reportable segments. Additionally, we recorded equity in earnings of joint ventures of $3.3 million for the three months ended June 30, 2014, compared to a loss in equity of joint ventures of $10.1 million for the three months ended June 30, 2013, primarily due to losses from our investment in Asphalt JV during the three months ended June 30, 2013.


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                          Segment Operating Highlights
             (Thousands of Dollars, Except Barrels/Day Information)
                                                        Three Months Ended June 30,
                                                          2014               2013            Change
Pipeline:
Refined products pipelines throughput (barrels/day)       521,391             459,663         61,728
Crude oil pipelines throughput (barrels/day)              427,122             350,850         76,272
Total throughput (barrels/day)                            948,513             810,513        138,000
Throughput revenues                                 $     117,798       $      96,976     $   20,822
Operating expenses                                         38,072              29,101          8,971
Depreciation and amortization expense                      19,490              16,648          2,842
Segment operating income                            $      60,236       $      51,227     $    9,009
Storage:
Throughput (barrels/day)                                  894,194             813,345         80,849
Throughput revenues                                 $      31,216       $      26,626     $    4,590
Storage lease revenues                                    113,770             116,053         (2,283 )
Total revenues                                            144,986             142,679          2,307
Operating expenses                                         69,091              72,212         (3,121 )
Depreciation and amortization expense                      25,888              26,055           (167 )
Segment operating income                            $      50,007       $      44,412     $    5,595
Fuels Marketing:
Product sales and other revenue                     $     493,651       $     670,604     $ (176,953 )
Cost of product sales                                     477,830             654,202       (176,372 )
Gross margin                                               15,821              16,402           (581 )
Operating expenses                                         10,996              12,964         (1,968 )
Depreciation and amortization expense                           4                   6             (2 )
Segment operating income                            $       4,821       $       3,432     $    1,389
Consolidation and Intersegment Eliminations:
Revenues                                            $      (6,690 )     $      (8,245 )   $    1,555
Cost of product sales                                      (4,075 )            (5,436 )        1,361
Operating expenses                                         (2,622 )            (2,962 )          340
Total                                               $           7       $         153     $     (146 )
Consolidated Information:
Revenues                                            $     749,745       $     902,014     $ (152,269 )
Cost of product sales                                     473,755             648,766       (175,011 )
Operating expenses                                        115,537             111,315          4,222
Depreciation and amortization expense                      45,382              42,709          2,673
Segment operating income                                  115,071              99,224         15,847
General and administrative expenses                        23,163              19,653          3,510
Other depreciation and amortization expense                 2,554               2,599            (45 )
Consolidated operating income                       $      89,354       $      76,972     $   12,382


Table of Contents

Pipeline
Revenues increased $20.8 million and throughputs increased 138,000 barrels per
day for the three months ended June 30, 2014, compared to the three months ended
June 30, 2013, primarily due to:
         an increase in revenues of $8.5 million and an increase in throughputs
          of 42,600 barrels per day on crude oil pipelines that serve Eagle Ford
          Shale production in South Texas, primarily resulting from continued
          growth in the region and the completion of expansion projects in 2014
          and the third quarter of 2013 that have increased our South Texas crude
          oil pipeline system's overall capacity;


         an increase in revenues of $4.6 million and an increase in throughputs
          of 69,795 barrels per day on pipelines serving the McKee refinery due
          to a turnaround at the refinery in April 2013, as well as higher
          overall production by the McKee refinery this period compared to the
          second quarter of 2013;


         an increase in revenues of $3.1 million and an increase in throughputs
          of 10,530 barrels per day on the Ammonia Pipeline due to favorable
          weather conditions during this period compared to the second quarter of
          2013; and


         an increase in revenues of $2.3 million and an increase in throughputs
          of 8,395 barrels per day on the East Pipeline due to higher demand.

Operating expenses increased $9.0 million for the three months ended June 30, 2014, compared to the three months ended June 30, 2013, primarily due to a $6.5 million gain in 2013 for the reduction of the contingent consideration liability recorded in association with our acquisition of certain assets from TexStar Midstream Services, LP (the TexStar Asset Acquisition). Please refer to Note 6 of the Condensed Notes to Consolidated Financial Statements in Item 1. "Financial Statements" for a more detailed discussion of the contingent consideration liability. In addition, power costs increased $2.1 million mainly due to the increase in throughputs on pipelines that serve Eagle Ford Shale production in South Texas.

Depreciation and amortization expense increased $2.8 million for the three months ended June 30, 2014, compared to the three months ended June 30, 2013, mainly due to the completion of various projects that serve Eagle Ford Shale production.

Storage
Throughput revenues increased $4.6 million and throughputs increased 80,849 barrels per day for the three months ended June 30, 2014, compared to the three months ended June 30, 2013. Revenues increased $3.0 million and throughputs increased 50,305 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 in the first quarter of 2014. Also, revenues increased $0.8 million and throughputs increased 17,277 barrels per day as a result of a turnaround in April 2013 at the McKee refinery.

Storage lease revenues decreased $2.3 million for the three months ended June 30, 2014, compared to the three months ended June 30, 2013, primarily due to:

         a decrease of $4.0 million, mostly at our West Coast terminals, as a
          result of reduced demand; and


         a decrease of $2.0 million at our St. James terminal, mainly due to the
          narrowing price differential on two traded crude oil grades (WTI and
          LLS) that reduced our profit sharing and volumes delivered to one of
          our unit train offloading facilities. This decrease was partially
          offset by increased revenues resulting from the completion of another
          unit train offloading facility in the fourth quarter of 2013 and
          storage rate increases.

The declines in storage lease revenues were partially offset by an increase of $2.6 million at our UK terminal due to the effect of foreign exchange rates, increased storage rates and increased throughput and related handling fees.

Operating expenses decreased $3.1 million for the three months ended June 30, 2014, compared to the three months ended June 30, 2013, primarily due to reduced maintenance and regulatory expenses in our west and gulf coast regions.

Fuels Marketing
Segment operating income increased $1.4 million for the three months ended June 30, 2014, compared to the three months ended June 30, 2013, primarily due to increased segment operating income of $5.1 million from our bunker fuel operations, mainly resulting from decreased vessel lease and fuel costs. The increase in segment operating income from our bunker fuel operations was partially offset by decreased segment operating income of $4.8 million in fuel oil trading, mainly resulting from lower product margins due to a lack of supply for blend components.

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.


Table of Contents

General
General and administrative expenses increased $3.5 million for the three months ended June 30, 2014, compared to the three months ended June 30, 2013, primarily as a result of higher compensation expense associated with our long-term incentive plans, which fluctuates with our unit price, partially offset by decreased employee benefit costs.

We recorded equity in earnings of joint ventures of $3.3 million for the three months ended June 30, 2014, compared to a loss in equity of joint ventures of $10.1 million for the three months ended June 30, 2013, primarily due to losses of $12.0 million from our investment in Asphalt JV for the three months ended June 30, 2013.

Interest expense, net increased $2.1 million for the three months ended June 30, 2014, compared to the three months ended June 30, 2013, mainly due to the issuance of $300.0 million of 6.75% senior notes in August 2013.

Interest income from related party represents the interest earned on the NuStar JV Facility prior to the Asphalt JV Sale.

Other (expense) income, net changed by $2.7 million for the three months ended June 30, 2014, compared to the three months ended June 30, 2013, mainly due to changes in foreign exchange rates related to our foreign subsidiaries.

Income tax expense decreased $3.0 million for the three months ended June 30, 2014, compared to the three months ended June 30, 2013, mainly due to decreased taxable income in corporate entities, a portion of which is attributable to the sale of the terminals in Mobile, AL in June 2014.


Table of Contents

Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013

                              Financial Highlights
        (Unaudited, Thousands of Dollars, Except Unit and Per Unit Data)
                                                     Six Months Ended June 30,
                                                      2014                2013           Change
Statement of Income Data:
Revenues:
Service revenues                                $      488,900       $    457,210     $    31,690
Product sales                                        1,110,058          1,442,990        (332,932 )
Total revenues                                       1,598,958          1,900,200        (301,242 )

Costs and expenses:
Cost of product sales                                1,068,714          1,401,020        (332,306 )
Operating expenses                                     221,602            224,832          (3,230 )
General and administrative expenses                     44,019             47,147          (3,128 )
Depreciation and amortization expense                   94,166             86,871           7,295
Total costs and expenses                             1,428,501          1,759,870        (331,369 )

Operating income                                       170,457            140,330          30,127
Equity in loss of joint ventures                        (1,012 )          (21,271 )        20,259
Interest expense, net                                  (67,539 )          (62,026 )        (5,513 )
Interest income from related party                       1,055              2,732          (1,677 )
Other income, net                                        3,204              2,528             676
Income from continuing operations before income
tax expense                                            106,165             62,293          43,872
Income tax expense                                       5,982              7,982          (2,000 )
Income from continuing operations                      100,183             54,311          45,872
(Loss) income from discontinued operations, net
of tax                                                  (5,147 )            3,062          (8,209 )
Net income                                      $       95,036       $     57,373     $    37,663

Net income (loss) per unit applicable to
limited partners:
Continuing operations                           $         0.98       $       0.40     $      0.58
Discontinued operations                                  (0.06 )             0.05           (0.11 )
Total                                           $         0.92       $       0.45     $      0.47
Weighted-average limited partner units
outstanding                                         77,886,078         77,886,078               -

Highlights
Net income increased $37.7 million for the six months ended June 30, 2014, compared to the six months ended June 30, 2013, mainly due to an increase in income from continuing operations, which benefitted from higher segment operating income and a decrease in the equity in loss of joint ventures. Segment operating income increased $27.0 million for the six months ended June 30, 2014, compared to the six months ended June 30, 2013, primarily due to increased segment operating income from the pipeline and fuels marketing segments, partially offset by decreased segment operating income from the storage segment.

Partially offsetting the improvement in income from continuing operations, we recorded a loss from discontinued operations for the six months ended June 30, 2014, compared to income from discontinued operations for the six months ended June 30, 2013. Discontinued operations include the results of operations of certain storage assets that were classified as "Assets held for sale" on the consolidated balance sheet beginning December 31, 2013, as well as the results of operations of the San Antonio Refinery and related assets, which we sold on January 1, 2013.


Table of Contents

                          Segment Operating Highlights
             (Thousands of Dollars, Except Barrels/Day Information)
                                                       Six Months Ended June 30,
                                                         2014             2013           Change
Pipeline:
Refined products pipelines throughput (barrels/day)       497,315         465,446         31,869
Crude oil pipelines throughput (barrels/day)              393,457         351,021         42,436
Total throughput (barrels/day)                            890,772         816,467         74,305
Throughput revenues                                 $     220,757     $   190,253     $   30,504
Operating expenses                                         69,689          66,507          3,182
Depreciation and amortization expense                      37,842          32,638          5,204
Segment operating income                            $     113,226     $    91,108     $   22,118
Storage:
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