10-Q 1 d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2010

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File Number 1-16417

 

 

LOGO

NUSTAR ENERGY L.P.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   74-2956831
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)

 

2330 North Loop 1604 West

San Antonio, Texas

  78248
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code (210) 918-2000

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule12b-2 of the Exchange Act:

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of common units outstanding as of October 31, 2010 was 64,610,549.

 

 

 


Table of Contents

 

NUSTAR ENERGY L.P. AND SUBSIDIARIES

FORM 10-Q

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION

  
Item 1.    Financial Statements:   
   Consolidated Balance Sheets as of September 30, 2010 and December 31, 2009      3   
   Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2010 and 2009      4   
   Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2010 and 2009      5   
   Condensed Notes to Consolidated Financial Statements      6   
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations      31   
Item 3.    Quantitative and Qualitative Disclosures About Market Risk      47   
Item 4.    Controls and Procedures      51   

PART II – OTHER INFORMATION

  
Item 6.    Exhibits      52   

SIGNATURES

     53   

 

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PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

NUSTAR ENERGY L.P. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Thousands of Dollars, Except Unit Data)

 

     September 30,
2010
    December 31,
2009
 
     (Unaudited)        
Assets     

Current assets:

    

Cash and cash equivalents

   $ 85,866      $ 62,006   

Accounts receivable, net of allowance for doubtful accounts of $1,479 and $1,351 as of September 30, 2010 and December 31, 2009, respectively

     297,556        211,797   

Inventories

     501,520        387,794   

Other current assets

     47,031        73,122   
                

Total current assets

     931,973        734,719   
                

Property, plant and equipment, at cost

     3,942,945        3,721,904   

Accumulated depreciation and amortization

     (798,183     (693,708
                

Property, plant and equipment, net

     3,144,762        3,028,196   

Intangible assets, net

     47,017        44,127   

Goodwill

     812,172        807,742   

Investment in joint venture

     68,799        68,728   

Deferred income tax asset

     8,573        13,893   

Other long-term assets, net

     178,152        77,268   
                

Total assets

   $ 5,191,448      $ 4,774,673   
                
Liabilities and Partners’ Equity     

Current liabilities:

    

Current portion of long-term debt

   $ 770      $ 770   

Accounts payable

     272,218        205,605   

Payable to related party

     23,309        10,639   

Notes payable

     0        20,000   

Accrued interest payable

     24,585        21,529   

Accrued liabilities

     46,582        64,651   

Taxes other than income tax

     14,677        15,534   

Income tax payable

     2,303        26   
                

Total current liabilities

     384,444        338,754   
                

Long-term debt, less current portion

     1,989,737        1,828,993   

Long-term payable to related party

     9,651        7,663   

Deferred income tax liability

     29,616        26,909   

Other long-term liabilities

     87,765        87,386   

Commitments and contingencies (Note 5)

    

Partners’ equity:

    

Limited partners (64,610,549 and 60,210,549 common units outstanding as of September 30, 2010 and December 31, 2009, respectively)

     2,626,231        2,423,689   

General partner

     58,060        53,469   

Accumulated other comprehensive income

     5,944        7,810   
                

Total partners’ equity

     2,690,235        2,484,968   
                

Total liabilities and partners’ equity

   $ 5,191,448      $ 4,774,673   
                

See Condensed Notes to Consolidated Financial Statements.

 

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NUSTAR ENERGY L.P. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

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

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2010     2009     2010     2009  

Revenues:

        

Service revenues

   $ 201,390      $ 190,439      $ 585,772      $ 549,133   

Product sales

     936,989        1,060,808        2,623,077        2,323,960   
                                

Total revenues

     1,138,379        1,251,247        3,208,849        2,873,093   

Costs and expenses:

        

Cost of product sales

     860,942        989,868        2,422,751        2,138,524   

Operating expenses:

        

Third parties

     86,104        87,724        259,465        239,656   

Related party

     35,644        30,466        103,563        92,361   
                                

Total operating expenses

     121,748        118,190        363,028        332,017   

General and administrative expenses:

        

Third parties

     9,727        9,109        28,633        26,531   

Related party

     17,133        10,104        47,691        40,998   
                                

Total general and administrative expenses

     26,860        19,213        76,324        67,529   

Depreciation and amortization expense

     38,539        36,786        114,653        108,323   
                                

Total costs and expenses

     1,048,089        1,164,057        2,976,756        2,646,393   
                                

Operating income

     90,290        87,190        232,093        226,700   

Equity in earnings of joint venture

     2,454        2,374        7,571        7,698   

Interest expense, net

     (20,583     (19,791     (58,059     (60,526

Other (expense) income, net

     (235     (1,961     14,882        25,883   
                                

Income before income tax expense

     71,926        67,812        196,487        199,755   

Income tax expense

     3,616        3,372        9,052        12,225   
                                

Net income

   $ 68,310      $ 64,440      $ 187,435      $ 187,530   
                                

Net income per unit applicable to limited
partners
(Note 11)

   $ 0.90      $ 1.03      $ 2.55      $ 2.99   
                                

Weighted average limited partner units outstanding

     64,610,549        54,460,549        62,386,373        54,460,549   
                                

See Condensed Notes to Consolidated Financial Statements.

 

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NUSTAR ENERGY L.P. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, Thousands of Dollars)

 

     Nine Months Ended September 30,  
     2010     2009  

Cash Flows from Operating Activities:

    

Net income

   $ 187,435      $ 187,530   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization expense

     114,653        108,323   

Amortization of debt related items

     (5,812     (5,266

Loss (gain) on sale or disposition of assets

     574        (21,160

Deferred income tax (benefit) expense

     (1,932     1,020   

Equity in earnings of joint venture

     (7,571     (7,698

Distributions of equity in earnings of joint venture

     7,500        6,750   

Changes in current assets and current liabilities (Note 12)

     (113,315     (61,226

Other, net

     (699     (2,035
                

Net cash provided by operating activities

     180,833        206,238   
                

Cash Flows from Investing Activities:

    

Reliability capital expenditures

     (34,927     (32,915

Strategic capital expenditures

     (156,531     (85,736

Acquisition

     (43,026     0   

Proceeds from sale or disposition of assets

     1,992        29,451   

Proceeds from insurance claims

     13,500        10,856   

Investment in other long-term assets

     (3,400     (9
                

Net cash used in investing activities

     (222,392     (78,353
                

Cash Flows from Financing Activities:

    

Proceeds from long-term debt borrowings

     775,434        868,189   

Proceeds from short-term debt borrowings

     177,041        306,828   

Proceeds from senior note offering, net of issuance costs

     445,574        0   

Long-term debt repayments

     (1,146,183     (819,040

Short-term debt repayments

     (197,041     (318,448

Proceeds from issuance of common units, net of issuance costs

     240,158        0   

Contributions from general partner

     5,078        0   

Distributions to unitholders and general partner

     (225,538     (197,514

Decrease in cash book overdrafts

     (8,746     (6,406
                

Net cash provided by (used in) financing activities

     65,777        (166,391
                

Effect of foreign exchange rate changes on cash

     (358     5,980   
                

Net increase (decrease) in cash and cash equivalents

     23,860        (32,526

Cash and cash equivalents as of the beginning of the period

     62,006        45,375   
                

Cash and cash equivalents as of the end of the period

   $ 85,866      $ 12,849   
                

See Condensed Notes to Consolidated Financial Statements.

 

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NUSTAR ENERGY L.P. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND BASIS OF PRESENTATION

Organization

NuStar Energy L.P. (NuStar Energy) (NYSE: NS) is engaged in the terminalling and storage of petroleum products, the transportation of petroleum products and anhydrous ammonia, and asphalt and fuels 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) wholly owns our general partner, Riverwalk Logistics, L.P., and owns a 17.7% total interest in us as of September 30, 2010.

We conduct our operations through our wholly owned subsidiaries, primarily NuStar Logistics, L.P. (NuStar Logistics) and NuStar Pipeline Operating Partnership L.P. (NuPOP). We have three business segments: storage, transportation, and asphalt and fuels marketing.

Basis of Presentation

These unaudited consolidated financial statements include the accounts of the Partnership and subsidiaries in which the Partnership has a controlling interest. Intercompany balances and transactions have been eliminated in consolidation. We account for investments in 50% or less-owned entities using the equity method.

These unaudited consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities Exchange Act of 1934. Accordingly, they do not include all of the information and notes required by GAAP for complete consolidated financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and all disclosures made are adequate. All such adjustments are of a normal recurring nature unless disclosed otherwise. Financial information for the three and nine months ended September 30, 2010 and 2009 included in these Condensed Notes to Consolidated Financial Statements is derived from our unaudited consolidated financial statements. Operating results for the three and nine months ended September 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010. The consolidated balance sheet as of December 31, 2009 has been derived from the audited consolidated financial statements as of that date. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2009.

Reclassifications

Certain previously reported amounts in the 2009 consolidated financial statements have been reclassified to conform to the 2010 presentation.

Acquisition

On May 21, 2010, we acquired the capital stock of Asphalt Holdings, Inc. for $44.1 million. The acquisition includes three storage terminals with 24 storage tanks and an aggregate capacity of approximately 1.8 million barrels located in Alabama along the Mobile River. The acquisition of Asphalt Holdings, Inc. was accounted for using the acquisition method. The purchase price has been preliminarily allocated based on the estimated fair values of the individual assets acquired and liabilities assumed at the date of acquisition pending completion of an independent appraisal and other evaluations. The consolidated statements of income include the results of operations for Asphalt Holdings, Inc. commencing on May 21, 2010.

2. NEW ACCOUNTING PRONOUNCEMENTS

Fair Value Measurements

In January 2010, the Financial Accounting Standards Board issued additional guidance that requires new disclosures regarding significant transfers in and out of Level 1 and Level 2 fair value measurements and additional information on the roll forward of Level 3 fair value measurements. This guidance also clarified the existing provisions on determining the appropriate classes of assets and liabilities to be reported and disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. This additional guidance is effective for interim and annual periods beginning after December 15, 2009, with the exception of the new requirements in the Level 3 roll forward, which will be effective for fiscal years beginning after December 15, 2010. We adopted these provisions effective January 1, 2010, and they did not have a

 

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NUSTAR ENERGY L.P. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

material impact on our disclosures. We do not expect the new requirements related to the Level 3 roll forward to have an impact on our disclosures.

3. INVENTORIES

Inventories consisted of the following:

 

     September 30,
2010
     December 31,
2009
 
     (Thousands of Dollars)  

Crude oil

   $ 101,514       $ 74,250   

Finished products

     390,432         302,980   

Materials and supplies

     9,574         10,564   
                 

Total

   $ 501,520       $ 387,794   
                 

4. DEBT

Revolving Credit Agreement

During the nine months ended September 30, 2010, we borrowed an aggregate $764.4 million under our $1.2 billion five-year revolving credit agreement (the 2007 Revolving Credit Agreement) to fund a portion of our capital expenditures and working capital requirements. Additionally, we repaid $1,146.2 million during the nine months ended September 30, 2010, which included the proceeds from the issuance of senior notes in August 2010 discussed below. The 2007 Revolving Credit Agreement bears interest based on either an alternative base rate or a LIBOR based rate. As of September 30, 2010, our weighted average borrowing interest rate was 1.0%, and we had $905.3 million available for borrowing under the 2007 Revolving Credit Agreement. Due to a covenant in our 2007 Revolving Credit Agreement that requires us to maintain, as of the end of each four consecutive fiscal quarters, a consolidated debt coverage ratio not to exceed 5.00-to-1.00, we may not be able to borrow the maximum available amount. As of September 30, 2010, the consolidated debt coverage ratio was 4.6x.

NuStar Logistics’ 4.80% Senior Notes

On August 12, 2010, NuStar Logistics issued $450.0 million of 4.80% senior notes under our shelf registration statement for net proceeds of $445.6 million. The net proceeds were used to reduce outstanding borrowings under our 2007 Revolving Credit Agreement. The interest on the 4.80% senior notes is payable semi-annually in arrears on March 1 and September 1 of each year beginning on March 1, 2011. The notes will mature on September 1, 2020.

The 4.80% senior notes rank equally with existing senior unsecured indebtedness of NuStar Logistics and do not have sinking fund requirements. The 4.80% senior notes issued by NuStar Logistics are fully and unconditionally guaranteed by NuStar Energy and NuPOP. NuPOP will be released from its guarantee when it no longer guarantees any obligations of NuStar Energy, or any of its subsidiaries, including NuStar Logistics, under any bank facility or public debt instrument. The 4.80% senior notes contain restrictions on NuStar Logistics’ ability to incur secured indebtedness unless the same security is also provided for the benefit of holders of the notes. In addition, the 4.80% senior notes limit NuStar Logistics’ ability to incur indebtedness secured by certain liens and to engage in certain sale-leaseback transactions. At the option of NuStar Logistics, the 4.80% senior notes may be redeemed in whole or in part at any time at a redemption price, which includes a make-whole premium, plus accrued and unpaid interest to the redemption date.

2010 Gulf Opportunity Zone Revenue Bonds

On July 15, 2010, the Parish of St. James, where our St. James, Louisiana, terminal is located, issued $100.0 million of Revenue Bonds (NuStar Logistics, L.P. Project) Series 2010 associated with our St. James terminal expansion pursuant to the Gulf Opportunity Zone Act of 2005. The bonds mature on July 1, 2040. The interest rate is based on a weekly tax-exempt bond market interest rate and is paid monthly. The interest rate was 0.3% as of September 30, 2010. Following the issuance, the proceeds were deposited with a trustee and will be disbursed to us upon our request

 

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NUSTAR ENERGY L.P. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

for reimbursement of expenditures related to our St. James terminal expansion. As of September 30, 2010, we have received $12.1 million from the trustee. The remaining $87.9 million in trust are included in “Other long-term assets, net,” and the $100.0 million obligation is included in “Long-term debt, less current portion” in our consolidated balance sheets as of September 30, 2010.

NuStar Logistics is solely obligated to service the principal and interest payments associated with the bonds. One of the lenders under our 2007 Revolving Credit Agreement issued a letter of credit in the amount of $101.3 million on our behalf to guarantee the payment of interest and principal on the bonds. This letter of credit ranks equally with existing senior unsecured indebtedness of NuStar Logistics.

Lines of Credit

As of September 30, 2010, we had one short-term line of credit with an uncommitted borrowing capacity of up to $20.0 million. We had no outstanding borrowings on this line of credit as of September 30, 2010. During the nine months ended September 30, 2010, we borrowed $177.0 million and repaid $197.0 million related to this line of credit.

5. COMMITMENTS AND CONTINGENCIES

Contingencies

We have contingent liabilities resulting from various litigation, claims and commitments, the most significant of which are discussed below. We record accruals for loss contingencies when losses are considered probable and can be reasonably estimated. Legal fees associated with defending the Partnership in legal matters are expensed as incurred. As of September 30, 2010, we have accrued $0.1 million related to settled matters and $73.4 million for contingent losses. The amount that will ultimately be paid related to these matters may differ from the recorded accruals, and the timing of such payments is uncertain.

Grace Energy Corporation Matter. In 1997, Grace Energy Corporation (Grace Energy) sued subsidiaries of Kaneb Pipeline Partners, L.P. (KPP) and Kaneb Services LLC (KSL and collectively with KPP and their respective subsidiaries, Kaneb) in Texas state court. We acquired Kaneb on July 1, 2005. The complaint sought recovery of the cost of remediation of fuel leaks in the 1970s from a pipeline that had once connected a former Grace Energy terminal with Otis Air Force Base in Massachusetts (Otis AFB). Grace Energy alleges the Otis AFB pipeline and related environmental liabilities had been transferred in 1978 to an entity that was part of Kaneb’s acquisition of Support Terminal Services, Inc. and its subsidiaries from Grace Energy in 1993. Kaneb contends that it did not acquire the Otis AFB pipeline and never assumed any responsibility for any associated environmental damage.

In 2000, the court entered final judgment that: (i) Grace Energy could not recover its own remediation costs of $3.5 million, (ii) Kaneb owned the Otis AFB pipeline and its related environmental liabilities and (iii) Grace Energy was awarded $1.8 million in attorney costs. Both Kaneb and Grace Energy appealed the final judgment of the trial court to the Texas Court of Appeals in Dallas. In 2001, Grace Energy filed a petition in bankruptcy, which created an automatic stay of actions against Grace Energy. In September 2008, Grace Energy filed its Joint Plan of Reorganization and Disclosure Statement.

The Otis AFB is a part of a Superfund Site pursuant to the Comprehensive Environmental Response Compensation and Liability Act (CERCLA). The site contains a number of groundwater contamination plumes, two of which are allegedly associated with the Otis AFB pipeline. Relying on the final judgment of the Texas state court assigning ownership of the Otis AFB pipeline to Kaneb, the U.S. Department of Justice (the DOJ) advised Kaneb in 2001 that it intends to seek reimbursement from Kaneb for the remediation costs associated with the two plumes. In November 2008, the DOJ forwarded information to us indicating that the past and estimated future remediation expenses associated with one plume are $71.9 million. The DOJ has indicated that they will not seek recovery of remediation costs for the second plume. The DOJ has not filed a lawsuit against us related to this matter, and we have not made any payments toward costs incurred by the DOJ. We are currently in settlement discussions with other potentially responsible parties and the DOJ, and a change in our estimate of this liability may occur in the near term. However, any settlement agreement that is reached must be approved by multiple parties and requires the approval of the bankruptcy court and the federal district court. We cannot currently estimate when or if a settlement will be finalized.

 

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NUSTAR ENERGY L.P. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

 

Eres Matter. In August 2008, Eres N.V. (Eres) forwarded a demand for arbitration to CITGO Asphalt Refining Company (CARCO), CITGO Petroleum Corporation (CITGO), NuStar Asphalt Refining, LLC (NuStar Asphalt) and NuStar Marketing LLC (NuStar Marketing, and together with CARCO, CITGO and NuStar Asphalt, the Defendants) contending that the Defendants are in breach of a tanker voyage charter party agreement, dated November 2004, between Eres and CARCO (the Charter Agreement). The Charter Agreement provides for CARCO’s use of Eres’ vessels for the shipment of asphalt. Eres contends that NuStar Asphalt and/or NuStar Marketing (together, the NuStar Entities) assumed the Charter Agreement when NuStar Asphalt purchased the CARCO assets, and that the Defendants have failed to perform under the Charter Agreement since January 1, 2008. Eres has valued its damages for the alleged breach of contract claim at approximately $78.1 million. Pursuant to a May 2010 ruling by the U.S. District Court for the Southern District of Texas, the NuStar Entities were found to have assumed the Charter Agreement from CARCO and to be obligated to defend and indemnify CITGO and CARCO against Eres’ claims. The Defendants were ordered to proceed with arbitration. We intend to vigorously defend against Eres’ claims in arbitration.

Other. We are also a party to additional claims and legal proceedings arising in the ordinary course of business. Due to the inherent uncertainty of litigation, there can be no assurance that the resolution of any particular claim or proceeding would not have a material adverse effect on our results of operations, financial position or liquidity. It is possible that if one or more of the matters described above were decided against us, the effects could be material to our results of operations in the period in which we would be required to record or adjust the related liability and could also be material to our cash flows in the periods we would be required to pay such liability.

Commitments

On June 18, 2010, we entered into a five-year lease to begin in 2011 for marine vessels, which will be used in our asphalt operations and represents an aggregate commitment of approximately $41.0 million.

6. FAIR VALUE MEASUREMENTS

We segregate the inputs used in measuring fair value into three levels: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists.

The following assets and liabilities are measured at fair value on a recurring basis:

 

     September 30, 2010  
     Level 1     Level 2     Level 3      Total  
     (Thousands of Dollars)  

Other current assets:

         

Product imbalances

   $ 1,015      $ 0      $ 0       $ 1,015   

Other long-term assets, net:

         

Interest rate swaps

     0        16,122        0         16,122   

Accrued liabilities:

         

Product imbalances

     (766     0        0         (766

Commodity derivatives

     (7,560     0        0         (7,560

Other long-term liabilities:

         

Interest rate swaps

     0        (2,279     0         (2,279
                                 

Total

   $ (7,311   $ 13,843      $ 0       $ 6,532   
                                 

 

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NUSTAR ENERGY L.P. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

 

     December 31, 2009  
     Level 1     Level 2      Level 3      Total  
     (Thousands of Dollars)  

Other current assets:

          

Product imbalances

   $ 2,096      $ 0       $ 0       $ 2,096   

Other long-term assets, net:

          

Interest rate swaps

     0        8,623         0         8,623   

Accrued liabilities:

          

Commodity derivatives

     (30,788     0         0         (30,788

Product imbalances

     (676     0         0         (676
                                  

Total

   $ (29,368   $ 8,623       $ 0       $ (20,745
                                  

Product Imbalances

We use quoted market prices as of the reporting date to value our assets and liabilities related to product imbalances.

Interest Rate Swaps

We estimate the fair value of the interest rate swaps using discounted cash flows, which use observable inputs such as time to maturity and market interest rates.

Commodity Derivatives

Our commodity derivative instruments consist of futures contracts and swaps traded on the NYMEX, and the fair values of these contracts are based on their quoted prices. We have consistently applied these valuation techniques in all periods presented. See Note 7. Derivatives, Financial Instruments and Risk Management Activities for a discussion of our derivative instruments.

Fair Value of Financial Instruments

We do not record our outstanding debt at fair value in our consolidated balance sheet. The estimated fair value and carrying amount of our debt was as follows:

 

     September 30,
2010
     December 31,
2009
 
     (Thousands of Dollars)  

Fair value

   $ 2,103,275       $ 1,877,373   

Carrying amount

   $ 1,990,507       $ 1,849,763   

We estimated the fair values of our debt using a discounted cash flow analysis using current incremental borrowing rates for similar types of borrowing arrangements.

7. DERIVATIVES, FINANCIAL INSTRUMENTS AND RISK MANAGEMENT ACTIVITIES

We utilize various derivative instruments to: (i) manage our exposure to commodity price risk, (ii) engage in a trading program and (iii) manage our exposure to interest rate risk. Our risk management policies and procedures are designed to monitor interest rates, NYMEX and over-the-counter positions, as well as physical volumes, grades, locations and delivery schedules to help ensure that our derivative activities address our market risks. We have a risk management committee that oversees our trading controls and procedures and certain aspects of commodity and trading risk management. Our risk management committee also reviews all new commodity and trading risk management strategies in accordance with our risk management policy, as approved by our board of directors.

Interest Rate Swaps

We are a party to certain interest rate swap agreements for the purpose of hedging the interest rate risk associated with a portion of our fixed-rate senior notes. During the three months ended September 30, 2010, we entered into fixed-to-floating interest rate swap agreements with an aggregate notional amount of $360.0 million related to the 4.80% senior notes issued on August 12, 2010. Under the terms of these interest rate swap agreements, we will receive a fixed rate (4.80%) and will pay a variable rate based on three-month USD LIBOR plus a percentage that varies with

 

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each agreement. The total aggregate notional amount of the fixed-to-floating interest rate swaps was $527.5 million and $167.5 million as of September 30, 2010 and December 31, 2009, respectively. As of September 30, 2010, the weighted-average interest rate for our fixed-to-floating interest rate swaps was 2.4%. We account for the fixed-to-floating interest rate swaps as fair value hedges and recognize the fair value of each interest rate swap in the consolidated balance sheet as either an asset or liability. These interest rate swap contracts qualify for the shortcut method of accounting. As a result, changes in the fair value of the swaps will completely offset the changes in the fair value of the underlying hedged debt.

In October 2010, we entered into an additional fixed-to-floating interest rate swap agreement with a notional amount of $90.0 million related to the 4.80% senior notes with terms similar to the swaps discussed above. This swap agreement also qualifies for the shortcut method of accounting.

During the three months ended September 30, 2010, we also entered into seven forward-starting interest rate swap agreements with an aggregate notional amount of $500.0 million related to forecasted probable debt issuances in 2012 and 2013. Under the terms of the swaps, we pay a fixed rate and receive three-month USD LIBOR. We entered into the swaps in order to hedge the risk of changes in the interest payments attributable to changes in the benchmark interest rate during the period from the effective date of the swap to the issuance of the forecasted debt. The following table summarizes information about our forward-starting swaps:

 

Number and Type

   Notional
Amount
     Period of Hedge      Weighted-
Average

Fixed  Rate
 
     (in millions)                

2 forward-starting interest rate swaps

   $ 125.0         03/13 – 03/23         3.5

2 forward-starting interest rate swaps

     150.0         06/13 – 06/23         3.5

3 forward-starting interest rate swaps

     225.0         02/12 – 02/22         3.1
                    

Total

   $ 500.0            3.3
                    

These swaps are designated and qualify as cash flow hedges, and we recognize the fair value of each interest rate swap in the consolidated balance sheet as either an asset or liability. We record the effective portion of mark-to-market adjustments as a component of “Accumulated other comprehensive income” (AOCI), and any hedge ineffectiveness is recognized immediately in “Interest expense, net.” The amount in AOCI will be amortized into “Interest expense, net” over the term of the forecasted debt.

Commodity Price Risk

We are exposed to commodity price risk with respect to our product inventories and related firm commitments to purchase and/or sell such inventories. We utilize futures contracts and swaps traded on the NYMEX to manage our exposure to changes in commodity prices, with the objective of stabilizing cash flows. We also enter into forward contracts in order to attempt to profit from market fluctuations.

The volume of commodity contracts is based on open derivative positions and represents the combined volume of our long and short positions on an absolute basis, which totaled 15.1 million barrels and 11.8 million barrels as of September 30, 2010 and December 31, 2009, respectively.

As of September 30, 2010, we had $13.4 million of margin deposits related to our derivative instruments.

 

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The fair values of our derivative instruments included in our consolidated balance sheets were as follows:

 

          Asset Derivatives      Liability Derivatives  
    

Balance Sheet Location

   September 30,
2010
     December 31,
2009
     September 30,
2010
    December 31,
2009
 
          (Thousands of Dollars)  

Derivatives Designated as Hedging Instruments:

             

Interest rate swaps

   Other long-term assets, net    $ 16,122       $ 8,623       $ 0      $ 0   

Commodity contracts

   Other current assets      1,839         0         0        0   

Commodity contracts

   Accrued liabilities      0         3,797         (2,698     (14,279

Interest rate swaps

   Other long-term liabilities      0         0         (2,279     0   
                                     

Total

        17,961         12,420         (4,977     (14,279
                                     

Derivatives Not Designated as Hedging Instruments:

             

Commodity contracts

   Other current assets      26,513         0         0        0   

Commodity contracts

   Accrued liabilities      0         9,766         (33,214     (30,072
                                     

Total

        26,513         9,766         (33,214     (30,072
                                     

Total Derivatives

      $ 44,474       $ 22,186       $ (38,191   $ (44,351
                                     

 

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No component of the associated derivative instruments’ gains or losses was excluded from our assessment of hedge ineffectiveness. The earnings impact of our derivative activity was as follows:

 

Derivatives Designated as Fair Value Hedging Instruments

  

Income Statement
Location

   Amount of Gain
(Loss) Recognized

in Income on
Derivative
(Effective Portion)
    Amount of  Gain
(Loss)

Recognized in
Income on
Hedged Item
    Amount of Gain
(Loss) Recognized
in Income  on
Derivative
(Ineffective Portion)
 
          (Thousands of Dollars)  

Three months ended September 30, 2010:

         

Interest rate swaps

   Interest expense, net    $ 3,886      $ (3,886   $ 0   

Commodity contracts

   Cost of product sales      (6,773     12,297        5,524   
                           

Total

      $ (2,887   $ 8,411      $ 5,524   
                           

Three months ended September 30, 2009:

         

Interest rate swaps

   Interest expense, net    $ 953      $ (953   $ 0   

Commodity contracts

   Cost of product sales      (94     6,490        6,396   
                           

Total

      $ 859      $ 5,537      $ 6,396   
                           

Nine months ended September 30, 2010:

         

Interest rate swaps

   Interest expense, net    $ 7,010      $ (7,010   $ 0   

Commodity contracts

   Cost of product sales      4,961        3,382        8,343   
                           

Total

      $ 11,971      $ (3,628   $ 8,343   
                           

Nine months ended September 30, 2009:

         

Interest rate swaps

   Interest expense, net    $ (5,158   $ 5,158      $ 0   

Commodity contracts

   Cost of product sales      (14,777     23,732        8,955   
                           

Total

      $ (19,935   $ 28,890      $ 8,955   
                           

 

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Derivatives Designated as Cash Flow Hedging Instruments

   Amount of Gain
(Loss) Recognized in

OCI on Derivative
(Effective Portion)
   

Income Statement
Location (a)

   Amount of Gain
(Loss) Reclassified
from
Accumulated OCI
into  Income
(Effective Portion)
    Amount of Gain
(Loss) Recognized
in Income  on
Derivative
(Ineffective Portion)
 
     (Thousands of Dollars)          (Thousands of Dollars)  

Three months ended September 30, 2010:

         

Commodity contracts

   $ (1,326   Cost of product sales    $ 0      $ (284

Interest rate swaps

     (1,790   Interest expense, net      0        0   
                           

Total

   $ (3,116      $ 0      $ (284
                           

Nine months ended September 30, 2010:

         

Commodity contracts

   $ (1,087   Cost of product sales    $ (913   $ 0   

Interest rate swaps

     (1,790   Interest expense, net      0        0   
                           

Total

   $ (2,877      $ (913   $ 0   
                           

 

(a) Amounts are included in specified location for both the gain (loss) reclassified from accumulated other comprehensive income (OCI) into income (effective portion) and the gain (loss) recognized in income on derivative (ineffective portion).

 

Derivatives Not Designated as Hedging Instruments

  

Income Statement
Location

   Amount of Gain (Loss)
Recognized in Income
 
          (Thousands of Dollars)  

Three months ended September 30, 2010:

     

Commodity contracts

   Cost of product sales    $ (1,963

Three months ended September 30, 2009:

     

Commodity contracts

   Cost of product sales    $ 2,574   

Nine months ended September 30, 2010:

     

Commodity contracts

   Cost of product sales    $ 4,735   

Commodity contracts

   Operating expenses      (10
           

Total

      $ 4,725   
           

Nine months ended September 30, 2009:

     

Commodity contracts

   Cost of product sales    $ (8,341

Commodity contracts

   Operating expenses      (3,564
           

Total

      $ (11,905
           

For derivatives designated as cash flow hedging instruments, once a hedged transaction occurs, we reclassify the effective portion from “Accumulated other comprehensive income” to “Cost of product sales” or “Interest expense, net.” As of September 30, 2010, we expect to reclassify $0.4 million to “Cost of product sales” within the next twelve months related to our commodity contracts. The maximum length of time over which we are hedging our exposure to the variability in future cash flows is under twelve months for our commodity contracts. We had no cash flow hedging instruments during the nine months ended September 30, 2009.

 

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Concentration of Credit Risk

We are exposed to credit risk on our hedging instruments in the event of nonperformance by counterparties. However, because our hedging activities are transacted only with highly rated institutions, we do not anticipate nonperformance by any of these counterparties.

8. RELATED PARTY TRANSACTIONS

Our operations are managed by NuStar GP, LLC, the general partner of our general partner. Under a services agreement between NuStar Energy and NuStar GP, LLC, employees of NuStar GP, LLC perform services for our U.S. operations. Certain of our wholly owned subsidiaries employ persons who perform services for our international operations. Employees of NuStar GP, LLC provide services to both NuStar Energy and NuStar GP Holdings; therefore, we reimburse NuStar GP, LLC for all costs related to its employees, other than costs associated with NuStar GP Holdings.

We had a payable to NuStar GP, LLC of $23.3 million and $10.6 million, as of September 30, 2010 and December 31, 2009, respectively, with both amounts representing payroll, employee benefit plans and unit-based compensation. We also had a long-term payable to NuStar GP, LLC as of September 30, 2010 and December 31, 2009 of $9.7 million and $7.7 million, respectively, related to amounts payable for retiree medical benefits and other post-employment benefits.

The following table summarizes information pertaining to related party transactions with NuStar GP, LLC:

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2010      2009      2010      2009  
     (Thousands of Dollars)  

Operating expenses

   $ 35,644       $ 30,466       $ 103,563       $ 92,361   

General and administrative expenses

     17,133         10,104         47,691         40,998   

9. OTHER INCOME

Other income consisted of the following:

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2010     2009     2010     2009  
     (Thousands of Dollars)  

Gain from insurance proceeds

   $ 0      $ 174      $ 13,500      $ 9,069   

Gain (loss) from sale or disposition of assets

     114        110        (574     21,160   

Foreign exchange losses

     (333     (2,324     (567     (4,767

Other

     (16     79        2,523        421   
                                

Other (expense) income, net

   $ (235   $ (1,961   $ 14,882      $ 25,883   
                                

The gain from insurance proceeds in both 2010 and 2009 resulted from insurance claims related to damage in the third quarter of 2008 primarily at our Texas City, Texas terminal caused by Hurricane Ike. For the nine months ended September 30, 2009, the gain from the sale or disposition of assets includes a gain of $21.4 million related to the June 15, 2009 sale of the Ardmore-Wynnewood pipeline in Oklahoma and the Trans-Texas pipeline.

 

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10. PARTNERS’ EQUITY

Issuance of Common Units

On May 19, 2010, we issued 4,400,000 common units representing limited partner interests at a price of $56.55 per unit. We used the net proceeds from this offering of $245.2 million, including a contribution of $5.1 million from our general partner to maintain its 2% general partner interest, mainly to reduce outstanding borrowings under our 2007 Revolving Credit Agreement and for the acquisition of Asphalt Holdings, Inc.

Allocations of Net Income

Our partnership agreement, as amended, sets forth the calculation to be used to determine the amount and priority of cash distributions that the common unitholders and general partner will receive. The partnership agreement also contains provisions for the allocation of net income and loss to the unitholders and the general partner. For purposes of maintaining partner capital accounts, the partnership agreement specifies that items of income and loss shall be allocated among the partners in accordance with their respective percentage interests. Normal allocations according to percentage interests are made after giving effect, if any, to priority income allocations in an amount equal to incentive cash distributions allocated 100% to the general partner.

The following table details the calculation of net income applicable to the general partner:

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2010     2009     2010     2009  
     (Thousands of Dollars)  

Net income applicable to general partner and limited partners’ interest

   $ 68,310      $ 64,440      $ 187,435      $ 187,530   

Less general partner incentive distribution

     8,568        7,055        24,736        20,913   
                                

Net income after general partner incentive distribution

     59,742        57,385        162,699        166,617   

General partner interest

     2     2     2     2
                                

General partner allocation of net income after general partner incentive distribution

     1,195        1,148        3,254        3,333   

General partner incentive distribution

     8,568        7,055        24,736        20,913   
                                

Net income applicable to general partner

   $ 9,763      $ 8,203      $ 27,990      $ 24,246   
                                

Cash Distributions

In August 2010, we paid a quarterly cash distribution totaling $78.8 million, or $1.065 per unit, related to the second quarter of 2010. On October 25, 2010, we announced a quarterly cash distribution of $1.075 per unit related to the third quarter of 2010. This distribution will be paid on November 5, 2010 to unitholders of record on November 1, 2010 and will total $79.6 million.

 

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The following table reflects the allocation of total cash distributions to the general and limited partners applicable to the period in which the distributions were earned:

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2010      2009      2010      2009  
     (Thousands of Dollars, Except Per Unit Data)  

General partner interest

   $ 1,592       $ 1,327       $ 4,635       $ 3,963   

General partner incentive distribution

     8,568         7,055         24,736         20,913   
                                   

Total general partner distribution

     10,160         8,382         29,371         24,876   

Limited partners’ distribution

     69,456         58,000         202,391         173,182   
                                   

Total cash distributions

   $ 79,616       $ 66,382       $ 231,762       $ 198,058   
                                   

Cash distributions per unit applicable to limited partners

   $ 1.075       $ 1.065       $ 3.205       $ 3.180   
                                   

Comprehensive Income

Our total comprehensive income was as follows:

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2010     2009      2010     2009  
     (Thousands of Dollars)  

Net income

   $ 68,310      $ 64,440       $ 187,435      $ 187,530   

Foreign currency translation adjustment

     9,026        9,174         98        20,227   

Unrealized loss on cash flow hedges

     (3,116     0         (1,964     0   
                                 

Comprehensive income

   $ 74,220      $ 73,614       $ 185,569      $ 207,757   
                                 

11. NET INCOME PER UNIT

We have identified the general partner interest and incentive distribution rights (IDR) as participating securities and use the two-class method when calculating the net income per unit applicable to limited partners, which is based on the weighted-average number of common units outstanding during the period. Basic and diluted net income per unit applicable to limited partners are the same because we have no potentially dilutive securities outstanding.

 

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The following table details the calculation of earnings per unit:

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2010     2009     2010     2009  
     (Thousands of Dollars, Except Unit and Per Unit Data)  

Net income

   $ 68,310      $ 64,440      $ 187,435      $ 187,530   

Less general partner distribution, including IDRs

     10,160        8,382        29,371        24,876   

Less limited partner distribution

     69,456        58,000        202,391        173,182   
                                

Distributions less than (greater than) earnings

   $ (11,306   $ (1,942   $ (44,327   $ (10,528
                                

General partner earnings:

        

Distributions

   $ 10,160      $ 8,382      $ 29,371      $ 24,876   

Allocation of distributions less than (greater than) earnings (2%)

     (225     (39     (886     (211
                                

Total

   $ 9,935      $ 8,343      $ 28,485      $ 24,665   
                                

Limited partner earnings:

        

Distributions

   $ 69,456      $ 58,000      $ 202,391      $ 173,182   

Allocation of distributions less than (greater than) earnings (98%)

     (11,081     (1,903     (43,441     (10,317
                                

Total

   $ 58,375      $ 56,097      $ 158,950      $ 162,865   
                                

Weighted average limited partner units outstanding

     64,610,549        54,460,549        62,386,373        54,460,549   

Net income per unit applicable to limited partners

   $ 0.90      $ 1.03      $ 2.55      $ 2.99   

12. STATEMENTS OF CASH FLOWS

Changes in current assets and current liabilities were as follows:

 

     Nine Months Ended September 30,  
     2010     2009  
     (Thousands of Dollars)  

Decrease (increase) in current assets:

    

Accounts receivable

   $ (86,025   $ (35,339

Inventories

     (114,885     (178,056

Other current assets

     27,287        (10,765

Increase (decrease) in current liabilities:

    

Accounts payable

     75,345        160,480   

Payable to related party

     12,697        5,487   

Accrued interest payable

     3,058        (677

Accrued liabilities

     (31,936     482   

Taxes other than income tax

     (858     3,558   

Income tax payable

     2,002        (6,396
                

Changes in current assets and current liabilities

   $ (113,315   $ (61,226
                

 

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Cash flows related to interest and income taxes were as follows:

 

     Nine Months Ended September 30,  
     2010      2009  
     (Thousands of Dollars)  

Cash paid for interest, net of amount capitalized

   $ 66,243       $ 70,626   

Cash paid for income taxes, net of tax refunds received

   $ 9,580       $ 17,218   

13. INCOME TAXES

During the nine months ended September 30, 2010, we received $13.5 million of proceeds resulting from insurance claims related to damage caused by Hurricane Ike primarily at our Texas City, Texas terminal in the third quarter of 2008, resulting in tax expense of approximately $4.7 million. Additionally, our taxable corporate subsidiary that received the insurance proceeds was part of the federal consolidated group that was the acquirer of Asphalt Holdings, Inc. The acquisition of Asphalt Holdings, Inc. included approximately $9.8 million of deferred tax liabilities related to temporary differences primarily related to property, plant and equipment. The receipt of the insurance proceeds and the acquisition of Asphalt Holdings, Inc. caused us to reevaluate the recorded valuation allowance related to certain net operating loss carryforwards previously expected to expire unused. We concluded that the income generated from the insurance proceeds, the deferred tax liability associated with Asphalt Holdings, Inc. and other tax planning strategies increased the likelihood of utilizing the net operating loss carryforwards; thus, we reduced the valuation allowance.

Tax effects of significant temporary differences representing deferred income tax assets and liabilities were as follows:

 

     September 30,
2010
    December 31,
2009
 
     (Thousands of Dollars)  

U.S.:

    

Net operating losses

   $ 16,595      $ 20,788   

Environmental and legal reserves

     14,825        14,234   

Other

     330        1,525   

Valuation allowance

     0        (9,457
                

Deferred tax assets – U.S.

     31,750        27,090   
                

Property, plant and equipment

     (23,177     (13,197
                

Net deferred income tax asset – U.S.

   $ 8,573      $ 13,893   
                

Foreign:

    

Net operating losses

   $ 4,069      $ 3,253   

Other

     727        687   

Capital loss

     1,014        2,166   

Valuation allowance

     (1,856     0   
                

Deferred tax assets – foreign

     3,954        6,106   
                

Property, plant and equipment

     (33,570     (33,015
                

Net deferred income tax liability – foreign

   $ (29,616   $ (26,909
                

 

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

 

14. SEGMENT INFORMATION

Our reportable business segments consist of storage, transportation, and asphalt and fuels marketing. Our segments represent strategic business units that offer different services. We evaluate the performance of each segment based on its respective operating income, before general and administrative expenses and certain non-segmental depreciation and amortization expense. General and administrative expenses are not allocated to the operating segments since those expenses relate primarily to the overall management at the entity level. Our principal operations include terminalling and storage of petroleum products, the transportation of petroleum products and anhydrous ammonia, and asphalt and fuels marketing. Intersegment revenues result from storage and throughput agreements with related parties at lease rates consistent with rates charged to third parties for storage and at pipeline tariff rates based upon the published tariff applicable to all shippers.

Results of operations for the reportable segments were as follows:

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2010     2009     2010     2009  
     (Thousands of Dollars)  

Revenues:

        

Storage:

        

Third party revenues

   $ 120,793      $ 112,697      $ 353,337      $ 328,820   

Intersegment revenues

     10,344        12,536        33,241        31,528   
                                

Total storage

     131,137        125,233        386,578        360,348   

Transportation:

        

Third party revenues

     80,597        77,742        232,435        220,313   

Intersegment revenues

     0        273        382        838   
                                

Total transportation

     80,597        78,015        232,817        221,151   

Asphalt and fuels marketing:

        

Third party revenues

     936,989        1,060,808        2,623,077        2,323,960   

Intersegment revenues

     85        0        2,917        0   
                                

Total asphalt and fuels marketing

     937,074        1,060,808        2,625,994        2,323,960   

Consolidation and intersegment eliminations

     (10,429     (12,809     (36,540     (32,366
                                

Total revenues

   $ 1,138,379      $ 1,251,247      $ 3,208,849      $ 2,873,093   
                                

Operating income:

        

Storage

   $ 45,635      $ 44,033      $ 131,388      $ 131,082   

Transportation

     37,512        35,425        106,004        100,394   

Asphalt and fuels marketing

     35,457        28,110        75,113        65,298   

Consolidation and intersegment eliminations

     1        41        278        869   
                                

Total segment operating income

     118,605        107,609        312,783        297,643   

Less general and administrative expenses

     26,860        19,213        76,324        67,529   

Less other depreciation and amortization expense

     1,455        1,206        4,366        3,414   
                                

Total operating income

   $ 90,290      $ 87,190      $ 232,093      $ 226,700   
                                

 

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Total assets by reportable segment were as follows:

 

     September 30,
2010
     December 31,
2009
 
     (Thousands of Dollars)  

Storage

   $ 2,383,526       $ 2,234,651   

Transportation

     1,262,904         1,286,533   

Asphalt and fuels marketing

     1,271,843         1,121,448   
                 

Total segment assets

     4,918,273         4,642,632   

Other partnership assets

     273,175         132,041   
                 

Total consolidated assets

   $ 5,191,448       $ 4,774,673   
                 

 

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15. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

NuStar Energy has no operations and its assets consist mainly of its investments in NuStar Logistics and NuPOP, both wholly owned subsidiaries. The senior notes issued by NuStar Logistics and NuPOP are fully and unconditionally guaranteed by NuStar Energy, and both NuStar Logistics and NuPOP fully and unconditionally guarantee the outstanding senior notes of the other. As a result, the following condensed consolidating financial statements are presented as an alternative to providing separate financial statements for NuStar Logistics and NuPOP.

Condensed Consolidating Balance Sheets

September 30, 2010

(Thousands of Dollars)

 

     NuStar
Energy
     NuStar
Logistics
     NuPOP      Non-Guarantor
Subsidiaries (a)
     Eliminations     Consolidated  

Assets

                

Cash and cash equivalents

   $ 53       $ 20,869       $ 0       $ 64,944       $ 0      $ 85,866   

Receivables, net

     0         21,279         11,762         264,515         0        297,556   

Inventories

     0         1,878         5,859         493,882         (99     501,520   

Other current assets

     0         14,348         1,343         31,340         0        47,031   

Intercompany receivable

     0         896,728         718,250         0         (1,614,978     0   
                                                    

Current assets

     53         955,102         737,214         854,681         (1,615,077     931,973   
                                                    

Property, plant and equipment, net

     0         985,360         616,736         1,542,666         0        3,144,762   

Intangible assets, net

     0         2,142         0         44,875         0        47,017   

Goodwill

     0         18,094         170,652         623,426         0        812,172   

Investment in wholly owned subsidiaries

     3,195,513         157,594         967,120         2,066,577         (6,386,804     0   

Investment in joint venture

     0         0         0         68,799         0        68,799   

Deferred income tax asset

     0         0         0         8,573         0        8,573   

Other long-term assets, net

     0         119,439         26,329         32,384         0        178,152   
                                                    

Total assets

   $ 3,195,566       $ 2,237,731       $ 2,518,051       $ 5,241,981       $ (8,001,881   $ 5,191,448   
                                                    

Liabilities and Partners’ Equity

                

Current portion of long-term debt

   $ 0       $ 770       $ 0       $ 0       $ 0      $ 770   

Payables

     0         32,994         8,700         253,833         0        295,527   

Accrued interest payable

     0         17,240         7,318         27         0        24,585   

Accrued liabilities

     830         15,777         4,147         25,828         0        46,582   

Taxes other than income tax

     63         4,903         3,512         6,199         0        14,677   

Income tax payable

     0         1,029         0         1,274         0        2,303   

Intercompany payable

     510,382         0         0         1,104,596         (1,614,978     0   
                                                    

Current liabilities

     511,275         72,713         23,677         1,391,757         (1,614,978     384,444   
                                                    

Long-term debt, less current portion

     0         1,440,133         516,621         32,983         0        1,989,737   

Long-term payable to related party

     0         3,119         0         6,532         0        9,651   

Deferred income tax liability

     0         0         0         29,616         0        29,616   

Other long-term liabilities

     0         6,360         272         81,133         0        87,765   

Total partners’ equity

     2,684,291         715,406         1,977,481         3,699,960         (6,386,903     2,690,235   
                                                    

Total liabilities and partners’ equity

   $ 3,195,566       $ 2,237,731       $ 2,518,051       $ 5,241,981       $ (8,001,881   $ 5,191,448   
                                                    

 

(a) Non-guarantor subsidiaries are wholly owned by NuStar Energy, NuStar Logistics or NuPOP.

 

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Condensed Consolidating Balance Sheet

December 31, 2009

(Thousands of Dollars)

 

     NuStar
Energy
     NuStar
Logistics
     NuPOP      Non-Guarantor
Subsidiaries (a)
    Eliminations     Consolidated  

Assets

               

Cash and cash equivalents

   $ 53       $ 1,602       $ 0       $ 60,351      $ 0      $ 62,006   

Receivables, net

     0         38,973         6,771         176,778        (10,725     211,797   

Inventories

     0         1,614         1,587         386,835        (2,242     387,794   

Other current assets

     0         9,132         2,233         61,757        0        73,122   

Intercompany receivable

     0         806,005         713,451         0        (1,519,456     0   
                                                   

Current assets

     53         857,326         724,042         685,721        (1,532,423     734,719   
                                                   

Property, plant and equipment, net

     0         947,895         626,698         1,453,603        0        3,028,196   

Intangible assets, net

     0         2,247         0         41,880        0        44,127   

Goodwill

     0         18,094         170,652         618,996        0        807,742   

Investment in wholly owned subsidiaries

     2,986,970         118,299         873,422         1,907,118        (5,885,809     0   

Investment in joint venture

     0         0         0         68,728        0        68,728   

Deferred income tax asset

     0         0         0         13,893        0        13,893   

Other long-term assets, net

     49         21,942         26,392         28,885        0        77,268   
                                                   

Total assets

   $ 2,987,072       $ 1,965,803       $ 2,421,206       $ 4,818,824      $ (7,418,232   $ 4,774,673   
                                                   

Liabilities and Partners’ Equity

               

Current portion of long-term debt

   $ 0       $ 770       $ 0       $ 0      $ 0      $ 770   

Payables

     944         18,566         10,654         196,805        (10,725     216,244   

Notes payable

     0         20,000         0         0        0        20,000   

Accrued interest payable

     0         12,996         8,490         43        0        21,529   

Accrued liabilities

     1,191         14,380         4,652         44,472        (44     64,651   

Taxes other than income tax

     125         4,183         2,280         8,946        0        15,534   

Income tax payable

     0         1,271         0         (1,245     0        26   

Intercompany payable

     507,654         0         0         1,011,806        (1,519,460     0   
                                                   

Current liabilities

     509,914         72,166         26,076         1,260,827        (1,530,229     338,754   
                                                   

Long-term debt, less current portion

     0         1,271,750         523,326         33,917        0        1,828,993   

Long-term payable to related party

     0         1,082         0         6,581        0        7,663   

Deferred income tax liability

     0         0         0         26,909        0        26,909   

Other long-term liabilities

     0         3,923         883         82,580        0        87,386   

Total partners’ equity

     2,477,158         616,882         1,870,921         3,408,010        (5,888,003     2,484,968   
                                                   

Total liabilities and partners’ equity

   $ 2,987,072       $ 1,965,803       $ 2,421,206       $ 4,818,824      $ (7,418,232   $ 4,774,673   
                                                   

 

(a) Non-guarantor subsidiaries are wholly owned by NuStar Energy, NuStar Logistics or NuPOP.

 

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NUSTAR ENERGY L.P. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

 

Condensed Consolidating Statements of Income

For the Three Months Ended September 30, 2010

(Thousands of Dollars)

 

     NuStar
Energy
    NuStar
Logistics
    NuPOP     Non-Guarantor
Subsidiaries (a)
    Eliminations     Consolidated  

Revenues

   $ 0      $ 72,051      $ 44,675      $ 1,078,737      $ (57,084   $ 1,138,379   

Costs and expenses

     367        46,664        31,267        1,026,792        (57,001     1,048,089   
                                                

Operating (loss) income

     (367     25,387        13,408        51,945        (83     90,290   

Equity in earnings of subsidiaries

     68,677        24,837        25,808        39,563        (158,885     0   

Equity in earnings of joint venture

     0        0        0        2,454        0        2,454   

Interest expense, net

     0        (14,330     (5,827     (426     0        (20,583

Other income, net

     0        69        (16     (288     0        (235
                                                

Income before income tax expense

     68,310        35,963        33,373        93,248        (158,968     71,926   

Income tax expense

     0        465        0        3,151        0        3,616   
                                                

Net income

   $ 68,310      $ 35,498      $ 33,373      $ 90,097      $ (158,968   $ 68,310   
                                                

 

(a) Non-guarantor subsidiaries are wholly owned by NuStar Energy, NuStar Logistics or NuPOP.

 

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NUSTAR ENERGY L.P. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Condensed Consolidating Statements of Income

For the Three Months Ended September 30, 2009

(Thousands of Dollars)

 

     NuStar
Energy
    NuStar
Logistics
    NuPOP     Non-Guarantor
Subsidiaries (a)
    Eliminations     Consolidated  

Revenues

   $ 0      $ 75,342      $ 37,796      $ 1,144,632      $ (6,523   $ 1,251,247   

Costs and expenses

     521        43,400        28,253        1,098,380        (6,497     1,164,057   
                                                

Operating (loss) income

     (521     31,942        9,543        46,252        (26     87,190   

Equity in earnings of subsidiaries

     64,961        24,581        18,033        27,575        (135,150     0   

Equity in earnings of joint venture

     0        0        0        2,374        0        2,374   

Interest expense, net

     0        (12,800     (6,058     (933     0        (19,791

Other income (expense), net

     0        161        (59     (2,063     0        (1,961
                                                

Income before income tax expense

     64,440        43,884        21,459        73,205        (135,176     67,812   

Income tax expense

     0        430        0        2,942        0        3,372   
                                                

Net income

   $ 64,440      $ 43,454      $ 21,459      $ 70,263      $ (135,176   $ 64,440   
                                                

 

(a) Non-guarantor subsidiaries are wholly owned by NuStar Energy, NuStar Logistics or NuPOP.

 

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NUSTAR ENERGY L.P. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

 

Condensed Consolidating Statements of Income

For the Nine Months Ended September 30, 2010

(Thousands of Dollars)

 

     NuStar
Energy
    NuStar
Logistics
    NuPOP     Non-Guarantor
Subsidiaries (a)
    Eliminations     Consolidated  

Revenues

   $ 0      $ 219,277      $ 117,535      $ 3,016,871      $ (144,834   $ 3,208,849   

Costs and expenses

     1,042        139,698        87,245        2,895,702        (146,931     2,976,756   
                                                

Operating (loss) income

     (1,042     79,579        30,290        121,169        2,097        232,093   

Equity in earnings of subsidiaries

     188,476        39,295        93,698        134,457        (455,926     0   

Equity in earnings of joint venture

     0        0        0        7,571        0        7,571   

Interest income (expense), net

     1        (38,744     (17,671     (1,645     0        (58,059

Other income, net

     0        1,308        243        13,331        0        14,882   
                                                

Income before income tax expense

     187,435        81,438        106,560        274,883        (453,829     196,487   

Income tax expense

     0        1,191        0        7,861        0        9,052   
                                                

Net income

   $ 187,435      $ 80,247      $ 106,560      $ 267,022      $ (453,829   $ 187,435   
                                                

 

(a) Non-guarantor subsidiaries are wholly owned by NuStar Energy, NuStar Logistics or NuPOP.

 

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NUSTAR ENERGY L.P. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

 

Condensed Consolidating Statements of Income

For the Nine Months Ended September 30, 2009

(Thousands of Dollars)

 

     NuStar
Energy
    NuStar
Logistics
    NuPOP     Non-Guarantor
Subsidiaries (a)
    Eliminations     Consolidated  

Revenues

   $ 0      $ 219,492      $ 105,691      $ 2,561,585      $ (13,675   $ 2,873,093   

Costs and expenses

     1,560        133,967        77,780        2,447,233        (14,147     2,646,393   
                                                

Operating (loss) income

     (1,560     85,525        27,911        114,352        472        226,700   

Equity in earnings of subsidiaries

     189,090        45,787        66,214        100,437        (401,528     0   

Equity in earnings of joint venture

     0        0        0        7,698        0        7,698   

Interest expense, net

     0        (39,381     (18,175     (2,970     0        (60,526

Other income, net

     0        21,586        47        4,250        0        25,883   
                                                

Income before income tax expense

     187,530        113,517        75,997        223,767        (401,056     199,755   

Income tax expense

     0        870        0        11,355        0        12,225   
                                                

Net income

   $ 187,530      $ 112,647      $ 75,997      $ 212,412      $ (401,056   $ 187,530   
                                                

 

(a) Non-guarantor subsidiaries are wholly owned by NuStar Energy, NuStar Logistics or NuPOP.

 

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NUSTAR ENERGY L.P. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

 

Condensed Consolidating Statements of Cash Flows

For the Nine Months Ended September 30, 2010

(Thousands of Dollars)

 

     NuStar
Energy
    NuStar
Logistics
    NuPOP     Non-Guarantor
Subsidiaries (a)
    Eliminations     Consolidated  

Net cash provided by (used in) operating activities

   $ 223,178      $ 122,613      $ 14,937      $ 45,666      $ (225,561   $ 180,833   
                                                

Cash flows from investing activities:

            

Capital expenditures

     0        (75,175     (10,017     (106,266     0        (191,458

Acquisition

     0        0        0        (43,026     0        (43,026

Proceeds from sale of assets

     0        16        28        1,948        0        1,992   

Proceeds from insurance claims

     0        0        0        13,500        0        13,500   

Investment in other long-term assets

     0        0        0        (3,400     0        (3,400

Investment in subsidiaries

     (245,604     0        0        (25     245,629        0   
                                                

Net cash used in investing activities

     (245,604     (75,159     (9,989     (137,269     245,629        (222,392
                                                

Cash flows from financing activities:

            

Debt borrowings

     0        952,475        0        0        0        952,475   

Debt repayments

     0        (1,343,224     0        0        0        (1,343,224

Senior note offering, net

     0        445,574        0        0        0        445,574   

Issuance of common units, net of issuance costs

     240,158        0        0        0        0        240,158   

General partner contribution

     5,078        0        0        0        0        5,078   

Partners’ contributions

     0        245,604        0        25        (245,629     0   

Distributions to unitholders and general partner

     (225,538     (225,538     0        (23     225,561        (225,538

Net intercompany borrowings (repayments)

     2,728        (90,801     (4,947     93,020        0        0   

Decrease in cash book overdrafts

     0        (6,987     (1     (1,758     0        (8,746
                                                

Net cash provided by (used in) financing activities

     22,426        (22,897     (4,948     91,264        (20,068     65,777   
                                                

Effect of foreign exchange rate changes on cash

     0        (5,290     0        4,932        0        (358

Net increase in cash and cash equivalents

     0        19,267        0        4,593        0        23,860   

Cash and cash equivalents as of the beginning of the period

     53        1,602        0        60,351        0        62,006   
                                                

Cash and cash equivalents as of the end of the period

   $ 53      $ 20,869      $ 0      $ 64,944      $ 0      $ 85,866   
                                                

 

(a) Non-guarantor subsidiaries are wholly owned by NuStar Energy, NuStar Logistics or NuPOP.

 

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NUSTAR ENERGY L.P. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

 

Condensed Consolidating Statements of Cash Flows

For the Nine Months Ended September 30, 2009

(Thousands of Dollars)

 

     NuStar
Energy
    NuStar
Logistics
    NuPOP     Non-Guarantor
Subsidiaries (a)
    Eliminations     Consolidated  

Net cash provided by (used in) operating activities

   $ 195,845      $ 81,353      $ 32,179      $ 94,395      $ (197,534   $ 206,238   
                                                

Cash flows from investing activities:

            

Capital expenditures

     0        (24,429     (17,916     (76,306     0        (118,651

Proceeds from sale or disposition of assets

     0        29,090        35        326        0        29,451   

Proceeds from insurance claims

     0        0        0        10,856        0        10,856   

Other

     0        0        0        (9     0        (9
                                                

Net cash provided by (used in) investing activities

     0        4,661        (17,881     (65,133     0        (78,353
                                                

Cash flows from financing activities:

            

Debt borrowings

     0        1,175,017        0        0        0        1,175,017   

Debt repayments

     0        (1,137,488     0        0        0        (1,137,488

Distributions to unitholders and general partner

     (197,514     (197,514     0        (20     197,534        (197,514

Net intercompany borrowings (repayments)

     1,669        76,053        (14,363     (63,359     0        0   

Decrease in cash book overdrafts

     0        (5,832     0        (574     0        (6,406
                                                

Net cash (used in) provided by financing activities

     (195,845     (89,764     (14,363     (63,953     197,534        (166,391
                                                

Effect of foreign exchange rate changes on cash

     0        4,841        0        1,139        0        5,980   

Net increase (decrease) in cash and cash equivalents

     0        1,091        (65     (33,552     0        (32,526

Cash and cash equivalents as of the beginning of the period

     53        2        656        44,664        0        45,375   
                                                

Cash and cash equivalents as of the end of the period

   $ 53      $ 1,093      $ 591      $ 11,112      $ 0      $ 12,849   
                                                

 

(a) Non-guarantor subsidiaries are wholly owned by NuStar Energy, NuStar Logistics or NuPOP.

 

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NUSTAR ENERGY L.P. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

 

16. SUBSEQUENT EVENTS

October 2010 Gulf Opportunity Zone Revenue Bonds

On October 7, 2010, the Parish of St. James, where our St. James, Louisiana, terminal is located, issued $50.0 million of Revenue Bonds (NuStar Logistics, L.P. Project) Series 2010A associated with our St. James terminal expansion pursuant to the Gulf Opportunity Zone Act of 2005. The bonds mature on October 1, 2040. The interest rate is based on a weekly tax-exempt bond market interest rate and is paid monthly. Following the issuance, the proceeds were deposited with a trustee and will be disbursed to us upon our request for reimbursement of expenditures related to our St. James terminal expansion. NuStar Logistics is solely obligated to service the principal and interest payments associated with the bonds. One of the lenders under our 2007 Revolving Credit Agreement issued a letter of credit in the amount of $50.6 million on our behalf to guarantee the payment of interest and principal on the bonds. This letter of credit ranks equally with existing senior unsecured indebtedness of NuStar Logistics.

 

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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, 2009, Part I, Item 1A “Risk Factors,” as well as our subsequent quarterly reports on Form 10-Q, 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 asphalt and fuels 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) wholly owns our general partner, Riverwalk Logistics, L.P., and owns a 17.7% total interest in us as of September 30, 2010. Our Management’s Discussion and Analysis of Financial Condition and Results of Operations is presented in the following five sections:

 

   

Overview

 

   

Results of Operations

 

   

Outlook

 

   

Liquidity and Capital Resources

 

   

Critical Accounting Policies

Operations

We conduct our operations through our wholly owned 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 in the United States, the Netherlands Antilles, Canada, Mexico, the Netherlands and the United Kingdom providing approximately 68.0 million barrels of storage capacity. Our terminals provide storage and handling services on a fee basis for petroleum products, specialty chemicals and other liquids, including crude oil and other feedstocks. We also own 60 crude oil and intermediate feedstock storage tanks and related assets that provide an aggregate 12.5 million barrels of storage capacity to refineries in California and Texas.

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 5,605 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 4.6 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 812 miles of crude oil pipelines in

 

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Texas, Oklahoma, Kansas, Colorado and Illinois, as well as associated crude oil storage facilities providing storage capacity of 1.9 million barrels in Texas and Oklahoma that are located along the 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.

Asphalt and Fuels Marketing. Our asphalt and fuels marketing segment includes our asphalt refining operations and our fuels marketing operations. We refine crude oil to produce asphalt and certain other refined products from our asphalt operations. We own two asphalt refineries with a combined throughput capacity of 104,000 barrels per day and related terminal facilities providing storage capacity of 5.0 million barrels. Additionally, as part of our fuels marketing operations, we purchase gasoline and other refined petroleum products for resale. The results of operations for the asphalt and fuels marketing segment depend largely on the gross margin between our costs and the sales price of the products we market. Therefore, the results of operations for this segment are more sensitive to changes in commodity prices compared to our storage and transportation segments. We enter into derivative contracts to mitigate the effect of commodity price fluctuations.

The following factors affect the results of our operations:

 

   

company-specific factors, such as 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 and market structure 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, 2010 Compared to Three Months Ended September 30, 2009

Financial Highlights

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

 

     Three Months Ended September 30,     Change  
     2010     2009    

Statement of Income Data:

      

Revenues:

      

Services revenues

   $ 201,390      $ 190,439      $ 10,951   

Product sales

     936,989        1,060,808        (123,819
                        

Total revenues

     1,138,379        1,251,247        (112,868
                        

Costs and expenses:

      

Cost of product sales

     860,942        989,868        (128,926

Operating expenses

     121,748        118,190        3,558   

General and administrative expenses

     26,860        19,213        7,647   

Depreciation and amortization expense

     38,539        36,786        1,753   
                        

Total costs and expenses

     1,048,089        1,164,057        (115,968
                        

Operating income

     90,290        87,190        3,100   

Equity in earnings of joint venture

     2,454        2,374        80   

Interest expense, net

     (20,583     (19,791     (792

Other expense, net

     (235     (1,961     1,726   
                        

Income before income tax expense

     71,926        67,812        4,114   

Income tax expense

     3,616        3,372        244   
                        

Net income

   $ 68,310      $ 64,440      $ 3,870   
                        

Net income per unit applicable to limited partners

   $ 0.90      $ 1.03      $ (0.13
                        

Weighted average limited partner units outstanding

     64,610,549        54,460,549        10,150,000   
                        

Highlights

Net income increased $3.9 million for the three months ended September 30, 2010, compared to the three months ended September 30, 2009, primarily due to an increase in segment operating income, partially offset by an increase in general and administrative expenses. Segment operating income increased $11.0 million for the three months ended September 30, 2010, compared to the three months ended September 30, 2009, due to increased operating income from all of our reportable business segments.

 

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Segment Operating Highlights

(Thousands of Dollars, Except Barrels/Day Information)

 

     Three Months Ended September 30,     Change  
     2010     2009    

Storage:

      

Throughput (barrels/day)

     673,121        708,281        (35,160

Throughput revenues

   $ 19,139      $ 19,892      $ (753

Storage lease revenues

     111,998        105,341        6,657   
                        

Total revenues

     131,137        125,233        5,904   

Operating expenses

     66,153        63,166        2,987   

Depreciation and amortization expense

     19,349        18,034        1,315   
                        

Segment operating income

   $ 45,635      $ 44,033      $ 1,602   
                        

Transportation:

      

Refined products pipelines throughput (barrels/day)

     526,825        544,345        (17,520

Crude oil pipelines throughput (barrels/day)

     382,845        318,567        64,278   
                        

Total throughput (barrels/day)

     909,670        862,912        46,758   

Throughput revenues

   $ 80,597      $ 78,015      $ 2,582   

Operating expenses

     30,488        29,966        522   

Depreciation and amortization expense

     12,597        12,624        (27
                        

Segment operating income

   $ 37,512      $ 35,425      $ 2,087   
                        

Asphalt and Fuels Marketing:

      

Product sales

   $ 937,074      $ 1,060,808      $ (123,734

Cost of product sales

     864,904        993,648        (128,744
                        

Gross margin

     72,170        67,160        5,010   

Operating expenses

     31,575        34,128        (2,553

Depreciation and amortization expense

     5,138        4,922        216   
                        

Segment operating income

   $ 35,457      $ 28,110      $ 7,347   
                        

Consolidation and Intersegment Eliminations:

      

Revenues

   $ (10,429   $ (12,809   $ 2,380   

Cost of product sales

     (3,962     (3,780     (182

Operating expenses

     (6,468     (9,070     2,602   
                        

Total

   $ 1      $ 41      $ (40
                        

Consolidated Information:

      

Revenues

   $ 1,138,379      $ 1,251,247      $ (112,868

Cost of product sales

     860,942        989,868        (128,926

Operating expenses

     121,748        118,190        3,558   

Depreciation and amortization expense

     37,084        35,580        1,504   
                        

Segment operating income

     118,605        107,609        10,996   

General and administrative expenses

     26,860        19,213        7,647   

Other depreciation and amortization expense

     1,455        1,206        249   
                        

Consolidated operating income

   $ 90,290      $ 87,190      $ 3,100   
                        

 

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Storage

Throughputs decreased 35,160 barrels per day and throughput revenues decreased $0.8 million for the three months ended September 30, 2010, compared to the three months ended September 30, 2009, mainly due to operational issues in 2010 at the refinery served by our Benicia crude oil storage tanks.

Storage lease revenues increased $6.7 million for the three months ended September 30, 2010, compared to the three months ended September 30, 2009, primarily due to:

 

   

an increase of $6.8 million across various domestic terminals due to rate escalations and new customer contracts, as well as higher throughput and related handling fees;

 

   

an increase of $3.2 million related to our acquisition of three terminals in Mobile County, Alabama in May 2010; and

 

   

a decrease of $2.7 million at our international terminals mainly due to the effect for foreign exchange rates, decreased reimbursable revenues, and lower throughput and related handling fees.

Operating expenses increased $3.0 million for the three months ended September 30, 2010, compared to the three months ended September 30, 2009, primarily due to employee-related expenses resulting from increased headcount and increases in other employee benefit expenses.

Depreciation and amortization expense increased $1.3 million for the three months ended September 30, 2010, compared to the three months ended September 30, 2009, primarily due to the completion of various terminal upgrade and expansion projects and our acquisition of three terminals in Mobile County, Alabama in May 2010.

Transportation

Throughputs increased 46,758 barrels per day and revenues increased $2.6 million for the three months ended September 30, 2010, compared to the three months ended September 30, 2009, primarily due to:

 

   

an increase of 9,540 barrels per day and an increase in revenues of $3.3 million on the Ammonia Pipeline due to an anticipated strong fall application season and more favorable weather conditions compared to prior year;

 

   

an increase of 12,471 barrels per day and an increase in revenues of $2.4 million on the East Pipeline due to higher overall demand in 2010 and operational issues at a refinery, which allowed us to supply more of that market;

 

   

an increase of 60,052 barrels per day and an increase of $1.9 million on our pipelines serving the Ardmore refinery as the refinery was shut down in the third quarter of 2009 following a lightning strike;

 

   

a decrease of 16,694 barrels per day and a decrease of $2.8 million on pipelines serving the McKee refinery due to operational issues at the refinery during the third quarter of 2010; and

 

   

a decrease of 30,700 barrels per day and a decrease of $2.0 million on the Houston pipeline due to a refinery project by one of our customers that limited the volumes shipped and market conditions that favored exporting instead of shipping through our pipeline.

Asphalt and Fuels Marketing

Sales and cost of product sales decreased $123.7 million and $128.7 million, respectively, resulting in an increase in total gross margin of $5.0 million for the three months ended September 30, 2010, compared to the three months ended September 30, 2009. The increase in total gross margin was primarily due to an increase of $10.7 million in the gross margin of our asphalt operations resulting primarily from tight asphalt supply in the Northeast, which contributed to a higher gross margin per barrel. For the three months ended September 30, 2010, gross margin per barrel for our asphalt operations increased to $7.83 from $5.03 for the three months ended September 30, 2009.

The increase in gross margin of our asphalt operations was partially offset by a decrease of $5.7 million in gross margin of our fuels marketing operations. This decrease was mainly due to hedging losses caused by rising commodity prices during the period and lower gross margin from wholesale and fuel oil sales.

Operating expenses decreased $2.6 million for the three months ended September 30, 2010, compared to the three months ended September 30, 2009, mainly due to lower rent expense resulting from less utilization of terminals in our storage segment.

 

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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. For the three months ended September 30, 2010, the asphalt and fuels marketing segment utilized less terminal capacity from our storage segment than for the three months ended September 30, 2009, resulting in a decrease in eliminations for revenue and operating expense.

General

General and administrative expenses increased $7.6 million for the three months ended September 30, 2010, compared to the three months ended September 30, 2009, primarily due to employee-related expenses resulting from increased headcount and increases in other employee benefit expenses, as well as higher compensation expense associated with our long-term incentive plans, which fluctuates with our unit price.

Other expense, net decreased $1.7 million for the three months ended September 30, 2010, compared to the three months ended September 30, 2009, mainly due to decreased foreign exchange losses related to our Canadian subsidiary.

 

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Nine Months Ended September 30, 2010 Compared to Nine Months Ended September 30, 2009

Financial Highlights

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

 

     Nine Months Ended September 30,     Change  
     2010     2009    

Statement of Income Data:

      

Revenues:

      

Services revenues

   $ 585,772      $ 549,133      $ 36,639   

Product sales

     2,623,077        2,323,960        299,117   
                        

Total revenues

     3,208,849        2,873,093        335,756   
                        

Costs and expenses:

      

Cost of product sales

     2,422,751        2,138,524        284,227   

Operating expenses

     363,028        332,017        31,011   

General and administrative expenses

     76,324        67,529        8,795   

Depreciation and amortization expense

     114,653        108,323        6,330   
                        

Total costs and expenses

     2,976,756        2,646,393        330,363   
                        

Operating income

     232,093        226,700        5,393   

Equity in earnings of joint venture

     7,571        7,698        (127

Interest expense, net

     (58,059     (60,526     2,467   

Other income, net

     14,882        25,883        (11,001
                        

Income before income tax expense

     196,487        199,755      &n