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EX-32.01 - SECTION 1350 CERTIFICATIONS - NuStar Energy L.P.dex3201.htm
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EX-31.01 - CERTIFICATIONS UNDER SECTION 302 - NuStar Energy L.P.dex3101.htm
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, 2009

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

(Address of principal executive offices)

78248

(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  ¨    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 (Check one):

 

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 November 1, 2009 was 54,460,549.

 

 

 


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, 2009 and December 31, 2008    3
  Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2009 and 2008    4
  Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2009 and 2008    5
  Condensed Notes to Consolidated Financial Statements    6
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations    28
Item 3.   Quantitative and Qualitative Disclosures About Market Risk    43
Item 4.   Controls and Procedures    46
PART II – OTHER INFORMATION   
Item 1.   Legal Proceedings    47
Item 6.   Exhibits    47
SIGNATURES    48

 

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Table of Contents

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,
2009
    December 31,
2008
 
     (Unaudited)        
Assets     

Current assets:

    

Cash and cash equivalents

   $ 12,849      $ 45,375   

Accounts receivable, net of allowance for doubtful accounts of $1,856 and $1,174 as of September 30, 2009 and December 31, 2008, respectively

     215,349        178,216   

Inventories

     398,914        220,574   

Other current assets

     55,027        42,321   
                

Total current assets

     682,139        486,486   
                

Property, plant and equipment, at cost

     3,632,381        3,507,573   

Accumulated depreciation and amortization

     (658,834     (565,749
                

Property, plant and equipment, net

     2,973,547        2,941,824   

Intangible assets, net

     46,009        51,704   

Goodwill

     807,742        806,330   

Investment in joint venture

     69,761        68,813   

Deferred income tax asset

     10,206        12,427   

Other long-term assets, net

     80,216        92,013   
                

Total assets

   $ 4,669,620      $ 4,459,597   
                
Liabilities and Partners’ Equity     

Current liabilities:

    

Current portion of long-term debt

   $ 694      $ 713   

Accounts payable

     301,307        145,963   

Payable to related party

     9,087        3,441   

Notes payable

     10,500        22,120   

Accrued interest payable

     21,819        22,496   

Accrued liabilities

     46,802        37,454   

Taxes other than income tax

     18,907        15,333   

Income tax payable

     1,865        4,504   
                

Total current liabilities

     410,981        252,024   
                

Long-term debt, less current portion

     1,914,598        1,872,015   

Long-term payable to related party

     7,102        6,645   

Deferred income tax liability

     25,545        27,370   

Other long-term liabilities

     94,154        94,546   

Commitments and contingencies (Note 5)

    

Partners’ equity:

    

Limited partners (54,460,549 common units outstanding as of September 30, 2009 and December 31, 2008)

     2,163,973        2,173,462   

General partner

     47,306        47,801   

Accumulated other comprehensive income (loss)

     5,961        (14,266
                

Total partners’ equity

     2,217,240        2,206,997   
                

Total liabilities and partners’ equity

   $ 4,669,620      $ 4,459,597   
                

See Condensed Notes to Consolidated Financial Statements.

 

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Table of Contents

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,  
     2009     2008     2009     2008  

Revenues:

        

Service revenues

   $ 190,439      $ 187,104      $ 549,133      $ 547,775   

Product sales

     1,060,808        1,638,122        2,323,960        3,247,805   
                                

Total revenues

     1,251,247        1,825,226        2,873,093        3,795,580   

Costs and expenses:

        

Cost of product sales

     989,868        1,467,152        2,138,524        3,036,077   

Operating expenses:

        

Third parties

     87,724        92,952        239,656        234,271   

Related party

     30,466        34,143        92,361        88,202   
                                

Total operating expenses

     118,190        127,095        332,017        322,473   

General and administrative expenses:

        

Third parties

     9,109        7,846        26,531        23,259   

Related party

     10,104        12,512        40,998        32,726   
                                

Total general and administrative expenses

     19,213        20,358        67,529        55,985   

Depreciation and amortization expense

     36,786        35,143        108,323        100,019   
                                

Total costs and expenses

     1,164,057        1,649,748        2,646,393        3,514,554   
                                

Operating income

     87,190        175,478        226,700        281,026   

Equity earnings from joint ventures

     2,374        2,122        7,698        6,072   

Interest expense, net

     (19,791     (25,228     (60,526     (67,027

Other (expense) income, net

     (1,961     1,696        25,883        12,236   
                                

Income before income tax expense

     67,812        154,068        199,755        232,307   

Income tax expense

     3,372        2,791        12,225        11,071   
                                

Net income

   $ 64,440      $ 151,277      $ 187,530      $ 221,236   
                                

Net income per unit applicable to limited partners (Note 10)

   $ 1.03      $ 2.60      $ 2.99      $ 3.77   
                                

Weighted average limited partner units outstanding

     54,460,549        54,460,549        54,460,549        52,753,696   
                                

See Condensed Notes to Consolidated Financial Statements.

 

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Table of Contents

NUSTAR ENERGY L.P. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, Thousands of Dollars)

 

     Nine Months Ended September 30,  
     2009     2008  

Cash Flows from Operating Activities:

    

Net income

   $ 187,530      $ 221,236   

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

    

Depreciation and amortization expense

     108,323        100,019   

Amortization of debt related items

     (5,266     (4,786

Gain on sale or disposition of assets

     (21,160     (5,495

Provision for deferred income tax

     1,020        387   

Equity earnings from joint ventures

     (7,698     (6,072

Distributions of equity earnings from joint ventures

     6,750        500   

Changes in current assets and current liabilities (Note 11)

     (61,226     (77,237

Other, net

     (2,035     2,880   
                

Net cash provided by operating activities

     206,238        231,432   
                

Cash Flows from Investing Activities:

    

Reliability capital expenditures

     (32,915     (28,001

Strategic and other capital expenditures

     (85,736     (113,554

Acquisition of East Coast Asphalt Operations

     —          (803,184

Proceeds from sale or disposition of assets

     29,451        6,877   

Proceeds from insurance settlement

     10,856        —     

Other

     (9     24   
                

Net cash used in investing activities

     (78,353     (937,838
                

Cash Flows from Financing Activities:

    

Proceeds from long-term debt borrowings

     868,189        1,788,932   

Proceeds from short-term debt borrowings

     306,828        590,700   

Proceeds from senior note offering, net of issuance costs

     —          346,226   

Long-term debt repayments

     (819,040     (1,552,553

Short-term debt repayments

     (318,448     (577,098

Proceeds from issuance of common units, net of issuance costs

     —          236,215   

Contributions from general partner

     —          5,025   

Distributions to unitholders and general partner

     (197,514     (176,103

Decrease in cash book overdrafts

     (6,406     (495

Other

     —          (4
                

Net cash (used in) provided by financing activities

     (166,391     660,845   
                

Effect of foreign exchange rate changes on cash

     5,980        (3,562
                

Net decrease in cash and cash equivalents

     (32,526     (49,123

Cash and cash equivalents as of the beginning of the period

     45,375        89,838   
                

Cash and cash equivalents as of the end of the period

   $ 12,849      $ 40,715   
                

See Condensed Notes to Consolidated Financial Statements.

 

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Table of Contents

NUSTAR ENERGY L.P. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION, BASIS OF PRESENTATION AND ACCOUNTING PRONOUNCEMENTS

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 20.4% total interest in us.

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, 2009 and 2008 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, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009. The consolidated balance sheet as of December 31, 2008 has been derived from the audited consolidated financial statements as of that date. You should read these consolidated financial statements in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2008.

We have reviewed and disclosed, as necessary, subsequent events that occurred after September 30, 2009 through November 5, 2009, the date of issuance of these unaudited financial statements.

New Accounting Pronouncements

Measuring Liabilities at Fair Value. In August 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2009-05, “Fair Value Measurements and Disclosures-Measuring Liabilities at Fair Value” (ASU 2009-05). ASU 2009-05 clarifies the guidance on the fair value measurement of liabilities for circumstances in which a quoted price in an active market for an identical liability is not available. ASU 2009-05 is effective the first reporting period after issuance. Accordingly, we adopted the provisions of ASU 2009-05 effective October 1, 2009 and do not expect it to materially affect our financial position or results of operations.

Variable Interest Entities. In June 2009, the FASB amended certain requirements related to variable interest entities (VIEs), including the requirements for determining whether an entity is a VIE or the primary beneficiary of a VIE. In addition, the amended requirements include additional disclosures about an entity’s involvement with a VIE. These amended requirements become effective as of the beginning of a company’s first annual reporting period that begins after November 15, 2009 and for interim periods within that first annual reporting period. Accordingly, we will be required to comply with the amended requirements on January 1, 2010 and do not expect it to materially affect our financial position or results of operations.

Subsequent Events. In May 2009, the FASB established accounting and disclosure requirements for events or transactions that occur after the balance sheet date but before financial statements are issued or are available to be issued. These requirements include the disclosure of the date through which subsequent events have been evaluated, and the basis for determining that date. We adopted these provisions effective April 1, 2009.

 

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NUSTAR ENERGY L.P. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Contingencies in Business Combinations. In April 2009, the FASB amended certain requirements related to business combinations to require that assets acquired and liabilities assumed in a business combination that arise from contingencies be recognized at fair value on the acquisition date if fair value can be determined. If fair value cannot be determined, then the acquired contingencies should be accounted for using previous applicable guidance. The amended requirements also made some changes to the accounting for contingent consideration arrangements and the disclosure of assets and liabilities arising from contingencies in a business combination. We adopted these provisions effective January 1, 2009, and there was no impact as this affects business combinations occuring after the effective date.

Financial Instruments. In April 2009, the FASB revised its existing disclosure requirements for the fair value of financial instruments in annual and interim financial statements. Starting with interim periods ending after June 15, 2009, we must disclose the fair value of all financial instruments, whether or not recognized at fair value in the balance sheet, along with the related carrying value and methods and significant assumptions used to estimate the fair value. Retrospective application for comparative periods presented is not required. Accordingly, we adopted these provisions effective April 1, 2009 and included the required disclosures in Note 6. Fair Value Measurements.

2. ACQUISITIONS

CITGO Asphalt Refining Company Asphalt Operations and Assets

On March 20, 2008, we acquired CITGO Asphalt Refining Company’s asphalt operations and assets (the East Coast Asphalt Operations) for approximately $840.4 million.

The acquisition of the East Coast Asphalt Operations was accounted for using the purchase method. The purchase price has been allocated based on the estimated fair values of the individual assets acquired and liabilities assumed at the date of acquisition. The purchase price and final purchase price allocation were as follows (in thousands):

 

Cash paid for the East Coast Asphalt Operations

   $ 801,686

Transaction costs

     1,498
      

Total cash paid

     803,184

Fair value of liabilities assumed

     37,238
      

Purchase price

   $ 840,422
      

Inventories

   $ 327,312

Other current assets

     1,439

Property, plant and equipment

     450,310

Goodwill

     22,132

Intangible assets

     11,510

Other long-term assets

     27,719
      

Purchase price allocation

   $ 840,422
      

3. INVENTORIES

Inventories consisted of the following:

 

     September 30,
2009
   December 31,
2008
     (Thousands of Dollars)

Crude oil

   $ 109,775    $ 14,912

Finished products

     289,139      205,662
             

Total

   $ 398,914    $ 220,574
             

 

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NUSTAR ENERGY L.P. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

4. DEBT

Revolving Credit Agreement

During the nine months ended September 30, 2009, we borrowed an aggregate $808.8 million under our 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 $762.8 million during the nine months ended September 30, 2009. The 2007 Revolving Credit Agreement bears interest based on either an alternative base rate or a LIBOR based rate, which was 1.0% as of September 30, 2009.

The 2007 Revolving Credit Agreement is diversified among numerous participating banks, including Lehman Brothers Bank, FSB (LB Bank), a subsidiary of Lehman Brothers Holdings Inc. (Lehman), which filed for bankruptcy protection in October 2008. LB Bank’s participation in the 2007 Revolving Credit Agreement totaled $42.5 million, of which $8.7 million remained outstanding as of September 30, 2009. As a result of Lehman’s bankruptcy filing in October 2008, LB Bank has elected not to fund its pro rata share of any future borrowings we request, which reduces the total commitment under the 2007 Revolving Credit Agreement to approximately $1.2 billion. Excluding LB Bank’s participation, we had $547.2 million available for borrowing under the 2007 Revolving Credit Agreement as of September 30, 2009. If other lenders under the 2007 Revolving Credit Agreement file for bankruptcy or experience severe financial hardship due to disruptions and steep declines in the global financial markets and tightening credit supply, they may not honor their pro rata share of our borrowing requests. In addition, the 2007 Revolving Credit Agreement 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, which may limit the amount we can borrow to an amount less than the total amount available. As of September 30, 2009, the consolidated debt coverage ratio was 4.6x.

Gulf Opportunity Zone Revenue Bonds

On June 26, 2008, the Parish of St. James, where our St. James, Louisiana, terminal is located, issued $56.2 million of Revenue Bonds (NuStar Logistics, L.P. Project) Series 2008 associated with our St. James terminal expansion. The bonds mature on June 1, 2038. 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, 2009. 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. As of September 30, 2009, we have received $55.5 million from the trustee, of which $3.2 million was received during the nine months ended September 30, 2009. As of September 30, 2009, the remaining $0.7 million in trust are included in “Other long-term assets, net,” and the $56.2 million obligation is included in “Long-term debt, less current portion” in our consolidated balance sheets.

Lines of Credit

As of September 30, 2009, we had one short-term line of credit with an uncommitted borrowing capacity of up to $20.0 million. Outstanding borrowings on this line of credit totaled $10.5 million as of September 30, 2009 at an interest rate of 2.2%. During the nine months ended September 30, 2009, we borrowed $306.8 million and repaid $316.3 million for current working capital needs.

5. COMMITMENTS AND CONTINGENCIES

Litigation and Environmental Matters

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, 2009, we have recorded $0.6 million of accruals related to settled matters and $79.7 million of accruals for contingent losses. The actual payment of any amounts accrued and the timing of such payments ultimately made is uncertain.

Grace Energy Corporation Matter. In 1997, Grace Energy Corporation (Grace Energy) sued subsidiaries of Kaneb Pipe Line Partners, L.P. (KPP) and Kaneb Services LLC (KSL and, collectively with KPP and their respective subsidiaries, Kaneb) in Texas state court. 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

 

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NUSTAR ENERGY L.P. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

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.

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 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. CARCO has demanded that NuStar Asphalt and NuStar Marketing defend and indemnify it against Eres’ claims and has filed a lawsuit in the Harris County District Court, Harris County, Texas, seeking to recover on its indemnity claim. This lawsuit has been removed and is currently pending in the U.S. District Court for the Southern District of Texas. In connection with the demand for arbitration, Eres filed a complaint in the U.S. District Court for the Southern District of New York (SDNY) seeking to require the Defendants to arbitrate the dispute and seeking to attach the banking funds of the Defendants (including cash, escrow funds, credits, debts, wire transfers, electronic funds transfers, accounts, letters of credit, freights and charter hire) within the SDNY in amounts of approximately $78.1 million, pending resolution of arbitration between Eres and the Defendants. This lawsuit has also been removed to and is currently pending in the U.S. District Court for the Southern District of Texas. To date, no funds of the Defendants have been attached. We intend to vigorously defend against these claims.

Department of Justice Matter. In February 2008, the DOJ advised us that the U.S. Environmental Protection Agency (the EPA) has requested that the DOJ initiate a lawsuit against NuPOP for (a) failing to prepare adequate Facility Response Plans, as required by Section 311(j)(5) of the Clean Water Act, 33 U.S.C. §1321(j), for certain of our pipeline terminals located in Region VII, by August 30, 1994, and (b) maintaining Spill Prevention, Control and Countermeasure (SPCC) Plans at the terminal that deviate from the SPCC regulations, 40 C.F.R. §112.3. A Facility Response Plan is a plan for responding to a worst case discharge, and to a substantial threat of such a discharge, of oil or hazardous substances. The SPCC rule requires specific facilities to prepare, amend and implement plans to prevent, prepare and respond to oil discharges to navigable waters and adjoining shorelines. We are currently in settlement negotiations with the DOJ to resolve these matters.

EPA Investigation. In November 2006, the EPA commenced an investigation at one of the terminals owned by Shore Terminals LLC (Shore). The investigation concerned allegations that Shore failed to comply with certain of its obligations under the Clean Air Act. Shore cooperated fully with the government in its investigation. At the conclusion of the investigation, Shore agreed to plead guilty to four counts of making a false statement under Title 18 United States Code 1001. Shore also agreed to pay a monetary fine of $1.75 million, contribute $750,000 to community environmental projects, serve two years of probation and participate in an environmental compliance program. On July 14, 2009, the United States District Court for the Northern District of California accepted the plea agreement.

 

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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

In June 2009, we entered into a lease agreement for three asphalt terminals with 1.5 million barrels of storage capacity located in Saginaw, Texas; Gloucester City, New Jersey; and Newport News, Virginia totaling approximately $33.0 million over a period of about 2.5 years.

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.

We have applied fair value recognition and disclosure provisions for financial assets and liabilities and for nonfinancial assets and liabilities that are re-measured at least annually as of January 1, 2008. As permitted, we applied the provisions for nonfinancial assets and liabilities that are not recognized or disclosed at fair value on a recurring basis as of January 1, 2009, which did not affect our financial position or results of operations.

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

 

     September 30, 2009  
     Level 1     Level 2     Level 3    Total  
     (Thousands of Dollars)  

Other current assets:

         

Product imbalances

   $ 1,263      $ —        $ —      $ 1,263   

Other long-term assets, net:

         

Interest rate swaps

     —          10,127        —        10,127   

Accrued liabilities:

         

Product imbalances

     (123     —          —        (123

Derivatives

     (19,766     —          —        (19,766
                               

Total

   $ (18,626   $ 10,127      $        —      $ (8,499
                               
     December 31, 2008  
     Level 1     Level 2     Level 3    Total  
     (Thousands of Dollars)  

Other current assets:

         

Derivatives

   $ 8,502      $ —        $ —      $ 8,502   

Product imbalances

     —          11,502        —        11,502   

Other long-term assets, net:

         

Interest rate swaps

     —          15,284        —        15,284   

Accrued liabilities:

         

Product imbalances

     —          (2,193     —        (2,193
                               

Total

   $ 8,502      $  24,593      $ —      $ 33,095   
                               

 

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Product Imbalances

Since the East Pipeline system is an open system, we incur product imbalances as a result of variances in pipeline meter readings and volume fluctuations within the pipeline system due to pressure and temperature changes. As of December 31, 2008, we valued assets and liabilities related to product imbalances by petroleum product at adjusted market prices. Effective January 1, 2009, we began using 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 uses observable inputs such as time to maturity and market interest rates.

Derivatives

A portion of our product inventories and related firm commitments qualify for fair value hedge treatment. The fair value of the respective hedged items is determined using quoted market prices.

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.

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 fixed-rate debt was as follows:

 

     September 30,
2009
   December 31,
2008
     (Thousands of Dollars)

Fair value

   $   1,306,263    $   1,157,470

Carrying amount

   $ 1,252,986    $ 1,261,234

We estimated these fair values using a discounted cash flow analysis, based on our current incremental borrowing rates for similar types of borrowing arrangements. The fair value of our variable rate debt approximates its carrying amount of $672.8 million as of September 30, 2009.

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 hedging 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.

In March 2008, the FASB amended and expanded the existing disclosure requirements for derivative instruments to require enhanced disclosures on how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for and their impact on an entity’s financial performance, financial position and cash flows. We adopted these disclosure requirements as of January 1, 2009.

 

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

 

    

Balance Sheet Location

   Asset Derivatives    Liability Derivatives  
        September 30,
2009
   December 31,
2008
   September 30,
2009
    December 31,
2008
 
               (Thousands of Dollars)        

Derivatives Designated as Fair Value Hedging Instruments:

             

Interest rate swaps

   Other long-term assets, net    $ 10,127    $ 15,284    $ —        $ —     

Commodity contracts

   Other current assets      —        7,005      —          (6,911

Commodity contracts

   Accrued liabilities      2,416      —        (7,517     —     
                                 

Total

        12,543      22,289      (7,517     (6,911
                                 

Derivatives Not Designated as Fair Value Hedging Instruments:

             

Commodity contracts

   Other current assets      —        8,408      —          —     

Commodity contracts

   Accrued liabilities      2,962      —        (17,627     —     
                                 

Total

        2,962      8,408      (17,627     —     
                                 

Total Derivatives

      $ 15,505    $ 30,697    $ (25,144   $ (6,911
                                 

 

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The earnings impact of our derivative activity was as follows for the three and nine months ended September 30, 2009:

 

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, 2009:

         

Interest rate swaps

   Interest expense, net    $ 953      $ (953   $ —  

Commodity contracts

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

Total

      $ 859      $ 5,537      $ 6,396
                         

Nine months ended September 30, 2009:

         

Interest rate swaps

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

Commodity contracts

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

Total

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

 

Derivatives Not Designated as Fair Value Hedging Instruments

  

Income Statement
Location

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

Three months ended September 30, 2009:

     

Commodity contracts

   Cost of product sales    $ 2,574   

Nine months ended September 30, 2009:

     

Commodity contracts

   Cost of product sales    $ (8,341

Commodity contracts

   Operating expenses      (3,564
           

Total

      $ (11,905
           

The following table presents the volume of our derivative activity. 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.

 

     September 30, 2009

Commodity contracts (thousands of barrels)

     10,978

Interest rate swaps (notional amount in thousands of dollars)

   $ 167,500

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 the fair value of certain of our product inventories, related firm commitments and product imbalances with the objective of stabilizing cash flows. Derivative instruments designated and qualifying as fair value hedges are recorded in the consolidated balance sheets as assets or liabilities at fair value, with related mark-to-market adjustments recorded in “Cost of product sales” in the consolidated statements of income. The offsetting gain or loss on the associated hedged physical inventory or firm commitment, together with the resulting hedge ineffectiveness, is recognized concurrently in “Cost of product sales.” No component of the associated derivative instruments’ gains or losses was excluded from our assessment of hedge ineffectiveness.

We record derivative instruments that do not qualify for hedge accounting, but that hedge physical inventory, in the consolidated balance sheets as assets or liabilities at fair value with mark-to-market adjustments recorded in “Cost of

 

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product sales” or “Operating expenses” in the consolidated statements of income. Fair value is based on quoted market prices.

From time to time, we also enter into derivative commodity instruments based on our analysis of market conditions in order to attempt to profit from market fluctuations. These derivative instruments are financial positions entered into without underlying physical inventory and are not considered hedges. We record these derivatives in the consolidated balance sheets as assets or liabilities at fair value with mark-to-market adjustments recorded in “Product sales” in the consolidated statements of income. We did not enter into any such derivatives during the nine months ended September 30, 2009.

As of September 30, 2009, we had $21.4 million of margin deposits related to our derivative instruments.

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. We account for the 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. The interest rate swap contracts qualify for the shortcut method of accounting. As a result, changes in the fair value of the derivatives will completely offset the changes in the fair value of the underlying hedged debt. As of September 30, 2009, the weighted-average interest rate for our interest rate swaps was 2.6%.

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 the general partner of our general partner, NuStar GP, LLC. The 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. We reimburse NuStar GP, LLC for all costs related to its employees, other than costs associated with NuStar GP Holdings under the services agreement described below. We had a payable of $9.1 million and $3.4 million, as of September 30, 2009 and December 31, 2008, respectively, with both amounts primarily representing payroll and benefit plan costs, net of payments made by us. We also had a long-term payable of $7.1 million and $6.6 million, as of September 30, 2009 and December 31, 2008, respectively, to NuStar GP, LLC 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,
     2009    2008    2009    2008
     (Thousands of Dollars)

Operating expenses

   $ 30,466    $ 34,143    $ 92,361    $ 88,202

General and administrative expenses

     10,104      12,512      40,998      32,726

GP Services Agreement

NuStar Energy and NuStar GP, LLC entered into a services agreement, effective as of January 1, 2008 (the GP Services Agreement). The GP Services Agreement provides that NuStar GP, LLC will furnish administrative and certain operating services necessary to conduct the business of NuStar Energy. All employees providing services to both NuStar GP Holdings and NuStar Energy are employed by NuStar GP, LLC; therefore, NuStar Energy reimburses NuStar GP, LLC for all employee costs, other than the expenses allocated to NuStar GP Holdings.

 

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9. OTHER INCOME

Other income consisted of the following:

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2009     2008     2009     2008  
     (Thousands of Dollars)  

Gain from insurance proceeds

   $ 174      $ —        $ 9,069      $ 3,504   

Gain from sale or disposition of assets

     110        332        21,160        5,650   

Foreign exchange (losses) gains

     (2,324     2,451        (4,767     3,469   

Other

     79        (1,087     421        (387
                                

Other income, net

   $ (1,961   $ 1,696      $ 25,883      $ 12,236   
                                

The gain from sale or disposal of fixed assets for the nine months ended September 30, 2009 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.

For the three and nine months ended September 30, 2009, the gain from insurance proceeds results from insurance claims related to damage caused by Hurricane Ike primarily at our Texas City terminal in the third quarter of 2008. For the nine months ended September 30, 2008, the gain from insurance proceeds relates to business interruption insurance proceeds associated with lost earnings at our pipelines and terminals that serve Valero Energy Corporation’s McKee refinery, which experienced a fire in February 2007.

10. PARTNERS’ EQUITY

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 done after giving effect, if any, to priority income allocations in an amount equal to incentive cash distributions allocated 100% to the general partner.

Net Income per Unit

In 2008, the FASB provided additional guidance regarding the application of the two-class method to calculate earnings per unit for master limited partnerships with incentive distribution rights (IDRs) that are accounted for as equity interests. Under the new guidance, effective January 1, 2009, a master limited partnership must allocate earnings to its IDRs in the calculation of earnings per unit. The terms of our partnership agreement limit distributions to the IDR holders to the amount of available cash calculated for the period. As a result, IDRs are not allocated undistributed earnings or distributions in excess of earnings, thus the effect of adopting the additional guidance was not significant to our calculation of earnings per unit. Previous periods have been restated to conform to this presentation. 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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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The following table details the calculation of earnings per unit:

 

     Three Months Ended September 30,    Nine Months Ended September 30,
     2009     2008    2009     2008
     (Thousands of Dollars, Except Per Unit Data)

Net income

   $ 64,440      $ 151,277    $ 187,530      $ 221,236

Less general partner distribution (including IDRs) (a)

     8,382        8,247      24,876        21,464

Less limited partner distribution

     58,000        57,591      173,182        159,903
                             

Distributions less than (greater than) earnings

   $ (1,942   $ 85,439    $ (10,528   $ 39,869
                             

General partner earnings:

         

Distributions

   $ 8,382      $ 8,247    $ 24,876      $ 21,464

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

     (39     1,709      (211     797
                             

Total

   $ 8,343      $ 9,956    $ 24,665      $ 22,261
                             

Limited partner earnings:

         

Distributions

   $ 58,000      $ 57,591    $ 173,182      $ 159,903

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

     (1,903     83,730      (10,317     39,072
                             

Total

   $ 56,097      $ 141,321    $ 162,865      $ 198,975
                             

Weighted average limited partner units outstanding

     54,460,549        54,460,549      54,460,549        52,753,696

Net income per unit applicable to limited partners:

         

Distributions

   $ 1.06      $ 1.06    $ 3.18      $ 3.03

Distributions less than (greater than) earnings

     (0.03     1.54      (0.19     0.74
                             

Total

   $ 1.03      $ 2.60    $ 2.99      $ 3.77
                             
 
  (a) For the first quarter of 2008, the general partner distribution used in our calculation of earnings per unit was based on the partnership interests outstanding as of March 31, 2008. We issued approximately 5.1 million common units in April 2008. Actual distribution payments are made within 45 days after the end of each quarter as of a record date that is set after the end of each quarter. Therefore, the general partner’s portion of the actual distribution made with respect to the nine months ended September 30, 2008, including the IDRs, which is shown in the distribution table below, exceeded the general partner distribution used in the calculation of earnings per unit.

Cash Distributions

In July 2009, we declared a quarterly cash distribution of $1.0575 per unit that was paid on August 13, 2009 to unitholders of record on August 6, 2009. This distribution related to the second quarter of 2009 and totaled $65.8 million. In October 2009, we declared a quarterly cash distribution of $1.065 per unit related to the third quarter of 2009. This distribution will be paid on November 12, 2009 to unitholders of record on November 5, 2009 and will total $66.4 million.

 

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

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,
     2009    2008    2009    2008
     (Thousands of Dollars, Except Per Unit Data)

General partner interest

   $ 1,327    $ 1,318    $ 3,963    $ 3,740

General partner incentive distribution

     7,055      6,929      20,913      18,365
                           

Total general partner distribution

     8,382      8,247      24,876      22,105

Limited partners’ distribution

     58,000      57,591      173,182      164,879
                           

Total cash distributions

   $ 66,382    $ 65,838    $ 198,058    $ 186,984
                           

Cash distributions per unit applicable to limited partners

   $ 1.065    $ 1.0575    $ 3.180    $ 3.0275
                           

Comprehensive Income

The difference between our net income and our comprehensive income resulted from foreign currency translation adjustments. Our total comprehensive income was as follows:

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2009    2008     2009    2008  
     (Thousands of Dollars)  

Net income

   $ 64,440    $ 151,277      $ 187,530    $ 221,236   

Foreign currency translation adjustment

     9,174      (13,817     20,227      (15,018
                              

Comprehensive income

   $ 73,614    $ 137,460      $ 207,757    $ 206,218   
                              

11. STATEMENTS OF CASH FLOWS

Changes in current assets and current liabilities were as follows:

 

     Nine Months Ended September 30,  
     2009     2008  
     (Thousands of Dollars)  

Decrease (increase) in current assets:

    

Accounts receivable

   $ (35,339   $ (206,125

Receivable from related party

     —          (425

Inventories

     (178,056     (133,361

Other current assets

     (10,765     (5,214

Increase (decrease) in current liabilities:

    

Accounts payable

     160,480        235,034   

Payable to related party

     5,487        —     

Accrued interest payable

     (677     5,902   

Accrued liabilities

     482        14,489   

Taxes other than income tax

     3,558        11,556   

Income tax payable

     (6,396     907   
                

Changes in current assets and current liabilities

   $ (61,226   $ (77,237
                

 

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

 

     Nine Months Ended September 30,
     2009    2008
     (Thousands of Dollars)

Cash paid for interest, net of amount capitalized

   $ 70,626    $ 70,643

Cash paid for income taxes, net of tax refunds received

   $ 17,218    $ 9,968

12. SEGMENT INFORMATION

Our operating 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 lease services, pipeline transportation services and asphalt and fuels marketing. Product sales included in our asphalt and fuels marketing segment consist of sales of asphalt and other petroleum products to third parties. Intersegment revenues result from storage and throughput agreements at lease rates consistent with rates charged to third parties for storage and at pipeline tariffs based upon the published tariff applicable to all shippers.

 

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Results of operations for the reportable segments were as follows:

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2009     2008     2009     2008  
     (Thousands of Dollars)  

Revenues:

        

Storage:

        

Third party revenues

   $ 112,697      $ 106,179      $ 328,820      $ 314,449   

Intersegment revenues

     12,536        9,602        31,528        22,105   
                                

Total storage

     125,233        115,781        360,348        336,554   

Transportation:

        

Third party revenues

     77,742        80,925        220,313        233,326   

Intersegment revenues

     273        238        838        644   
                                

Total transportation

     78,015        81,163        221,151        233,970   

Asphalt and fuels marketing:

        

Third party revenues

     1,060,808        1,638,122        2,323,960        3,247,805   

Intersegment revenues

     —          —          —          29   
                                

Total asphalt and fuels marketing

     1,060,808        1,638,122        2,323,960        3,247,834   

Consolidation and intersegment eliminations

     (12,809     (9,840     (32,366     (22,778
                                

Total revenues

   $ 1,251,247      $ 1,825,226      $ 2,873,093      $ 3,795,580   
                                

Operating income:

        

Storage

   $ 44,033      $ 30,182      $ 131,082      $ 103,188   

Transportation

     35,425        28,961        100,394        96,036   

Asphalt and fuels marketing

     28,110        137,604        65,298        140,359   

Consolidation and intersegment eliminations

     41        9        869        (34
                                

Total segment operating income

     107,609        196,756        297,643        339,549   

Less general and administrative expenses

     19,213        20,358        67,529        55,985   

Less other depreciation and amortization

     1,206        920        3,414        2,538   
                                

Total operating income

   $ 87,190      $ 175,478      $ 226,700      $ 281,026   
                                

Total assets by reportable segment were as follows:

 

     September 30,
2009
   December 31,
2008
     (Thousands of Dollars)

Storage

   $ 2,192,350    $ 2,140,010

Transportation

     1,289,303      1,327,666

Asphalt and fuels marketing

     1,117,722      885,492
             

Total segment assets

     4,599,375      4,353,168

Other partnership assets

     70,245      106,429
             

Total consolidated assets

   $ 4,669,620    $ 4,459,597
             

 

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Table of Contents

NUSTAR ENERGY L.P. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

13. 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, 2009

(Thousands of Dollars)

 

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

Assets

               

Cash and cash equivalents

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

Receivables, net

     —        25,203        8,800      185,423      (4,077     215,349

Inventories

     —        —          340      398,797      (223     398,914

Other current assets

     —        13,262        3,099      38,666      —          55,027

Intercompany receivable

     —        261,765        680,355      —        (942,120     —  
                                           

Current assets

     53      301,323        693,185      633,998      (946,420     682,139
                                           

Property, plant and equipment, net

     —        934,948        627,468      1,411,131      —          2,973,547

Intangible assets, net

     —        2,365        —        43,644      —          46,009

Goodwill

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

Investment in wholly owned subsidiaries

     2,332,761      128,221        872,920      1,877,013      (5,210,915     —  

Investment in joint venture

     —        —          —        69,761      —          69,761

Deferred income tax asset

     —        —          —        10,206      —          10,206

Other long-term assets, net

     56      24,056        26,424      29,680      —          80,216
                                           

Total assets

   $ 2,332,870    $ 1,409,007      $ 2,390,649    $ 4,694,429    $ (6,157,335   $ 4,669,620
                                           

Liabilities and Partners’ Equity

               

Current portion of long-term debt

   $ —      $ 694      $ —      $ —      $ —        $ 694

Payables

     5      13,700        10,678      290,088      (4,077     310,394

Notes payable

     —        10,500        —        —        —          10,500

Accrued interest payable

     —        14,453        7,318      48      —          21,819

Accrued liabilities

     964      9,857        3,430      32,553      (2     46,802

Taxes other than income tax

     63      5,254        3,393      10,197      —          18,907

Income tax payable

     —        859        —        1,006      —          1,865

Intercompany payable

     120,559      —          —        821,561      (942,120     —  
                                           

Current liabilities

     121,591      55,317        24,819      1,155,453      (946,199     410,981
                                           

Long-term debt, less current portion

     —        1,355,526        525,449      33,623      —          1,914,598

Long-term payable to related party

     —        505        —        6,597      —          7,102

Deferred tax liability

     —        —          —        25,545      —          25,545

Other long-term liabilities

     —        4,043        1,162      88,949      —          94,154

Total partners’ equity

     2,211,279      (6,384     1,839,219      3,384,262      (5,211,136     2,217,240
                                           

Total liabilities and partners’ equity

   $ 2,332,870    $ 1,409,007      $ 2,390,649    $ 4,694,429    $ (6,157,335   $ 4,669,620
                                           

 

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

 

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Table of Contents

NUSTAR ENERGY L.P. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Condensed Consolidating Balance Sheets

December 31, 2008

(Thousands of Dollars)

 

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

Assets

                

Cash and cash equivalents

   $ 53    $ 2    $ 656    $ 44,664    $ —        $ 45,375

Accounts receivable, net

     8      33,620      8,421      143,141      (6,974     178,216

Inventories

     —        —        347      220,937      (710     220,574

Other current assets

     9      9,472      13,673      19,167      —          42,321

Intercompany receivable

     —        337,685      666,052      —        (1,003,737     —  
                                          

Current assets

     70      380,779      689,149      427,909      (1,011,421     486,486
                                          

Property, plant and equipment, net

     —        954,487      629,091      1,358,246      —          2,941,824

Intangible assets, net

     —        2,771      —        48,933      —          51,704

Goodwill

     —        18,613      170,652      617,065      —          806,330

Investment in wholly owned subsidiaries

     2,341,184      82,435      806,706      1,679,065      (4,909,390     —  

Investment in joint venture

     —        —        —        68,813      —          68,813

Deferred income tax asset

     —        —        —        12,427      —          12,427

Other long-term assets, net

     56      34,557      26,517      30,883      —          92,013
                                          

Total assets

   $ 2,341,310    $ 1,473,642    $ 2,322,115    $ 4,243,341    $ (5,920,811   $ 4,459,597
                                          

Liabilities and Partners’ Equity

                

Current portion of long-term debt

   $ —      $ 713    $ —      $ —      $ —        $ 713

Payables

     —        23,900      10,171      122,307      (6,974     149,404

Notes payable

     —        22,120      —        —        —          22,120

Accrued interest payable

     —        13,830      8,490      176      —          22,496

Accrued liabilities

     1,032      14,998      5,076      16,365      (17     37,454

Taxes other than income tax

     125      3,866      2,687      8,655      —          15,333

Income tax payable

     —        976      —        3,528      —          4,504

Intercompany payable

     118,890      —        —        884,847      (1,003,737     —  
                                          

Current liabilities

     120,047      80,403      26,424      1,035,878      (1,010,728     252,024
                                          

Long-term debt, less current portion

     —        1,309,763      531,504      30,748      —          1,872,015

Long-term payable to related party

     —        —        —        6,645      —          6,645

Deferred tax liability

     —        —        —        27,370      —          27,370

Other long-term liabilities

     —        4,992      965      88,589      —          94,546

Total partners’ equity

     2,221,263      78,484      1,763,222      3,054,111      (4,910,083     2,206,997
                                          

Total liabilities and partners’ equity

   $ 2,341,310    $ 1,473,642    $ 2,322,115    $ 4,243,341    $ (5,920,811   $ 4,459,597
                                          

 

(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

   $ —        $ 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 earnings in subsidiaries

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

Equity earnings from joint venture

     —          —          —          2,374        —          2,374   

Interest expense, net

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

Other income (expense), net

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

Income before income tax expense

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

Income tax expense

     —          430        —          2,942        —          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 Three Months Ended September 30, 2008

(Thousands of Dollars)

 

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

Revenues

   $ —        $ 76,295      $ 37,376      $ 1,714,321      $ (2,766   $ 1,825,226   

Costs and expenses

     519        46,201        31,977        1,573,785        (2,734     1,649,748   
                                                

Operating (loss) income

     (519     30,094        5,399        140,536        (32     175,478   

Equity earnings in subsidiaries

     151,796        111,047        29,667        51,926        (344,436     —     

Equity (loss) earnings from joint ventures

     —          (357     —          2,479        —          2,122   

Interest expense, net

     —          (17,719     (6,142     (1,367     —          (25,228

Other income (expense), net

     —          116        (437     2,017        —          1,696   
                                                

Income before income tax expense

     151,277        123,181        28,487        195,591        (344,468     154,068   

Income tax expense

     —          —          —          2,791        —          2,791   
                                                

Net income

   $ 151,277      $ 123,181      $ 28,487      $ 192,800      $ (344,468   $ 151,277   
                                                

 

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

 

23


Table of Contents

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

   $ —        $ 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 earnings in subsidiaries

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

Equity earnings from joint venture

     —          —          —          7,698        —          7,698   

Interest expense, net

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

Other income, net

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

Income before income tax expense

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

Income tax expense

     —          870        —          11,355        —          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.

 

24


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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, 2008

(Thousands of Dollars)

 

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

Revenues

   $ —        $ 223,483      $ 109,186      $ 3,467,964      $ (5,053   $ 3,795,580   

Costs and expenses

     1,163        135,686        83,917        3,298,809        (5,021     3,514,554   
                                                

Operating (loss) income

     (1,163     87,797        25,269        169,155        (32     281,026   

Equity earnings in subsidiaries

     222,477        96,364        71,005        124,480        (514,326     —     

Equity earnings from joint ventures

     —          353        —          5,719        —          6,072   

Interest expense, net

     —          (45,873     (18,575     (2,579     —          (67,027

Other (expense) income, net

     (78     8,205        (445     4,554        —          12,236   
                                                

Income before income tax expense

     221,236        146,846        77,254        301,329        (514,358     232,307   

Income tax expense

     —          976        —          10,095        —          11,071   
                                                

Net income

   $ 221,236      $ 145,870      $ 77,254      $ 291,234      $ (514,358   $ 221,236   
                                                

 

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

 

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Table of Contents

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

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

Proceeds from insurance settlement

     —          —          —          10,856        —          10,856   

Proceeds from sale or disposition of assets

     —          29,090        35        326        —          29,451   

Other

     —          —          —          (9     —          (9
                                                

Net cash provided by (used in) investing activities

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

Cash flows from financing activities:

            

Debt borrowings

     —          1,175,017        —          —          —          1,175,017   

Debt repayments

     —          (1,137,488     —          —          —          (1,137,488

Distributions to unitholders and general partner

     (197,514     (197,514     —          (20     197,534        (197,514

Net intercompany borrowings (repayments)

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

Other

     —          (5,832     —          (574     —          (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

     —          4,841        —          1,139        —          5,980   

Net increase (decrease) in cash and cash equivalents

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

Cash and cash equivalents as of the beginning of the period

     53        2        656        44,664        —          45,375   
                                                

Cash and cash equivalents as of the end of the period

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

 

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

 

26


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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, 2008

(Thousands of Dollars)

 

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

Net cash provided by (used in) operating activities

   $ 174,059      $ 82,741      $ 23,624      $ 127,128      $ (176,120   $ 231,432   
                                                

Cash flows from investing activities:

            

Capital expenditures

     —          (37,290     (6,094     (98,171     —          (141,555

Acquisition

     —          —          —          (803,184     —          (803,184

Proceeds from sale or disposition of assets

     —          4,362        —          2,515        —          6,877   

Other

     —          —          —          24        —          24   
                                                

Net cash used in investing activities

     —          (32,928     (6,094     (898,816     —          (937,838
                                                

Cash flows from financing activities:

            

Debt borrowings

     —          2,379,632        —          —          —          2,379,632   

Debt repayments

     —          (2,129,651     —          —          —          (2,129,651

Senior note offering, net

     —          346,226        —          —          —          346,226   

Issuance of common units, net of issuance costs

     236,215        —          —          —          —          236,215   

General partner contribution

     5,025        —          —          —          —          5,025   

Distributions to unitholders and general partner

     (176,103     (176,103     —          (17     176,120        (176,103

Net intercompany (repayments) borrowings

     (239,196     (467,071     (17,100     723,367        —          —     

Other

     —          (432     —          (67     —          (499
                                                

Net cash (used in) provided by financing activities

     (174,059     (47,399     (17,100     723,283        176,120        660,845   
                                                

Effect of foreign exchange rate changes on cash

     —          (4,319     —          757        —          (3,562

Net (decrease) increase in cash and cash equivalents

     —          (1,905     430        (47,648     —          (49,123

Cash and cash equivalents as of the beginning of the period

     7        12,284        122        77,425        —          89,838   
                                                

Cash and cash equivalents as of the end of the period

   $ 7      $ 10,379      $ 552      $ 29,777      $ —        $ 40,715   
                                                

 

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

 

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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, 2008, 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 the 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 20.4% total interest in us. Our Management’s Discussion and Analysis of Financial Condition and Results of Operations is presented in five sections:

 

   

Overview

 

   

Results of Operations

 

   

Outlook

 

   

Liquidity and Capital Resources

 

   

Critical Accounting Policies

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.

Storage

We own terminals in the United States, the Netherland Antilles, Canada, Mexico, the Netherlands and the United Kingdom providing approximately 65.9 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,

 

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Missouri, Illinois, Indiana, Iowa and Nebraska. We also own 812 miles of crude oil pipelines in 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 4.7 million barrels. Additionally, as part of our fuels marketing operations, we purchase gasoline and other refined petroleum products for resale. The activities of the asphalt and fuels marketing segment expose us to the risk of fluctuations in commodity prices, which directly impact the results of operations for the asphalt and fuels marketing segment. We enter into derivative contracts to mitigate the effect of commodity price fluctuations.

Factors Affecting Results of Operations

The following are what we consider the most important factors affecting 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 assets.

 

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RESULTS OF OPERATIONS

Three Months Ended September 30, 2009 Compared to Three Months Ended September 30, 2008

Financial Highlights

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

 

     Three Months Ended September 30,        
     2009     2008     Change  

Statement of Income Data:

  

Revenues:

      

Services revenues

   $ 190,439      $ 187,104      $ 3,335   

Product sales

     1,060,808        1,638,122        (577,314
                        

Total revenues

     1,251,247        1,825,226        (573,979
                        

Costs and expenses:

      

Cost of product sales

     989,868        1,467,152        (477,284

Operating expenses

     118,190        127,095        (8,905

General and administrative expenses

     19,213        20,358        (1,145

Depreciation and amortization expense

     36,786        35,143        1,643   
                        

Total costs and expenses

     1,164,057        1,649,748        (485,691
                        

Operating income

     87,190        175,478        (88,288

Equity earnings from joint ventures

     2,374        2,122        252   

Interest expense, net

     (19,791     (25,228     5,437   

Other (expense) income, net

     (1,961     1,696        (3,657
                        

Income before income tax expense

     67,812        154,068        (86,256

Income tax expense

     3,372        2,791        581   
                        

Net income

   $ 64,440      $ 151,277      $ (86,837
                        

Net income per unit applicable to limited partners

   $ 1.03      $ 2.60      $ (1.57
                        

Weighted average limited partner units outstanding

     54,460,549        54,460,549        —     
                        

Highlights

Net income decreased $86.8 million for the three months ended September 30, 2009, compared to the three months ended September 30, 2008, primarily due to a decrease in segment operating income. Segment operating income decreased $89.1 million during the three months ended September 30, 2009, compared to the three months ended September 30, 2008, primarily due to a decreased product margin associated with our asphalt operations in our asphalt and fuels marketing segment. The decrease in operating income from our asphalt and fuels marketing segment was partially offset by increased operating income from our storage and transportation segments.

 

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Segment Operating Highlights

(Thousands of Dollars, Except Barrels/Day Information)

 

     Three Months Ended September 30,        
     2009     2008     Change  

Storage:

      

Throughput (barrels/day)

     708,281        713,323        (5,042

Throughput revenues

   $ 19,892      $ 22,640      $ (2,748

Storage lease revenues

     105,341        93,141        12,200   
                        

Total revenues

     125,233        115,781        9,452   

Operating expenses

     63,166        68,699        (5,533

Depreciation and amortization expense

     18,034        16,900        1,134   
                        

Segment operating income

   $ 44,033      $ 30,182      $ 13,851   
                        

Transportation:

      

Refined products pipelines throughput (barrels/day)

     544,345        652,174        (107,829

Crude oil pipelines throughput (barrels/day)

     318,567        398,341        (79,774
                        

Total throughput (barrels/day)

     862,912        1,050,515        (187,603

Throughput revenues

   $ 78,015      $ 81,163      $ (3,148

Operating expenses

     29,966        39,543        (9,577

Depreciation and amortization expense

     12,624        12,659        (35
                        

Segment operating income

   $ 35,425      $ 28,961      $ 6,464   
                        

Asphalt and Fuels Marketing:

      

Product sales

   $ 1,060,808      $ 1,638,122      $ (577,314

Cost of product sales

     993,648        1,471,084        (477,436

Operating expenses

     34,128        24,770        9,358   

Depreciation and amortization expense

     4,922        4,664        258   
                        

Segment operating income

   $ 28,110      $ 137,604      $ (109,494
                        

Consolidation and Intersegment Eliminations:

      

Revenues

   $ (12,809   $ (9,840   $ (2,969

Cost of product sales

     (3,780     (3,932     152   

Operating expenses

     (9,070     (5,917     (3,153
                        

Total

   $ 41      $ 9      $ 32   
                        

Consolidated Information:

      

Revenues

   $ 1,251,247      $ 1,825,226      $ (573,979

Cost of product sales

     989,868        1,467,152        (477,284

Operating expenses

     118,190        127,095        (8,905

Depreciation and amortization expense

     35,580        34,223        1,357   
                        

Segment operating income

     107,609        196,756        (89,147

General and administrative expenses

     19,213        20,358        (1,145

Other depreciation and amortization expense

     1,206        920        286   
                        

Consolidated operating income

   $ 87,190      $ 175,478      $ (88,288
                        

 

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Storage

Throughputs decreased 5,042 barrels per day for the three months ended September 30, 2009, compared to the three months ended September 30, 2008, mainly due to the conversion of some throughput-based contracts to lease-based contracts in January 2009. Throughputs for these terminals are no longer reported, and revenues associated with these terminals are reported as storage lease revenues. In addition, throughputs decreased at the Southlake terminal for the three months ended September 30, 2009 as the shipper diverted throughput. Partially offsetting these decreases were increased throughputs at our Texas City and Corpus Christi crude oil storage tank facilities during the third quarter of 2009 due to the impacts of Hurricanes Dolly, Gustav and Ike in the third quarter of 2008.

Total revenues increased $9.5 million for the three months ended September 30, 2009, compared to the three months ended September 30, 2008, primarily due to higher storage revenues associated with:

 

   

an increase of $4.6 million due to completed tank expansion projects at our Amsterdam, St. James, Jacksonville and Texas City terminals;

 

   

an increase of $2.6 million mainly due to rate escalations, new contracts and increased customer utilization at certain of our domestic terminals;

 

   

an increase of $1.7 million primarily due to the negative impact of Hurricane Ike in the third quarter of 2008 at our Texas City terminal and Texas City and Corpus Christi crude oil storage tank facilities; and

 

   

an increase of $0.7 million at our Point Tupper and St. Eustatius facilities mainly due to product movement and handling fees.

These increases were partially offset by a decrease of $0.9 million due to the sales of our Westwego, Reno and Milwaukee terminals in December 2008.

Operating expenses decreased $5.5 million for the three months ended September 30, 2009, compared to the three months ended September 30, 2008, primarily due to:

 

   

a decrease of $2.0 million related to an environmental accrual in the third quarter of 2008 that was settled in 2009;

 

   

a decrease of $1.8 million in power costs driven by lower natural gas and marine gas oil prices;

 

   

a decrease of $1.6 million due to higher costs in 2008 related to the impact of Hurricane Ike in the third quarter of 2008; and

 

   

a decrease of $1.0 million in reimbursable expenses mainly due to fewer tank cleaning and blending projects and lower fuel and natural gas costs during the third quarter of 2009.

These decreases were partially offset by a $1.4 million increase in taxes other than income taxes mainly due to an ad valorem tax settlement in 2008 at one of our refined product terminals.

Transportation

Throughputs decreased 187,603 barrels per day and revenues decreased $3.1 million for the three months ended September 30, 2009, compared to the three months ended September 30, 2008, primarily due to:

 

   

lower throughputs of 54,707 barrels per day and a decrease in revenues of $1.9 million due to the sale of the Ardmore-Wynnewood pipeline in June 2009;

 

   

lower throughputs of 56,619 barrels per day and a decrease in revenues of $1.4 million on our pipelines serving the Ardmore refinery as the refinery was shut down in the third quarter of 2009 following a lightning strike;

 

   

lower throughputs of 26,825 barrels per day and a decrease in revenues of $0.5 million on our pipelines serving the Three Rivers refinery due to a scheduled turnaround during the third quarter of 2009 and reduced crude run rates as a result of the economic downturn;

 

   

lower throughputs of 15,169 barrels per day and a decrease in revenues of $0.4 million on our refined product pipelines serving the McKee refinery mainly due to lower overall demand from the economic downturn and the sale of the Trans Texas pipeline in June 2009; and

 

   

lower throughputs of 13,153 barrels per day due to the sale of the Skelly-Belvieu pipeline in December 2008.

The tariff increase that became effective July 1, 2009 partially offset these declines in revenues. These declines were also partially offset by an increase in revenues of $1.2 million on the East Pipeline primarily a result of the

 

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tariff increase, increased long-haul throughputs and higher throughputs in 2009 due to the negative impact of Hurricane Ike in the third quarter of 2008.

Operating expenses decreased $9.6 million for the three months ended September 30, 2009, compared to the three months ended September 30, 2008, primarily due to a $4.3 million decrease resulting from a reduction in our product imbalance liability due to the effect of lower prices and decreased volumes of product imbalances on the East Pipeline. In addition, power costs decreased $3.7 million from lower throughputs and natural gas prices and internal overhead costs decreased $1.5 million from lower salaries and wages, which further contributed to the decrease in operating expenses.

Asphalt and Fuels Marketing

Sales and cost of product sales decreased $577.3 million and $477.4 million, respectively, resulting in a decrease in product margin of $99.9 million during the three months ended September 30, 2009, compared to the three months ended September 30, 2008. Product margin associated with our asphalt operations decreased $100.7 million due to less demand, which prevented asphalt prices from increasing consistently with the increase in crude oil prices. The decrease in demand was mainly due to weak private sector activity due to adverse weather conditions on the East Coast and the economic downturn.

Operating expenses increased $9.4 million for the three months ended September 30, 2009, compared to the three months ended September 30, 2008, primarily due to:

 

   

an increase of $5.6 million due to the leasing of additional terminals;

 

   

an increase of $1.6 million associated with our asphalt operations resulting from the amortization of deferred maintenance costs and higher idle capacity costs;

 

   

an increase of $1.0 million associated with the addition of bunkering activities at our Jacksonville and Texas City terminals; and

 

   

an increase of $0.9 million due to increased tug and barge costs related to new vessels being received at our St. Eustatius facility throughout 2008 and 2009.

These increases were partially offset by lower environmental taxes of $0.9 million and lower power costs of $1.4 million at our leased asphalt terminals due to lower natural gas prices.

General

General and administrative expenses decreased by $1.1 million for the three months ended September 30, 2009, compared to the three months ended September 30, 2008, primarily due to a decrease in salaries and wages resulting from a lower all-employee bonus accrual. This was partially offset by higher external legal costs and other professional fees. In addition, compensation expense associated with our long-term incentive plans increased, which resulted from an increase in our unit price in the third quarter of 2009.

Interest expense, net decreased by $5.4 million for the three months ended September 30, 2009, compared to the three months ended September 30, 2008, primarily due to decreases in interest rates, including the variable interest rate paid on our interest rate swaps, and lower debt balances. These decreases in interest expense were partially offset by lower capitalized interest as a result of the completion of various tank expansion projects.

Other income, net decreased by $3.7 million for the three months ended September 30, 2009, compared to the three months ended September 30, 2008, primarily due to foreign exchange losses related to our Canadian subsidiary.

 

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Nine Months Ended September 30, 2009 Compared to Nine Months Ended September 30, 2008

Financial Highlights

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

 

     Nine Months Ended September 30,        
     2009     2008     Change  

Statement of Income Data:

  

Revenues:

      

Services revenues

   $ 549,133      $ 547,775      $ 1,358   

Product sales

     2,323,960        3,247,805        (923,845
                        

Total revenues

     2,873,093        3,795,580        (922,487
                        

Costs and expenses:

      

Cost of product sales

     2,138,524        3,036,077        (897,553

Operating expenses

     332,017        322,473        9,544   

General and administrative expenses

     67,529        55,985        11,544   

Depreciation and amortization expense

     108,323        100,019        8,304   
                        

Total costs and expenses

     2,646,393        3,514,554        (868,161
                        

Operating income

     226,700        281,026        (54,326

Equity earnings from joint ventures

     7,698        6,072        1,626   

Interest expense, net

     (60,526     (67,027     6,501   

Other income, net

     25,883        12,236        13,647   
                        

Income before income tax expense

     199,755        232,307        (32,552

Income tax expense

     12,225        11,071        1,154   
                        

Net income

   $ 187,530      $ 221,236      $ (33,706
                        

Net income per unit applicable to limited partners

   $ 2.99      $ 3.77      $ (0.78
                        

Weighted average limited partner units outstanding

     54,460,549        52,753,696        1,706,853   
                        

Highlights

Net income decreased $33.7 million for the nine months ended September 30, 2009, compared to the nine months ended September 30, 2008, primarily due to a decrease in segment operating income and an increase in general and administrative expenses. This was partially offset by an increase in other income and a decrease in interest expense.

Segment operating income decreased $41.9 million during the nine months ended September 30, 2009, compared to the nine months ended September 30, 2008, primarily due to a $75.1 million decrease in operating income for the asphalt and fuels marketing segment, which was mainly due to a decreased product margin associated with our asphalt operations. This was partially offset by an increase in gross margin due to the $61.0 million hedging loss in the second quarter of 2008. The decrease in operating income from our asphalt and fuels marketing segment was partially offset by increased operating income from our storage and transportation segments.

 

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Segment Operating Highlights

(Thousands of Dollars, Except Barrels/Day Information)

 

     Nine Months Ended September 30,        
     2009     2008     Change  

Storage:

      

Throughput (barrels/day)

     667,005        756,319        (89,314

Throughput revenues

   $ 59,648      $ 68,790      $ (9,142

Storage lease revenues

     300,700        267,764        32,936   
                        

Total revenues

     360,348        336,554        23,794   

Operating expenses

     176,794        183,818        (7,024

Depreciation and amortization expense

     52,472        49,548        2,924   
                        

Segment operating income

   $ 131,082      $ 103,188      $ 27,894   
                        

Transportation:

      

Refined products pipelines throughput (barrels/day)

     576,165        682,214        (106,049

Crude oil pipelines throughput (barrels/day)

     350,034        405,276        (55,242
                        

Total throughput (barrels/day)

     926,199        1,087,490        (161,291

Revenues

   $ 221,151      $ 233,970      $ (12,819

Operating expenses

     82,856        99,873        (17,017

Depreciation and amortization expense

     37,901        38,061        (160
                        

Segment operating income

   $ 100,394      $ 96,036      $ 4,358   
                        

Asphalt and Fuels Marketing:

      

Product sales

   $ 2,323,960      $ 3,247,834      $ (923,874

Cost of product sales

     2,150,450        3,046,755        (896,305

Operating expenses

     93,676        50,848        42,828   

Depreciation and amortization expense

     14,536        9,872        4,664   
                        

Segment operating income

   $ 65,298      $ 140,359      $ (75,061
                        

Consolidation and Intersegment Eliminations:

      

Revenues

   $ (32,366   $ (22,778   $ (9,588

Cost of product sales

     (11,926     (10,678     (1,248

Operating expenses

     (21,309     (12,066     (9,243
                        

Total

   $ 869      $ (34   $ 903   
                        

Consolidated Information:

      

Revenues

   $ 2,873,093      $ 3,795,580      $ (922,487

Cost of product sales

     2,138,524        3,036,077        (897,553

Operating expenses

     332,017        322,473        9,544   

Depreciation and amortization expense

     104,909        97,481        7,428   
                        

Segment operating income

     297,643        339,549        (41,906

General and administrative expenses

     67,529        55,985        11,544   

Other depreciation and amortization expense

     3,414        2,538        876   
                        

Consolidated operating income

   $ 226,700      $ 281,026      $ (54,326
                        

 

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Storage

Throughputs decreased 89,314 barrels per day for the nine months ended September 30, 2009, compared to the nine months ended September 30, 2008, mainly due to the conversion of some throughput-based contracts to lease-based contracts in January 2009. Throughputs for these terminals are no longer reported, and revenues associated with these terminals are reported under storage lease revenues. In addition, throughputs decreased due to turnarounds in the first quarter of 2009 at refineries served by our Texas City and Corpus Christi crude oil storage tanks and a turnaround at the McKee refinery in May 2009.

Total revenues increased by $23.8 million for the nine months ended September 30, 2009, compared to the nine months ended September 30, 2008, primarily due to higher storage revenues associated with:

 

   

an increase of $17.2 million due to completed tank expansion projects at our Amsterdam, St. James, Texas City and Jacksonville terminals;

 

   

an increase of $4.5 million at our Amsterdam terminal resulting from increased product throughput and associated handling fees and the effect of favorable foreign exchange rates;

 

   

an increase of $2.9 million at our Los Angeles and Selby terminals primarily due to higher negotiated storage rates and increased product throughputs;

 

   

an increase of $2.7 million at our Tacoma terminal primarily resulting from an increase in product throughput and associated handling fees; and

 

   

an increase of $2.2 million at our Point Tupper facility mainly due to increased dockage and wharfage revenues and new storage contracts.

These increases were partially offset by a decrease of $6.7 million at our UK operations mainly due to the effect of foreign exchange rates. In addition, revenues decreased $2.7 million due to the sales of our Westwego, Reno and Milwaukee terminals in December 2008.

Operating expenses decreased $7.0 million for the nine months ended September 30, 2009, compared to the nine months ended September 30, 2008, primarily due to decreased power costs driven by lower natural gas and marine gas oil prices and an environmental accrual in the third quarter of 2008 that was settled in 2009.

Depreciation and amortization expense increased $2.9 million for the nine months ended September 30, 2009, compared to the nine months ended September 30, 2008, primarily due to the completion of various terminal expansion projects.

Transportation

Throughputs decreased 161,291 barrels per day and revenues decreased $12.8 million for the nine months ended September 30, 2009, compared to the nine months ended September 30, 2008, primarily due to:

 

   

lower throughputs of 47,723 barrels per day and a decrease in revenues of $6.5 million on our pipelines serving the McKee refinery primarily due to a turnaround in May 2009 and lower overall demand from the economic downturn, as well as decreased throughputs and revenues on the El Paso-Santa Fe Pipeline as a shipper acquired our joint venture partner’s interest and is now shipping product on its purchased space rather than our space;

 

   

a decrease in throughputs of 6,519 barrels per day and a decrease in revenues of $3.7 million on the Ammonia Pipeline due to high inventory levels of ammonia in the Midwest that carried over from the fall of 2008 and unseasonably wet and cold weather in the first half of 2009;

 

   

a decrease in throughputs of 31,108 barrels per day and a decrease in revenues of $2.3 million on our pipelines serving the Ardmore refinery due to operational issues at the refinery during the second and third quarters of 2009 and a refinery shut down in the third quarter of 2009 following a lightning strike;

 

   

a decrease in throughputs of 26,261 barrels per day and a decrease in revenues of $0.8 million due to the sale of the Ardmore-Wynnewood pipeline in June 2009; and

 

   

a decrease in throughputs of 19,963 barrels per day and a decrease in revenues of $0.8 million on our pipelines serving the Three Rivers refinery due to a scheduled turnaround during the third quarter of 2009 and reduced crude run rates as a result of the economic downturn.

Throughputs also decreased 12,439 barrels per day due to the sale of the Skelly-Belvieu pipeline in December 2008.

 

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The tariff increase that became effective July 1, 2009 partially offset these declines in revenues. These declines were also partially offset by an increase in revenues of $2.4 million on the East Pipeline primarily as a result of the tariff increase and increased long-haul throughputs.

Operating expenses decreased $17.0 million for the nine months ended September 30, 2009, compared to the nine months ended September 30, 2008, primarily due to:

 

   

a decrease of $7.0 million due to a reduction in our product imbalance liability resulting from lower prices of product imbalances on the East Pipeline, partially offset by a hedging loss;

 

   

a decrease of $6.4 million in power costs resulting from lower throughputs and lower natural gas prices; and

 

   

a decrease of $3.1 million in maintenance expenses on certain of the refined product pipelines resulting from fewer repair projects in 2009.

Asphalt and Fuels Marketing

Sales and cost of product sales decreased $923.9 million and $896.3 million, respectively, resulting in a decrease in product margin of $27.6 million during the nine months ended September 30, 2009, compared to the nine months ended September 30, 2008. Product margin associated with our asphalt operations decreased $33.5 million due to less demand, which prevented asphalt prices from increasing consistently with the increase in crude oil prices, partially offset by an increase in product margin due to the $61.0 million hedging loss in the second quarter of 2008. In addition, product margin associated with our bunkering activities decreased $9.3 million, mainly due to a significant decrease in the market price per metric ton of bunker fuel at our St. Eustatius and Point Tupper facilities. The bunkering product margin also decreased due to lower product volumes at St. Eustatius and a hedging gain in the third quarter of 2008, which we did not have in 2009.

These decreases were partially offset by an increase in product margin of $15.3 million related to our other marketing operations due to increased volumes from entering new markets.

Operating expenses increased by $42.8 million for the nine months ended September 30, 2009, compared to the nine months ended September 30, 2008, primarily due to:

 

   

an increase of $20.7 million due to a full nine months of asphalt operations related to our acquisition of the East Coast Asphalt Operations, the amortization of deferred maintenance costs, higher idle capacity costs and increased asphalt terminal rentals;

 

   

an increase of $5.2 million related to increased tug and barge costs associated with new vessels being received at our St. Eustatius facility throughout 2008 and 2009; and

 

   

an increase of $3.1 million due to increased storage costs resulting from increased tank rentals.

Depreciation and amortization expense increased $4.7 million for the nine months ended September 30, 2009, compared to the nine months ended September 30, 2008, due to our acquisition of the East Coast Asphalt Operations in March 2008.

General

General and administrative expenses increased by $11.5 million for the nine months ended September 30, 2009, compared to the nine months ended September 30, 2008, primarily due to an increase in compensation expense associated with our long-term incentive plans resulting from an increase in our unit price during the nine months ended