NS 2Q11 10Q

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 June 30, 2011
OR
o
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
  _________________________________________
NUSTAR ENERGY L.P.
(Exact name of registrant as specified in its charter)
  _________________________________________
 
Delaware
 
74-2956831
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
2330 North Loop 1604 West
San Antonio, Texas
 
78248
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code (210) 918-2000
 _________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule12b-2 of the Exchange Act:
Large accelerated filer
 
x
Accelerated filer
 
£
 
 
 
 
 
 
Non-accelerated filer
 
o  (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  o   No  x
The number of common units outstanding as of July 31, 2011 was 64,610,549.
 
 
 
 
 


Table of Contents

NUSTAR ENERGY L.P. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
Item 6.
 
 

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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)
 
June 30,
2011
 
December 31,
2010
 
(Unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
128,876

 
$
181,121

Accounts receivable, net of allowance for doubtful accounts of $1,458
and $1,457 as of June 30, 2011 and December 31, 2010, respectively
457,410

 
302,053

Inventories
667,908

 
413,537

Other current assets
61,162

 
42,796

Total current assets
1,315,356

 
939,507

Property, plant and equipment, at cost
4,274,702

 
4,021,319

Accumulated depreciation and amortization
(912,850
)
 
(833,862
)
Property, plant and equipment, net
3,361,852

 
3,187,457

Intangible assets, net
46,305

 
43,033

Goodwill
848,949

 
813,270

Investment in joint venture
67,272

 
69,603

Deferred income tax asset
10,176

 
8,138

Other long-term assets, net
246,798

 
325,385

Total assets
$
5,896,708

 
$
5,386,393

Liabilities and Partners’ Equity
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
255,984

 
$
832

Accounts payable
509,190

 
282,382

Payable to related party
15,492

 
10,345

Accrued interest payable
29,719

 
29,706

Accrued liabilities
59,323

 
57,953

Taxes other than income tax
14,029

 
10,718

Income tax payable
1,590

 
1,293

Total current liabilities
885,327

 
393,229

Long-term debt, less current portion
2,186,260

 
2,136,248

Long-term payable to related party
11,411

 
10,088

Deferred income tax liability
36,407

 
29,565

Other long-term liabilities
118,337

 
114,563

Commitments and contingencies (Note 5)

 

Partners’ equity:
 
 
 
Limited partners (64,610,549 common units outstanding
as of June 30, 2011 and December 31, 2010)
2,561,460

 
2,598,873

General partner
56,609

 
57,327

Accumulated other comprehensive income
26,152

 
46,500

Total NuStar Energy L.P. partners' equity
2,644,221

 
2,702,700

Noncontrolling interest
14,745

 

Total partners’ equity
2,658,966

 
2,702,700

Total liabilities and partners’ equity
$
5,896,708

 
$
5,386,393

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 June 30,
 
Six Months Ended June 30,
 
2011
 
2010
 
2011
 
2010
Revenues:
 
 
 
 
 
 
 
Service revenues:
 
 
 
 
 
 
 
Third parties
$
199,208

 
$
195,087

 
$
397,471

 
$
384,382

Related party
407

 

 
537

 

Total service revenues
199,615

 
195,087

 
398,008

 
384,382

Product sales
1,389,569

 
929,854

 
2,425,792

 
1,686,088

Total revenues
1,589,184

 
1,124,941

 
2,823,800

 
2,070,470

Costs and expenses:
 
 
 
 
 
 
 
Cost of product sales
1,269,448

 
842,588

 
2,261,815

 
1,561,809

Operating expenses:
 
 
 
 
 
 
 
Third parties
97,825

 
85,868

 
182,955

 
173,361

Related party
36,801

 
34,075

 
71,910

 
67,919

Total operating expenses
134,626

 
119,943

 
254,865

 
241,280

General and administrative expenses:
 
 
 
 
 
 
 
Third parties
10,084

 
8,875

 
19,119

 
18,906

Related party
16,035

 
13,320

 
32,983

 
30,558

Total general and administrative expenses
26,119

 
22,195

 
52,102

 
49,464

Depreciation and amortization expense
41,640

 
38,185

 
81,936

 
76,114

Total costs and expenses
1,471,833

 
1,022,911

 
2,650,718

 
1,928,667

Operating income
117,351

 
102,030

 
173,082

 
141,803

Equity in earnings of joint venture
2,010

 
2,102

 
4,398

 
5,117

Interest expense, net
(20,622
)
 
(18,890
)
 
(41,079
)
 
(37,476
)
Other (expense) income, net
(967
)
 
14,816

 
(6,466
)
 
15,117

Income before income tax expense
97,772

 
100,058

 
129,935

 
124,561

Income tax expense
5,167

 
636

 
8,814

 
5,436

Net income
92,605

 
99,422

 
121,121

 
119,125

Less net income attributable to
noncontrolling interest
6

 

 
20

 

Net income attributable to NuStar Energy L.P.
$
92,599

 
$
99,422

 
$
121,101

 
$
119,125

Net income per unit applicable to
limited partners (Note 11)
$
1.27

 
$
1.43

 
$
1.57

 
$
1.64

Weighted-average limited partner units outstanding
64,610,549

 
62,289,670

 
64,610,549

 
61,255,853

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)
 
 
Six Months Ended June 30,
 
2011
 
2010
Cash Flows from Operating Activities:
 
 
 
Net income
$
121,121

 
$
119,125

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization expense
81,936

 
76,114

Amortization of debt related items
(4,690
)
 
(3,868
)
Gain on sale or disposition of assets, including insurance recoveries
(236
)
 
(12,812
)
Deferred income tax expense (benefit)
1,487

 
(2,301
)
Equity in earnings of joint venture
(4,398
)
 
(5,117
)
Distributions of equity in earnings of joint venture
6,729

 
5,050

Changes in current assets and current liabilities (Note 12)
(201,736
)
 
(162,015
)
Other, net
1,611

 
(523
)
Net cash provided by operating activities
1,824

 
13,653

Cash Flows from Investing Activities:
 
 
 
Reliability capital expenditures
(20,573
)
 
(21,262
)
Strategic capital expenditures
(135,821
)
 
(96,423
)
Acquisitions
(100,448
)
 
(43,026
)
Proceeds from insurance recoveries

 
13,500

Investment in other long-term assets
(5,580
)
 
(3,224
)
Proceeds from sale or disposition of assets

289

 
157

Net cash used in investing activities
(262,133
)
 
(150,278
)
Cash Flows from Financing Activities:
 
 
 
Proceeds from long-term debt borrowings
585,764

 
671,355

Proceeds from short-term debt borrowings
31,600

 
175,791

Long-term debt repayments
(225,993
)
 
(636,633
)
Short-term debt repayments
(31,600
)
 
(195,791
)
Proceeds from issuance of common units, net of issuance costs

 
240,297

Contributions from general partner

 
5,078

Distributions to unitholders and general partner
(159,232
)
 
(146,784
)
Proceeds from termination of interest rate swaps
9,112

 

Other, net
(2,811
)
 
(5,511
)
Net cash provided by financing activities
206,840

 
107,802

Effect of foreign exchange rate changes on cash
1,224

 
1,371

Net decrease in cash and cash equivalents
(52,245
)
 
(27,452
)
Cash and cash equivalents as of the beginning of the period
181,121

 
62,006

Cash and cash equivalents as of the end of the period
$
128,876

 
$
34,554

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 AND BASIS OF PRESENTATION

Organization
NuStar Energy L.P. (NuStar Energy) (NYSE: NS) is engaged in the terminalling and storage of petroleum products, the transportation of petroleum products and anhydrous ammonia, and petroleum refining and marketing. Unless otherwise indicated, the terms “NuStar Energy,” “the Partnership,” “we,” “our” and “us” are used in this report to refer to NuStar Energy L.P., to one or more of our consolidated subsidiaries or to all of them taken as a whole. NuStar GP Holdings, LLC (NuStar GP Holdings) (NYSE: NSH) owns our general partner, Riverwalk Logistics, L.P., and owns a 17.5% total interest in us as of June 30, 2011.
We conduct our operations through our 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. Noncontrolling interests are separately disclosed on the consolidated balance sheets and consolidated statements of income. 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 the Quarterly Report on 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 are adequate. All such adjustments are of a normal recurring nature unless disclosed otherwise. Financial information for the three and six months ended June 30, 2011 and 2010 included in these Condensed Notes to Consolidated Financial Statements is derived from our unaudited consolidated financial statements. Operating results for the three and six months ended June 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011. The consolidated balance sheet as of December 31, 2010 has been derived from the audited consolidated financial statements as of that date. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2010.

Reclassifications
Certain previously reported amounts in the 2010 consolidated financial statements have been reclassified to conform to the 2011 presentation.

Acquisitions
On April 19, 2011, we purchased certain refining and storage assets, inventory and other working capital items from AGE Refining, Inc. for $62.0 million, including the assumption of certain environmental liabilities. The assets consist of a 14,500 barrel per day refinery in San Antonio, Texas (the San Antonio Refinery) and 200,000 barrels of storage capacity in Elmendorf, Texas. The purchase price has been preliminarily allocated based on the estimated fair values of the individual assets acquired and liabilities assumed at the date of acquisition, pending completion of an independent appraisal and other evaluations. The consolidated statements of income include the results of operations for our acquisition of the San Antonio Refinery and related storage assets commencing on April 19, 2011.

On February 9, 2011, we acquired 75% of the outstanding capital of a Turkish company, which owns two terminals in Mersin, Turkey, with an aggregate 1.3 million barrels of storage capacity, for approximately $57.3 million (the Turkey Acquisition). Both terminals are connected via pipelines to an offshore platform located approximately three miles off the Mediterranean Sea coast. The purchase price has been preliminarily allocated based on the estimated fair values of the individual assets acquired, liabilities assumed and noncontrolling interest at the date of acquisition. The purchase price allocation is pending completion of an independent appraisal and other evaluations. The consolidated statements of income include the results of operations for the Turkey Acquisition commencing on February 9, 2011, with 25% accounted for as a noncontrolling interest.


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NUSTAR ENERGY L.P. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)



2. NEW ACCOUNTING PRONOUNCEMENTS

Other Comprehensive Income
In June 2011, the Financial Accounting Standards Board (FASB) amended the disclosure requirements for the presentation of comprehensive income. The amended requirements eliminate the option to present components of other comprehensive income (OCI) as part of the statement of changes in equity. Under the amended requirements, all changes in OCI are to be presented either in a single continuous statement of comprehensive income or in two separate but consecutive financial statements. The changes are effective for fiscal years and interim periods beginning after December 15, 2011, and retrospective application is required. Accordingly, we will adopt these provisions January 1, 2012. These amendments only affect financial statement presentation and will not impact our financial position or results of operations.

Fair Value Measurements
In May 2011, the FASB issued amended guidance and disclosure requirements for fair value measurements. The new guidance results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between GAAP and International Financial Reporting Standards. These changes are effective for interim and annual periods beginning on or after December 15, 2011, and early adoption is not permitted. Accordingly, we will adopt these provisions January 1, 2012, and we do not expect the amended guidance to have a material impact on our financial position, results of operations or disclosures.

3. INVENTORIES

Inventories consisted of the following:
 
 
June 30,
2011
 
December 31,
2010
 
(Thousands of Dollars)
Crude oil
$
195,509

 
$
122,945

Finished products
463,101

 
281,197

Materials and supplies
9,298

 
9,395

Total
$
667,908

 
$
413,537


4. DEBT

Revolving Credit Agreement
During the six months ended June 30, 2011, we borrowed an aggregate $520.0 million under our $1.2 billion five-year revolving credit agreement (the 2007 Revolving Credit Agreement) to fund a portion of our capital expenditures and working capital requirements. Additionally, we repaid $226.0 million during the six months ended June 30, 2011. The 2007 Revolving Credit Agreement bears interest based on either an alternative base rate or a LIBOR-based rate. As of June 30, 2011, our weighted average borrowing interest rate was 0.9%, and we had $429.4 million available for borrowing under the 2007 Revolving Credit Agreement. Due to a covenant in our 2007 Revolving Credit Agreement that requires us to maintain, as of the end of each four consecutive fiscal quarters, a consolidated debt coverage ratio not to exceed 5.00-to-1.00, we may not be able to borrow the maximum available amount. On March 7, 2011, we amended the 2007 Revolving Credit Agreement to exclude unused proceeds from the Gulf Opportunity Zone bond issuances from total indebtedness in the calculation of the consolidated debt coverage ratio. As of June 30, 2011, our consolidated debt coverage ratio was 4.3x.

Gulf Opportunity Zone Revenue Bonds
The Parish of St. James, Louisiana issued three separate series of tax exempt revenue bonds in 2010 (2010 GoZone Bonds) associated with our St. James terminal expansion pursuant to the Gulf Opportunity Zone Act of 2005. The interest rate on these bonds is based on a weekly tax-exempt bond market interest rate, and interest is paid monthly. The interest rate was 0.1% as of June 30, 2011. 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. The amount remaining in trust related to the 2010 GoZone Bonds is included in “Other long-term assets, net,” and the amount of bonds issued is included in “Long-term debt, less current portion” in our consolidated balance sheets. For the six months ended June 30, 2011, we received net proceeds of $65.8 million from the 2010 GoZone Bonds. As of June 30, 2011, the amount remaining in trust totaled $139.6 million.

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NUSTAR ENERGY L.P. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)



Lines of Credit
As of June 30, 2011, we had one short-term line of credit with an uncommitted borrowing capacity of up to $20.0 million. We had no outstanding borrowings on this line of credit as of June 30, 2011. During the six months ended June 30, 2011, we borrowed and repaid $31.6 million related to this line of credit.

5. COMMITMENTS AND CONTINGENCIES

Contingencies
We have contingent liabilities resulting from various litigation, claims and commitments, the most significant of which are discussed below. We record accruals for loss contingencies when losses are considered probable and can be reasonably estimated. Legal fees associated with defending the Partnership in legal matters are expensed as incurred. As of June 30, 2011, we have accrued $75.6 million for contingent losses. The amount that will ultimately be paid related to these matters may differ from the amounts accrued, and the timing of such payments is uncertain.

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

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

The Otis AFB is a part of a Superfund Site pursuant to the Comprehensive Environmental Response Compensation and Liability Act (CERCLA). The site contains a number of groundwater contamination plumes, two of which are allegedly associated with the Otis AFB pipeline. Relying on the final judgment of the Texas state court assigning ownership of the Otis AFB pipeline to Kaneb, the United States Department of Justice (the DOJ) advised Kaneb in 2001 that it intends to seek reimbursement from Kaneb for the remediation costs associated with the two plumes. In November 2008, the DOJ forwarded information to us indicating that the past and estimated future remediation expenses associated with one plume are $71.9 million. The DOJ has indicated that they will not seek recovery of remediation costs for the second plume. The DOJ has not filed a lawsuit against us related to this matter, and we have not made any payments toward costs incurred by the DOJ. We are currently in settlement discussions with other potentially responsible parties and the DOJ, and a change in our estimate of this liability may occur in the near term. However, any settlement agreement that is reached must be approved by multiple parties and requires the approval of the bankruptcy court and the federal district court. We cannot currently estimate when or if a settlement will be finalized.
 
Eres Matter. In August 2008, Eres N.V. (Eres) forwarded a demand for arbitration to CITGO Asphalt Refining Company (CARCO), CITGO Petroleum Corporation (CITGO), NuStar Asphalt Refining, LLC (NuStar Asphalt) and NuStar Marketing LLC (NuStar Marketing, and together with CARCO, CITGO and NuStar Asphalt, the Defendants) contending that the Defendants are in breach of a tanker voyage charter party agreement, dated November 2004, between Eres and CARCO (the Charter Agreement). The Charter Agreement provides for CARCO's use of Eres' vessels for the shipment of asphalt. Eres contends that NuStar Asphalt and/or NuStar Marketing (together, the NuStar Entities) assumed the Charter Agreement when NuStar Asphalt purchased the CARCO assets, and that the Defendants have failed to perform under the Charter Agreement since January 1, 2008. Eres has valued its damages for the alleged breach of contract claim at approximately $78.1 million. Pursuant to a May 2010 ruling by the United States District Court for the Southern District of Texas, the NuStar Entities were found to have assumed the Charter Agreement from CARCO and to be obligated to defend and indemnify CITGO and CARCO against Eres' claims. The Defendants were ordered to proceed with arbitration; an arbitration hearing occurred in June 2011. Additional arbitration hearing dates are currently scheduled for mid-October 2011. We intend to vigorously defend against Eres' claims in arbitration.


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NUSTAR ENERGY L.P. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


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.

6. FAIR VALUE MEASUREMENTS

We segregate the inputs used in measuring fair value into three levels: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists.
The following assets and liabilities are measured at fair value:
 
 
June 30, 2011
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(Thousands of Dollars)
Other current assets:
 
 
 
 
 
 
 
Product imbalances
$
1,074

 
$

 
$

 
$
1,074

Commodity derivatives
10,898

 
4,653

 

 
15,551

Other long-term assets, net:
 
 
 
 
 
 
 
Interest rate swaps

 
23,214

 

 
23,214

Accrued liabilities:
 
 
 
 
 
 
 
Product imbalances
(625
)
 

 

 
(625
)
Commodity derivatives
(5,878
)
 
(19,883
)
 

 
(25,761
)
Other long-term liabilities:
 
 
 
 
 
 
 
Interest rate swaps

 
(20,362
)
 

 
(20,362
)
Total
$
5,469

 
$
(12,378
)
 
$

 
$
(6,909
)

 
December 31, 2010
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(Thousands of Dollars)
Other current assets:
 
 
 
 
 
 
 
Product imbalances
$
991

 
$

 
$

 
$
991

Other long-term assets, net:
 
 
 
 
 
 
 
Interest rate swaps

 
45,663

 

 
45,663

Accrued liabilities:
 
 
 
 
 
 
 
Product imbalances
(988
)
 

 

 
(988
)
Commodity derivatives
(14,741
)
 

 

 
(14,741
)
Other long-term liabilities:
 
 
 
 
 
 
 
Interest rate swaps

 
(29,483
)
 

 
(29,483
)
Total
$
(14,738
)
 
$
16,180

 
$

 
$
1,442


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

Interest Rate Swaps
We estimate the fair value of both our fixed-to-floating and forward-starting interest rate swaps using discounted cash flows, which use observable inputs such as time to maturity and market interest rates.


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NUSTAR ENERGY L.P. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


Commodity Derivatives
The fair value of certain of our commodity derivative instruments are based on quoted prices on an exchange; accordingly, these are categorized in Level 1 of the fair value hierarchy. We also have derivative instruments that are are valued using industry pricing services and other observable inputs, such as quoted prices on an exchange for similar derivative instruments. Therefore, these derivative instruments are categorized in Level 2 of the fair value hierarchy. We have consistently applied these valuation techniques in all periods presented. See Note 7. Derivatives and Risk Management Activities for a discussion of our derivative instruments.

Fair Value of Financial Instruments
We do not record our outstanding debt at fair value in our consolidated balance sheet. The estimated fair value and carrying amount of our debt was as follows:
 
 
June 30,
2011
 
December 31,
2010
 
(Thousands of Dollars)
Fair value
$
2,553,057

 
$
2,249,190

Carrying amount
$
2,442,244

 
$
2,137,080


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

7. DERIVATIVES 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, futures and swaps 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.
Interest Rate Risk
We are a party to certain interest rate swap agreements to manage our exposure to changes in interest rates. We have fixed-to-floating interest rate swap agreements associated with a portion of our fixed-rate senior notes. During the six months ended June 30, 2011, we entered into a fixed-to-floating interest rate swap agreement with a notional amount of $40.0 million related to the 7.65% senior notes issued in April 2008. Under the terms of this interest rate swap agreement, we will receive a fixed rate of 7.65% and will pay a variable rate based on three-month USD LIBOR plus a percentage. We account for this fixed-to-floating interest rate swap as a fair value hedge. Accordingly, we record mark-to-market adjustments to the fair value of the swap and the related change in the fair value of the associated hedged debt, as well as any hedge ineffectiveness, in "Interest expense, net."

We are also a party to fixed-to-floating interest rate swap agreements that qualify for the shortcut method of accounting. As a result, changes in the fair value of these swaps completely offset the changes in the fair value of the underlying hedged debt. During the six months ended June 30, 2011, we terminated interest rate swap agreements with an aggregate notional amount of $167.5 million associated with our 6.875% and 6.05% senior notes. We received $9.1 million in connection with the termination, which is being amortized into "Interest expense, net" over the remaining lives of the 6.875% and 6.05% senior notes. Proceeds from the termination of interest rate swap agreements is included in cash flows from financing activities on the consolidated statements of cash flows. The total aggregate notional amount of the fixed-to-floating interest rate swaps was $490.0 million and $617.5 million as of June 30, 2011 and December 31, 2010, respectively. The weighted-average interest rate that we paid under our fixed-to-floating interest rate swaps was 2.5% as of June 30, 2011.

We are also a party to forward-starting interest rate swap agreements with an aggregate notional amount of $500.0 million as of June 30, 2011 and December 31, 2010 related to forecasted probable debt issuances in 2012 and 2013. We entered into the swaps in order to hedge the risk of changes in the interest payments attributable to changes in the benchmark interest rate during the period from the effective date of the swap to the issuance of the forecasted debt. These swaps are designated and qualify as cash flow hedges.

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NUSTAR ENERGY L.P. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)



Commodity Price Risk
We are exposed to market risks related to the volatility of crude oil and refined product prices. In order to reduce the risk of commodity price fluctuations with respect to our crude oil and finished product inventories and related firm commitments to purchase and/or sell such inventories, we utilize futures and swaps contracts, which qualify and we designate as fair value hedges.

During the second quarter of 2011, we entered into swaps contracts to hedge the price risk associated with the San Antonio Refinery. These swaps contracts fix the purchase price of crude oil and sales prices of refined products for a portion of the expected production of the San Antonio Refinery, thereby mitigating the risk of volatility of future cash flows associated with hedged volumes. These swaps contracts qualified and we designated them as cash flow hedges.

Derivatives that are intended to hedge our commodity price risk, but fail to qualify as fair value or cash flow hedges are considered economic hedges, and associated gains and losses are recorded in net income.

We also enter into commodity derivatives 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. Changes in the fair values are recorded in net income.

The volume of commodity contracts is based on open derivative positions and represents the combined volume of our long and short positions on an absolute basis, which totaled 35.0 million barrels and 12.8 million barrels as of June 30, 2011 and December 31, 2010, respectively.

As of June 30, 2011, and December 31, 2010, we had $7.4 million and $17.8 million, respectively, of margin deposits related to our derivative instruments.

The fair values of our derivative instruments included in our consolidated balance sheets were as follows:
 
 
 
 
Asset Derivatives
 
Liability Derivatives
 
Balance Sheet Location
 
June 30, 2011
 
December 31, 2010
 
June 30, 2011
 
December 31, 2010
 
 
 
(Thousands of Dollars)
Derivatives Designated as
Hedging Instruments:
 
 
 
 
 
 
 
 
 
Commodity contracts
Other current assets
 
$
16,045

 
$

 
$
(12,052
)
 
$

Interest rate swaps
Other long-term assets, net
 
23,214

 
45,663

 

 

Commodity contracts
Accrued liabilities
 
42,562

 
2,176

 
(62,445
)
 
(2,522
)
Interest rate swaps
Other long-term liabilities
 

 

 
(20,362
)
 
(29,483
)
Total
 
 
81,821

 
47,839

 
(94,859
)
 
(32,005
)
 
 
 
 
 
 
 
 
 
 
Derivatives Not Designated
as Hedging Instruments:
 
 
 
 
 
 
 
 
 
Commodity contracts
Other current assets
 
26,313

 

 
(14,755
)
 

Commodity contracts
Accrued liabilities
 
5,105

 
46,632

 
(10,983
)
 
(61,027
)
Total
 
 
31,418

 
46,632

 
(25,738
)
 
(61,027
)
 
 
 
 
 
 
 
 
 
 
Total Derivatives
 
 
$
113,239

 
$
94,471

 
$
(120,597
)
 
$
(93,032
)
 

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NUSTAR ENERGY L.P. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


The earnings impact of our derivative activity was as follows:
 
Derivatives Designated as Fair Value Hedging Instruments
 
Income Statement
Location
 
Amount of Gain
(Loss) Recognized
in Income on
Derivative
(Effective Portion)
 
Amount of  Gain
(Loss)
Recognized in
Income on
Hedged Item
 
Amount of Gain
(Loss) Recognized
in Income  on
Derivative
(Ineffective Portion)
 
 
 
 
(Thousands of Dollars)
Three months ended June 30, 2011:
 
 
 
 
 
 
 
 
Interest rate swaps
 
Interest expense, net
 
$
14,528

 
$
(14,812
)
 
$
(284
)
Commodity contracts
 
Cost of product sales
 
1,002

 
(1,650
)
 
(648
)
Total
 
 
 
$
15,530

 
$
(16,462
)
 
$
(932
)
 
 
 
 
 
 
 
 
 
Three months ended June 30, 2010:
 
 
 
 
 
 
 
 
Interest rate swaps
 
Interest expense, net
 
$
1,890

 
$
(1,890
)
 
$

Commodity contracts
 
Cost of product sales
 
13,061

 
(12,002
)
 
1,059

Total
 
 
 
$
14,951

 
$
(13,892
)
 
$
1,059

 
 
 
 
 
 
 
 
 
Six months ended June 30, 2011:
 
 
 
 
 
 
 
 
Interest rate swaps
 
Interest expense, net
 
$
8,614

 
$
(8,852
)
 
$
(238
)
Commodity contracts
 
Cost of product sales
 
(11,064
)
 
10,720

 
(344
)
Total
 
 
 
$
(2,450
)
 
$
1,868

 
$
(582
)
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2010:
 
 
 
 
 
 
 
 
Interest rate swaps
 
Interest expense, net
 
$
3,124

 
$
(3,124
)
 
$

Commodity contracts
 
Cost of product sales
 
11,734

 
(8,915
)
 
2,819

Total
 
 
 
$
14,858

 
$
(12,039
)
 
$
2,819

 

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NUSTAR ENERGY L.P. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


Derivatives Designated as Cash Flow Hedging Instruments
 
Amount of Gain
(Loss) Recognized in
OCI on Derivative
(Effective Portion)
 
Income Statement
Location (a)
 
Amount of Gain
(Loss) Reclassified
from
Accumulated OCI
into  Income
(Effective Portion)
 
Amount of Gain
(Loss) Recognized
in Income  on
Derivative
(Ineffective Portion)
 
 
(Thousands of Dollars)
 
 
 
(Thousands of Dollars)
Three months ended June 30, 2011:
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
(15,708
)
 
Interest expense, net
 
$

 
$

Commodity contracts
 
(16,454
)
 
Cost of product sales
 
(1,225
)
 

Total
 
$
(32,162
)
 
 
 
$
(1,225
)
 
$

 
 
 
 
 
 
 
 
 
Three months ended June 30, 2010:
 
 
 
 
 
 
 
 
Commodity contracts
 
$
1,119

 
Cost of product sales
 
$
(498
)
 
$
284

 
 
 
 
 
 
 
 
 
Six months ended June 30, 2011:
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
(12,830
)
 
Interest expense, net
 
$

 
$

Commodity contracts
 
(16,454
)
 
Cost of product sales
 
(1,225
)
 

Total
 
$
(29,284
)
 
 
 
$
(1,225
)
 
$

 
 
 
 
 
 
 
 
 
Six months ended June 30, 2010:
 
 
 
 
 
 
 
 
Commodity contracts
 
$
239

 
Cost of product sales
 
$
(913
)
 
$
284

(a)
Amounts are included in specified location for both the gain (loss) reclassified from accumulated other comprehensive income (OCI) into income (effective portion) and the gain (loss) recognized in income on derivative (ineffective portion).
Derivatives Not Designated as Hedging Instruments
 
Income Statement
Location
 
Amount of Gain (Loss)
Recognized in Income
 
 
 
 
(Thousands of Dollars)
Three months ended June 30, 2011:
 
 
 
 
Commodity contracts
 
Revenues
 
$
(29
)
Commodity contracts
 
Cost of product sales
 
4,462

Commodity contracts
 
Operating expenses
 

Total
 
 
 
$
4,433

 
 
 
 
 
Three months ended June 30, 2010:
 
 
 
 
Commodity contracts
 
Cost of product sales
 
$
5,632

Commodity contracts
 
Operating expenses
 

Total
 
 
 
$
5,632

 
 
 
 
 
Six months ended June 30, 2011:
 
 
 
 
Commodity contracts
 
Revenues
 
$
235

Commodity contracts
 
Cost of product sales
 
(11,167
)
Commodity contracts
 
Operating expenses
 
46

Total
 
 
 
$
(10,886
)
 
 
 
 
 
Six months ended June 30, 2010:
 
 
 
 
Commodity contracts
 
Cost of product sales
 
$
6,698

Commodity contracts
 
Operating expenses
 
(10
)
Total
 
 
 
$
6,688


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NUSTAR ENERGY L.P. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)



For derivatives designated as cash flow hedging instruments, once a hedged transaction occurs, we reclassify the effective portion from accumulated OCI to “Cost of product sales” or “Interest expense, net.” As of June 30, 2011, we expect to reclassify a loss of $8.5 million to “Cost of product sales” and a gain of $0.3 million to “Interest expense, net” within the next twelve months. The maximum length of time over which we are hedging our exposure to the variability in future cash flows is approximately two years for our forward-starting interest rate swaps and approximately five years for our commodity contracts.
 
Concentration of Credit Risk
We are exposed to credit risk on our hedging instruments in the event of nonperformance by counterparties. However, because our hedging activities are transacted only with highly rated institutions, we do not anticipate nonperformance by any of these counterparties.

8. RELATED PARTY TRANSACTIONS

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

The following table summarizes information pertaining to related party transactions:
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2011
 
2010
 
2011
 
2010
 
(Thousands of Dollars)
Revenues
$
407

 
$

 
$
537

 
$

Operating expenses
$
36,801

 
$
34,075

 
$
71,910

 
$
67,919

General and administrative expenses
$
16,035

 
$
13,320

 
$
32,983

 
$
30,558


We had a payable to NuStar GP, LLC of $15.5 million and $10.3 million, as of June 30, 2011 and December 31, 2010, respectively, with both amounts representing payroll, employee benefit plans and unit-based compensation. We also had a long-term payable to NuStar GP, LLC as of June 30, 2011 and December 31, 2010 of $11.4 million and $10.1 million, respectively, related to amounts payable for retiree medical benefits and other post-employment benefits.

9. OTHER (EXPENSE) INCOME

Other (expense) income, net consisted of the following:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2011
 
2010
 
2011
 
2010
 
(Thousands of Dollars)
Storage agreement early termination costs
$

 
$

 
$
(5,000
)
 
$

Gain from insurance recoveries

 
13,500

 

 
13,500

Gain (loss) from sale or disposition of assets
178

 
(793
)
 
236

 
(688
)
Foreign exchange gains (losses)
34

 
382

 
(576
)
 
(234
)
Other, net
(1,179
)
 
1,727

 
(1,126
)
 
2,539

Other (expense) income, net
$
(967
)
 
$
14,816

 
$
(6,466
)
 
$
15,117


For the six months ended June 30, 2011, "Other (expense) income, net" included $5.0 million in costs associated with the early termination of a third-party storage agreement at our Paulsboro, New Jersey asphalt refinery. For the three and six months ended June 30, 2010, the gain from insurance recoveries resulted from insurance claims related to damage in the third quarter of 2008 primarily at our Texas City, Texas terminal caused by Hurricane Ike.

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NUSTAR ENERGY L.P. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)



10. PARTNERS’ EQUITY

Partners' Equity Activity
The following table summarizes changes in the carrying amount of partners' equity and noncontrolling interest:

 
Three Months Ended June 30, 2011
 
Three Months Ended June 30, 2010
 
NuStar Energy L.P. Partners' Equity
 
Noncontrolling Interest
 
Total Partners'
Equity
 
NuStar Energy L.P. Partners' Equity
 
Noncontrolling Interest
 
Total Partners'
Equity
 
(Thousands of Dollars)
Beginning balance
$
2,663,017

 
$
15,566

 
$
2,678,583

 
$
2,430,330

 
$

 
$
2,430,330

Net income
92,599

 
6

 
92,605

 
99,422

 

 
99,422

Other comprehensive
income:
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation
adjustment
(842
)
 
(827
)
 
(1,669
)
 
(8,519
)
 

 
(8,519
)
Unrealized gain (loss) on
cash flow hedges
(32,162
)
 

 
(32,162
)
 
1,617

 

 
1,617

Net loss reclassified into
income on cash flow hedges
1,225

 

 
1,225

 

 

 

Total other comprehensive
income
(31,779
)
 
(827
)
 
(32,606
)
 
(6,902
)
 

 
(6,902
)
Total comprehensive income
60,820

 
(821
)
 
59,999

 
92,520

 

 
92,520

Cash distributions to
partners
(79,616
)
 

 
(79,616
)
 
(73,392
)
 

 
(73,392
)
Issuance of common units,
including contribution
from general partner

 

 

 
245,450

 

 
245,450

Ending balance
$
2,644,221

 
$
14,745

 
$
2,658,966

 
$
2,694,908

 
$

 
$
2,694,908



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NUSTAR ENERGY L.P. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


 
Six Months Ended June 30, 2011
 
Six Months Ended June 30, 2010
 
NuStar Energy L.P. Partners' Equity
 
Noncontrolling Interest
 
Total Partners'
Equity
 
NuStar Energy L.P. Partners' Equity
 
Noncontrolling Interest
 
Total Partners'
Equity
 
(Thousands of Dollars)
Beginning balance
$
2,702,700

 
$

 
$
2,702,700

 
$
2,484,968

 
$

 
$
2,484,968

Turkey acquisition

 
15,000

 
15,000

 

 

 

Net income
121,101

 
20

 
121,121

 
119,125

 

 
119,125

Other comprehensive
income:
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation
adjustment
7,711

 
(275
)
 
7,436

 
(8,928
)
 

 
(8,928
)
Unrealized gain (loss) on
cash flow hedges
(29,284
)
 

 
(29,284
)
 
1,152

 

 
1,152

Net loss reclassified into
income on cash flow hedges
1,225

 

 
1,225

 

 

 

Total other comprehensive
income
(20,348
)
 
(275
)
 
(20,623
)
 
(7,776
)
 

 
(7,776
)
Total comprehensive income
100,753

 
(255
)
 
100,498

 
111,349

 

 
111,349

Cash distributions to
partners
(159,232
)
 

 
(159,232
)
 
(146,784
)
 

 
(146,784
)
Issuance of common units,
including contribution
from general partner

 

 

 
245,375

 

 
245,375

Ending balance
$
2,644,221

 
$
14,745

 
$
2,658,966

 
$
2,694,908

 
$

 
$
2,694,908


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 the general partner will receive. The partnership agreement also contains provisions for the allocation of net income and loss to the unitholders and the general partner. For purposes of maintaining partner capital accounts, the partnership agreement specifies that items of income and loss shall be allocated among the partners in accordance with their respective percentage interests. Normal allocations according to percentage interests are made after giving effect to priority income allocations, if any, in an amount equal to incentive cash distributions allocated 100% to the general partner. The following table details the calculation of net income applicable to the general partner:  
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2011
 
2010
 
2011
 
2010
 
(Thousands of Dollars)
Net income attributable to NuStar Energy L.P.
$
92,599

 
$
99,422

 
$
121,101

 
$
119,125

Less general partner incentive distribution
8,963

 
8,369

 
17,531

 
16,168

Net income after general partner incentive distribution
83,636

 
91,053

 
103,570

 
102,957

General partner interest
2
%
 
2
%
 
2
%
 
2
%
General partner allocation of net income after
general partner incentive distribution
1,673

 
1,821

 
2,071

 
2,059

General partner incentive distribution
8,963

 
8,369

 
17,531

 
16,168

Net income applicable to general partner
$
10,636

 
$
10,190

 
$
19,602

 
$
18,227


Cash Distributions
On May 13, 2011, we paid a quarterly cash distribution totaling $79.6 million, or $1.075 per unit, related to the first quarter of 2011. On July 28, 2011, our board of directors approved a quarterly cash distribution of $1.095 per unit related to the second quarter of 2011. This distribution will be paid on August 12, 2011 to unitholders of record on August 9, 2011 and will total $81.3 million.
 

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NUSTAR ENERGY L.P. AND SUBSIDIARIES
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 June 30,
 
Six Months Ended June 30,
 
2011
 
2010
 
2011
 
2010
 
(Thousands of Dollars, Except Per Unit Data)
General partner interest
$
1,627

 
$
1,576

 
$
3,219

 
$
3,043

General partner incentive distribution
8,963

 
8,369

 
17,531

 
16,168

Total general partner distribution
10,590

 
9,945

 
20,750

 
19,211

Limited partners’ distribution
70,749

 
68,809

 
140,205

 
132,935

Total cash distributions
$
81,339

 
$
78,754

 
$
160,955

 
$
152,146

 
 
 
 
 
 
 
 
Cash distributions per unit applicable
to limited partners
$
1.095

 
$
1.065

 
$
2.170

 
$
2.130


11. NET INCOME PER UNIT

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

The following table details the calculation of earnings per unit:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2011
 
2010
 
2011
 
2010
 
(Thousands of Dollars, Except Unit and Per Unit Data)
Net income attributable to NuStar Energy L.P.
$
92,599

 
$
99,422

 
$
121,101

 
$
119,125

Less general partner distribution (including IDR)
10,590

 
9,945

 
20,750

 
19,211

Less limited partner distribution
70,749

 
68,809

 
140,205

 
132,935

Distributions less than (greater than) earnings
$
11,260

 
$
20,668

 
$
(39,854
)
 
$
(33,021
)
 
 
 
 
 
 
 
 
General partner earnings:
 
 
 
 
 
 
 
Distributions
$
10,590

 
$
9,945

 
$
20,750

 
$
19,211

Allocation of distributions less than
(greater than) earnings (2%)
225

 
413

 
(798
)
 
(661
)
Total
$
10,815

 
$
10,358

 
$
19,952

 
$
18,550

 
 
 
 
 
 
 
 
Limited partner earnings:
 
 
 
 
 
 
 
Distributions
$
70,749

 
$
68,809

 
$
140,205

 
$
132,935

Allocation of distributions less than
(greater than) earnings (98%)
11,035

 
20,255

 
(39,056
)
 
(32,360
)
Total
$
81,784

 
$
89,064

 
$
101,149

 
$
100,575

 
 
 
 
 
 
 
 
Weighted-average limited partner units outstanding
64,610,549

 
62,289,670

 
64,610,549

 
61,255,853

 
 
 
 
 
 
 
 
Net income per unit applicable to limited partners
$
1.27

 
$
1.43

 
$
1.57

 
$
1.64



17

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NUSTAR ENERGY L.P. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


12. STATEMENTS OF CASH FLOWS
Changes in current assets and current liabilities were as follows:
 
 
Six Months Ended June 30,
 
2011
 
2010
 
(Thousands of Dollars)
Decrease (increase) in current assets:
 
 
 
Accounts receivable
$
(139,110
)
 
$
(73,261
)
Inventories
(239,766
)
 
(190,579
)
Other current assets
(17,759
)
 
27,248

Increase (decrease) in current liabilities:
 
 
 
Accounts payable
202,229

 
94,389

Payable to related party
5,133

 
13,815

Accrued interest payable
11

 
27

Accrued liabilities
(16,068
)
 
(31,862
)
Taxes other than income tax
3,124

 
(3,189
)
Income tax payable
470

 
1,397

Changes in current assets and current liabilities
$
(201,736
)
 
$
(162,015
)
 
Cash flows related to interest and income taxes were as follows:
 
 
Six Months Ended June 30,
 
2011
 
2010
 
(Thousands of Dollars)
Cash paid for interest, net of amount capitalized
$
53,684

 
$
44,775

Cash paid for income taxes, net of tax refunds received
$
7,070

 
$
8,614


13. SEGMENT INFORMATION

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

18

Table of Contents
NUSTAR ENERGY L.P. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


Results of operations for the reportable segments were as follows:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2011
 
2010
 
2011
 
2010
 
(Thousands of Dollars)
Revenues:
 
 
 
 
 
 
 
Storage:
 
 
 
 
 
 
 
Third-party revenues
$
127,646

 
$
118,131

 
$
252,899

 
$
232,544

Intersegment revenues
11,491

 
10,678

 
22,883

 
22,897

Related party revenues
407

 

 
537

 

Total storage
139,544

 
128,809

 
276,319

 
255,441

Transportation:
 
 
 
 
 
 
 
Third-party revenues
71,562

 
76,956

 
144,572

 
151,838

Intersegment revenues

 
2

 

 
382

Total transportation
71,562

 
76,958

 
144,572

 
152,220

Asphalt and fuels marketing:
 
 
 
 
 
 
 
Third-party revenues
1,389,569

 
929,854

 
2,425,792

 
1,686,088

Intersegment revenues
749

 
136

 
4,594

 
2,832

Total asphalt and fuels marketing
1,390,318

 
929,990

 
2,430,386

 
1,688,920

Consolidation and intersegment eliminations
(12,240
)
 
(10,816
)
 
(27,477
)
 
(26,111
)
Total revenues
$
1,589,184

 
$
1,124,941

 
$
2,823,800

 
$
2,070,470

 
 
 
 
 
 
 
 
Operating income:
 
 
 
 
 
 
 
Storage
$
42,848

 
$
42,865

 
$
91,544

 
$
85,753

Transportation
30,163

 
34,735

 
64,560

 
68,492

Asphalt and fuels marketing
72,153

 
47,552

 
72,271

 
39,656

Consolidation and intersegment eliminations
(110
)
 
514

 
(45
)
 
277

Total segment operating income
145,054

 
125,666

 
228,330

 
194,178

Less general and administrative expenses
26,119

 
22,195

 
52,102

 
49,464

Less other depreciation and amortization expense
1,584

 
1,441

 
3,146

 
2,911

Total operating income
$
117,351

 
$
102,030

 
$
173,082

 
$
141,803


 Total assets by reportable segment were as follows:
 
 
June 30,
2011
 
December 31,
2010
 
(Thousands of Dollars)
Storage
$
2,564,255

 
$
2,454,264

Transportation
1,237,768

 
1,256,614

Asphalt and fuels marketing
1,696,521

 
1,154,499

Total segment assets
5,498,544

 
4,865,377

Other partnership assets
398,164

 
521,016

Total consolidated assets
$
5,896,708

 
$
5,386,393

 

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Table of Contents
NUSTAR ENERGY L.P. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


14. 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 each of 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
June 30, 2011
(Thousands of Dollars)
 
 
NuStar
Energy
 
NuStar
Logistics
 
NuPOP
 
Non-Guarantor
Subsidiaries (a)
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
53

 
$
40,109

 
$

 
$
88,714

 
$

 
$
128,876

Receivables, net

 
24,190

 
6,235

 
426,985

 

 
457,410

Inventories

 
2,030

 
9,232

 
656,985

 
(339
)
 
667,908

Other current assets

 
14,009

 
1,221

 
45,932

 

 
61,162

Intercompany receivable

 
918,943

 
745,857

 

 
(1,664,800
)
 

Total current assets
53

 
999,281

 
762,545

 
1,218,616

 
(1,665,139
)
 
1,315,356

Property, plant and equipment, net

 
1,080,100

 
603,274

 
1,678,478

 

 
3,361,852

Intangible assets, net

 
2,036

 

 
44,269

 

 
46,305

Goodwill

 
18,094

 
170,652

 
660,203

 

 
848,949

Investment in wholly owned
subsidiaries
3,130,434

 
242,172

 
1,107,639

 
2,264,898

 
(6,745,143
)
 

Investment in joint venture

 

 

 
67,272

 

 
67,272

Deferred income tax asset

 

 

 
10,176

 

 
10,176

Other long-term assets, net
23

 
179,591

 
26,329

 
40,855

 

 
246,798

Total assets
$
3,130,510

 
$
2,521,274

 
$
2,670,439

 
$
5,984,767

 
$
(8,410,282
)
 
$
5,896,708

Liabilities and Partners’ Equity
 
 
 
 
 
 
 
 
 
 
 
Current portion of long-term debt
$

 
$
832

 
$
255,152

 
$

 
$

 
$
255,984

Payables

 
43,404

 
5,302

 
475,976

 

 
524,682

Accrued interest payable

 
21,207

 
8,490

 
22

 

 
29,719

Accrued liabilities
584

 
11,784

 
3,480

 
43,475

 

 
59,323

Taxes other than income tax

 
4,690

 
2,995

 
6,344

 

 
14,029

Income tax payable

 
921

 

 
669

 

 
1,590

Intercompany payable
511,856