NS 3Q12 10-Q

Table of Contents

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 _________________________________________
 FORM 10-Q
 _________________________________________
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2012
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.)
 
 
 
19003 IH-10 West
San Antonio, Texas
 
78257
(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 October 31, 2012 was 77,886,078.
 
 
 
 
 



Table of Contents

NUSTAR ENERGY L.P. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
Item 1.
 
 
 
Item 5.
 
 
 
Item 6.
 
 

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PART I – FINANCIAL INFORMATION

Item 1.
Financial Statements
NUSTAR ENERGY L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars, Except Unit Data)
 
September 30,
2012
 
December 31,
2011
 
(Unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
107,456

 
$
17,497

Accounts receivable, net of allowance for doubtful accounts of $2,248
and $2,147 as of September 30, 2012 and December 31, 2011, respectively
453,137

 
547,808

Receivable from related party
2,358

 

Inventories
240,694

 
587,785

Income tax receivable
995

 
4,148

Other current assets
59,600

 
43,685

Total current assets
864,240

 
1,200,923

Property, plant and equipment, at cost
4,171,269

 
4,413,305

Accumulated depreciation and amortization
(1,016,179
)
 
(982,837
)
Property, plant and equipment, net
3,155,090

 
3,430,468

Intangible assets, net
26,518

 
38,923

Goodwill
822,911

 
846,717

Investment in joint ventures
116,139

 
66,687

Deferred income tax asset
2,080

 
9,141

Note receivable from related party
170,711

 

Other long-term assets, net
206,195

 
288,331

Total assets
$
5,363,884

 
$
5,881,190

Liabilities and Partners’ Equity
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
517,863

 
$
364,959

Accounts payable
439,622

 
454,326

Payable to related party
13,717

 
6,735

Accrued interest payable
23,966

 
29,833

Accrued liabilities
97,441

 
71,270

Taxes other than income tax
15,020

 
13,455

Income tax payable
2,771

 
3,222

Total current liabilities
1,110,400

 
943,800

Long-term debt, less current portion
1,518,543

 
1,928,071

Long-term payable to related party
16,004

 
14,502

Deferred income tax liability
30,851

 
35,437

Other long-term liabilities
15,987

 
95,045

Commitments and contingencies (Note 6)

 

Partners’ equity:
 
 
 
Limited partners (77,886,078 and 70,756,078 common units outstanding
as of September 30, 2012 and December 31, 2011, respectively)
2,679,791

 
2,817,069

General partner
60,375

 
62,539

Accumulated other comprehensive loss
(80,981
)
 
(27,407
)
Total NuStar Energy L.P. partners’ equity
2,659,185

 
2,852,201

Noncontrolling interest
12,914

 
12,134

Total partners’ equity
2,672,099

 
2,864,335

Total liabilities and partners’ equity
$
5,363,884

 
$
5,881,190


See Condensed Notes to Consolidated Financial Statements.

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NUSTAR ENERGY L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Unaudited, Thousands of Dollars, Except Unit and Per Unit Data)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
Revenues:
 
 
 
 
 
 
 
Service revenues:
 
 
 
 
 
 
 
Third parties
$
221,108

 
$
210,395

 
$
634,350

 
$
607,866

Related party
713

 
286

 
2,198

 
823

Total service revenues
221,821

 
210,681

 
636,548

 
608,689

Product sales
1,522,945

 
1,613,669

 
4,745,815

 
4,039,461

Total revenues
1,744,766

 
1,824,350

 
5,382,363

 
4,648,150

Costs and expenses:
 
 
 
 
 
 
 
Cost of product sales
1,486,985

 
1,535,609

 
4,638,011

 
3,797,424

Operating expenses:
 
 
 
 
 
 
 
Third parties
103,387

 
98,464

 
288,283

 
281,419

Related party
39,032

 
37,151

 
115,065

 
109,061

Total operating expenses
142,419

 
135,615

 
403,348

 
390,480

General and administrative expenses:
 
 
 
 
 
 
 
Third parties
8,773

 
8,746

 
26,566

 
27,865

Related party
16,181

 
8,985

 
48,710

 
41,968

Total general and administrative expenses
24,954

 
17,731

 
75,276

 
69,833

Depreciation and amortization expense
39,686

 
42,418

 
129,943

 
124,354

Asset impairment loss

 

 
249,646

 

Goodwill impairment loss

 

 
22,132

 

Gain on legal settlement

 

 
(28,738
)
 

Total costs and expenses
1,694,044

 
1,731,373

 
5,489,618

 
4,382,091

Operating income (loss)
50,722

 
92,977

 
(107,255
)
 
266,059

Equity in (loss) earnings of joint ventures
(951
)
 
2,599

 
3,816

 
6,997

Interest expense, net
(24,867
)
 
(21,565
)
 
(71,037
)
 
(62,644
)
Other (expense) income, net
(19,940
)
 
767

 
(21,384
)
 
(5,699
)
Income (loss) before income tax expense
4,964

 
74,778

 
(195,860
)
 
204,713

Income tax expense
622

 
4,497

 
20,354

 
13,311

Net income (loss)
4,342

 
70,281

 
(216,214
)
 
191,402

Less net (loss) income attributable to
noncontrolling interest
(47
)
 
123

 
(217
)
 
143

Net income (loss) attributable to NuStar Energy L.P.
$
4,389

 
$
70,158

 
$
(215,997
)
 
$
191,259

Net (loss) income per unit applicable to
limited partners (Note 12)
$
(0.09
)
 
$
0.92

 
$
(3.40
)
 
$
2.49

Weighted-average limited partner units outstanding
72,383,578

 
64,612,423

 
71,302,538

 
64,611,181

 
 
 
 
 
 
 
 
Comprehensive (loss) income
$
(4,018
)
 
$
(55,969
)
 
$
(268,791
)
 
$
44,529

Less comprehensive income (loss) attributable
to noncontrolling interest
66

 
(2,063
)
 
780

 
(2,318
)
Comprehensive (loss) income attributable to
NuStar Energy L.P.
$
(4,084
)
 
$
(53,906
)
 
$
(269,571
)
 
$
46,847


See Condensed Notes to Consolidated Financial Statements.

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NUSTAR ENERGY L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, Thousands of Dollars)
 
Nine Months Ended September 30,
 
2012
 
2011
Cash Flows from Operating Activities:
 
 
 
Net (loss) income
$
(216,214
)
 
$
191,402

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 
 
 
Depreciation and amortization expense
129,943

 
124,354

Amortization of debt related items
(5,718
)
 
(8,328
)
Loss (gain) from sale or disposition of assets
19,828

 
(117
)
Asset and goodwill impairment loss
271,778

 

Gain on legal settlement
(28,738
)
 

Deferred income tax expense
1,403

 
4,130

Equity in earnings of joint ventures
(3,816
)
 
(6,997
)
Distributions of equity in earnings of joint venture
6,364

 
9,397

Changes in current assets and current liabilities (Note 13)
108,750

 
(216,427
)
Other, net
(11,701
)
 
4,457

Net cash provided by operating activities
271,879

 
101,871

Cash Flows from Investing Activities:
 
 
 
Reliability capital expenditures
(21,420
)
 
(32,808
)
Strategic capital expenditures
(299,358
)
 
(211,150
)
Acquisitions

 
(100,693
)
Investment in other long-term assets
(2,364
)
 
(8,449
)
Proceeds from sale or disposition of assets
35,547

 
445

Proceeds from sale of Asphalt Operations
436,276

 

Increase in note receivable from related party
(170,711
)
 

Net cash used in investing activities
(22,030
)
 
(352,655
)
Cash Flows from Financing Activities:
 
 
 
Proceeds from long-term debt borrowings
1,805,168

 
707,102

Proceeds from short-term debt borrowings
71,880

 
31,600

Proceeds from senior note offering, net of issuance costs
247,408

 

Long-term debt repayments
(2,287,178
)
 
(348,153
)
Short-term debt repayments
(71,880
)
 
(31,600
)
Proceeds from issuance of common units, net of issuance costs
336,662

 
1,583

Contributions from general partner
7,121

 
70

Distributions to unitholders and general partner
(267,228
)
 
(240,571
)
(Payments for) proceeds from termination of interest rate swaps
(5,678
)
 
12,632

Other, net
363

 
(785
)
Net cash (used in) provided by financing activities
(163,362
)
 
131,878

Effect of foreign exchange rate changes on cash
3,472

 
(3,001
)
Net increase (decrease) in cash and cash equivalents
89,959

 
(121,907
)
Cash and cash equivalents as of the beginning of the period
17,497

 
181,121

Cash and cash equivalents as of the end of the period
$
107,456

 
$
59,214

See Condensed Notes to Consolidated Financial Statements.

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NUSTAR ENERGY L.P. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND BASIS OF PRESENTATION

Organization and Operations
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 15.1% total interest in us as of September 30, 2012.
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 condensed 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 financial statements. Inter-partnership balances and transactions have been eliminated in consolidation. We account for investments in 50% or less-owned entities using the equity method.
These unaudited condensed 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 nine months ended September 30, 2012 and 2011 included in these Condensed Notes to Consolidated Financial Statements is derived from our unaudited condensed consolidated financial statements. Operating results for the three and nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. The consolidated balance sheet as of December 31, 2011 has been derived from the audited consolidated financial statements as of that date. These unaudited condensed 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, 2011.

2. DISPOSITIONS

Asphalt Operations
On September 28, 2012, we sold a 50% voting interest (the Asphalt Sale) in NuStar Asphalt LLC (Asphalt JV), previously a wholly owned subsidiary, to an affiliate of Lindsay Goldberg LLC (Lindsay Goldberg), a private investment firm. Asphalt JV owns and operates asphalt refining assets that were previously wholly owned by NuStar Energy, including the asphalt refineries located in Paulsboro, New Jersey and Savannah, Georgia (collectively, the Asphalt Operations). Lindsay Goldberg paid $175.0 million for the Class A equity interests (Class A Interests) of Asphalt JV, while we retained the Class B equity interests with a fair value of $52.0 million (Class B Interests). The Class A Interests have a distribution preference over the Class B Interests, as well as a liquidation preference.

NuStar Asphalt Refining, LLC and NuStar Marketing LLC are wholly owned subsidiaries of NuStar Asphalt LLC. Unless otherwise indicated, the term “Asphalt JV” is used in this report to refer to Asphalt JV, to one or more of its consolidated subsidiaries or to all of them taken as a whole.

At closing, we received $261.3 million from Asphalt JV for inventory related to the Asphalt Operations, pending a final inventory valuation. Asphalt JV funded the purchase of those inventories with proceeds from borrowings under a third-party asset-based revolving credit facility (the Third-Party Financing) and a $250.0 million unsecured revolving credit facility provided by NuStar Energy (the NuStar JV Facility). In addition to the NuStar JV Facility, we entered into various other agreements with Asphalt JV. See Note 9. Related Party Transactions for additional discussion of our agreements with Asphalt JV.


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Deconsolidation. We determined the equity of Asphalt JV is not sufficient to finance its activities without additional subordinated support, including support provided by us as described in Note 9. Related Party Transactions. Therefore, we determined the Asphalt JV is a variable interest entity (VIE). An entity is required to consolidate a VIE if the entity is considered the primary beneficiary of the VIE. We analyzed our relationship with Asphalt JV, including our representation on the board of members, our equity interests and our rights under the various agreements with Asphalt JV and determined that NuStar Energy does not have the power to direct the activities most significant to the economic performance of Asphalt JV. As a result, NuStar Energy is not the primary beneficiary of Asphalt JV. Upon closing, we deconsolidated Asphalt JV and started reporting our remaining investment in Asphalt JV using the equity method of accounting. Since the fair value of the consideration we received was less than the carrying amount of the assets of the Asphalt Operations, we recognized a loss of $21.6 million in “Other (expense) income, net” in the condensed consolidated statements of comprehensive income for the three and nine months ended September 30, 2012.

As of September 30, 2012, we included our 50% interest in Asphalt JV within “Investment in joint ventures” on the consolidated balance sheet. The condensed consolidated statements of comprehensive income include the results of operations for Asphalt JV in “Equity in earnings of joint ventures” commencing on September 28, 2012. Because of our continued involvement with Asphalt JV, we have not presented the results of operations for the Asphalt Operations prior to closing as discontinued operations. Beginning on September 28, 2012, we have presented transactions between us and the Asphalt JV as related party transactions in the consolidated financial statements.

Our maximum exposure to loss as a result of our involvement with Asphalt JV is approximately $448.7 million, which consists of (i) our investment in Asphalt JV of $48.7 million as of September 30, 2012, (ii) up to $250.0 million under the NuStar JV Facility and (iii) up to $150.0 million for credit support, including guarantees.

Other
On April 16, 2012, we sold five terminals in Georgia and Alabama with an aggregate storage capacity of 1.8 million barrels for total proceeds of $30.8 million.

3. ASSET IMPAIRMENTS

In anticipation of the Asphalt Sale, we evaluated the goodwill and other long-lived assets associated with the Asphalt Operations for potential impairment. As of June 30, 2012, we estimated the fair value of the Asphalt Operations reporting unit as the sum of (i) the purchase price to be paid by Lindsay Goldberg for the Class A Interests of Asphalt JV, (ii) the fair value of the Class B Interests of Asphalt JV that we would retain and (iii) the fair value of the working capital, primarily inventory. We determined the fair value of the Class B Interests using a combination of estimated discounted future cash flows and a pricing model. The fair value of the working capital was based on estimated current market prices. The estimated fair value of the Asphalt Operations reporting unit was less than its carrying value, which resulted in the recognition of a goodwill impairment loss of $22.1 million in the second quarter of 2012. In addition, in the second quarter of 2012, we recorded an asset impairment loss of $244.3 million in order to write-down the carrying value of long-lived assets related to the Asphalt Operations, including fixed assets, intangible assets and other long-term assets to their estimated fair value. The goodwill impairment loss and the asset impairment loss related to the Asphalt Operations are reported in the asphalt and fuels marketing segment.

In the second quarter of 2012, we reduced the carrying value of the fixed assets of one of our refined product terminals to its estimated fair value and recorded an asset impairment loss of $2.1 million. The impairment loss resulted from changing market conditions that reduced the estimated cash flows for that terminal. The impairment loss associated with this refined product terminal was reported in the storage segment. In addition, we recorded an asset impairment loss of $3.3 million in the second quarter of 2012 in order to reduce the carrying value of certain corporate assets we intend to sell to their estimated sales price of $2.8 million. These corporate assets that are held for sale are included in “Other current assets” on the consolidated balance sheet as of September 30, 2012.


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


The total asset impairment loss consisted of the following:

 
Nine Months Ended
September 30, 2012
 
(Thousands of Dollars)
Asphalt Operations:
 
Property, plant and equipment, net
$
232,759

Intangible assets, net
6,564

Other long-term assets, net
4,902

Asset impairment loss
244,225

 
 
Other:
 
Property, plant and equipment, net
5,421

Total asset impairment loss
$
249,646


4. INVENTORIES

Inventories consisted of the following:
 
September 30,
2012
 
December 31,
2011
 
(Thousands of Dollars)
Crude oil
$
11,267

 
$
157,297

Finished products
221,113

 
421,288

Materials and supplies
8,314

 
9,200

Total
$
240,694

 
$
587,785


5. DEBT

Revolving Credit Agreement
On May 2, 2012, NuStar Logistics replaced its $1.2 billion five-year revolving credit agreement (the 2007 Revolving Credit Agreement) with a new $1.5 billion five-year revolving credit agreement (the 2012 Revolving Credit Agreement), which includes the ability to borrow up to the equivalent of $250.0 million in Euros. NuStar Logistics used borrowings of $588.6 million under the 2012 Revolving Credit Agreement and cash on hand to repay in full the balance on the 2007 Revolving Credit Agreement. Obligations under the 2012 Revolving Credit Agreement are guaranteed by NuStar Energy and NuPOP. NuPOP will be released from its guarantee of the 2012 Revolving Credit Agreement when it no longer guarantees NuStar Logistics public debt instruments.

The 2012 Revolving Credit Agreement contains customary restrictive covenants, including requiring us to maintain, as of the end of each rolling period, which consists of any period of four consecutive fiscal quarters, a consolidated debt coverage ratio (consolidated indebtedness to consolidated EBITDA, as defined in the 2012 Revolving Credit Agreement) not to exceed 5.00-to-1.00; provided, for the rolling period ending June 30th of each year, the maximum consolidated debt coverage ratio will increase to 5.50-to-1.00. Moreover, if we consummate an acquisition for an aggregate net consideration of at least $50.0 million, the maximum consolidated debt coverage ratio will increase to 5.50-to-1.00 for two rolling periods.

On June 29, 2012, we amended the 2012 Revolving Credit Agreement to permit unlimited investments in joint ventures and unconsolidated subsidiaries, provided that no default exists, and to limit the amount of cash distributions for such joint ventures and unconsolidated subsidiaries included in the calculation of the consolidated debt coverage ratio to 20% of consolidated EBITDA (the Amendment). In addition, the Amendment provides that we will be in compliance with the consolidated debt coverage ratio as long as it does not exceed 6.50-to-1.00 for the rolling period ended June 30, 2012 or 6.00-to-1.00 for the rolling period ending September 30, 2012. The Amendment further stipulates that if the Asphalt Operations were owned by an unconsolidated joint venture, the maximum allowed consolidated debt coverage would revert to 5.00-to-1.00. Therefore, as of September 30, 2012, our consolidated debt coverage ratio could not exceed 5.00-to-1.00. The requirement not to exceed a

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


maximum consolidated debt coverage ratio may limit the amount we can borrow under the 2012 Revolving Credit Agreement to an amount less than the total amount available for borrowing. As of September 30, 2012, our consolidated debt coverage ratio was 4.3x, and we had $1,152.9 million available for borrowing.

During the nine months ended September 30, 2012, we borrowed an aggregate $1,772.0 million under our revolving credit agreements to fund working capital requirements, our capital expenditures and distributions. Additionally, we repaid $1,937.2 million during the nine months ended September 30, 2012 under our revolving credit agreements. These borrowings and repayments include borrowings under the 2012 Revolving Credit Agreement to pay down the 2007 Revolving Credit Agreement and the $100.0 million of 6.875% senior notes due July 15, 2012.

The 2012 Revolving Credit Agreement bears interest, at our option, based on either an alternative base rate or a LIBOR-based rate. The interest rate on the 2012 Revolving Credit Agreement is subject to adjustment if our debt rating is downgraded (or subsequently upgraded) by certain credit rating agencies. As of September 30, 2012, our weighted average interest rate was 1.7%.

UK Term Loan
On June 29, 2012, our UK subsidiary, NuStar Terminals Limited, amended the £21.0 million amended and restated term loan agreement (the UK Term Loan) to be consistent with the covenant terms of the 2012 Revolving Credit Agreement. As a result of this amendment to the UK Term Loan, the covenants and ratios of the UK Term Loan are substantially the same as the 2012 Revolving Credit Agreement, as amended.

NuStar Logistics 6.875% Senior Notes
In July 2012, we repaid the $100.0 million of 6.875% senior notes due July 15, 2012 with borrowings under our 2012 Revolving Credit Agreement.

NuStar Logistics 4.75% Senior Notes
On February 2, 2012, NuStar Logistics issued $250.0 million of 4.75% senior notes under our May 13, 2010 shelf registration statement. The net proceeds of $247.4 million were used to repay the outstanding principal amount of NuPOP’s 7.75% senior notes due February 15, 2012. The interest on the 4.75% senior notes is payable semi-annually in arrears on February 1 and August 1 of each year beginning on August 1, 2012. The notes will mature on February 1, 2022. The 4.75% senior notes do not have sinking fund requirements. These notes rank equally with existing senior unsecured indebtedness of NuStar Logistics and contain restrictions on NuStar Logistics’ ability to incur secured indebtedness unless the same security is also provided for the benefit of holders of the senior notes. In addition, the senior notes limit NuStar Logistics’ ability to incur indebtedness secured by certain liens and to engage in certain sale-leaseback transactions. At the option of NuStar Logistics, the 4.75% senior notes may be redeemed in whole or in part at any time at a redemption price, which includes a make-whole premium, plus accrued and unpaid interest to the redemption date. The 4.75% senior notes are fully and unconditionally guaranteed by NuStar Energy and NuPOP.
 
Gulf Opportunity Zone Revenue Bonds
In 2008, 2010 and 2011, the Parish of St. James, Louisiana issued, pursuant to the Gulf Opportunity Zone Act of 2005, tax-exempt revenue bonds (GoZone Bonds) associated with our St. James terminal expansions. The GoZone Bonds bear interest based on a weekly tax-exempt bond market interest rate, and we pay interest monthly. The interest rate was 0.2% as of September 30, 2012. The proceeds are deposited with a trustee and disbursed to us upon our request for reimbursement of expenditures related to our St. James terminal expansions. We include the amount remaining in trust related to the GoZone Bonds in “Other long-term assets, net,” and the amount of bonds issued in “Long-term debt, less current portion” on the consolidated balance sheets. For the nine months ended September 30, 2012, we received $38.8 million from the trustee. As of September 30, 2012, the amount remaining in trust totaled $134.6 million.

Line of Credit
On July 2, 2012, our short-term line of credit that had an uncommitted borrowing capacity of up to $20.0 million was terminated. During the nine months ended September 30, 2012, we borrowed and repaid $71.9 million related to this line of credit.

Credit Ratings
The interest rates on the 2012 Revolving Credit Agreement and NuStar Logistics’ $350.0 million of 7.65% senior notes are subject to adjustment if our debt rating is downgraded (or subsequently upgraded) by certain credit rating agencies. In July 2012, Standard & Poor’s lowered our credit rating to BB+ from BBB- and revised the outlook to Stable. In August 2012, Fitch Ratings also lowered our credit rating to BB+ from BBB- and revised the outlook to Stable. The interest rates applicable to the

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


2012 Revolving Credit Agreement do not adjust unless both Moody’s and Standard & Poor’s change their ratings. However, the downgrade by Standard & Poor’s caused the interest rate on NuStar Logistics’ $350.0 million of 7.65% senior notes to increase by 0.25%. These downgrades may also require us to provide additional credit support for certain contracts.

6. COMMITMENTS AND CONTINGENCIES

Contingencies
We have contingent liabilities resulting from various litigation, claims and commitments, as 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, 2012, we have accrued $0.3 million for contingent losses. The amount that will ultimately be paid related to these matters may differ from the recorded accruals, and the timing of such payments is uncertain.

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

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

The Otis AFB is a part of a Superfund Site pursuant to the Comprehensive Environmental Response Compensation and Liability Act (CERCLA). The site contains a number of groundwater contamination plumes, two of which are allegedly associated with the Otis AFB pipeline. Relying on the final judgment of the Texas state court assigning ownership of the Otis AFB pipeline to Kaneb, the 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. We reached an agreement to settle the claims of the United States government with respect to the Otis AFB pipeline and to resolve the underlying dispute between Kaneb and Grace. The settlement was approved by the United States Bankruptcy Court for the District of Delaware and a consent decree was entered by the United States District Court for the District of Massachusetts. Pursuant to the terms of the settlement, we paid approximately $13.1 million to the United States government in July 2012 and received releases of claims from various private parties and a covenant not to sue from the United States government. In connection with the settlement, we recognized a gain of $28.7 million during the second quarter of 2012.

Other
We are 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.

Commitments
On November 17, 2010, we entered into a crude purchase commitment with Statoil Brasil Oleo E Gas Limitada (Statoil) to purchase an average of 10,000 barrels per day of crude oil over a three-year period, which began in December 2011. Pending receipt of and payment for one final shipment from Statoil in the fourth quarter of 2012, this agreement will be terminated.

In connection with the deconsolidation of the Asphalt Operations, our future minimum rental payments applicable to noncancellable operating leases were reduced by certain storage and railcar lease obligations.


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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


7. 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 consider counterparty credit risk and our own credit risk in the determination of all estimated fair values.

Recurring Fair Value Measurements
Product Imbalances. We value our assets and liabilities related to product imbalances using quoted market prices in active markets 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.

Commodity Derivatives. We base the fair value of certain of our commodity derivative instruments on quoted prices on an exchange; accordingly, we include these in Level 1 of the fair value hierarchy. We also have derivative instruments for which we determine fair value using industry pricing services and other observable inputs, such as quoted prices on an exchange for similar derivative instruments. Therefore, we include these derivative instruments in Level 2 of the fair value hierarchy. We have consistently applied these valuation techniques in all periods presented. See Note 8. Derivatives and Risk Management Activities for a discussion of our derivative instruments.
The following assets and liabilities are measured at fair value:
 
September 30, 2012
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(Thousands of Dollars)
Other current assets:
 
 
 
 
 
 
 
Product imbalances
$
898

 
$

 
$

 
$
898

Commodity derivatives
19,013

 
2,365

 

 
21,378

Other long-term assets, net:
 
 
 
 
 
 
 
Commodity derivatives

 
6,675

 

 
6,675

Accrued liabilities:
 
 
 
 
 
 
 
Product imbalances
(577
)
 

 

 
(577
)
Commodity derivatives
(5,929
)
 
(20,861
)
 

 
(26,790
)
Interest rate swaps

 
(41,117
)
 

 
(41,117
)
Other long-term liabilities:
 
 
 
 
 
 
 
Commodity derivatives

 
(1,265
)
 

 
(1,265
)
Total
$
13,405

 
$
(54,203
)
 
$

 
$
(40,798
)


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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


 
December 31, 2011
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(Thousands of Dollars)
Other current assets:
 
 
 
 
 
 
 
Product imbalances
$
2,117

 
$

 
$

 
$
2,117

Commodity derivatives
10,282

 
1,830

 

 
12,112

Other long-term assets, net:
 
 
 
 
 
 
 
Commodity derivatives

 
27,084

 

 
27,084

Interest rate swaps

 
2,335

 

 
2,335

Accrued liabilities:
 
 
 
 
 
 
 
Product imbalances
(1,469
)
 

 

 
(1,469
)
Commodity derivatives
(5,424
)
 

 

 
(5,424
)
Interest rate swaps

 
(22,009
)
 

 
(22,009
)
Other long-term liabilities:
 
 
 
 
 
 
 
Interest rate swaps

 
(27,190
)
 

 
(27,190
)
Total
$
5,506

 
$
(17,950
)
 
$

 
$
(12,444
)

Fair Value of Financial Instruments
We recognize cash equivalents, receivables, payables and debt in our consolidated balance sheets at their carrying amount.
The fair values of these financial instruments, except for debt, approximate their carrying amounts. The estimated fair value and carrying amount of our debt was as follows:
 
September 30,
2012
 
December 31,
2011
 
(Thousands of Dollars)
Fair value
$
2,018,993

 
$
2,377,565

Carrying amount
$
2,036,406

 
$
2,293,030


We estimated the fair value of our publicly-traded senior notes based upon quoted prices in active markets; therefore, we determined the fair value of our publicly traded senior notes falls in Level 1 of the fair value hierarchy. For our other debt, for which a quoted market price is not available, we estimated the fair value using a discounted cash flow analysis using current incremental borrowing rates for similar types of borrowing arrangements and determined the fair value falls in Level 2 of the fair value hierarchy.

As of September 30, 2012, we also had a note receivable from related party of $170.7 million under the NuStar JV Facility. The note receivable related to the NuStar JV Facility was recorded at face value, and the fair value of the note receivable approximates its carrying amount as of September 30, 2012. See Note 9. Related Party Transactions for additional information on the NuStar JV Facility.

8. DERIVATIVES AND RISK MANAGEMENT ACTIVITIES

We utilize various derivative instruments to: (i) manage our exposure to commodity price risk; (ii) manage our exposure to interest rate risk; and (iii) attempt to profit from market fluctuations. Our risk management policies and procedures are designed to monitor interest rates, futures and swap positions 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. Our risk management committee oversees our trading controls and procedures and certain aspects of our 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, which was approved by our board of directors.
Interest Rate Risk
We are a party to certain interest rate swap agreements that we use to manage our exposure to changes in interest rates. We entered into fixed-to-floating interest rate swap agreements associated with a portion of our fixed-rate senior notes. During the six months ended June 30, 2012, we entered into and terminated fixed-to-floating interest rate swap agreements with an

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


aggregate notional amount of $200.0 million related to the 4.75% senior notes issued on February 2, 2012. Under the terms of these interest rate swap agreements, we received a fixed rate of 4.75% and paid a variable rate based on one month USD LIBOR plus a percentage that varied with each agreement. We also terminated fixed-to-floating interest rate swap agreements with an aggregate notional amount of $270.0 million associated with our 4.80% senior notes. We received $19.7 million in connection with the terminations, which we are amortizing into “Interest expense, net” over the remaining lives of the 4.80% and 4.75% senior notes. The termination payments are included in cash flows from financing activities on the consolidated statements of cash flows. We had no fixed-to-floating interest rate swaps as of September 30, 2012, and the total aggregate notional amount of the fixed-to-floating interest rate swaps was $270.0 million as of December 31, 2011.

We are also a party to forward-starting interest rate swap agreements related to forecasted probable debt issuances. We entered into these 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. In connection with the issuance of the 4.75% senior notes on February 2, 2012, we terminated forward-starting interest rate swap agreements with an aggregate notional amount of $225.0 million. We paid $25.4 million in connection with the terminations, which is being amortized into “Interest expense, net” over the life of the 4.75% senior notes. The termination payment is included in cash flows from financing activities on the consolidated statements of cash flows. As of September 30, 2012 and December 31, 2011, the total aggregate notional amount of the forward-starting interest rate swaps was $275.0 million and $500.0 million, respectively.

Commodity Price Risk
We are exposed to market risks related to the volatility of crude oil and refined product prices. In order to attempt 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 commodity futures and swap contracts, which qualify, and we designate them as, fair value hedges.

We also enter into commodity swap contracts to attempt to hedge the price risk associated with the San Antonio refinery. These 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 attempting to mitigate the risk of volatility of future cash flows associated with hedged volumes. These contracts qualify, and we designate them, as cash flow hedges. During the second quarter of 2012, we reduced the hedged volumes of the expected production of the San Antonio refinery, thereby exposing us to additional price risk.

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 we record associated gains and losses from such derivatives in net income. We also entered into commodity derivatives in order to attempt to profit from market fluctuations. These derivative instruments were financial positions entered into without underlying physical inventory and were not considered hedges. Changes in the fair values were 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 23.0 million barrels and 27.8 million barrels as of September 30, 2012 and December 31, 2011, respectively.


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The fair values of our derivative instruments included in our consolidated balance sheets were as follows:
 
 
 
Asset Derivatives
 
Liability Derivatives
 
Balance Sheet Location
 
September 30, 2012
 
December 31, 2011
 
September 30, 2012
 
December 31, 2011
 
 
 
(Thousands of Dollars)
Derivatives Designated as
Hedging Instruments:
 
 
 
 
 
 
 
 
 
Commodity contracts
Other current assets
 
$
4,182

 
$
36,116

 
$
(783
)
 
$
(33,616
)
Commodity contracts
Other long-term assets, net
 
22,943

 
86,052

 
(20,761
)
 
(66,175
)
Interest rate swaps
Other long-term assets, net
 

 
2,335

 

 

Commodity contracts
Accrued liabilities
 
15,132

 

 
(40,708
)
 

Interest rate swaps
Accrued liabilities
 

 

 
(41,117
)
 
(22,009
)
Commodity contracts
Other long-term liabilities
 
9,861

 

 
(9,171
)
 

Interest rate swaps
Other long-term liabilities
 

 

 

 
(27,190
)
Total
 
 
52,118

 
124,503

 
(112,540
)
 
(148,990
)
 
 
 
 
 
 
 
 
 
 
Derivatives Not Designated
as Hedging Instruments:
 
 
 
 
 
 
 
 
 
Commodity contracts
Other current assets
 
26,484

 
15,568

 
(8,505
)
 
(5,956
)
Commodity contracts
Other long-term assets, net
 
13,726

 
7,207

 
(9,233
)
 

Commodity contracts
Accrued liabilities
 
21,035

 
519

 
(22,249
)
 
(5,943
)
Commodity contracts
Other long-term liabilities
 

 

 
(1,955
)
 

Total
 
 
61,245

 
23,294

 
(41,942
)
 
(11,899
)
 
 
 
 
 
 
 
 
 
 
Total Derivatives
 
 
$
113,363

 
$
147,797

 
$
(154,482
)
 
$
(160,889
)
 

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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 September 30, 2012:
 
 
 
 
 
 
 
 
Interest rate swaps
 
Interest expense, net
 
$

 
$

 
$

Commodity contracts
 
Cost of product sales
 
(23,131
)
 
22,505

 
(626
)
Total
 
 
 
$
(23,131
)
 
$
22,505

 
$
(626
)
 
 
 
 
 
 
 
 
 
Three months ended September 30, 2011:
 
 
 
 
 
 
 
 
Interest rate swaps
 
Interest expense, net
 
$
45,963

 
$
(46,320
)
 
$
(357
)
Commodity contracts
 
Cost of product sales
 
3,772

 
(4,508
)
 
(736
)
Total
 
 
 
$
49,735

 
$
(50,828
)
 
$
(1,093
)
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2012:
 
 
 
 
 
 
 
 
Interest rate swaps
 
Interest expense, net
 
$
(17,345
)
 
$
17,345

 
$

Commodity contracts
 
Cost of product sales
 
(20,496
)
 
19,058

 
(1,438
)
Total
 
 
 
$
(37,841
)
 
$
36,403

 
$
(1,438
)
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2011:
 
 
 
 
 
 
 
 
Interest rate swaps
 
Interest expense, net
 
$
54,577

 
$
(55,172
)
 
$
(595
)
Commodity contracts
 
Cost of product sales
 
(7,292
)
 
6,212

 
(1,080
)
Total
 
 
 
$
47,285

 
$
(48,960
)
 
$
(1,675
)
 

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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 September 30, 2012:
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
(3,825
)
 
Interest expense, net
 
$
(645
)
 
$

Commodity contracts
 
(20,629
)
 
Cost of product sales
 
(8,728
)
 
277

Total
 
$
(24,454
)
 
 
 
$
(9,373
)
 
$
277

 
 
 
 
 
 
 
 
 
Three months ended September 30, 2011:
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
(63,100
)
 
Interest expense, net
 
$

 
$

Commodity contracts
 
(46,532
)
 
Cost of product sales
 
(7,733
)
 
3,594

Total
 
$
(109,632
)
 
 
 
$
(7,733
)
 
$
3,594

 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2012:
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
(17,276
)
 
Interest expense, net
 
$
(1,697
)
 
$

Commodity contracts
 
(73,289
)
 
Cost of product sales
 
(24,590
)
 
4,287

Total
 
$
(90,565
)
 
 
 
$
(26,287
)
 
$
4,287

 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2011:
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
(75,930
)
 
Interest expense, net
 
$

 
$

Commodity contracts
 
(62,986
)
 
Cost of product sales
 
(8,958
)
 
3,594

Total
 
$
(138,916
)
 
 
 
$
(8,958
)
 
$
3,594

(a)
Amounts are included in specified location for both the gain (loss) reclassified from accumulated other comprehensive income (OCI) into income (effective portion) and the gain (loss) recognized in income on derivative (ineffective portion).
Derivatives Not Designated as Hedging Instruments
 
Income Statement
Location
 
Amount of Gain (Loss)
Recognized in Income
 
 
 
 
(Thousands of Dollars)
Three months ended September 30, 2012:
 
 
 
 
Commodity contracts
 
Cost of product sales
 
$
(846
)
 
 
 
 
 
Three months ended September 30, 2011:
 
 
 
 
Commodity contracts
 
Cost of product sales
 
$
5,482

 
 
 
 
 
Nine months ended September 30, 2012:
 
 
 
 
Commodity contracts
 
Revenues
 
$
(7,654
)
Commodity contracts
 
Cost of product sales
 
23,091

 
 
 
 
$
15,437

 
 
 
 
 
Nine months ended September 30, 2011:
 
 
 
 
Commodity contracts
 
Revenues
 
$
235

Commodity contracts
 
Cost of product sales
 
(5,685
)
Commodity contracts
 
Operating expenses
 
46

 
 
 
 
$
(5,404
)

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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 September 30, 2012, we expect to reclassify a loss of $25.6 million to “Cost of product sales” and a loss of $4.2 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 three years for our commodity contracts and less than one year for our forward-starting interest rate swaps.

9. RELATED PARTY TRANSACTIONS

The following table summarizes information pertaining to related party transactions:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
 
(Thousands of Dollars)
Revenues
$
713

 
$
286

 
$
2,198

 
$
823

Operating expenses
$
39,032

 
$
37,151

 
$
115,065

 
$
109,061

General and administrative expenses
$
16,181

 
$
8,985

 
$
48,710

 
$
41,968


NuStar GP, LLC
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 United States operations. Certain of our wholly owned subsidiaries employ persons who perform services for our international operations. Employees of NuStar GP, LLC provide services to both NuStar Energy and NuStar GP Holdings; therefore, we reimburse NuStar GP, LLC for all costs related to its employees, other than costs associated with NuStar GP Holdings.

We had a payable to NuStar GP, LLC of $13.7 million and $6.7 million as of September 30, 2012 and December 31, 2011, respectively, with both amounts representing payroll, employee benefit plan expenses and unit-based compensation. We also had a long-term payable to NuStar GP, LLC as of September 30, 2012 and December 31, 2011 of $16.0 million and $14.5 million, respectively, related to amounts payable for retiree medical benefits and other post-employment benefits.

Asphalt JV
As of September 30, 2012, we had a receivable from Asphalt JV of $2.1 million associated with the Asphalt Sale.

Financing Agreements and Credit Support. The NuStar JV Facility is an unsecured revolving credit facility provided by NuStar Energy that will be available to fund working capital needs and for general purposes of Asphalt JV in an aggregate principal amount not to exceed $250.0 million for a term of seven years. The NuStar JV Facility matures on September 28, 2019 and bears interest based on either an alternative base rate or a LIBOR-based rate. We recognize interest income over the term of the facility in “Interest expense, net” on the consolidated statements of comprehensive income. As of September 30, 2012, the interest rate was 4.875%. In the event NuStar Energy no longer owns an equity interest in Asphalt JV, the interest rate increases and the availability under the NuStar JV Facility is reduced to a maximum of $167.0 million after two years and $83.0 million after three years. On September 28, 2012, Asphalt JV borrowed $170.7 million from us under the NuStar JV Facility.

In addition, during the term of the NuStar JV Facility, NuStar Energy will provide credit support, such as guarantees, letters of credit and cash collateral, as applicable, of up to $150.0 million. As of September 30, 2012, NuStar Energy has provided guarantees for commodity purchases, lease obligations and certain utilities for Asphalt JV with a maximum potential exposure of $141.8 million. In addition, NuStar has provided three guarantees to suppliers that do not specify a maximum amount. All guarantees were in existence prior to the Asphalt Sale, and the majority of these guarantees have no expiration date. In the event NuStar Energy must fund its obligation under these guarantees, that amount will be added to borrowings under the NuStar JV Facility.

Terminal Service Agreements. Simultaneously with the Asphalt Sale, we entered into four terminal service agreements with Asphalt JV for our terminals in Wilmington, NC, Rosario, NM, Catoosa, OK and Houston, TX. Pursuant to the terms of the agreements, we will provide aggregate storage capacity of 0.8 million barrels and blending services to Asphalt JV for a service charge of $1.5 million per year. The storage charge will be adjusted annually based on the percentage increase in the consumer price index. The terminal service agreements each have a term of ten years, with Asphalt JV's option to extend for an additional five years. Asphalt JV also has the option to terminate any terminal service agreement with 90 days written notice. If any of the terminal service agreements are extended, the storage charge will be based on the then-current fair market storage rates for

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


comparable storage services charged by us to third parties.

Crude Oil Supply Agreements. In connection with the Asphalt Sale, NuStar Marketing LLC assigned the crude oil supply agreement (the PDVSA Crude Oil Supply Agreement) with an affiliate of Petróleos de Venezuela S. A. (PDVSA) to NuStar Logistics.

Simultaneously with the Asphalt Sale, we entered into a crude oil supply agreement with Asphalt JV (the Asphalt JV Crude Oil Supply Agreement) that commits Asphalt JV to purchase from us in a given year the lesser of (i) the number of barrels of crude oil required to be purchased by us from PDVSA under the PDVSA Crude Oil Supply Agreement for such year or (ii) 35,000 barrels per day of crude oil multiplied by the number of days in such year. The price for the crude oil under this agreement will be the actual price paid by us to PDVSA under the PDVSA Crude Oil Supply Agreement and will include any credits received or adjustments made. The Asphalt JV Crude Oil Supply Agreement is effective for the term of the PDVSA Crude Oil Supply Agreement.

Services Agreements Between Asphalt JV and NuStar GP,LLC. In conjunction with the Asphalt Sale, NuStar GP, LLC entered into a services agreement with Asphalt JV, effective September 28, 2012 (the Asphalt JV Services Agreement). The Asphalt JV Services Agreement provides that NuStar GP, LLC will furnish certain administrative and other operating services necessary to conduct the business of Asphalt JV. Asphalt JV will compensate NuStar GP, LLC for these services through an annual fee totaling $10.0 million, subject to adjustment based on the annual merit increase percentage applicable to NuStar GP, LLC employees for the most recently completed contract year. The Asphalt JV Services Agreement will terminate on December 31, 2017 and will automatically renew for successive two-year terms. Asphalt JV may terminate the Asphalt JV Services Agreement at any time, with 180 days prior written notice or reduce the level of service with 45 days prior written notice.

In addition, NuStar GP, LLC entered into an employee services agreement with Asphalt JV, effective September 28, 2012 (the Asphalt JV Employee Services Agreement). The Asphalt JV Employee Services Agreement provides that certain of NuStar GP, LLC employees will provide employee-services to Asphalt JV. In exchange, Asphalt JV will reimburse NuStar GP, LLC for the compensation expense of those employees at the same rates that were in effect at the effective date of the Asphalt JV Employee Services Agreement, including an annual bonus amount that does not exceed NuStar GP, LLC’s target bonus plan. The employees covered under the Asphalt JV Employee Services Agreement will not be entitled to any new unit-based compensation grants from NuStar GP, LLC, and Asphalt JV will not be responsible for unit-based compensation costs prior to the effective date. The Asphalt JV Employee Services Agreement will terminate on December 31, 2012.

Other
For the three and nine months ended September 30, 2012, the majority of related party revenues resulted from storage agreements between our Turkey subsidiary and the noncontrolling shareholder. We had a receivable of $0.3 million as of September 30, 2012 related to these revenues.

10. OTHER (EXPENSE) INCOME

Other (expense) income, net consisted of the following:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
 
(Thousands of Dollars)
(Loss) gain from sale or disposition of assets
$
(19,880
)
 
$
(119
)
 
$
(19,828
)
 
$
117

Contingent loss adjustment

 
(3,250
)
 

 
(3,250
)
Storage agreement early termination costs

 

 

 
(5,000
)
Foreign exchange (losses) gains
(1,069
)
 
3,059

 
(3,568
)
 
2,483

Other, net
1,009

 
1,077

 
2,012

 
(49
)
Other (expense) income, net
$
(19,940
)
 
$
767

 
$
(21,384
)
 
$
(5,699
)

For the three and nine months ended September 30, 2012, the (loss) gain on sale or disposition of assets included a $21.6 million loss in connection with the deconsolidation of Asphalt JV. See Note 2. Dispositions for additional discussion on the Asphalt Sale.

For the nine months ended September 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.

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



11. PARTNERS’ EQUITY

Issuance of Common Units
On September 10, 2012, we issued 7,130,000 common units representing limited partner interests at a price of $48.94 per unit. We used the net proceeds from this offering of $344.1 million, including a contribution of $7.1 million from our general partner to maintain its 2% general partner interest, for general partnership purposes, including repayments of outstanding borrowings under our 2012 Revolving Credit Agreement and working capital purposes.

Partners Equity Activity
The following table summarizes changes in the carrying amount of equity attributable to NuStar Energy L.P. partners and noncontrolling interest:
 
Three Months Ended September 30, 2012
 
Three Months Ended September 30, 2011
 
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
$
2,408,269

 
$
12,848

 
$
2,421,117

 
$
2,644,221

 
$
14,745

 
$
2,658,966

Net (loss) income
4,389

 
(47
)
 
4,342

 
70,158

 
123

 
70,281

Other comprehensive
(loss) income:
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation
adjustment
6,608

 
113

 
6,721

 
(22,165
)
 
(2,186
)
 
(24,351
)
Net unrealized loss
on cash flow hedges
(24,454
)
 

 
(24,454
)
 
(109,632
)
 

 
(109,632
)
Net loss reclassified into
income on cash flow
hedges
9,373

 

 
9,373

 
7,733

 

 
7,733

Total other comprehensive
(loss) income
(8,473
)
 
113

 
(8,360
)
 
(124,064
)
 
(2,186
)
 
(126,250
)
Cash distributions to
partners
(89,076
)
 

 
(89,076
)
 
(81,339
)
 

 
(81,339
)
Issuance of common units,
including contribution
from general partner
344,076

 

 
344,076

 
3,391

 

 
3,391

Ending balance
$
2,659,185

 
$
12,914

 
$
2,672,099

 
$
2,512,367

 
$
12,682

 
$
2,525,049



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


 
Nine Months Ended September 30, 2012
 
Nine Months Ended September 30, 2011
 
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
$
2,852,201

 
$
12,134

 
$
2,864,335

 
$
2,702,700

 
$

 
$
2,702,700

Acquisition

 

 

 

 
15,000

 
15,000

Net (loss) income
(215,997
)
 
(217
)
 
(216,214
)
 
191,259

 
143

 
191,402

Other comprehensive
(loss) income:
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation
adjustment
10,704

 
997

 
11,701

 
(14,454
)
 
(2,461
)
 
(16,915
)
Net unrealized loss
on cash flow hedges
(90,565
)
 

 
(90,565
)
 
(138,916
)
 

 
(138,916
)
Net loss reclassified into
income on cash flow
hedges
26,287

 

 
26,287

 
8,958

 

 
8,958

Total other comprehensive
(loss) income
(53,574
)
 
997

 
(52,577
)
 
(144,412
)
 
(2,461
)
 
(146,873
)
Cash distributions to
partners
(267,228
)
 

 
(267,228
)
 
(240,571
)
 

 
(240,571
)
Issuance of common units,
including contribution
from general partner
344,076

 

 
344,076

 
3,391

 

 
3,391

Other
(293
)
 

 
(293
)
 

 

 

Ending balance
$
2,659,185

 
$
12,914

 
$
2,672,099

 
$
2,512,367

 
$
12,682

 
$
2,525,049


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 September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
 
(Thousands of Dollars)
Net (loss) income attributable to NuStar Energy L.P.
$
4,389

 
$
70,158

 
$
(215,997
)
 
$
191,259

Less general partner incentive distribution
10,805

 
8,972

 
30,437

 
26,503

Net (loss) income after general partner
incentive distribution
(6,416
)
 
61,186

 
(246,434
)
 
164,756

General partner interest
2
%
 
2
%
 
2
%
 
2
%
General partner allocation of net (loss) income after
general partner incentive distribution
(128
)
 
1,223

 
(4,928
)
 
3,294

General partner incentive distribution
10,805

 
8,972

 
30,437

 
26,503

Net income applicable to general partner
$
10,677

 
$
10,195

 
$
25,509

 
$
29,797


Cash Distributions
On August 10, 2012, we paid a quarterly cash distribution totaling $89.1 million, or $1.095 per unit, related to the second quarter of 2012. On October 25, 2012, we announced a quarterly cash distribution of $1.095 per unit related to the third quarter of 2012. This distribution will be paid on November 14, 2012 to unitholders of record on November 9, 2012 and will total $98.1 million.

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Table of Contents
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 September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
 
(Thousands of Dollars, Except Per Unit Data)
General partner interest
$
1,961

 
$
1,628

 
$
5,525

 
$
4,847

General partner incentive distribution
10,805

 
8,972

 
30,437

 
26,503

Total general partner distribution
12,766

 
10,600

 
35,962

 
31,350

Limited partners’ distribution
85,285

 
70,814

 
240,241

 
211,019

Total cash distributions
$
98,051

 
$
81,414

 
$
276,203

 
$
242,369

 
 
 
 
 
 
 
 
Cash distributions per unit applicable
to limited partners
$
1.095

 
$
1.095

 
$
3.285

 
$
3.265


12. 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 September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
 
(Thousands of Dollars, Except Unit and Per Unit Data)
Net (loss) income attributable to NuStar Energy L.P.
$
4,389

 
$
70,158

 
$
(215,997
)
 
$
191,259

Less general partner distribution (including IDR)
12,766

 
10,600

 
35,962

 
31,350

Less limited partner distribution
85,285

 
70,814

 
240,241

 
211,019

Distributions (greater than) less than earnings
$
(93,662
)
 
$
(11,256
)
 
$
(492,200
)
 
$
(51,110
)
 
 
 
 
 
 
 
 
General partner earnings:
 
 
 
 
 
 
 
Distributions
$
12,766

 
$
10,600

 
$
35,962

 
$
31,350

Allocation of distributions (greater than)
less than earnings (2%)
(1,874
)
 
(225
)
 
(9,846
)
 
(1,023
)
Total
$
10,892

 
$
10,375

 
$
26,116

 
$
30,327

 
 
 
 
 
 
 
 
Limited partner earnings:
 
 
 
 
 
 
 
Distributions
$
85,285

 
$
70,814

 
$
240,241

 
$
211,019

Allocation of distributions (greater than)
less than earnings (98%)
(91,788
)
 
(11,031
)
 
(482,354
)
 
(50,087
)
Total
$
(6,503
)
 
$
59,783

 
$
(242,113
)
 
$
160,932

 
 
 
 
 
 
 
 
Weighted-average limited partner units outstanding
72,383,578

 
64,612,423

 
71,302,538

 
64,611,181

 
 
 
 
 
 
 
 
Net (loss) income per unit applicable to limited partners
$
(0.09
)
 
$
0.92

 
$
(3.40
)
 
$
2.49



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


13. STATEMENTS OF CASH FLOWS
Changes in current assets and current liabilities were as follows:
 
Nine Months Ended September 30,
 
2012
 
2011
 
(Thousands of Dollars)
Decrease (increase) in current assets:
 
 
 
Accounts receivable
$
95,213

 
$
(148,814
)
Receivable from related party
(3,149
)
 

Inventories
60,878

 
(176,936
)
Income tax receivable
3,190

 

Other current assets
(17,571
)
 
(25,838
)
Increase (decrease) in current liabilities:
 
 
 
Accounts payable
(11,854
)
 
153,626

Payable to related party
6,976

 
2,023

Accrued interest payable
(5,867
)
 
(6,092
)
Accrued liabilities
(21,253
)
 
(21,471
)
Taxes other than income tax
2,662

 
5,607

Income tax payable
(475
)
 
1,468

Changes in current assets and current liabilities
$
108,750

 
$
(216,427
)
 
The above changes in current assets and current liabilities differ from changes between amounts reflected in the applicable balance sheets due to our deconsolidation of the Asphalt Operations in connection with the Asphalt Sale and the effect of foreign currency translation.

Cash flows related to interest and income taxes were as follows:
 
Nine Months Ended September 30,
 
2012
 
2011
 
(Thousands of Dollars)
Cash paid for interest, net of amount capitalized
$
85,583

 
$
87,576

Cash paid for income taxes, net of tax refunds received
$
18,308

 
$
11,974



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


14. INCOME TAXES

The tax effects of significant temporary differences representing deferred income tax assets and liabilities were as follows:
 
September 30,
2012
 
December 31, 2011
 
(Thousands of Dollars)
Deferred income tax assets:
 
 
 
Net operating losses
$
24,552

 
$
17,089

Environmental and legal reserves
216

 
14,822

Capital loss
1,712

 
1,044

Valuation allowance
(71
)
 
(1,161
)
Total deferred income tax assets
26,409

 
31,794

 
 
 
 
Deferred income tax liabilities:
 
 
 
Property, plant and equipment
(54,184
)
 
(57,392
)
Other
(996
)
 
(698
)
Total deferred income tax liabilities
(55,180
)
 
(58,090
)
 
 
 
 
Net deferred income tax liability
$
(28,771
)
 
$
(26,296
)
 
 
 
 
Reported on the Consolidated Balance Sheets as:
 
 
 
Deferred income tax asset
$
2,080

 
$
9,141

Deferred income tax liability
(30,851
)
 
(35,437
)
Net deferred income tax liability
$
(28,771
)
 
$
(26,296
)

Grace Energy Corporation Matter
In connection with the settlement of the Grace Energy Corporation matter, we recognized a pre-tax gain of $28.7 million within one of our taxable subsidiaries. As a result, we recorded related income tax expense of $10.1 million, resulting from the reduction of the related deferred income tax asset. See Note 6. Commitments and Contingencies for a discussion on the Grace Energy Corporation matter.
 
Canadian Income Tax Audit
During the second quarter of 2012, we recorded $1.0 million of additional income tax liability and $2.2 million of interest and penalties associated with an ongoing Canadian income tax audit for the years 2006 through 2011. We also recorded $1.3 million of Canadian withholding tax and $0.7 million of interest and penalties associated with the withholding tax liability related to interest payments made from our Canadian subsidiaries to a United States entity from 2003 to 2009. We believe that adequate provisions for uncertainties related to the Canadian audits have been reflected in the financial statements.

15. 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 petroleum refining and 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.

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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 September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
 
(Thousands of Dollars)
Revenues:
 
 
 
 
 
 
 
Storage:
 
 
 
 
 
 
 
Third parties
$
128,538

 
$
128,561

 
$
389,412

 
$
381,460

Intersegment
19,679

 
13,042

 
55,542

 
35,925

Related party
713

 
286

 
2,198

 
823

Total storage
148,930

 
141,889

 
447,152

 
418,208

Transportation:
 
 
 
 
 
 
 
Third parties
92,570

 
81,834

 
244,938

 
226,406

Intersegment
1,160

 
65

 
2,171

 
65

Total transportation
93,730

 
81,899

 
247,109

 
226,471

Asphalt and fuels marketing:
 
 
 
 
 
 
 
Third parties
1,522,945

 
1,613,669

 
4,745,815

 
4,039,461

Intersegment
99

 
5,024

 
406

 
9,618

Total asphalt and fuels marketing
1,523,044

 
1,618,693

 
4,746,221

 
4,049,079

Consolidation and intersegment eliminations
(20,938
)
 
(18,131
)
 
(58,119
)
 
(45,608
)
Total revenues
$
1,744,766

 
$
1,824,350

 
$
5,382,363