Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended June 30, 2010

OR

 

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

For the transition period from              to             

Commission File Number 1-16417

 

 

LOGO

NUSTAR ENERGY L.P.

(Exact name of registrant as specified in its charter)

 

 

 

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

2330 North Loop 1604 West

San Antonio, Texas

(Address of principal executive offices)

78248

(Zip Code)

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

 

 

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

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

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

 

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

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

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

 

 

 


Table of Contents

NUSTAR ENERGY L.P. AND SUBSIDIARIES

FORM 10-Q

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION

Item 1.

   Financial Statements:   
   Consolidated Balance Sheets as of June 30, 2010 and December 31, 2009    3
   Consolidated Statements of Income for the Three and Six Months Ended June 30, 2010 and 2009    4
   Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2010 and 2009    5
   Condensed Notes to Consolidated Financial Statements    6

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    28

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk    43

Item 4.

   Controls and Procedures    47

PART II – OTHER INFORMATION

  

Item 1.

   Legal Proceedings    48

Item 6.

   Exhibits    49

SIGNATURES

   53

 

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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,     December 31,  
     2010     2009  
     (Unaudited)        
Assets     

Current assets:

    

Cash and cash equivalents

   $ 34,554      $ 62,006   

Accounts receivable, net of allowance for doubtful accounts of $1,338 and $1,351 as of June 30, 2010 and December 31, 2009, respectively

     283,969        211,797   

Inventories

     577,905        387,794   

Other current assets

     45,348        73,122   
                

Total current assets

     941,776        734,719   
                

Property, plant and equipment, at cost

     3,849,441        3,721,904   

Accumulated depreciation and amortization

     (760,298     (693,708
                

Property, plant and equipment, net

     3,089,143        3,028,196   

Intangible assets, net

     49,131        44,127   

Goodwill

     812,172        807,742   

Investment in joint venture

     68,795        68,728   

Deferred income tax asset

     8,626        13,893   

Other long-term assets, net

     81,023        77,268   
                

Total assets

   $ 5,050,666      $ 4,774,673   
                
Liabilities and Partners’ Equity     

Current liabilities:

    

Current portion of long-term debt

   $ 770      $ 770   

Accounts payable

     294,194        205,605   

Payable to related party

     24,298        10,639   

Notes payable

     0        20,000   

Accrued interest payable

     21,551        21,529   

Accrued liabilities

     32,886        64,651   

Taxes other than income tax

     12,307        15,534   

Income tax payable

     1,887        26   
                

Total current liabilities

     387,893        338,754   
                

Long-term debt, less current portion

     1,845,506        1,828,993   

Long-term payable to related party

     8,975        7,663   

Deferred income tax liability

     28,485        26,909   

Other long-term liabilities

     84,899        87,386   

Commitments and contingencies (Note 5)

    

Partners’ equity:

    

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

     2,636,632        2,423,689   

General partner

     58,242        53,469   

Accumulated other comprehensive income

     34        7,810   
                

Total partners’ equity

     2,694,908        2,484,968   
                

Total liabilities and partners’ equity

   $ 5,050,666      $ 4,774,673   
                

See Condensed Notes to Consolidated Financial Statements.

 

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NUSTAR ENERGY L.P. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

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

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2010     2009     2010     2009  

Revenues:

        

Service revenues

   $ 195,087      $ 176,042      $ 384,382      $ 358,694   

Product sales

     929,854        811,800        1,686,088        1,263,152   
                                

Total revenues

     1,124,941        987,842        2,070,470        1,621,846   

Costs and expenses:

        

Cost of product sales

     842,588        731,861        1,561,809        1,148,656   

Operating expenses:

        

Third parties

     85,868        79,370        173,361        151,932   

Related party

     34,075        31,135        67,919        61,895   
                                

Total operating expenses

     119,943        110,505        241,280        213,827   

General and administrative expenses:

        

Third parties

     8,875        9,826        18,906        17,422   

Related party

     13,320        16,026        30,558        30,894   
                                

Total general and administrative expenses

     22,195        25,852        49,464        48,316   

Depreciation and amortization expense

     38,185        35,548        76,114        71,537   
                                

Total costs and expenses

     1,022,911        903,766        1,928,667        1,482,336   
                                

Operating income

     102,030        84,076        141,803        139,510   

Equity in earnings of joint venture

     2,102        3,011        5,117        5,324   

Interest expense, net

     (18,890     (20,265     (37,476     (40,735

Other income, net

     14,816        19,240        15,117        27,844   
                                

Income before income tax expense

     100,058        86,062        124,561        131,943   

Income tax expense

     636        2,327        5,436        8,853   
                                

Net income

   $ 99,422      $ 83,735      $ 119,125      $ 123,090   
                                

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

   $ 1.43      $ 1.38      $ 1.64      $ 1.96   
                                

Weighted average limited partner units outstanding

     62,289,670        54,460,549        61,255,853        54,460,549   
                                

See Condensed Notes to Consolidated Financial Statements.

 

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NUSTAR ENERGY L.P. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, Thousands of Dollars)

 

     Six Months Ended June 30,  
     2010     2009  

Cash Flows from Operating Activities:

    

Net income

   $ 119,125      $ 123,090   

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

    

Depreciation and amortization expense

     76,114        71,537   

Amortization of debt related items

     (3,868     (3,461

Loss (gain) on sale or disposition of assets

     688        (21,050

Deferred income tax (benefit) expense

     (2,301     1,065   

Equity in earnings of joint venture

     (5,117     (5,324

Distributions of equity in earnings of joint venture

     5,050        4,000   

Changes in current assets and current liabilities (Note 12)

     (175,515     (239,137

Other, net

     (523     642   
                

Net cash provided by (used in) operating activities

     13,653        (68,638
                

Cash Flows from Investing Activities:

    

Reliability capital expenditures

     (21,262     (16,491

Strategic capital expenditures

     (96,423     (52,516

Acquisition

     (43,026     0   

Proceeds from sale or disposition of assets

     157        29,151   

Proceeds from insurance claims

     13,500        10,162   

Investment in other long-term assets

     (3,224     0   
                

Net cash used in investing activities

     (150,278     (29,694
                

Cash Flows from Financing Activities:

    

Proceeds from long-term debt borrowings

     671,355        588,189   

Proceeds from short-term debt borrowings

     175,791        189,600   

Long-term debt repayments

     (636,633     (340,922

Short-term debt repayments

     (195,791     (191,720

Proceeds from issuance of common units, net of issuance costs

     240,297        0   

Contributions from general partner

     5,078        0   

Distributions to unitholders and general partner

     (146,784     (131,676

Decrease in cash book overdrafts

     (5,511     (8,508
                

Net cash provided by financing activities

     107,802        104,963   
                

Effect of foreign exchange rate changes on cash

     1,371        2,719   
                

Net (decrease) increase in cash and cash equivalents

     (27,452     9,350   

Cash and cash equivalents as of the beginning of the period

     62,006        45,375   
                

Cash and cash equivalents as of the end of the period

   $ 34,554      $ 54,725   
                

See Condensed Notes to Consolidated Financial Statements.

 

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NUSTAR ENERGY L.P. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND BASIS OF PRESENTATION

Organization

NuStar Energy L.P. (NuStar Energy) (NYSE: NS) is engaged in the terminalling and storage of petroleum products, the transportation of petroleum products and anhydrous ammonia, and asphalt and fuels marketing. Unless otherwise indicated, the terms “NuStar Energy,” “the Partnership,” “we,” “our” and “us” are used in this report to refer to NuStar Energy L.P., to one or more of our consolidated subsidiaries or to all of them taken as a whole. NuStar GP Holdings, LLC (NuStar GP Holdings) (NYSE: NSH) wholly owns our general partner, Riverwalk Logistics, L.P., and owns a 17.5% total interest in us as of June 30, 2010.

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

Basis of Presentation

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

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

Reclassifications

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

Acquisition

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

2. NEW ACCOUNTING PRONOUNCEMENTS

Fair Value Measurements

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

 

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NUSTAR ENERGY L.P. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

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

3. INVENTORIES

Inventories consisted of the following:

 

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

Crude oil

   $ 140,158    $ 74,250

Finished products

     427,586      302,980

Materials and supplies

     10,161      10,564
             

Total

   $ 577,905    $ 387,794
             

4. DEBT

Revolving Credit Agreement

During the six months ended June 30, 2010, we borrowed an aggregate $671.4 million under our $1.2 billion five-year revolving credit agreement (the 2007 Revolving Credit Agreement) to fund a portion of our capital expenditures and working capital requirements. Additionally, we repaid $636.6 million during the six months ended June 30, 2010. The 2007 Revolving Credit Agreement bears interest based on either an alternative base rate or a LIBOR based rate, which was 0.9% as of June 30, 2010. We had $606.1 million available for borrowing under the 2007 Revolving Credit Agreement as of June 30, 2010. Due to a covenant in our 2007 Revolving Credit Agreement that requires us to maintain, as of the end of each four consecutive fiscal quarters, a consolidated debt coverage ratio not to exceed 5.00-to-1.00, we may not be able to borrow the maximum available amount. As of June 30, 2010, the consolidated debt coverage ratio was 4.5x.

Lines of Credit

As of June 30, 2010, we had one short-term line of credit with an uncommitted borrowing capacity of up to $20.0 million. We had no outstanding borrowings on this line of credit as of June 30, 2010. During the six months ended June 30, 2010, we borrowed $175.8 million and repaid $195.8 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, 2010, we have accrued $0.3 million related to settled matters and $73.3 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

 

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

court to the Texas Court of Appeals in Dallas. In 2001, Grace Energy filed a petition in bankruptcy, which created an automatic stay of actions against Grace Energy. In September 2008, Grace Energy filed its Joint Plan of Reorganization and Disclosure Statement.

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

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

Department of Justice Matter. In February 2008, the DOJ advised us that the U.S. Environmental Protection Agency has requested that the DOJ initiate a lawsuit against NuPOP for (a) failing to prepare adequate Facility Response Plans, as required by Section 311(j)(5) of the Clean Water Act, 33 U.S.C. §1321(j), for certain of our pipeline terminals located in Region VII, by August 30, 1994, and (b) maintaining Spill Prevention, Control and Countermeasure Plans (SPCC) Plans at the terminal that deviate from the SPCC regulations, 40 C.F.R. §112.3. A Facility Response Plan is a plan for responding to a worst case discharge, and to a substantial threat of such a discharge, of oil or hazardous substances. The SPCC rule requires specific facilities to prepare, amend and implement plans to prevent, prepare and respond to oil discharges to navigable waters and adjoining shorelines. We cooperated fully with the DOJ’s investigation, and all required Facility Response Plans are now in place. On March 18, 2010, the DOJ filed a consent decree in the U.S. District Court for the District of Nebraska. Pursuant to the terms of the consent decree, we agreed to pay a penalty of $450,000 and implement a supplemental environmental project to install and operate tank monitoring and alarm systems at several of our facilities. The consent decree was entered by the court in late April 2010. Our payment was made in late May 2010.

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

Commitments

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

 

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NUSTAR ENERGY L.P. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

6. FAIR VALUE MEASUREMENTS

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

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

 

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

Other current assets:

          

Product imbalances

   $ 811      $ 0    $ 0    $ 811   

Commodity derivatives

     7,558        0      0      7,558   

Other long-term assets, net:

          

Interest rate swaps

     0        11,747      0      11,747   

Accrued liabilities:

          

Product imbalances

     (482     0      0      (482
                              

Total

   $ 7,887      $ 11,747    $ 0    $ 19,634   
                              
     December 31, 2009  
     Level 1     Level 2    Level 3    Total  
     (Thousands of Dollars)   

Other current assets:

          

Product imbalances

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

Other long-term assets, net:

          

Interest rate swaps

     0        8,623      0      8,623   

Accrued liabilities:

          

Commodity derivatives

     (30,788     0      0      (30,788

Product imbalances

     (676     0      0      (676
                              

Total

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

Product Imbalances

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

Interest Rate Swaps

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

Commodity Derivatives

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

 

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

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,    December 31,
     2010      2009
     (Thousands of Dollars)

Fair value

   $ 1,907,760    $ 1,877,373

Carrying amount

   $ 1,846,276    $ 1,849,763

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

7. DERIVATIVES, FINANCIAL INSTRUMENTS AND RISK MANAGEMENT ACTIVITIES

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

Interest Rate Swaps

We are a party to certain interest rate swap agreements for the purpose of hedging the interest rate risk associated with a portion of our fixed-rate senior notes. The interest rate swap contracts have an aggregate notional amount of $167.5 million. We account for the interest rate swaps as fair value hedges and recognize the fair value of each interest rate swap in the consolidated balance sheet as either an asset or liability. The interest rate swap contracts qualify for the shortcut method of accounting. As a result, changes in the fair value of the derivatives will completely offset the changes in the fair value of the underlying hedged debt. As of June 30, 2010, the weighted-average interest rate for our interest rate swaps was 2.4%.

Commodity Price Risk

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

The volume of commodity contracts is based on open derivative positions and represents the combined volume of our long and short positions on an absolute basis, which totaled 6.2 million barrels and 11.8 million barrels as of June 30, 2010 and December 31, 2009, respectively.

 

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NUSTAR ENERGY L.P. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

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

 

     Balance Sheet Location    Asset Derivatives    Liability Derivatives  
        June 30,
2010
   December 31,
2009
   June 30,
2010
    December 31,
2009
 
          (Thousands of Dollars)  

Derivatives Designated as Hedging Instruments:

             

Interest rate swaps

   Other long-term

assets, net

   $ 11,747    $ 8,623    $ 0      $ 0   

Commodity contracts

   Other current assets      6,829      0      (31     0   

Commodity contracts

   Accrued liabilities      0      3,797      0        (14,279
                                 

Total

        18,576      12,420      (31     (14,279
                                 

Derivatives Not Designated as Hedging Instruments:

             

Commodity contracts

   Other current assets      2,052      0      (1,292     0   

Commodity contracts

   Accrued liabilities      0      9,766      0        (30,072
                                 

Total

        2,052      9,766      (1,292     (30,072
                                 

Total Derivatives

      $ 20,628    $ 22,186    $ (1,323   $ (44,351
                                 

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

 

Derivatives Designated as Fair Value Hedging Instruments

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

Three months ended June 30, 2010:

         

Interest rate swaps

   Interest expense, net    $ 1,890      $ (1,890   $ 0

Commodity contracts

   Cost of product sales      13,061        (12,002     1,059
                         

Total

      $ 14,951      $ (13,892   $ 1,059
                         

Three months ended June 30, 2009:

         

Interest rate swaps

   Interest expense, net    $ (4,696   $ 4,696      $ 0

Commodity contracts

   Cost of product sales      (13,418     14,799        1,381
                         

Total

      $ (18,114   $ 19,495      $ 1,381
                         

Six months ended June 30, 2010:

         

Interest rate swaps

   Interest expense, net    $ 3,124      $ (3,124   $ 0

Commodity contracts

   Cost of product sales      11,734        (8,915     2,819
                         

Total

      $ 14,858      $ (12,039   $ 2,819
                         

Six months ended June 30, 2009:

         

Interest rate swaps

   Interest expense, net    $ (6,111   $ 6,111      $ 0

Commodity contracts

   Cost of product sales      (14,683     17,242        2,559
                         

Total

      $ (20,794   $ 23,353      $ 2,559
                         

 

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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, 2010:

       

Commodity contracts

   $ 1,119    Cost of product sales    $ (498   $ 284

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 Fair Value Hedging Instruments

  

Income Statement
Location

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

Three months ended June 30, 2010:

     

Commodity contracts

   Cost of product sales    $ 5,632   

Commodity contracts

   Operating expenses      0   
           

Total

      $ 5,632   
           

Three months ended June 30, 2009:

     

Commodity contracts

   Cost of product sales    $ (11,024

Commodity contracts

   Operating expenses      (2,783
           

Total

      $ (13,807
           

Six months ended June 30, 2010:

     

Commodity contracts

   Cost of product sales    $ 6,698   

Commodity contracts

   Operating expenses      (10
           

Total

      $ 6,688   
           

Six months ended June 30, 2009:

     

Commodity contracts

   Cost of product sales    $ (10,915

Commodity contracts

   Operating expenses      (3,564
           

Total

      $ (14,479
           

For derivatives designated as cash flow hedging instruments, once a hedged transaction occurs, we reclassify the effective portion from “Accumulated other comprehensive income” to “Cost of product sales.” As of June 30, 2010, we had a credit balance of $0.9 million in “Accumulated other comprehensive income,” all of which should be reclassified to “Cost of product sales” 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 under twelve months. We had no cash flow hedging instruments during the six months ended June 30, 2009.

 

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NUSTAR ENERGY L.P. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

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. All 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 $24.3 million and $10.6 million, as of June 30, 2010 and December 31, 2009, 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 June 30, 2010 and December 31, 2009 of $9.0 million and $7.7 million, respectively, related to amounts payable for retiree medical benefits and other post-employment benefits.

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

 

     Three Months Ended June 30,    Six Months Ended June 30,
     2010    2009    2010    2009
     (Thousands of Dollars)

Operating expenses

   $ 34,075    $ 31,135    $ 67,919    $ 61,895

General and administrative expenses

     13,320      16,026      30,558      30,894

9. OTHER INCOME

Other income consisted of the following:

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2010     2009     2010     2009  
     (Thousands of Dollars)  

Gain from insurance proceeds

   $ 13,500      $ 1,670      $ 13,500      $ 8,895   

(Loss) gain from sale or disposition of assets

     (793     21,022        (688     21,050   

Foreign exchange gains (losses)

     382        (3,666     (234     (2,443

Other

     1,727        214        2,539        342   
                                

Other income, net

   $ 14,816      $ 19,240      $ 15,117      $ 27,844   
                                

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

10. PARTNERS’ EQUITY

Issuance of Common Units

On May 19, 2010, we issued 4,400,000 common units representing limited partner interests at a price of $56.55 per unit. We used the net proceeds from this offering of $245.4 million, including a contribution of $5.1 million from our general partner to maintain its 2% general partner interest, mainly to reduce outstanding borrowings under our 2007 Revolving Credit Agreement and for the acquisition of Asphalt Holdings, Inc.

 

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NUSTAR ENERGY L.P. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Allocations of Net Income

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

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

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2010     2009     2010     2009  
     (Thousands of Dollars)  

Net income applicable to general partner and limited partners’ interest

   $ 99,422      $ 83,735      $ 119,125      $ 123,090   

Less general partner incentive distribution

     8,369        6,929        16,168        13,858   
                                

Net income after general partner incentive distribution

     91,053        76,806        102,957        109,232   

General partner interest

     2     2     2     2
                                

General partner allocation of net income after general partner incentive distribution

     1,821        1,536        2,059        2,185   

General partner incentive distribution

     8,369        6,929        16,168        13,858   
                                

Net income applicable to general partner

   $ 10,190      $ 8,465      $ 18,227      $ 16,043   
                                

Cash Distributions

In April 2010, we declared a quarterly cash distribution of $1.065 per unit that was paid on May 14, 2010 to unitholders of record on May 7, 2010. This distribution related to the first quarter of 2010 and totaled $73.4 million. On August 2, 2010, we announced a quarterly cash distribution of $1.065 per unit related to the second quarter of 2010. This distribution will be paid on August 13, 2010 to unitholders of record on August 6, 2010 and will total $78.8 million.

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,
     2010    2009    2010    2009
     (Thousands of Dollars, Except Per Unit Data)

General partner interest

   $ 1,576    $ 1,318    $ 3,043    $ 2,636

General partner incentive distribution

     8,369      6,929      16,168      13,858
                           

Total general partner distribution

     9,945      8,247      19,211      16,494

Limited partners’ distribution

     68,809      57,591      132,935      115,182
                           

Total cash distributions

   $ 78,754    $ 65,838    $ 152,146    $ 131,676
                           

Cash distributions per unit applicable to limited partners

   $ 1.0650    $ 1.0575    $ 2.1300    $ 2.1150
                           

 

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NUSTAR ENERGY L.P. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Comprehensive Income

Our total comprehensive income was as follows:

 

     Three Months Ended June 30,    Six Months Ended June 30,
     2010     2009    2010     2009
     (Thousands of Dollars)

Net income

   $ 99,422      $ 83,735    $ 119,125      $ 123,090

Foreign currency translation adjustment

     (8,519     17,053      (8,928     11,053

Unrealized gain on cash flow hedges

     1,617        0      1,152        0
                             

Comprehensive income

   $ 92,520      $ 100,788    $ 111,349      $ 134,143
                             

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,  
     2010    2009    2010     2009  
     (Thousands of Dollars, Except Per Unit Data)  

Net income

   $ 99,422    $ 83,735    $ 119,125      $ 123,090   

Less general partner distribution, including IDRs

     9,945      8,247      19,211        16,494   

Less limited partner distribution

     68,809      57,591      132,935        115,182   
                              

Distributions less than (greater than) earnings

   $ 20,668    $ 17,897    $ (33,021   $ (8,586
                              

General partner earnings:

          

Distributions

   $ 9,945    $ 8,247    $ 19,211      $ 16,494   

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

     413      358      (661     (172
                              

Total

   $ 10,358    $ 8,605    $ 18,550      $ 16,322   
                              

Limited partner earnings:

          

Distributions

   $ 68,809    $ 57,591    $ 132,935      $ 115,182   

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

     20,255      17,539      (32,360     (8,414
                              

Total

   $ 89,064    $ 75,130    $ 100,575      $ 106,768   
                              

Weighted average limited partner units outstanding

     62,289,670      54,460,549      61,255,853        54,460,549   

Net income per unit applicable to limited partners

   $ 1.43    $ 1.38    $ 1.64      $ 1.96   

 

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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,  
     2010     2009  
     (Thousands of Dollars)   

Decrease (increase) in current assets:

    

Accounts receivable

   $ (73,261   $ (99,253

Inventories

     (190,579     (261,873

Other current assets

     27,248        (38,677

Increase (decrease) in current liabilities:

    

Accounts payable

     94,389        147,223   

Payable to related party

     13,815        1,580   

Accrued interest payable

     27        (295

Accrued liabilities

     (45,362     13,485   

Taxes other than income tax

     (3,189     3,335   

Income tax payable

     1,397        (4,662
                

Changes in current assets and current liabilities

   $ (175,515   $ (239,137
                

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

 

     Six Months Ended June 30,
     2010    2009
     (Thousands of Dollars)

Cash paid for interest, net of amount capitalized

   $ 44,775    $ 46,816

Cash paid for income taxes, net of tax refunds received

   $ 8,614    $ 12,105

13. INCOME TAXES

During the three and six months ended June 30, 2010, we received $13.5 million of proceeds resulting from insurance claims related to damage caused by Hurricane Ike primarily at our Texas City, Texas terminal in the third quarter of 2008, resulting in tax expense of approximately $4.7 million. Additionally, our corporate subsidiary that received the insurance proceeds was part of the federal consolidated group that was the acquirer of Asphalt Holdings, Inc, a corporation and therefore subject to income tax. The acquisition of Asphalt Holdings, Inc. included approximately $9.8 million of deferred tax liabilities related to temporary differences primarily related to property, plant and equipment. The receipt of the insurance proceeds and the acquisition of Asphalt Holdings, Inc. caused us to reevaluate the valuation allowance recorded related to certain net operating loss carryforwards previously expected to expire unused. We concluded that the income generated from the insurance proceeds, the deferred tax liability associated with Asphalt Holdings, Inc. and other tax planning strategies increased the likelihood of utilizing the net operating loss carryforwards, and we reduced the valuation allowance by $8.6 million.

 

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NUSTAR ENERGY L.P. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

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

 

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

U.S.:

    

Net operating losses

   $ 16,721      $ 20,788   

Environmental and legal reserves

     14,289        14,234   

Other

     1,459        1,525   

Valuation allowance

     (875     (9,457
                

Deferred tax assets – U. S.

     31,594        27,090   
                

Property, plant and equipment

     (22,968     (13,197
                

Net deferred income tax asset – U.S.

   $ 8,626      $ 13,893   
                

Foreign:

    

Net operating losses

   $ 4,001      $ 3,253   

Other

     0        687   

Capital loss

     1,036        2,166   

Valuation allowance

     (1,814     0   
                

Deferred tax assets – foreign

     3,223        6,106   
                

Property, plant and equipment

     (31,450     (33,015

Other

     (258     0   
                

Deferred tax liabilities – foreign

     (31,708     (33,015
                

Net deferred income tax liability – foreign

   $ (28,485   $ (26,909
                

14. SEGMENT INFORMATION

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

 

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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,  
     2010     2009     2010     2009  
     (Thousands of Dollars)  

Revenues:

        

Storage:

        

Third party revenues

   $ 118,131      $ 107,616      $ 232,544      $ 216,123   

Intersegment revenues

     10,678        9,697        22,897        18,992   
                                

Total storage

     128,809        117,313        255,441        235,115   

Transportation:

        

Third party revenues

     76,956        68,426        151,838        142,571   

Intersegment revenues

     2        318        382        565   
                                

Total transportation

     76,958        68,744        152,220        143,136   

Asphalt and fuels marketing:

        

Third party revenues

     929,854        811,800        1,686,088        1,263,152   

Intersegment revenues

     136        —          2,832        —     
                                

Total asphalt and fuels marketing

     929,990        811,800        1,688,920        1,263,152   

Consolidation and intersegment eliminations

     (10,816     (10,015     (26,111     (19,557
                                

Total revenues

   $ 1,124,941      $ 987,842      $ 2,070,470      $ 1,621,846   
                                

Operating income:

        

Storage

   $ 42,865      $ 40,397      $ 85,753      $ 87,049   

Transportation

     34,735        28,440        68,492        64,969   

Asphalt and fuels marketing

     47,552        41,676        39,656        37,188   

Consolidation and intersegment eliminations eliminations

     514        497        277        828   
                                

Total segment operating income

     125,666        111,010        194,178        190,034   

Less general and administrative expenses

     22,195        25,852        49,464        48,316   

Less other depreciation and amortization

     1,441        1,082        2,911        2,208   
                                

Total operating income

   $ 102,030      $ 84,076      $ 141,803      $ 139,510   
                                

Total assets by reportable segment were as follows:

 

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

Storage

   $ 2,329,533    $ 2,234,651

Transportation

     1,263,843      1,286,533

Asphalt and fuels marketing

     1,333,523      1,121,448
             

Total segment assets

     4,926,899      4,642,632

Other partnership assets assets

     123,767      132,041
             

Total consolidated assets

   $ 5,050,666    $ 4,774,673
             

 

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NUSTAR ENERGY L.P. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

15. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

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

Condensed Consolidating Balance Sheets

June 30, 2010

(Thousands of Dollars)

 

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

Assets

                

Cash and cash equivalents

   $ 53    $ 3    $ 0    $ 34,498    $ 0      $ 34,554

Receivables, net

     0      22,790      7,640      253,539      0        283,969

Inventories

     0      1,706      1,492      574,722      (15     577,905

Other current assets

     0      13,518      1,098      30,732      0        45,348

Intercompany receivable

     0      941,930      717,379      0      (1,659,309     0
                                          

Current assets

     53      979,947      727,609      893,491      (1,659,324     941,776
                                          

Property, plant and equipment, net

     0      968,464      618,494      1,502,185      0        3,089,143

Intangible assets, net

     0      2,177      0      46,954      0        49,131

Goodwill

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

Investment in wholly owned subsidiaries

     3,205,590      132,756      941,312      2,027,023      (6,306,681     0

Investment in joint venture

     0      0      0      68,795      0        68,795

Deferred income tax asset

     0      0      0      8,626      0        8,626

Other long-term assets, net

     0      23,168      26,329      31,526      0        81,023
                                          

Total assets

   $ 3,205,643    $ 2,124,606    $ 2,484,396    $ 5,202,026    $ (7,966,005   $ 5,050,666
                                          

Liabilities and Partners’ Equity

                

Current portion of long-term debt

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

Payables

     0      34,470      6,196      277,826      0        318,492

Accrued interest payable

     0      13,030      8,490      31      0        21,551

Accrued liabilities

     696      10,781      3,728      17,681      0        32,886

Taxes other than income tax

     0      3,285      2,710      6,312      0        12,307

Income tax payable

     0      563      0      1,324      0        1,887

Intercompany payable

     510,073      0      0      1,149,236      (1,659,309     0
                                          

Current liabilities

     510,769      62,899      21,124      1,452,410      (1,659,309     387,893
                                          

Long-term debt, less current portion

     0      1,295,192      518,913      31,401      0        1,845,506

Long-term payable to related party

     0      2,426      0      6,549      0        8,975

Deferred tax liability

     0      0      0      28,485      0        28,485

Other long-term liabilities

     0      3,637      251      81,011      0        84,899

Total partners’ equity

     2,694,874      760,452      1,944,108      3,602,170      (6,306,696     2,694,908
                                          

Total liabilities and partners’ equity

   $ 3,205,643    $ 2,124,606    $ 2,484,396    $ 5,202,026    $ (7,966,005   $ 5,050,666
                                          

 

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

 

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Table of Contents

NUSTAR ENERGY L.P. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Condensed Consolidating Balance Sheet

December 31, 2009

(Thousands of Dollars)

 

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

Assets

               

Cash and cash equivalents

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

Receivables, net

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

Inventories

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

Other current assets

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

Intercompany receivable

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

Current assets

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

Property, plant and equipment, net

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

Intangible assets, net

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

Goodwill

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

Investment in wholly owned subsidiaries

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

Investment in joint venture

     0      0      0      68,728        0        68,728

Deferred income tax asset

     0      0      0      13,893        0        13,893

Other long-term assets, net

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

Total assets

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

Liabilities and Partners’ Equity

               

Current portion of long-term debt

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

Payables

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

Notes payable

     0      20,000      0      0        0        20,000

Accrued interest payable

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

Accrued liabilities

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

Taxes other than income tax

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

Income tax payable

     0      1,271      0      (1,245     0        26

Intercompany payable

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

Current liabilities

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

Long-term debt, less current portion

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

Long-term payable to related party

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

Deferred tax liability

     0      0      0      26,909        0        26,909

Other long-term liabilities

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

Total partners’ equity

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

Total liabilities and partners’ equity

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

 

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

 

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Table of Contents

NUSTAR ENERGY L.P. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Condensed Consolidating Statements of Income

For the Three Months Ended June 30, 2010

(Thousands of Dollars)

 

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

Revenues

   $ 0      $ 73,994      $ 37,496      $ 1,052,482      $ (39,031   $ 1,124,941   

Costs and expenses

     226        44,206        28,547        991,370        (41,438     1,022,911   
                                                

Operating (loss) income

     (226     29,788        8,949        61,112        2,407        102,030   

Equity in earnings of subsidiaries

     99,648        33,490        43,103        57,400        (233,641     0   

Equity in earnings of joint venture

     0        0        0        2,102        0        2,102   

Interest expense, net

     0        (12,407     (5,921     (562     0        (18,890

Other income, net

     0        664        247        13,905        0        14,816   
                                                

Income before income tax expense

     99,422        51,535        46,378        133,957        (231,234     100,058   

Income tax expense

     0        333        0        303        0        636   
                                                

Net income

   $ 99,422      $ 51,202      $ 46,378      $ 133,654      $ (231,234   $ 99,422   
                                                

 

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

 

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Table of Contents

NUSTAR ENERGY L.P. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Condensed Consolidating Statements of Income

For the Three Months Ended June 30, 2009

(Thousands of Dollars)

 

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

Revenues

   $ 0      $ 68,049      $ 35,785      $ 887,708      $ (3,700   $ 987,842   

Costs and expenses

     552        46,102        27,015        834,166        (4,069     903,766   
                                                

Operating (loss) income

     (552     21,947        8,770        53,542        369        84,076   

Equity in earnings of subsidiaries

     84,287        33,171        18,442        28,420        (164,320     0   

Equity in earnings of joint venture

     0        0        0        3,011        0        3,011   

Interest expense, net

     0        (13,294     (6,043     (928     0        (20,265

Other income (expense), net

     0        21,193        103        (2,056     0        19,240   
                                                

Income before income tax expense

     83,735        63,017        21,272        81,989        (163,951     86,062   

Income tax expense

     0        220        0        2,107        0        2,327   
                                                

Net income

   $ 83,735      $ 62,797      $ 21,272      $ 79,882      $ (163,951   $ 83,735   
                                                

 

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

 

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NUSTAR ENERGY L.P. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Condensed Consolidating Statements of Income

For the Six Months Ended June 30, 2010

(Thousands of Dollars)

 

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

Revenues

   $ 0      $ 147,226      $ 72,860      $ 1,938,134      $ (87,750   $ 2,070,470   

Costs and expenses

     675        93,034        55,978        1,868,910        (89,930     1,928,667   
                                                

Operating (loss) income

     (675     54,192        16,882        69,224        2,180        141,803   

Equity in earnings of subsidiaries

     119,799        14,458        67,890        94,894        (297,041     0   

Equity in earnings of joint venture

     0        0        0        5,117        0        5,117   

Interest income (expense), net

     1        (24,414     (11,844     (1,219     0        (37,476

Other income, net

     0        1,239        259        13,619        0        15,117   
                                                

Income before income tax expense

     119,125        45,475        73,187        181,635        (294,861     124,561   
                  

Income tax expense

     0        726        0        4,710        0        5,436   
                                                

Net income

   $ 119,125      $ 44,749      $ 73,187      $ 176,925      $ (294,861   $ 119,125   
                                                

 

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

 

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Table of Contents

NUSTAR ENERGY L.P. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Condensed Consolidating Statements of Income

For the Six Months Ended June 30, 2009

(Thousands of Dollars)

 

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

Revenues

   $ 0      $ 144,150      $ 67,895      $ 1,416,953      $ (7,152   $ 1,621,846   

Costs and expenses

     1,039        90,567        49,527        1,348,853        (7,650     1,482,336   
                                                

Operating (loss) income

     (1,039     53,583        18,368        68,100        498        139,510   

Equity in earnings of subsidiaries

     124,129        21,206        48,181        72,862        (266,378     0   

Equity in earnings of joint venture

     0        0        0        5,324        0        5,324   

Interest expense, net

     0        (26,581     (12,117     (2,037     0        (40,735

Other income, net

     0        21,425        106        6,313        0        27,844   
                                                

Income before income tax expense

     123,090        69,633        54,538        150,562        (265,880     131,943   
                  

Income tax expense

     0        440        0        8,413        0        8,853   
                                                

Net income

   $ 123,090      $ 69,193      $ 54,538      $ 142,149      $ (265,880   $ 123,090   
                                                

 

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

 

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NUSTAR ENERGY L.P. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Condensed Consolidating Statements of Cash Flows

For the Six Months Ended June 30, 2010

(Thousands of Dollars)

 

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

Net cash provided by (used in) operating activities

   $ 144,594      $ 84,332      $ 9,135      $ (77,609   $ (146,799   $ 13,653   
                                                

Cash flows from investing activities:

            

Capital expenditures

     0        (45,645     (5,146     (66,894     0        (117,685

Acquisition

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

Proceeds from sale of assets

     0        0        18        139        0        157   

Proceeds from insurance claims

     0        0        0        13,500        0        13,500   

Investment in other long-term assets

     0        0        0        (3,224     0        (3,224

Investment in subsidiaries

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

Net cash used in investing activities

     (245,604     (45,645     (5,128     (99,530     245,629        (150,278
                                                

Cash flows from financing activities:

            

Debt borrowings

     0        847,146        0        0        0        847,146   

Debt repayments

     0        (832,424     0        0        0        (832,424

Issuance of common units, net of issuance costs

     240,297        0        0        0        0        240,297   

General partner contribution

     5,078        0        0        0        0        5,078   

Partners’ contributions

     0        245,604        0        25        (245,629     0   

Distributions to unitholders and general partner

     (146,784     (146,784     0        (15     146,799        (146,784

Net intercompany borrowings (repayments)

     2,419        (136,145     (4,006     137,732        0        0   

Decrease in cash book overdrafts

     0        (3,962     (1     (1,548     0        (5,511
                                                

Net cash provided by (used in) financing activities

     101,010        (26,565     (4,007     136,194        (98,830     107,802   
                                                

Effect of foreign exchange rate changes on cash

     0        (13,721     0        15,092        0        1,371   

Net decrease in cash and cash equivalents

     0        (1,599     0        (25,853     0        (27,452

Cash and cash equivalents as of the beginning of the period

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

Cash and cash equivalents as of the end of the period

   $ 53      $ 3      $ 0      $ 34,498      $ 0      $ 34,554   
                                                

 

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

 

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NUSTAR ENERGY L.P. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Condensed Consolidating Statements of Cash Flows

For the Six Months Ended June 30, 2009

(Thousands of Dollars)

 

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

Net cash provided by (used in) operating activities

   $ 130,167      $ 40,262      $ 20,131      $ (127,509   $ (131,689   $ (68,638
                                                

Cash flows from investing activities:

            

Capital expenditures

     0        (15,698     (12,802     (40,507     0        (69,007

Proceeds from sale or disposition of assets

     0        29,090        35        26        0        29,151   

Proceeds from insurance claims

     0        0        0        10,162        0        10,162   
                                                

Net cash provided by (used in) investing activities

     0        13,392        (12,767     (30,319     0        (29,694
                                                

Cash flows from financing activities:

            

Debt borrowings

     0        777,789        0        0        0        777,789   

Debt repayments

     0        (532,642     0        0        0        (532,642

Distributions to unitholders and general partner

     (131,676     (131,676     0        (13     131,689        (131,676

Net intercompany borrowings (repayments)

     1,509        (159,266     (7,334     165,091        0        0   

Decrease in cash book overdrafts

     0        (8,082     0        (426     0        (8,508
                                                

Net cash (used in) provided by financing activities

     (130,167     (53,877     (7,334     164,652        131,689        104,963   
                                                

Effect of foreign exchange rate changes on cash

     0        225        0        2,494        0        2,719   

Net increase in cash and cash equivalents

     0        2        30        9,318        0        9,350   

Cash and cash equivalents as of the beginning of the period

     53        2        656        44,664        0        45,375   
                                                

Cash and cash equivalents as of the end of the period

   $ 53      $ 4      $ 686      $ 53,982      $ 0      $ 54,725   
                                                

 

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

 

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NUSTAR ENERGY L.P. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

16. SUBSEQUENT EVENTS

2010 Gulf Opportunity Zone Revenue Bonds

On July 15, 2010, the Parish of St. James, where our St. James, Louisiana, terminal is located, issued $100.0 million of Revenue Bonds (NuStar Logistics, L.P. Project) Series 2010 associated with our St. James terminal expansion pursuant to the Gulf Opportunity Zone Act of 2005. The bonds mature on July 1, 2040. The interest rate is based on a weekly tax-exempt bond market interest rate and is paid monthly. Following the issuance, the proceeds were deposited with a trustee and will be disbursed to us upon our request for reimbursement of expenditures related to our St. James terminal expansion. NuStar Logistics is solely obligated to service the principal and interest payments associated with the bonds. One of the lenders under our 2007 Revolving Credit Agreement issued a letter of credit in the amount of $101.3 million on our behalf to guarantee the payment of interest and principal on the bonds. This letter of credit ranks equally with existing senior unsecured indebtedness of NuStar Logistics.

 

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Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

FORWARD-LOOKING STATEMENTS

This Form 10-Q contains certain estimates, predictions, projections, assumptions and other forward-looking statements that involve various risks and uncertainties. While these forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect our current judgment regarding the direction of our business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested in this report. These forward-looking statements can generally be identified by the words “anticipates,” “believes,” “expects,” “plans,” “intends,” “estimates,” “forecasts,” “budgets,” “projects,” “will,” “could,” “should,” “may” and similar expressions. These statements reflect our current views with regard to future events and are subject to various risks, uncertainties and assumptions. Please read our Annual Report on Form 10-K for the year ended December 31, 2009, Part I, Item 1A “Risk Factors,” as well as our subsequent quarterly reports on Form 10-Q, for a discussion of certain of those risks, uncertainties and assumptions.

If one or more of these risks or uncertainties materialize, or if the underlying assumptions prove incorrect, our actual results may vary materially from those described in any forward-looking statement. Other unknown or unpredictable factors could also have material adverse effects on our future results. Readers are cautioned not to place undue reliance on this forward-looking information, which is as of the date of this Form 10-Q. We do not intend to update these statements unless it is required by the securities laws to do so, and we undertake no obligation to publicly release the result of any revisions to any such forward-looking statements that may be made to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.

OVERVIEW

NuStar Energy L.P. (NuStar Energy) is a publicly held Delaware limited partnership engaged in the terminalling and storage of petroleum products, the transportation of petroleum products and anhydrous ammonia, and asphalt and fuels marketing. Unless otherwise indicated, the terms “NuStar Energy,” “the Partnership,” “we,” “our” and “us” are used in this report to refer to NuStar Energy L.P., to one or more of our consolidated subsidiaries or to all of them taken as a whole. NuStar GP Holdings, LLC (NuStar GP Holdings) (NYSE: NSH) wholly owns our general partner, Riverwalk Logistics, L.P., and owns a 17.5% total interest in us as of June 30, 2010. Our Management’s Discussion and Analysis of Financial Condition and Results of Operations is presented in five sections:

 

   

Overview

 

   

Results of Operations

 

   

Outlook

 

   

Liquidity and Capital Resources

 

   

Critical Accounting Policies

Operations

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

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

Transportation. We own common carrier refined product pipelines in Texas, Oklahoma, Colorado, New Mexico, Kansas, Nebraska, Iowa, South Dakota, North Dakota and Minnesota covering approximately 5,605 miles, consisting of the Central West System, the East Pipeline and the North Pipeline. The East and North Pipelines also include 21 terminals providing storage capacity of 4.6 million barrels, and the East Pipeline includes two tank farms providing storage capacity of 1.2 million barrels. In addition, we own a 2,000 mile anhydrous ammonia pipeline located in Louisiana, Arkansas, Missouri, Illinois, Indiana, Iowa and Nebraska. We also own 812 miles of crude oil pipelines in

 

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Texas, Oklahoma, Kansas, Colorado and Illinois, as well as associated crude oil storage facilities providing storage capacity of 1.9 million barrels in Texas and Oklahoma that are located along the crude oil pipelines. We charge tariffs on a per barrel basis for transporting refined products, crude oil and other feedstocks in our refined product and crude oil pipelines and on a per ton basis for transporting anhydrous ammonia in our ammonia pipeline.

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

The following factors affect the results of our operations:

 

   

company-specific factors, such as integrity issues and maintenance requirements that impact the throughput rates of our assets;

 

   

seasonal factors that affect the demand for products transported by and/or stored in our assets and the demand for products we sell, particularly asphalt;

 

   

industry factors, such as changes in the prices of petroleum products, that affect demand and operations of our competitors;

 

   

factors such as commodity price volatility and market structure that impact our asphalt and fuels marketing segment; and

 

   

other factors, such as refinery utilization rates and maintenance turnaround schedules, that impact our refineries, as well as the operations of refineries served by our storage and transportation assets.

 

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RESULTS OF OPERATIONS

Three Months Ended June 30, 2010 Compared to Three Months Ended June 30, 2009

Financial Highlights

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

 

     Three Months Ended June 30,     Change  
     2010     2009    

Statement of Income Data:

      

Revenues:

      

Services revenues

   $ 195,087      $ 176,042      $ 19,045   

Product sales

     929,854        811,800        118,054   
                        

Total revenues

     1,124,941        987,842        137,099   
                        

Costs and expenses:

      

Cost of product sales

     842,588        731,861        110,727   

Operating expenses

     119,943        110,505        9,438   

General and administrative expenses

     22,195        25,852        (3,657

Depreciation and amortization expense

     38,185        35,548        2,637   
                        

Total costs and expenses

     1,022,911        903,766        119,145   
                        

Operating income

     102,030        84,076        17,954   

Equity earnings from joint ventures

     2,102        3,011        (909

Interest expense, net

     (18,890     (20,265     1,375   

Other income, net

     14,816        19,240        (4,424
                        

Income before income tax expense

     100,058        86,062        13,996   

Income tax expense

     636        2,327        (1,691
                        

Net income

   $ 99,422      $ 83,735      $ 15,687   
                        

Net income per unit applicable to limited partners

   $ 1.43      $ 1.38      $ 0.05   
                        

Weighted average limited partner units outstanding

     62,289,670        54,460,549        7,829,121   
                        

Highlights

Net income increased $15.7 million for the three months ended June 30, 2010, compared to the three months ended June 30, 2009, primarily due to an increase in segment operating income, partially offset by a decrease in other income. Segment operating income increased $14.7 million for the three months ended June 30, 2010, compared to the three months ended June 30, 2009, due to increased operating income from all of our segments, especially our transportation and asphalt and fuels marketing segments.

 

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Segment Operating Highlights

(Thousands of Dollars, Except Barrels/Day Information)

 

     Three Months Ended June 30,     Change  
     2010     2009    

Storage:

      

Throughput (barrels/day)

     684,982        695,558        (10,576

Throughput revenues

   $ 19,119      $ 19,728      $ (609

Storage lease revenues

     109,690        97,585        12,105   
                        

Total revenues

     128,809        117,313        11,496   

Operating expenses

     66,955        59,470        7,485   

Depreciation and amortization expense

     18,989        17,446        1,543   
                        

Segment operating income

   $ 42,865      $ 40,397      $ 2,468   
                        

Transportation:

      

Refined products pipelines throughput (barrels/day)

     533,979        564,762        (30,783

Crude oil pipelines throughput (barrels/day)

     398,518        346,291        52,227   
                        

Total throughput (barrels/day)

     932,497        911,053        21,444   

Throughput revenues

   $ 76,958      $ 68,744      $ 8,214   

Operating expenses

     29,543        27,690        1,853   

Depreciation and amortization expense

     12,680        12,614        66   
                        

Segment operating income

   $ 34,735      $ 28,440      $ 6,295   
                        

Asphalt and Fuels Marketing:

      

Product sales

   $ 929,990      $ 811,800      $ 118,190   

Cost of product sales

     847,065        736,009        111,056   
                        

Gross margin

     82,925        75,791        7,134   

Operating expenses

     30,298        29,709        589   

Depreciation and amortization expense

     5,075        4,406        669   
                        

Segment operating income

   $ 47,552      $ 41,676      $ 5,876   
                        

Consolidation and Intersegment Eliminations:

      

Revenues

   $ (10,816   $ (10,015   $ (801

Cost of product sales

     (4,477     (4,148     (329

Operating expenses

     (6,853     (6,364     (489
                        

Total

   $ 514      $ 497      $ 17   
                        

Consolidated Information:

      

Revenues

   $ 1,124,941      $ 987,842      $ 137,099   

Cost of product sales

     842,588        731,861        110,727   

Operating expenses

     119,943        110,505        9,438   

Depreciation and amortization expense

     36,744        34,466        2,278   
                        

Segment operating income

     125,666        111,010        14,656   

General and administrative expenses

     22,195        25,852        (3,657

Other depreciation and amortization expense

     1,441        1,082        359   
                        

Consolidated operating income

   $ 102,030      $ 84,076      $ 17,954   
                        

 

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Storage

Revenues increased $11.5 million for the three months ended June 30, 2010, compared to the three months ended June 30, 2009, primarily due to:

 

   

an increase of $6.4 million across various domestic terminals due to rate escalations, new customer contracts and increased customer utilization, as well as higher throughput and related handling charges;

 

   

an increase of $2.7 million at our international terminals mainly due to new customer contracts and increased customer utilization, as well as higher throughput and related handling charges and the completion of our tank expansion project at our Amsterdam terminal; and

 

   

an increase of $1.5 million related to our acquisition of Asphalt Holdings, Inc., which included three terminals in Mobile County, Alabama.

Operating expenses increased $7.5 million for the three months ended June 30, 2010, compared to the three months ended June 30, 2009, primarily due to an increase of $3.5 million in employee-related expenses and an increase of $1.5 million in maintenance expenses resulting from tank work at certain terminals in our gulf coast and west coast regions.

Depreciation and amortization expense increased $1.5 million for the three months ended June 30, 2010, compared to the three months ended June 30, 2009, primarily due to the completion of various terminal upgrade and expansion projects.

Transportation

Throughputs increased 21,444 barrels per day and revenues increased $8.2 million for the three months ended June 30, 2010, compared to the three months ended June 30, 2009, primarily due to:

 

   

an increase of 75,122 barrels per day and an increase in revenues of $6.1 million on pipelines serving the McKee refinery, mainly due to the completion of a turnaround at the refinery in 2009;

 

   

an increase of 14,754 barrels per day and an increase in revenues of $3.0 million on the East Pipeline due to the impact of high system inventories and lower demand in 2009;

 

   

an increase of 7,607 barrels per day and an increase in revenues of $2.5 million on the Ammonia Pipeline resulting from more favorable weather conditions compared to the prior year and an early start of the planting season;

 

   

a decrease in throughputs of 13,450 barrels per day and a decrease in revenues of $2.1 million due to a scheduled turnaround at the refinery served by the North Pipeline; and

 

   

a decrease in throughputs of 52,848 barrels per day and a decrease in revenues of $1.3 million due to the sale of the Ardmore-Wynnewood and Trans-Texas pipelines.

Operating expenses increased $1.9 million for the three months ended June 30, 2010, compared to the three months ended June 30, 2009, due to increased power costs and product imbalances on the East Pipeline. For the three months ended June 30, 2009, we recognized gains from our product imbalances mainly due to an increase in prices and higher volumes.

Asphalt and Fuels Marketing

Sales and cost of product sales increased $118.2 million and $111.1 million, respectively, resulting in an increase in total gross margin of $7.1 million for the three months ended June 30, 2010, compared to the three months ended June 30, 2009. The increase in total gross margin was primarily due to an increase of $9.0 million in our fuels marketing operations mainly due to hedge gains in the second quarter of 2010. Although the gross margin per barrel for our asphalt operations was slightly higher in the second quarter of 2010 as compared to the second quarter of 2009, gross margin decreased $1.9 million due to lower volumes sold.

Consolidation and Intersegment Eliminations

Revenue, cost of product sales and operating expense eliminations primarily relate to storage and transportation fees charged to the asphalt and fuels marketing segment by the transportation and storage segments. For the three months ended June 30, 2010, the asphalt and fuels marketing segment utilized more terminal capacity from our storage segment than for the three months ended June 30, 2009, resulting in higher eliminations for revenue and operating expense.

 

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General

General and administrative expenses decreased $3.7 million for the three months ended June 30, 2010, compared to the three months ended June 30, 2009. This decrease was primarily due to a decline in compensation expense associated with our long-term incentive plans, which fluctuates with our unit price.

Interest expense decreased $1.4 million for the three months ended June 30, 2010, compared to the three months ended June 30, 2009, mainly due to a lower balance on our revolving credit agreement and a lower variable interest rate paid on our interest rate swaps.

Other income, net consisted of the following:

 

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

Gain from insurance proceeds

   $ 13,500      $ 1,670   

(Loss) gain from sale or disposition of assets

     (793     21,022   

Foreign exchange gains (losses)

     382        (3,666

Other

     1,727        214   
                

Other income, net

   $ 14,816      $ 19,240   
                

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

Income tax expense decreased $1.7 million for the three months ended June 30, 2010, compared to the three months ended June 30, 2009, primarily due to the reversal of a deferred tax asset valuation allowance, partially offset by increased expense resulting from higher taxable income. The receipt of $13.5 million in insurance proceeds related to Hurricane Ike and our acquisition of Asphalt Holdings, Inc. caused us to reevaluate the valuation allowance recorded related to certain net operating loss carryforwards previously expected to expire unused.

 

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Six Months Ended June 30, 2010 Compared to Six Months Ended June 30, 2009

Financial Highlights

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

 

     Six Months Ended June30,     Change  
     2010     2009    

Statement of Income Data:

      

Revenues:

      

Services revenues

   $ 384,382      $ 358,694      $ 25,688   

Product sales

     1,686,088        1,263,152        422,936   
                        

Total revenues

     2,070,470        1,621,846        448,624   
                        

Costs and expenses:

      

Cost of product sales

     1,561,809        1,148,656        413,153   

Operating expenses

     241,280        213,827        27,453   

General and administrative expenses

     49,464        48,316        1,148   

Depreciation and amortization expense

     76,114        71,537        4,577   
                        

Total costs and expenses

     1,928,667        1,482,336        446,331   
                        

Operating income

     141,803        139,510        2,293   

Equity earnings from joint ventures

     5,117        5,324        (207

Interest expense, net

     (37,476     (40,735     3,259   

Other income, net

     15,117        27,844        (12,727
                        

Income before income tax expense

     124,561        131,943        (7,382

Income tax expense

     5,436        8,853        (3,417
                        

Net income

   $ 119,125      $ 123,090      $ (3,965
                        

Net income per unit applicable to limited partners

   $ 1.64      $ 1.96      $ (0.32
                        

Weighted average limited partner units outstanding

     61,255,853        54,460,549        6,795,304   
                        

Highlights

Net income decreased $4.0 million for the six months ended June 30, 2010, compared to the six months ended June 30, 2009, primarily due to a decrease in other income, partially offset by an increase in segment operating income. Segment operating income increased $4.1 million during the six months ended June 30, 2010, compared to the six months ended June 30, 2009, mainly due to increased operating income from our transportation segment and asphalt and fuels marketing segment.

 

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Segment Operating Highlights

(Thousands of Dollars, Except Barrels/Day Information)

 

     Six Months Ended June 30,     Change  
     2010     2009    

Storage:

      

Throughput (barrels/day)

     663,339        646,025        17,314   

Throughput revenues

   $ 36,946      $ 39,756      $ (2,810

Storage lease revenues

     218,495        195,359        23,136   
                        

Total revenues

     255,441        235,115        20,326   

Operating expenses

     132,033        113,628        18,405   

Depreciation and amortization expense

     37,655        34,438        3,217   
                        

Segment operating income

   $ 85,753      $ 87,049      $ (1,296
                        

Transportation:

      

Refined products pipelines throughput (barrels/day)

     530,678        592,341        (61,663

Crude oil pipelines throughput (barrels/day)

     380,975        366,027        14,948   
                        

Total throughput (barrels/day)

     911,653        958,368        (46,715

Revenues

   $ 152,220      $ 143,136      $ 9,084   

Operating expenses

     58,296        52,890        5,406   

Depreciation and amortization expense

     25,432        25,277        155   
                        

Segment operating income

   $ 68,492      $ 64,969      $ 3,523   
                        

Asphalt and Fuels Marketing:

      

Product sales

   $ 1,688,920      $ 1,263,152      $ 425,768   

Cost of product sales

     1,573,799        1,156,802        416,997   
                        

Gross margin

     115,121        106,350        8,771   

Operating expenses

     65,349        59,548        5,801   

Depreciation and amortization expense

     10,116        9,614        502   
                        

Segment operating income

   $ 39,656      $ 37,188      $ 2,468   
                        

Consolidation and Intersegment Eliminations:

      

Revenues

   $ (26,111   $ (19,557   $ (6,554

Cost of product sales

     (11,990     (8,146     (3,844

Operating expenses

     (14,398     (12,239     (2,159
                        

Total

   $ 277      $ 828      $ (551
                        

Consolidated Information:

      

Revenues

   $ 2,070,470      $ 1,621,846      $ 448,624   

Cost of product sales

     1,561,809        1,148,656        413,153   

Operating expenses

     241,280        213,827        27,453   

Depreciation and amortization expense

     73,203        69,329        3,874   
                        

Segment operating income

     194,178        190,034        4,144   

General and administrative expenses

     49,464        48,316        1,148   

Other depreciation and amortization expense

     2,911        2,208        703   
                        

Consolidated operating income

   $ 141,803      $ 139,510      $ 2,293   
                        

 

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Storage

Throughputs increased 17,314 barrels per day for the six months ended June 30, 2010, compared to the six months ended June 30, 2009, mainly due to the completion of turnarounds in 2009 at refineries served by our Texas City and Corpus Christi crude oil storage tanks. Throughput revenues decreased $2.8 million for the six months ended June 30, 2010, compared to the six months ended June 30, 2009, despite the increase in total throughputs, due to lower throughputs at refined product terminals, which have higher throughput fees per barrel than the Texas City and Corpus Christi crude oil storage tanks.

Storage revenues increased $23.1 million for the six months ended June 30, 2010, compared to the six months ended June 30, 2009, primarily due to:

 

   

an increase of $10.7 million across various domestic terminals due to higher throughput and related handling charges, as well as rate escalations, new customer contracts and increased customer utilization;

 

   

an increase of $5.8 million at our Amsterdam and UK terminals, mainly due to higher throughput and associated handling fees at our UK terminals, the completed tank expansion project at our Amsterdam terminal and the effect of foreign exchange rates;