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Article by DailyStocks_admin    (12-31-13 11:19 PM)

Description

NUSTAR ENERGY L.P. Director WILLIAM E GREEHEY bought 102,100 shares on 12-19-2013 at $ 49

BUSINESS OVERVIEW

General

We are a Delaware limited partnership that owns and operates most of the crude oil and refined product pipeline, terminalling and storage assets that support Valero Energy Corporation's McKee, Three Rivers and Ardmore refineries and its marketing operations located in Texas, Oklahoma, Colorado, New Mexico and Arizona. Our common units are listed on the New York Stock Exchange under the "VLI" symbol. Our principal executive offices are located at One Valero Place, San Antonio, Texas 78212 and our telephone number is (210) 370-2000. We conduct all of our operations through a subsidiary entity, Valero Logistics Operations, L.P.

We were originally formed under the name of "Shamrock Logistics, L.P.," and changed our name to "Valero L.P." effective January 1, 2002, upon completion of Valero Energy Corporation's (Valero Energy) acquisition of Ultramar Diamond Shamrock Corporation (UDS) on December 31, 2001. In addition, "Shamrock Logistics Operations, L.P." changed its name to "Valero Logistics Operations, L.P." effective January 1, 2002. When used in this report, the terms "we," "our," "us" or similar words or phrases may refer, depending upon the context, to Valero L.P., or to Valero Logistics Operations, L.P. or both taken as a whole.

We generate revenues from our pipeline operations by charging tariffs for transporting crude oil and refined products through our pipelines. We also generate revenue through our terminalling operations by charging a terminalling fee to our customers, primarily Valero Energy and its affiliates. The terminalling fee is earned when the refined products enter the terminal and includes the cost of transferring the refined products from the terminal to trucks. An additional fee is charged at the refined product terminals for blending additives into certain refined products. We do not generate any separate revenue from our crude oil storage facilities. Instead, the costs associated with these facilities were considered in establishing the tariff rates charged for transporting crude oil from the storage facilities to the refineries.

The term throughput as used in this document generally refers to the crude oil or refined product barrels, as applicable, that pass through each pipeline, even if those barrels also are transported in another of our pipelines for which we received a separate tariff.


Our Relationship With Valero Energy

Valero Energy is one of the top three U.S. refining companies in terms of refining capacity. It acquired UDS on December 31, 2001, and now owns and operates 12 refineries, three of which are served by our pipelines and terminals:

•
the McKee refinery, which has a current total capacity to process 170,000 barrels per day, or bpd, of crude oil and other feedstocks, making it the largest refinery located between the Texas Gulf Coast and the West Coast;

•
the Three Rivers refinery, which has a current total capacity to process 98,000 bpd of crude oil and other feedstocks; and

•
the Ardmore refinery, which has a current total capacity to process 85,000 bpd of crude oil and other feedstocks.

Valero Energy markets the refined products produced by these refineries primarily in Texas, Oklahoma, Colorado, New Mexico and Arizona through a network of approximately 2,700 company-operated and dealer-operated convenience stores, as well as through other wholesale and spot market sales and exchange agreements.

Valero Energy's obligation to use our crude oil and refined product pipelines and terminals will be suspended if material changes occur in the market conditions for the transportation of crude oil and refined products, or in the markets served by these refineries, that have a material adverse effect on Valero Energy, or if we are unable to handle the volumes Valero Energy requests that we transport due to operational difficulties with the pipelines or terminals. In the event Valero Energy does not transport in our pipelines or use our terminals to terminal the minimum volume requirements and its obligation has not been suspended under the terms of the agreement, it is required to make a cash payment determined by multiplying the shortfall in volume by the weighted average tariff rate or terminal fee charged.

In addition, Valero Energy has agreed to remain the shipper for crude oil and refined products owned by it transported through our pipelines, and neither challenge, nor cause others to challenge, our interstate or intrastate tariff rates for the transportation of crude oil and refined products until at least April, 2008.

We do not currently have any employees. Under a Services Agreement between us and Valero Energy and certain of its affiliates, employees of Valero Energy and its affiliates perform services on our behalf, and those entities are reimbursed for the services rendered by their employees. In addition, we pay Valero Energy and its affiliates an annual fee of $5,200,000 under the Services Agreement to perform and provide us with other services.

Valero Energy owns and controls our general partner, Riverwalk Logistics, L.P. UDS Logistics, LLC, the limited partner of our general partner, owns a total of 4,424,322 common units and 9,599,322 subordinated units representing an aggregate 71.6% limited partner interest in us. Our general partner owns a 2% interest in us and also owns incentive distribution rights giving it higher percentages of our cash distributions as various target distribution levels are met. In addition, we have entered into an Omnibus Agreement with Valero Energy, which, among other things, governs potential competition between us, on the one hand, and Valero Energy and its affiliates, on the other.

Business Strategies

The primary objective of our business strategies is to increase distributable cash flow per unit. Our business strategies include:

Sustaining high levels of throughput and cash flow.

Our base strategy is to sustain our current levels of throughput and cash flow, which we expect will provide a strong platform for the future growth of our transportation, terminalling and storage business. Accordingly, we intend to continue to invest in our existing pipeline, terminalling and storage assets in order to maintain and increase the current capacity and throughput of our pipelines. In order to ensure stable throughput of crude oil and refined products for our pipelines, we have established what we believe are competitive tariff rates for our pipelines and we have also entered into the seven-year Pipelines and Terminals Usage Agreement with Valero Energy described above. Our pipelines are directly connected to the McKee, Three Rivers and Ardmore refineries, and we provide their most competitive access to crude oil and other feedstock requirements and distribution of their refined products to Valero Energy's markets in Texas, Oklahoma, Colorado, New Mexico and Arizona. During the year ended December 31, 2001, the McKee, Three Rivers and Ardmore refineries obtained approximately 78% of their crude oil and other feedstocks through our crude oil pipelines, distributed approximately 80% of their refined products through our refined product pipelines and used our terminalling services for approximately 60% of their refined products shipped from the refineries.

Increasing throughput in our existing pipelines and shifting volumes to higher tariff pipelines.

We have available capacity in all of our existing pipelines. During the year ended December 31, 2001, we averaged approximately 64% capacity utilization in our crude oil pipelines and approximately 61% capacity utilization in our refined product pipelines. Over time, we believe the increasing refined product demand in the southwestern and Rocky Mountain regions of the United States will allow us to shift some refined product throughput to our higher tariff, longer-distance refined product pipelines from some of our lower tariff refined product pipelines. In the future, depending on market conditions, we may also have the opportunity to transport through our pipelines, crude oil and refined products that are currently transported through pipelines retained by Valero Energy and to transport additional third-party volumes.

Increasing our pipeline and terminal capacity through expansions and new construction.

We are continually evaluating opportunities to increase capacity in our existing pipelines by adding pumping stations or horsepower to existing pumping stations or increasing pipeline diameter to keep pace with increases in crude oil and refined product demand. In 2000, we completed an expansion project to increase the capacity of our McKee to Colorado Springs refined product pipeline by 20,000 barrels per day. In 2001, we initiated a project, completed in January, 2002, that expanded our share of capacity in the Amarillo to Albuquerque refined product pipeline by 4,667 barrels per day.

We will also consider extending existing refined product pipelines or constructing new refined product pipelines to meet rising refined product demand that Valero Energy intends to supply in high growth areas in the southwestern and Rocky Mountain regions of the United States.

Pursuing selective strategic and accretive acquisitions that complement our existing asset base.

We plan to actively pursue opportunities to purchase assets that increase our cash flow per unit. Since mid-2001, we have exercised three options to purchase assets under the Omnibus Agreement with Valero Energy that was put in place at the time we became a public entity. In July 2001, we acquired the Southlake refined product terminal for $5,600,000; in December 2001, we acquired the Ringgold crude oil storage facility for $5,200,000; and in February 2002, we acquired the Wichita Falls crude oil pipeline and storage facility for $64,000,000. After funding the cost of each of these acquisitions, approximately $40,000,000 remains available under our $120,000,000 revolving credit facility, which we entered into in December, 2000. We believe future acquisition opportunities may include some of the assets owned by Valero Energy as well as assets owned by third parties. We expect that the assets to be acquired may include pipelines, terminals and storage facilities, and other assets that we believe will contribute to the successful execution of our business strategies.

Continuing to improve our operating efficiency.

We aggressively monitor and control our cost structure. We have been able to implement cost saving initiatives such as utilizing chemical additives to reduce friction in some of our pipelines and aggressively negotiating more favorable rate structures with our power providers. We intend to continue to make investments to improve our operations and pursue cost saving initiatives.


Pipeline Operations

We have an ownership interest in 9 crude oil pipelines with an aggregate length of approximately 782 miles and 18 refined product pipelines with an aggregate length of approximately 2,845 miles. We operate all of the pipelines except for:

•
the McKee to Denver refined product pipeline in which we have a minority ownership interest and which is operated by the Phillips Pipeline Company; and

•
the Hooker to Clawson segment of the Hooker to McKee crude oil pipeline in which segment we have a 50% ownership interest and which is operated by the Jayhawk Pipeline Company.
In each of the pipelines, only Valero Energy transports crude oil or refined products in the capacity attributable to our ownership interest except for:

•
the Amarillo to Albuquerque refined product pipeline, in which Equiva Trading Company also transports refined products through our share of the pipeline; and

•
the Amarillo to Abernathy refined product pipeline, in which Phillips Texas Pipeline Company also transports refined products through our share of the pipeline.

For the pipelines in which we own less than a 100% ownership interest, we fund capital expenditures in proportion to our respective ownership percentages.

Crude Oil Pipelines

Our crude oil pipelines deliver crude oil and other feedstocks, such as gas oil and normal butane, from various points in Texas, Oklahoma, Kansas and Colorado to Valero Energy's McKee, Three Rivers and Ardmore refineries.

CEO BACKGROUND

Approval of the Plan and Amendment

Our general partner, NuStar GP, LLC, maintains the Plan. The Board of Directors approved an amendment and restatement of the Plan that, assuming it is approved by the common unitholders as a result of this Proxy Statement, will be effective as of May 1, 2011. The essential features of the Plan, as amended by the Amendment, are summarized below.

The Board believes that increasing the total number of common units available for awards under the Plan is necessary to ensure that a sufficient and reasonable number of common units will be available to fund our compensation programs to: (i) aid in the retention of key employees who are important to our success; (ii) motivate employee and director contributions through equity ownership in us; (iii) align potential increases in compensation to our financial results that generally drive the value of our common units; and (iv) pay our directors. If the Amendment is not approved, we will not have sufficient common units available under the Plan for long-term compensation awards to our employees and directors, consistent with our prior practices.
The Amendment would also contain a related technical amendment to reflect that, historically, NuStar Energy has purchased common units in the open market, rather than issued new common units.

The Amendment would amend the Plan:

•
to increase the number of common units available for issuance under the Plan from 1,500,000 common units (of which 112,368 remain available for grant) to 3,250,000 common units; and

•
to provide that, consistent with past practice, any common units delivered under the Plan shall consist, in whole or in part, of common units acquired in the open market, from any affiliate, the Partnership or any other person, or any combination of the foregoing, as determined by the Committee in its discretion, rather than of newly issued common units.

Purpose

The Plan is intended to promote the interests of the Partnership by providing to employees and directors of NuStar GP, LLC and its affiliates who perform services for the Partnership and its subsidiaries incentive awards for superior performance that are based on common units. The Plan is also intended to enhance NuStar GP, LLC’s and its affiliates’ ability to attract and retain employees whose services are key to the growth and profitability of the Partnership, and to encourage them to devote their best efforts to the business of the Partnership, thereby advancing the Partnership’s interests.
The Partnership is seeking unitholder approval of the Amendment in order to comply with New York Stock Exchange requirements.

Plan Provisions

The Plan provides for the grant of options to acquire common units and restricted units representing limited partner interests in the Partnership (“ Units ”). The Plan also provides for Performance Awards in the form of cash or units. In certain cases restricted units may be granted in tandem with a distribution equivalent right (“ DER ”), which is a contingent right to receive an amount in cash equal to the cash distributions made by the Partnership with respect to a Unit during the period such restricted unit is outstanding.

Administration . The Plan is administered by the Compensation Committee of the Board or such other committee of the Board appointed to administer the Plan (the “ Committee ”). Annual grant levels for participants in the Plan are recommended by the Chief Executive Officer of NuStar GP, LLC, subject to the review and approval of the Committee.

Subject to the express provisions of the Plan, the Committee is authorized to: (i) designate participants in the Plan; (ii) determine the type or types of awards to be granted to a participant; (iii) determine the number of Units to be covered by an award; (iv) determine the terms and conditions of any award; (v) determine whether, to what extent, and under what circumstances awards may be settled, exercised, canceled or forfeited; (vi) interpret and administer the Plan and any instrument or agreement relating to an award made under the Plan; (vii) establish, amend, suspend or waive such rules and regulations and appoint such agents as it shall deem appropriate for the proper administration of the Plan; and (viii) make any other determination and take any other action that the Committee deems necessary for the administration of the Plan.

Units Available for Awards. The number of Units available under the Plan will be 3,250,000 (pending unitholder approval) subject to certain adjustments, as provided below. If an award is forfeited or otherwise expires without the delivery of Units to the participant, the Units subject to the forfeiture, termination, or cancellation will again be available for subsequent grant under the Plan. If the Committee determines that any distribution, recapitalization, split, reverse split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase or exchange of Units or other securities of the Partnership, issuance of warrants or other rights to purchase Units or other securities of the Partnership, or other similar transaction or event affects the Units such that an adjustment is determined by the Committee to be appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan, then the Committee may adjust (1) the number and type of Units with respect to which awards may be granted; (2) the number and type of Units subject to outstanding awards; and (3) if deemed appropriate, make a provision for a cash payment to the holder of an outstanding award. The number of Units subject to an award is required to be a whole number.

Eligibility . As determined by the Committee, any employee or director of NuStar GP, LLC or an Affiliate is eligible to receive awards under the Plan. An “ Affiliate ” generally means an entity controlled by or under common control with NuStar GP, LLC. The terms and conditions of awards need not be the same with respect to each participant. The grant of an award does not give a participant the right to be retained in the employ of NuStar GP, LLC or any of its Affiliates or to remain on the Board.

Awards . Awards under the Plan may, in the discretion of the Committee, be granted alone or in addition to, or in tandem with, any other award granted under the Plan. In addition to Performance Cash, which is a cash award conditioned upon the attainment of one or more performance goals, the Plan provides that the following awards may be granted:

Options . The Committee has the authority to determine the employees and directors to whom options shall be granted, the number of Units to be covered by each option, the purchase price for each option and the conditions and limitations applicable to the exercise of the option.
Each option granted under the Plan will be evidenced by a grant agreement in such form as the Committee prescribes, which sets forth the terms of the option and the rights and obligations of the Partnership and the participant.

In general, the Plan provides that the option price per Unit may not be less than 100% of the fair market value of a Unit on the date of the option grant.
The Committee also determines the restricted period (the time or times at which an option may be exercised in whole or in part) and the method or methods by which a participant may pay the exercise price.

Once an option (or any portion) becomes vested in accordance with the foregoing schedule, the option (or such portion) remains exercisable for a period of ten years from the date of vesting, or for a shorter period specified by the Committee or the grant agreement.
An option is not assignable or transferable by the participant other than by will or by the laws of descent and distribution. During the lifetime of the participant, an option is exercisable only by the participant. The Plan provides that options may be exercised in certain circumstances following a participant’s termination of employment, including termination as a result of the participant’s death, disability or retirement.
No participant will have any rights of a unitholder with respect to any Units covered by an option until the participant has exercised the option, paid the option purchase price and has been issued such Units.

Restricted Units . The Committee has the authority to grant phantom units under the Plan, which is equivalent in value and in dividend and interest rights to a Unit, and which upon or following vesting entitles the participant to receive a Unit (each, a “ Restricted Unit ”). The Committee has the authority to determine the employees and directors to whom Restricted Units shall be granted, the number of Restricted Units to be granted to each such participant, the duration of the restricted period (if any) and the conditions under which the Restricted Units may vest (which may be immediate upon the grant of the Restricted Unit, or may be Performance Units, which is a Unit conditioned upon the attainment of one or more performance goals). The Committee may also include a tandem grant of a DER that entitles the participant to receive cash equal to any cash distributions made on Units prior to the vesting of the Restricted Units, which may be paid directly to the participant, be credited to a bookkeeping account or be subject to additional restrictions determined by the Committee.

Each Restricted Unit granted under the Plan will be evidenced by a grant agreement in such form as the Committee prescribes, which sets forth the terms of the option and the rights and obligations of the Partnership and the participant.

A Restricted Unit is not assignable or transferable by the participant other than by will or by the laws of descent and distribution. During the lifetime of the participant, a Restricted Unit is exercisable only by the participant. The Plan provides that Restricted Units may vest in certain circumstances following a participant’s termination of employment, including termination as a result of the participant’s death, disability or retirement.
Change or Control or Sale of Significant Assets. Upon a change of control of NuStar GP Holdings or NuStar GP, LLC, all awards granted under the Plan automatically vest and become payable or exercisable, as the case may be, in full.

A “ change of control ” occurs upon one or more of the following events:

(1) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of NuStar GP, LLC or the Partnership to any person or its Affiliates, unless immediately following such sale, lease, exchange or other transfer such assets are owned, directly or indirectly, by NuStar GP Holdings and its Affiliates or by NuStar GP, LLC;

(2) the consolidation or merger of the Partnership or NuStar GP, LLC with or into another entity pursuant to a transaction in which the outstanding voting interests of NuStar GP, LLC is changed into or exchanged for cash, securities or other property, other than any such transaction where:
(a) all outstanding voting interests of NuStar GP, LLC are changed into or exchanged for voting stock or interests of the surviving corporation or entity or its parent and

(b) the holders of the voting interests of NuStar GP, LLC immediately prior to such transaction own, directly or indirectly, not less than a majority of the voting stock or interests of the surviving corporation or entity or its parent immediately after such transaction and, in the case of the Partnership, NuStar GP Holdings retains operational control, whether by way of holding a general partner interest, managing member interest or a majority of the outstanding voting interests of the surviving corporation or entity or its parent;

(3) a person or group becomes a beneficial owner of more than 50% of all voting interests of NuStar GP, LLC or NuStar GP Holdings then outstanding; or

(4) in the case of NuStar GP Holdings, the consummation of a reorganization, merger, consolidation or other form of business transaction or series of business transactions, in each case, with respect to which more than 50% of the voting power of the outstanding equity interests in NuStar GP Holdings cease to be owned by the persons who owned such interests immediately prior to such reorganization, merger or other form of business transaction or series of business transactions.

In the event NuStar GP, LLC or the Partnership sells or otherwise disposes of a significant portion of the assets under its control, and as a consequence of the disposition (1) a participant’s employment is terminated by the Partnership, NuStar GP, LLC or their Affiliates without cause or by the participant for good reason or (2) as a result of such sale or disposition, the participant’s employer shall no longer be the Partnership, NuStar GP, LLC or one of their Affiliates, then all of such participant’s awards under the Plan shall automatically vest and become payable or exercisable, as the case may be, in full.
Amendment and Termination. The Committee has authority to amend, alter, suspend, discontinue or terminate the Plan except to the extent prohibited by applicable law or the rules of the New York Stock Exchange, the principal securities exchange on which the Units are traded. The Committee may waive any conditions or rights under, amend any terms of, or alter any award granted.

Federal Tax Consequences

The following is a general description of the federal income tax consequences of options and the Restricted Units granted under the Plan. It is a general summary only. In particular, this general description does not discuss the applicability of the income tax laws of any state or foreign country.
Options granted under the Plan are non-statutory options under the Internal Revenue Code. There are no federal income tax consequences to participants, the Partnership or NuStar GP, LLC upon the grant of an option under the Plan. Generally, upon the exercise of options, participants will recognize ordinary compensation income in an amount equal to the excess of the fair market value of the Units at the time of exercise over the purchase price of the option. The participant will recognize ordinary compensation income when distribution equivalents are paid to the participant. The Partnership generally will be entitled to a corresponding federal income tax deduction.

Upon the sale of Units acquired by exercise of an option, a participant generally will have gain or loss (which may consist of both ordinary and capital gain and loss elements depending upon the Partnership’s taxable income and loss during the period in which the Units were held). The participant’s adjusted tax basis in the Units will be the purchase price plus the amount of ordinary income recognized by the participant at the time of exercise of the option, adjusted for intervening Partnership gains or losses and distributions.

A Restricted Unit awarded under the Plan represents the right of the participant to receive one Unit upon the satisfaction of the conditions necessary for the vesting. As Restricted Units are awarded and administered under the Plan, there are no federal income tax consequences to participants, the Partnership or NuStar GP, LLC upon the award of a Restricted Unit. Generally, upon the vesting of Restricted Units, the participants will recognize ordinary compensation income in an amount equal to the fair market value of the Units received. The participant will recognize ordinary compensation income when distribution equivalents are paid to the participant. The Partnership generally will be entitled to a corresponding federal income tax deduction.

Upon the sale of Units acquired from the vesting of Restricted Units, a participant generally will have gain or loss (which may consist of both ordinary and capital gain and loss elements depending upon the Partnership’s taxable income and loss during the period in which the Units were held). The participant’s adjusted tax basis in the Units will be the amount of ordinary income recognized by the participant at the time of receipt of each of the Units from the vesting of the Restricted Units, adjusted for intervening Partnership gains or losses and distributions.

New Plan Benefits

Because the Plan is discretionary, benefits or amounts to be received by individual grantees in the future are not determinable. The following forth information concerning the Restricted Unit and performance unit awards made during 2010 pursuant to the Plan to (a) the chief executive officer and the four most highly compensated officers as of the end of the last fiscal year, (b) all current executive officers as a group, (c) all current directors who are not executive officers as a group, and (d) all employees, including all current officers and directors who are not executive officers, as a group.

Name and Position: Curtis V. Anastasio
Restricted Units: 6,900
Performance Units: 5,230

Name and Position: Steven A. Blank
Restricted Units: 3,065
Performance Units: 2,350

Name and Position: James R. Bluntzer
Restricted Units: 2,750
Performance Units: 2,110

Name and Position: Paul W. Brattlof
Restricted Units: 2,345
Performance Units: 1,800

Name and Position: Mary Rose Brown
Restricted Units: 2,750
Performance Units: 2,110

Name and Position: Executive Group(1)
Restricted Units: 23,430
Performance Units: 17,830

Name and Position: Non-Executive Director Group
Restricted Units: 3,938
Performance Units: -

Name and Position: Non-Executive Officer Employee Group
Restricted Units: 164,580
Performance Units: 1,500

(1) The current executive officers are: Curtis V. Anastasio, Bradley C. Barron, Steven A. Blank, James R. Bluntzer, Paul W. Brattlof, Mary Rose Brown, Daniel S. Oliver, and Thomas R. Shoaf.

Awards Granted Under the Plan

As of March 1, 2011, out of the 1,500,000 Units authorized for grant under the Plan, an aggregate of 1,387,632 Units (net of cancellations) have been awarded, and 112,368 Units remained available for grant. If the Amendment to the Plan is approved, the total number of Units that may be issued will be 3,250,000 Units, meaning that 1,862,368 Units will be available for grant under the Plan, as amended by the Amendment.

No grants have been made that are subject to unitholder approval of the Amendment to the Plan. Because grants under the Plan are discretionary, it is not possible at present to predict the number of grants or the persons to whom grants will be made in the future under the Plan.
The last sales price of the Partnership’s Units on March 1, 2011 was $70.07 per Unit.

Text of the Plan

The full text of the Plan, marked to show the Amendment, is attached as Appendix A to this Proxy Statement. The statements made in this Proxy Statement with respect to the Amendment should be read in conjunction with, and are qualified in their entirety by reference to, the full text of the Plan attached as Appendix A to this Proxy Statement.

Vote Required

The approval of the Amendment of the Plan requires the affirmative vote of a majority of the issued and outstanding common units entitled to vote and that are present in person or by proxy at the special meeting. Under Delaware law, an abstention on this proposal will have the same legal effect as an “against” vote. A broker non-vote will not be counted as having been voted on, or as a vote “against,” the proposal.

Recommendation

THE BOARD OF DIRECTORS OF THE GENERAL PARTNER OF OUR GENERAL PARTNER UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR” THE PROPOSAL TO AMEND THE PLAN.

MANAGEMENT DISCUSSION FROM LATEST 10K

Introduction

Current Organization

Valero L.P. owns and operates most of the crude oil and refined product pipeline, terminalling and storage assets located in Texas, Oklahoma, New Mexico and Colorado that support Valero Energy's McKee, Three Rivers and Ardmore refineries located in Texas and Oklahoma.

Valero Energy's refining operations include various logistics assets (pipelines, terminals, marine dock facilities, bulk storage facilities, refinery delivery racks, rail car loading equipment and shipping and trucking operations) that support the refining and retail operations. A portion of the logistics assets consists of crude oil and refined product pipelines, refined product terminals and crude oil storage facilities located in Texas, Oklahoma, New Mexico and Colorado that support the McKee, Three Rivers and Ardmore refineries located in Texas and Oklahoma. These pipeline, terminalling and storage assets transport crude oil and other feedstocks to the refineries and transport refined products from the refineries to terminals for further distribution. Valero Energy markets the refined products produced by these refineries primarily in Texas, Oklahoma, Colorado, New Mexico and Arizona through a network of approximately 2,700 company-operated and dealer-operated convenience stores, as well as through other wholesale and spot market sales and exchange agreements.

Valero Energy is one of the largest independent refining and marketing companies in the United States. Subsequent to the acquisition of UDS by Valero Energy, Valero Energy owns and operates twelve refineries in Texas (5), California (2), Louisiana, Oklahoma, Colorado, New Jersey and Quebec, Canada with a combined throughput capacity of approximately 1,900,000 barrels per day. Valero Energy produces premium, environmentally clean products such as reformulated gasoline, low-sulfur diesel and oxygenates and gasoline meeting specifications of the California Air Resources Board (CARB). Valero Energy also produces conventional gasoline, distillates, jet fuel, asphalt and petrochemicals. Valero Energy markets its refined products through a network of approximately 4,800 company-operated and dealer-operated convenience stores, 86 cardlock stations, as well as through other wholesale and spot market sales and exchange agreements. In the northeast United States and in eastern Canada, Valero Energy sells, on a retail basis, home heating oil to approximately 250,000 households.

Acquisition of UDS by Valero Energy

On May 7, 2001, UDS announced that it had entered into an Agreement and Plan of Merger (the acquisition agreement) with Valero Energy whereby UDS agreed to be acquired by Valero Energy for total consideration of approximately $4.3 billion. In September 2001, the board of directors and shareholders of both UDS and Valero Energy approved the acquisition and, on December 31, 2001, Valero Energy completed its purchase acquisition of UDS. Under the acquisition agreement, UDS shareholders received, for each share of UDS common stock they held, at their election, cash, Valero Energy common stock or a combination of cash and Valero Energy common stock, having a value Prior to the acquisition, Valero Energy owned and operated six refineries in Texas (3), Louisiana, New Jersey and California with a combined throughput capacity of more than 1,100,000 barrels per day. Valero Energy marketed its gasoline, diesel fuel and other refined products in 34 states through a bulk and rack marketing network and, in California, through approximately 350 retail locations. Upon completion of the acquisition, Valero Energy became the ultimate parent of Riverwalk Logistics, L.P., our general partner. In addition, Valero Energy became the obligor under the various agreements UDS had with us, including the Services Agreement, the Pipelines and Terminals Usage Agreement and the environmental indemnification.

Reorganizations and Initial Public Offering

Prior to July 1, 2000, the pipeline, terminalling and storage assets and operations included discussed in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations were referred to as the Ultramar Diamond Shamrock Logistics Business as if it had existed as a single separate entity from UDS. UDS formed Valero Logistics Operations to assume ownership of and to operate the assets of the Ultramar Diamond Shamrock Logistics Business. Effective July 1, 2000, UDS transferred the crude oil and refined product pipelines, terminalling and storage assets and certain liabilities of the Ultramar Diamond Shamrock Logistics Business (predecessor) to Valero Logistics Operations (successor). The transfer of assets and certain liabilities to Valero Logistics Operations represented a reorganization of entities under common control and was recorded at historical cost.

Effective with the closing of an initial public offering of common units of Valero L.P. on April 16, 2001, the ownership of Valero Logistics Operations held by various subsidiaries of Valero Energy was transferred to Valero L.P. in exchange for ownership interests (common and subordinated units) in Valero L.P. This transfer also represented a reorganization of entities under common control and was recorded at historical cost.

The following discussion is based on the operating results of the consolidated and combined financial statements of Valero L.P., Valero Logistics Operations and the Ultramar Diamond Shamrock Logistics Business as follows:

•
consolidated financial statements of Valero L.P. and Valero Logistics Operations (successor) as of December 31, 2001 and for the period from April 16, 2001 to December 31, 2001;

•
combined financial statements of Valero L.P. and Valero Logistics Operations (successor) as of December 31, 2000 and for the period from July 1, 2000 to December 31, 2000 and the period from January 1, 2001 to April 15, 2001; and

•
combined financial statements of Valero L.P., Valero Logistics Operations and the Ultramar Diamond Shamrock Logistics Business (predecessor) for the six months ended June 30, 2000 and for the year ended December 31, 1999.
This consolidated and combined financial statement presentation more clearly reflects our financial position and results of operations as a result of the recent reorganizations of entities under common control.

Seasonality

The operating results of Valero L.P. are affected by factors affecting the business of Valero Energy, including refinery utilization rates, crude oil prices, the demand for and prices of refined products and industry refining capacity.

The throughput of crude oil we transport is directly affected by the level of, and refiner demand for, crude oil in markets served directly by our crude oil pipelines. Crude oil inventories tend to increase due to over production of crude oil by producing companies and countries and planned maintenance turnaround activity by refiners. As crude oil inventories increase, the market price for crude oil declines, along with the market prices for refined products. To bring crude oil inventories back in line with demand, refiners reduce production levels, which also has the effect of increasing crude oil market prices.

The throughput of the refined products we transport is directly affected by the level of, and user demand for, refined products in the markets served directly or indirectly by our pipelines. Demand for gasoline in most markets peaks during the summer driving season, which extends from April to September, and declines during the fall and winter months. Demand for gasoline in the Arizona market, however, generally is higher in the winter months than summer months due to greater tourist activity and second home usage in the winter months. Historically, we have not experienced significant fluctuations in throughput due to the stable demand for refined products and the growing population base in the southwestern and Rocky Mountain regions of the United States.

Results of Operations

Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

The results of operations for the year ended December 31, 2001 presented in the following table are derived from the consolidated statement of income for Valero L.P. and Valero Logistics Operations, L.P. for the period from April 16, 2001 to December 31, 2001 and the combined statement of income for Valero L.P. and Valero Logistics Operations for the period from January 1, 2001 to April 15, 2001, which in this discussion are combined and referred to as the year ended December 31, 2001. The results of operations for the year ended December 31, 2000 presented in the following table is derived from the statement of income of the Ultramar Diamond Shamrock Logistics Business for the six months ended June 30, 2000 and the combined statement of income of Valero L.P. and Valero Logistics Operations for the six months ended December 31, 2000, which in this discussion are combined and referred to as the year ended December 31, 2000.

Revenues for the year ended December 31, 2001 were $98,827,000 as compared to $92,053,000 for the year ended December 31, 2000, an increase of 7% or $6,774,000. This increase in revenues is due primarily to the following items:

•
revenues for the Ringgold to Wasson and the Wasson to Ardmore crude oil pipelines increased $1,400,000 due to a combined 12% increase in throughput barrels, resulting from UDS purchasing greater quantities of crude oil from third parties near Ringgold instead of gathering crude oil barrels near Wasson. In March 2001, UDS sold its Oklahoma crude oil gathering operation which was located near Wasson;

•
revenues for the Corpus Christi to Three Rivers crude oil pipeline increased $1,390,000 despite the 8% decrease in throughput barrels for the year ended December 31, 2001 as compared to 2000. The Corpus Christi to Three Rivers crude oil pipeline was temporarily converted into a refined product pipeline during the third quarter of 2001 due to the alkylation unit shutdown at UDS' Three Rivers refinery. The increase in revenues is primarily due to the increased tariff rate charged to transport refined products during the third quarter of 2001. In addition, effective May 2001, the crude oil tariff rate was increased to cover the additional costs (dockage and wharfage fees) associated with operating a marine crude oil storage facility in Corpus Christi;

•
revenues for the McKee to El Paso refined product pipeline increased $1,187,000 primarily due to a 9% increase in throughput barrels resulting from an increase in UDS' sales into the Arizona market. The McKee to El Paso refined product pipeline connects with a third party pipeline which runs to Arizona;

•
revenues for the Three Rivers to Laredo refined product pipeline decreased by $464,000 due to a 24% decrease in throughput barrels partially offset by an increase in the tariff rate effective July 1, 2001. The Laredo refined product terminal revenues also decreased by $290,000 due to the 24% decrease in throughput barrels. The lower throughput barrels are a result of Pemex's expansion of its Monterrey, Mexico refinery that increased the supply of refined products to Nuevo Laredo, Mexico, which is across the border from Laredo, Texas;

•
revenues for the Southlake refined product terminal, acquired on July 1, 2001, increased by $1,341,000 and throughput barrels increased by 4,601,000 for the year ended December 31, 2001; and

•
revenues for all refined product terminals, excluding the Southlake and Laredo refined product terminals, increased $1,343,000 primarily due to an increase in the terminalling fee charged at our marine-based refined product terminals to cover the additional costs (dockage and wharfage fees) associated with operating a marine refined product terminal and the additional fee of $0.042 per barrel charged for blending additives into certain refined products.
Operating expenses increased $120,000 for the year ended December 31, 2001 as compared to the year ended December 31, 2000 primarily due to the following items:

•
during the year ended December 31, 2000, we recognized a loss of $916,000 due to the impact of volumetric expansions, contractions and measurement discrepancies in our pipelines related to the first six months of 2000. Beginning July 1, 2000, the impact of volumetric expansions, contractions and measurement discrepancies in the pipelines is borne by the shippers and is therefore no longer reflected in operating expenses;

•
utility expenses increased by $1,538,000, or 17%, due to higher electricity rates during the year ended December 31, 2001 as compared to the year ended December 31, 2000 resulting from higher natural gas costs;

•
the acquisition of the Southlake refined product terminal increased operating expenses by $308,000;

•
employee related expenses increased due to higher accruals for incentive compensation; and

•
other operating expenses decreased due to lower rental expenses for fleet vehicles, satellite communications and safety equipment as a result of more favorable leasing arrangements.

General and administrative expenses increased 4% for the year ended December 31, 2001 as compared to 2000 due to increased general and administrative costs related to being a publicly held entity. Prior to July 1, 2000, UDS allocated approximately 5% of its general and administrative expenses incurred in the United States to its pipeline, terminalling and storage operations to cover costs of centralized corporate functions such as legal, accounting, treasury, engineering, information technology and other corporate services. Effective July 1, 2000, UDS entered into a Services Agreement with us to provide the general and administrative services noted above for an annual fee of $5,200,000, payable monthly. This annual fee is in addition to the incremental general and administrative costs incurred from third parties as a result of our being a publicly held entity.

Depreciation and amortization expense increased $1,130,000 for the year ended December 31, 2001 as compared to the year ended December 31, 2000 due to the additional depreciation related to the Southlake refined product terminal and Ringgold crude oil storage facility acquired during 2001 and additional depreciation related to the recently completed capital projects.

Interest expense for the year ended December 31, 2001 was $3,811,000 as compared to $5,181,000 for 2000. During the period from January 1, 2001 to April 15, 2001, we incurred $2,513,000 of interest expense related to the $107,676,000 of debt due to parent that we assumed on July 1, 2000 and paid off on April 16, 2001. In addition, beginning April 16, 2001, Valero Logistics Operations borrowed $20,506,000 under the revolving credit facility resulting in $738,000 of interest expense for the eight and a half months ended December 31, 2001. Interest expense prior to July 1, 2000 relates only to the debt due to the Port of Corpus Christi Authority of Nueces County, Texas. Interest expense from July 1, 2000 through April 15, 2001 relates to the debt due to parent and the debt due to the Port of Corpus Christi Authority. Interest expense subsequent to April 16, 2001 relates to the borrowings under the revolving credit facility and the debt due to the Port of Corpus Christi Authority.

Equity income from Skelly-Belvieu for the year ended December 31, 2001 decreased $698,000, or 18%, as compared to 2000 due primarily to a 13% decrease in throughput barrels in the Skellytown to Mont Belvieu refined product pipeline. The decreased throughput in 2001 is due to both UDS and Phillips Petroleum Company utilizing greater quantities of natural gas to run their refining operations instead of selling the natural gas to third parties in Mont Belvieu.

Effective July 1, 2000, UDS transferred the assets and certain liabilities of the Ultramar Diamond Shamrock Logistics Business (predecessor) to Valero Logistics Operations (successor). As limited partnerships, Valero L.P. and Valero Logistics Operations are not subject to federal or state income taxes. Due to this change in tax status, the deferred income tax liability of $38,217,000 as of June 30, 2000 was written off in the statement of income of the Ultramar Diamond Shamrock Logistics Business(predecessor) for the six months ended June 30, 2000. The resulting net benefit for income taxes of $30,812,000 for the six months ended June 30, 2000, includes the write-off of the deferred income tax liability less the provision for income taxes of $7,405,000 for the six months ended June 30, 2000. The income tax provision for the six months ended June 30, 2000 was based upon the effective income tax rate for the Ultramar Diamond Shamrock Logistics Business of 38%. The effective income tax rate exceeds the U.S. federal statutory income tax rate due to state income taxes.

Income before income taxes for the year ended December 31, 2001 was $45,873,000 as compared to $39,845,000 for the year ended December 31, 2000. The increase of $6,028,000 is primarily due to the increase in revenues resulting from higher tariff rates and higher throughput barrels in our pipelines and terminals for 2001 as compared to 2000.

Year Ended December 31, 2000 Compared to Year Ended December 31, 1999

The results of operations for the year ended December 31, 2000 presented in the following table are derived from the statement of income of the Ultramar Diamond Shamrock Logistics Business for the six months ended June 30, 2000 and the combined statement of income of Valero L.P. and Valero Logistics Operations for the six months ended December 31, 2000, which in this discussion are combined and referred to as the year ended December 31, 2000.

Revenues for the year ended December 31, 2000 were $92,053,000 as compared to $109,773,000 for the year ended December 31, 1999, a decrease of 16% or $17,720,000. Effective January 1, 2000, we implemented revised tariff rates on many of our pipelines, which resulted in lower revenues being recognized in 2000 as compared to 1999. Adjusting the revenues for the year ended December 31, 1999 using the newly established tariff rates and the throughput barrels resulted in as adjusted revenues of $87,881,000. On a comparative basis, revenues increased $4,172,000 or 5%. The following discussion is based on a comparison of the as adjusted revenues for the year ended December 31, 1999 and the actual revenues for the year ended December 31, 2000:

•
revenues for the McKee to El Paso refined product pipeline increased $1,618,000 due to a 13% increase in throughput barrels, resulting from higher refined product demand in El Paso and the Arizona market and temporary refinery disruptions on the West Coast;

•
revenues increased $990,000 for the Corpus Christi to Three Rivers crude oil pipeline due to a 6% increase in throughput barrels. In 2000, UDS increased production at the Three Rivers refinery to meet the growing demand in south Texas;

•
revenues generated from the refined product terminals were $15,516,000 for the year ended December 31, 2000 as compared to $15,238,000 for the year ended December 31, 1999 due to a combined 3% increase in throughput at the various terminals;

•
revenues from the McKee to Denver refined product pipeline increased $266,000 in 2000 as compared to 1999 as throughput increased 10% due to increasing demand in Denver, Colorado;

•
revenues from the Three Rivers to Pettus (Corpus Christi segment) refined product pipeline increased $433,000 in 2000 as compared to 1999 as throughput increased 112% due to rising refined product demand in south Texas; and

•
revenues for the Three Rivers to Laredo refined product pipeline increased $260,000 for 2000 as compared to 1999 due to a 9% increase in throughput barrels, resulting from increased refined product demand in Laredo, Texas and its sister city of Nuevo Laredo, Mexico. Laredo, Texas is one of the fastest growing cities in the United States and UDS is the major supplier of refined products to this area of Texas.

Operating expenses increased $5,629,000, or 23%, in 2000 from 1999 primarily due to the following items:

•
higher operating expenses of $538,000 resulting from a loss of $916,000 in 2000 as compared to a loss of $378,000 in 1999 due to the impact of volumetric expansions and contractions and discrepancies in the measurement of throughput. Effective July 1, 2000, the impact of these items is borne by the shippers in our pipelines and is therefore not reflected in operating expenses;

•
higher maintenance expenses of $1,747,000 primarily related to discretionary environmental expenditures on terminal operations;

•
utility expenses increasing $1,801,000 in 2000 as compared to 1999 as a result of higher throughput barrels in most pipelines and terminals and higher electricity rates in the fourth quarter of 2000 as a result of higher natural gas costs; and

•
higher salary and employee benefit expenses of $853,000 in 2000 as compared to 1999 due to increased benefit accruals and rising salary costs.

Depreciation and amortization expense decreased $58,000 for the year ended December 31, 2000 as compared to the year ended December 31, 1999 due to the sale of an additional 8.33% interest in the McKee to El Paso refined product pipeline and terminal in August 1999. Partially offsetting the decrease was additional depreciation related to the recently completed capital projects, including the expansion of the McKee to Colorado Springs and the Amarillo to Albuquerque refined product pipelines.

General and administrative expenses increased 9% in 2000 as compared to 1999 due to increased general and administrative costs at UDS while the net amount reimbursed by partners on jointly owned pipelines in 2000 remained comparable to 1999.

Interest expense of $5,181,000 for the year ended December 31, 2000 was higher than the $777,000 recognized during the year ended December 31, 1999 due to the additional interest expense recognized in the third and fourth quarters of 2000 related to the $107,676,000 of debt due to parent.

Equity income from Skelly-Belvieu represents the 50% interest in the net income of Skelly-Belvieu Pipeline Company, which operates the Skellytown to Mont Belvieu refined product pipeline. Equity income from Skelly-Belvieu for the year ended December 31, 2000 was $3,877,000 as compared to $3,874,000 for the year ended December 31, 1999.

Effective July 1, 2000, UDS transferred the assets and certain liabilities of the Ultramar Diamond Shamrock Logistics Business (predecessor) to Valero Logistics Operations (successor). As limited partnerships, Valero L.P. and Valero Logistics Operations are not subject to federal or state income taxes. Due to this change in tax status, the deferred income tax liability of $38,217,00 as of June 30, 2000 was written off in the statement of income of the Ultramar Diamond Shamrock Logistics Business for the six months ended June 30, 2000. The resulting net benefit for income taxes of $30,812,000 for the six months ended June 30, 2000, includes the write-off of the deferred income tax liability less the provision for income taxes of $7,405,000 for the first six months of 2000. The income tax provision for 1999 was based upon the effective income tax rate for the Ultramar Diamond Shamrock Logistics Business of 38.3%. The effective income tax rate exceeds the U.S. federal statutory income tax rate due to state income taxes.

Income before income taxes for the year ended December 31, 2000 was $39,845,000 as compared to $69,319,000 for the year ended December 31, 1999. The decrease of $29,474,000, or 43%, is primarily due to the decreased tariff revenues as a result of the revised tariff rates that went into effect January 1, 2000, the impact of which was $21,892,000.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

OVERVIEW

NuStar Energy L.P. (NuStar Energy) (NYSE: NS) 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 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) owns our general partner, Riverwalk Logistics, L.P., and owns a 15.0% total interest in us as of September 30, 2013 . Our Management’s Discussion and Analysis of Financial Condition and Results of Operations is presented in six sections:

•
Overview
•
Results of Operations
•
Trends and Outlook
•
Liquidity and Capital Resources
•
Related Party Transactions
•
Critical Accounting Policies

Dispositions and Acquisitions

San Antonio Refinery Sale . On January 1, 2013 , we sold our fuels refinery in San Antonio, Texas (the San Antonio Refinery) and related assets, which included inventory, a terminal in Elmendorf, Texas and a pipeline connecting the terminal and refinery for approximately $117.0 million (the San Antonio Refinery Sale). We have presented the results of operations for the San Antonio Refinery and related assets, previously reported in the fuels marketing and pipeline segments, as discontinued operations for all periods presented. Please refer to Note 2 of the Condensed Notes to Consolidated Financial Statements in Item 1. “Financial Statements” for a discussion of the San Antonio Refinery Sale.

Asphalt Sale. On September 28, 2012, we sold a 50% ownership interest (the Asphalt Sale) in NuStar Asphalt LLC (Asphalt JV), previously a wholly owned subsidiary. Asphalt JV owns and operates the asphalt refining assets that were previously wholly owned by NuStar Energy (collectively, the Asphalt Operations). Upon closing, we deconsolidated Asphalt JV and started reporting our remaining investment in Asphalt JV using the equity method of accounting. The results of the Asphalt Operations were previously included in the fuels marketing segment.

TexStar Asset Acquisition. On December 13, 2012, NuStar Logistics completed its acquisition of the TexStar Crude Oil Assets(as defined below), including 100% of the partnership interest in TexStar Crude Oil Pipeline, LP, from TexStar MidstreamServices, LP and certain of its affiliates (collectively, TexStar) for approximately $325.0 million (the TexStar Asset Acquisition). The TexStar Crude Oil Assets consist of approximately 140 miles of crude oil pipelines and gathering lines, as well as five terminals and storage facilities providing 0.6 million barrels of storage capacity. The condensed consolidated statements of comprehensive income (loss) include the results of operations for the TexStar Asset Acquisition in the pipeline segment commencing on December 13, 2012 .

Operations

We conduct our operations through our 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, pipeline (formerly known as the transportation segment), and fuels marketing.

Storage . We own terminals and storage facilities in the United States, Canada, Mexico, the Netherlands, including St. Eustatius in the Caribbean, the United Kingdom and Turkey providing approximately 85.0 million barrels of storage capacity. Our terminals and storage facilities provide storage and handling services on a fee basis for petroleum products, specialty chemicals and other liquids, including crude oil and other feedstocks.

Pipeline. We own common carrier refined product pipelines in Texas, Oklahoma, Colorado, New Mexico, Kansas, Nebraska, Iowa, South Dakota, North Dakota and Minnesota covering approximately 5,463 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 4.9 million barrels, and the East Pipeline includes two tank farms providing storage capacity of 1.4 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 1,180 miles of crude oil pipelines in Texas, Oklahoma, Kansas, Colorado and Illinois, as well as 3.4 million barrels of crude storage in Texas and Oklahoma located along those 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.

Fuels Marketing . In 2013, we renamed the “Asphalt and Fuels Marketing Segment” to the “Fuels Marketing Segment” since this name more accurately reflects the operations that remain after our deconsolidation of Asphalt JV in 2012 and the San Antonio Refinery Sale. Within our fuels marketing operations, we purchase crude oil and refined petroleum products for resale. The results of operations for the fuels marketing segment depend largely on the margin between our cost and the sales prices of the products we market. Therefore, the results of operations for this segment are more sensitive to changes in commodity prices compared to the operations of the storage and pipeline segments. We enter into derivative contracts to attempt to mitigate the effects of commodity price fluctuations.

The following factors affect the results of our operations:
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company-specific factors, such as facility 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;
•
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 that impact our fuels marketing segment; and
•
other factors, such as refinery utilization rates and maintenance turnaround schedules, that impact the operations of refineries served by our storage and pipeline assets.

RESULTS OF OPERATIONS

Three Months Ended September 30, 2013 Compared to Three Months Ended September 30, 2012

Highlights

Net income increased $28.9 million for the three months ended September 30, 2013 , compared to the three months ended September 30, 2012 , mainly due to a $21.6 million loss related to the Asphalt Sale in the third quarter of 2012, and a loss from discontinued operations of $9.6 million in the third quarter of 2012, which is attributable to the San Antonio Refinery Sale.

Storage

Throughput revenues increased $4.7 million and throughputs increased 51,852 barrels per day for the three months ended September 30, 2013 , compared to the three months ended September 30, 2012 . Throughputs increased 79,365 barrels per day and revenues increased $5.5 million at our Corpus Christi crude storage tank facility due to an increase in Eagle Ford Shale crude oil being shipped to Corpus Christi. These increases were partially offset by a decrease in throughputs of 25,570 barrels per day and a decrease in revenues of $0.9 million, primarily due to maintenance at the refineries served by our Benicia crude oil storage tanks and Three Rivers refined products terminals.

Storage lease revenues decreased $13.1 million for the three months ended September 30, 2013 , compared to the three months ended September 30, 2012 , primarily due to:
•
a decrease of $10.9 million at various domestic terminals, mainly as a result of reduced demand in several markets, resulting in lower throughputs, storage fees and reimbursable revenues; Demand was lower as a result of the backwardated market, and a narrowing price differential on two traded crude oil grades (WTI and LLS) reduced profit sharing on our unit train at our St. James terminal;
•
a decrease of $2.4 million at asphalt terminals under storage agreements with Asphalt JV, which we entered into simultaneously with the Asphalt Sale; and
•
a decrease of $1.8 million at our UK and Amsterdam terminals, mainly due to reduced demand and decreased throughput and related handling fees.

Those declines in storage lease revenues were partially offset by an increase in storage lease revenues of $1.6 million due to increased reimbursable revenues and throughputs at our Point Tupper terminal facility and an increase of $1.4 million due to our acquisition of a lease at the Red Fish Bay terminal in conjunction with the TexStar Asset Acquisition.

Depreciation and amortization expense increased $4.4 million for the three months ended September 30, 2013 , compared to the three months ended September 30, 2012 , primarily due to the completion of a dock optimization project at our Corpus Christi crude storage tank facility and tank expansion projects at our St. Eustatius and St. James terminals.

Pipeline

Revenues increased $18.9 million and throughputs increased 5,731 barrels per day for the three months ended September 30, 2013 , compared to the three months ended September 30, 2012 , primarily due to:
•
an increase in revenues of $14.3 million and an increase in throughputs of 53,338 barrels per day on crude oil pipelines that serve Eagle Ford Shale production in South Texas, primarily resulting from the TexStar Asset Acquisition and crude oil pipelines that were placed in service in the fourth quarter of 2012 and during the nine months ended September 30, 2013;
•
an increase in revenues of $1.8 million and an increase in throughputs of 2,678 barrels per day on the refined product pipelines serving the McKee refinery due to increased volumes on certain pipelines with higher tariffs;
•
an increase in revenues of $1.7 million, while throughputs remained flat, on the North Pipeline due to higher average tariffs resulting from the annual index adjustment in July 2013 and the recognition of reimbursed pipeline expansion costs; and
•
an increase in revenues of $1.5 million on the East Pipeline due to higher average tariffs resulting from the annual index adjustment in July 2013 and increased long-haul deliveries. Throughputs decreased 13,791 barrels per day due to a late start of the fall harvest and intermittent gasoline shortages.

The higher throughputs were partially offset by a decrease in throughputs of 27,381 barrels per day on crude oil pipelines serving the Ardmore refinery due to a new contract effective January 1, 2013 , that combines two segments of a crude oil pipeline serving the Ardmore refinery that were previously reported as separate throughputs. In addition, revenues decreased $1.1 million and throughputs decreased 4,906 barrels per day on the Ammonia Pipeline primarily due to a late start of the fall harvest in 2013.

Operating expenses decreased $1.5 million for the three months ended September 30, 2013 , compared to the three months ended September 30, 2012 , primarily due to temporary barge rental costs in 2012 related to moving a customer’s product in conjunction with an Eagle Ford Shale project and decreased maintenance costs on the East Pipeline. These decreases were partially offset by an increase in operating expenses resulting from the TexStar Asset Acquisition.

Depreciation and amortization expense increased $4.3 million for the three months ended September 30, 2013 , compared to the three months ended September 30, 2012 , mainly due to the TexStar Asset Acquisition in December 2012 and the completion of various projects that serve Eagle Ford Shale production.

Fuels Marketing

The consolidated statements of comprehensive income include the results of operations for Asphalt JV in “Equity in (loss) earnings of joint ventures” commencing on September 28, 2012. Previously, we reported the results of operations for our Asphalt Operations in the fuels marketing segment. For the three months ended September 30, 2013, this segment mainly includes refined products marketing, crude oil trading, heavy fuel oil and bunkering operations.

Sales and cost of product sales decreased $280.3 million and $278.0 million , respectively, resulting in a decrease in total gross margin of $2.3 million for the three months ended September 30, 2013 , compared to the three months ended September 30, 2012 . The decrease in total gross margin was primarily due to a decrease of $8.1 million in the gross margin from bunker fuel sales, mainly at our St. Eustatius and Texas City facilities. Reduced demand for bunker fuels and increased competition in the U.S. Gulf Coast and the Caribbean has negatively impacted our sales prices and resulted in lower gross margins as compared to the same period last year. This decrease was partially offset by an increase of $4.9 million in the gross margin from fuel oil trading for the three months ended September 30, 2013 , compared to the three months ended September 30, 2012 , due to hedge gains that were partially offset by lower sales prices and a 22% decline in volumes sold compared to the same period last year.

Operating expenses decreased $1.8 million for the three months ended September 30, 2013 , compared to the three months ended September 30, 2012 , primarily as a result of decreased vessel lease and fuel costs at our St. Eustatius facility and decreased railcar costs associated with fuel oil sales.

Other income (expense), net changed by $21.4 million for the three months ended September 30, 2013 , compared to the three months ended September 30, 2012 , mainly due to a $21.6 million loss related to the Asphalt Sale in the third quarter of 2012.

Income tax expense decreased $1.2 million for the three months ended September 30, 2013 , compared to the three months ended September 30, 2012 , mainly due to rate reductions in the UK and Texas in 2013 and Canadian tax audit adjustments recorded in 2012.

For the three months ended September 30, 2012 , we recorded a loss from discontinued operations of $9.6 million , all of which is attributable to the San Antonio Refinery.

Consolidation and Intersegment Eliminations
Revenue and operating expense eliminations primarily relate to storage fees charged to the fuels marketing segment by the storage segment. Revenue and operating expense eliminations changed by $12.7 million and $9.8 million , respectively, for the three months ended September 30, 2013 , compared to the three months ended September 30, 2012 , mainly due to the Asphalt Sale in September 2012. Cost of product sales eliminations represent expenses charged to the fuels marketing segment for costs associated with inventory that are expensed once the inventory is sold.

General

General and administrative expenses decreased $6.1 million for the three months ended September 30, 2013 , compared to the three months ended September 30, 2012 , primarily as a result of lower compensation expense associated with our long-term incentive plans. Salaries and wages also decreased due to a reduction in the bonus accrual and lower headcount. In addition, certain general and administrative expenses are now reimbursed by Asphalt JV for corporate support services under a services agreement between Asphalt JV and NuStar GP, LLC.

Equity in loss of joint ventures increased $4.4 million for the three months ended September 30, 2013 , compared to the three months ended September 30, 2012 , primarily due to an $8.2 million loss from our investment in Asphalt JV, that was mainly related to weak asphalt margins.

Interest expense, net increased $7.2 million for the three months ended September 30, 2013 , compared to the three months ended September 30, 2012 , mainly due to the issuance of the $402.5 million of 7.625% fixed-to-floating rate subordinated notes in January 2013.

Interest income from related party of $1.8 million for the three months ended September 30, 2013 represents the interest earned on a $250.0 million seven-year unsecured revolving credit facility with Asphalt JV.

Nine Months Ended September 30, 2013 Compared to Nine Months Ended September 30, 2012

Highlights

Net income increased $306.8 million for the nine months ended September 30, 2013 , compared to the nine months ended September 30, 2012 , primarily due to an operating loss of $302.8 million in the fuels marketing segment for the nine months ended September 30, 2012 , compared to an operating loss of $7.2 million for the nine months ended September 30, 2013 . The operating loss in the fuels marketing segment mainly resulted from an asset impairment charge of $266.4 million in the second quarter of 2012 related to the goodwill and long-lived assets of the Asphalt Operations

Storage

Throughput revenue increased $9.2 million , and throughputs increased 16,490 barrels per day, for the nine months ended September 30, 2013 , compared to the nine months ended September 30, 2012 . Revenues increased $13.7 million and throughputs increased 80,292 barrels per day as a result of changing our Corpus Christi crude storage tank facility from a lease-based to a throughput-based facility in the third quarter of 2012 in connection with the Eagle Ford Shale projects in our pipeline segment. These increases were partially offset by decreased throughputs of 56,500 barrels per day and decreased revenues of $3.9 million resulting from turnarounds, maintenance and operational issues in 2013 at the refineries served by our Corpus Christi, Texas City and Benicia crude oil storage tanks and our Three Rivers refined products terminals.

Storage lease revenues decreased $26.4 million for the nine months ended September 30, 2013 , compared to the nine months ended September 30, 2012 , primarily due to:
•
a decrease of $23.1 million at various domestic terminals, mainly as a result of reduced demand in several markets, resulting in lower throughputs, storage fees and reimbursable revenues;
•
a decrease of $7.6 million at our St. Eustatius terminal facility, mainly due to decreased reimbursable revenue, throughput and related handling fees and dockage revenues;
•
a decrease of $6.2 million at our Corpus Christi crude storage tank facility due to the change to throughput-based fees in July 2012;
•
a decrease of $5.8 million at asphalt terminals under storage agreements with Asphalt JV, which we entered into simultaneously with the Asphalt Sale;
•
a decrease of $4.9 million at our UK and Amsterdam terminals, mainly due to reduced demand and the effect of foreign exchange rates; and
•
a decrease of $2.9 million due to the sale of five refined product terminals in April 2012.

The declines in storage lease revenues were partially offset by an increase in storage lease revenues of $22.7 million resulting from a completed unit train offloading facility at our St. James terminal and completed tank expansion projects at our St. James and St. Eustatius terminals. In addition, revenues increased $4.1 million as a result of our acquisition of a lease at the Red Fish Bay terminal in conjunction with the TexStar Asset Acquisition.

Operating expenses increased $4.7 million for the nine months ended September 30, 2013 , compared to the nine months ended September 30, 2012 , primarily due to:
•
an increase of $4.0 million in other operating expenses, mainly due to increased dockage activity at our Corpus Christi crude storage tank facility;
•
an increase of $3.2 million in salaries and wages, due to merit increases and higher temporary labor costs, a collective labor agreement that became effective in mid-2012 associated with our St. Eustatius terminal and our acquisition of a lease at the Red Fish Bay terminal in conjunction with the TexStar Asset Acquisition; and
•
an increase of $3.4 million due to increased dock and rail labor costs at our St. James terminal and increased maintenance costs at our St. Eustatius terminal.

These increases were partially offset by a decrease of $6.1 million in reimbursable expenses, consistent with the decrease in reimbursable revenues, mainly at our St. Eustatius terminal facility and terminals in our northeast region.

Depreciation and amortization expense increased $9.8 million for the nine months ended September 30, 2013 , compared to the nine months ended September 30, 2012 , primarily due to the completion of a dock optimization project at our Corpus Christi crude storage tank facility, unit train and tank expansion projects at our St. James terminal and a tank expansion project at our St. Eustatius terminal.

Pipeline

Revenues increased $56.8 million and throughputs increased 22,014 for the nine months ended September 30, 2013 , compared to the nine months ended September 30, 2012 , primarily due to:
•
an increase in revenues of $43.3 million and an increase in throughputs of 64,379 barrels per day on crude oil pipelines that serve Eagle Ford Shale production in South Texas, primarily resulting from the TexStar Asset Acquisition and crude oil pipelines that were placed in service in the fourth quarter of 2012;
•
an increase in revenues of $5.6 million and an increase in throughputs of 2,116 barrels per day on the North Pipeline, mainly due to the completion of an expansion project at the Mandan refinery in June 2012 and the recognition of reimbursed pipeline expansion costs;
•
an increase in revenues of $5.0 million, resulting from a slight increase in throughputs on the crude oil and refined product pipelines serving the McKee refinery, due to increased volumes on pipelines with higher tariffs; and

•
an increase in revenues of $3.4 million on the East Pipeline due to higher average tariffs resulting from the annual index adjustment in July 2013 and increased long-haul deliveries. Throughputs decreased 4,678 barrels per day as a result of a late start of the fall harvest and intermittent gasoline shortages.

The higher throughputs were partially offset by a decrease in throughputs of 27,372 barrels per day on crude oil pipelines serving the Ardmore refinery due to a new contract effective January 1, 2013 that combines two segments of a crude oil pipeline serving the Ardmore refinery that were previously reported as separate throughputs. In addition, the Ardmore refinery had a turnaround and operational issues during the first quarter of 2013.

Operating expenses increased $7.4 million for the nine months ended September 30, 2013 , compared to the nine months ended September 30, 2012 , primarily due to an increase of $14.8 million on crude oil pipelines that serve Eagle Ford Shale production in South Texas, resulting from the TexStar Asset Acquisition and crude oil pipelines that were placed in service in the fourth quarter of 2012. This increase was partially offset by a decrease of $6.5 million resulting from the reduction of the contingent consideration liability recorded in association with the TexStar Asset Acquisition. Please refer to Note 6 of the Condensed Notes to Consolidated Financial Statements in Item 1. “Financial Statements” for further discussion. In addition, operating expenses decreased $2.3 million due temporary barge rental costs in 2012 related to moving a customer’s product in conjunction with an Eagle Ford Shale project.

Depreciation and amortization expense increased $11.0 million for the nine months ended September 30, 2013 , compared to the nine months ended September 30, 2012 , mainly due to TexStar Asset Acquisition in December 2012 and the completion of various projects that serve Eagle Ford Shale production.

CONF CALL

Ross Payne - Wells Fargo Securities, LLC
Our next presenter is NuStar Energy L.P. NuStar recently reduced its ownership position in the Asphalt business notably and is now fully focused on its core businesses. We are glad to have with us today Curt Anastasio, CEO and President; Steve Blank, Executive Vice President and CFO and Brad Barron, EVP and General Counsel. Curt?

Curt Anastasio - President and CEO
Thank you, Ross. Let me begin with just an overview of NuStar for those who may not be familiar with the Company. We actually have two public companies. We have a public GP, NuStar GP Holdings, LLC which is the ticker NSH and our operating MLP is NuStar Energy and has market cap of about $4 billion for NuStar Energy and little above -- little over $1 billion, about a $1.2 billion for NuStar GP Holdings. We went public in April of 2001.

This attempts to depict on one page the assets of the Company, but essentially we have three business segments. We have Pipelines, Storage Terminals and what we call Fuels Marketing. And the Pipeline and Storage terminals after a strategic redirection of the company over the last couple of years amounts to more than 95% of our business, when you look at cash flow or earnings. So we’re more than 95% now, a fee-based MLP.

Just to use the map -- referring to the map for a moment, the Pipeline business is predominantly crude oil and refined petroleum products. The pipelines are centered in the central part of North America all the way from northern Mexico, up to North Dakota and near the Canadian border.

And as I mentioned its crude oil refined petroleum products and we also have the largest ammonia transportation system in the country over 2,000 miles of ammonia pipeline, which goes from the Louisiana Gulf Coast up throughout the Corn Belt and helps to fertilize the Corn Belt of the United States. And there are some terminals that as you see those little dots on the pipeline system associated with those pipelines.

And our Storage terminal business is scattered around -- in most of the United States on the coast and in the interior and also at a total of eight countries, including the United States. So we’re West Coast, U.S Gulf Coast, East Coast, the interior of the country, and the bottom center of the map you see our European operations, its United Kingdom, you see there England, Ireland, Scotland products terminals and also in Amsterdam and Holland, in the Netherlands. We have a significant products trading terminal and also in the Eastern Mediterranean and Turkey we have two adjacent terminals.

Then in the bottom center, you see our single largest terminal, it’s a 14 million barrel deep-water terminal of crude oil and refined products in a place called St. Eustatius in the Caribbean that’s near [ph] St Maarten for those of you a more familiar island that probably for many of you vacationers.

And then in eastern Canada all the way in the upper right part of this map, Point Tupper, Nova Scotia we have a terminal that’s 7.5 million barrel deep-water terminal crude oil and refined petroleum products. And we’re at close to 100 million barrels of storage capacity, one of the worlds largest liquids terminal operators.

We also have a third part of our business, its called Fuels Marketing. This is now less than 5% of our business. This is where we used to have the Asphalt Refining and Marketing business. This has now been pushed out to a JV with a private equity firm. So what’s left in there is bunker and fuel oil marketing which we do principally in two locations, Texas City and St. Eustatius in the Caribbean. A little bit of crude trading around St. James, Louisiana and a butane blending operation in part of our products pipeline system and that’s what left in that 4% to 5% of the business in Fuels Marketing.

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