NUSTAR ENERGY L.P. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION In this Form 10-Q, we make certain forward-looking statements, such as statements regarding our plans, strategies, objectives, expectations, estimates, predictions, projections, assumptions, intentions, resources and the future impact of the coronavirus, or COVID-19, the responses thereto, the slowdown in economic activity and the actions by oil producing nations on our business. 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, which may cause actual results to differ materially. Please read Item 1A "Risk Factors" contained in Part I of our Annual Report on Form 10-K for the year endedDecember 31, 2019 , Item 1A "Risk Factors" contained in Part II of this Quarterly Report on Form 10-Q, as well as our subsequent filings with theSecurities and Exchange Commission , 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 we are 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. (NYSE: NS) is engaged in the transportation of petroleum products and anhydrous ammonia, and the terminalling, storage and marketing of petroleum products. Unless otherwise indicated, the terms "NuStar Energy ," "NS," "the Partnership," "we," "our" and "us" are used in this report to refer toNuStar Energy L.P. , to one or more of our consolidated subsidiaries or to all of them taken as a whole. Our business is managed under the direction of the board of directors ofNuStar GP, LLC , the general partner of our general partner,Riverwalk Logistics, L.P. , both of which are indirectly wholly owned subsidiaries of ours. Our Management's Discussion and Analysis of Financial Condition and Results of Operations is presented in five sections: • Overview, including Trends and Outlook
• Results of Operations
• Liquidity and Capital Resources
• Critical Accounting Policies
• New Accounting Pronouncements
COVID-19 and OPEC+ Actions InMarch 2020 , theWorld Health Organization declared the coronavirus, or COVID-19, a pandemic as the illness spread across the globe. COVID-19 has had a severe impact on global economic activity, as government authorities have instituted stay-home orders and other measures to reduce the spread of COVID-19, and billions of people around the world have ceased their usual day-to-day activities. The scale of this decrease has significantly reduced demand for petroleum products. In March, the negative economic impact of the COVID-19 pandemic and demand deterioration was exacerbated by disputes among theOrganization of Petroleum Exporting Countries and other oil producing nations (OPEC+) regarding their agreed production rates that contributed to a significant over-supply in crude, resulting in a sharp decline in, and increase in the volatility of, crude oil prices. The uncertainty surrounding the ongoing impact of the pandemic and OPEC+ over-supply combined to undermine financial markets around the world, includingU.S. equity markets, and contributed to precipitous drops in value and historically high volatility across many sectors. These adverse conditions also led to a decline in our unit price and market capitalization, and, due to that decline, we recorded a goodwill impairment charge of$225.0 million associated with our crude oil pipelines in the first quarter of 2020. Please refer to Note 3 of the Condensed Notes to Consolidated Financial Statements in Item 1. "Financial Statements" for additional information about the goodwill impairment, including our method for determining the fair value of the reporting units. 26 --------------------------------------------------------------------------------
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Ongoing uncertainty surrounding the COVID-19 pandemic and its impact on demand for petroleum products and future production decisions by oil-producing nations continue to cause volatility and negatively impact global equity, debt and commodity markets. Trends and Outlook In March, in response to the negative impacts of, and the continued uncertainty related to, the COVID-19 pandemic and actions by OPEC+, we implemented our business continuity plan and implemented measures to ensure we continue to conduct business, operate safely and maintain a safe working environment for our employees, whether working remotely or on-site at our locations acrossNorth America . In March, we extended the maturity on our revolving credit agreement fromOctober 2021 toOctober 2023 as part of our overall ongoing effort to improve our liquidity and financial flexibility. We also began taking steps to preserve and enhance our liquidity by reducing spending, preserving cash, strengthening our balance sheet and addressing our near-term debt maturities. We significantly reduced our strategic capital expenditures planned for the full-year 2020 by$145.0 million , or 45% below our previous forecast, to a range of$165.0 to$195.0 million . We also reduced our controllable and operating expenses for the full-year 2020, mainly related to power and other costs associated with lower expected throughput and certain discretionary maintenance, travel and other expenses, and we lowered the distribution related to the first quarter of 2020 to$0.40 per common unit. In addition, in April, we entered into a$750.0 million three-year unsecured term loan, which provides us with the financial flexibility to address our near-term debt maturities inSeptember 2020 andFebruary 2021 . While the COVID-19 pandemic and actions by OPEC+ did not have a significant impact on our first quarter 2020 results, other than the goodwill impairment charge we recorded for the first quarter, we do expect to see some negative impact on our results of operations in the second quarter and future periods. Our assets are balanced approximately 60% to 40% between our pipeline and storage segments, and 60% to 40% between refined products and crude oil, which we believe is more important than ever to navigate these unprecedented times. For 2020, we expect reduced throughput and earnings on most of our crude oil and refined product systems, compared to our previous expectations for 2020, and to varying degrees. The geographic location of our assets and the products we transport, tends to mitigate some of the negative impact from COVID-19. Unlike the hardest-hit densely populated cities on the East and West Coasts, our refined product pipelines are mainly located inTexas , where the stay-home orders began being lifted at the beginning of May, and in the Midwest, where demand has been insulated by lower-density population centers and continued strong agricultural demand. In addition, while we have seen declines in gasoline demand due to the stay-home directives, diesel demand has remained stable, mainly supported by trucks continuing to deliver supplies across the country and agriculture demand. Our crude oil pipelines are somewhat insulated by minimum volume commitments on certain systems, but we do expect lower throughputs on our crude oil pipelines that serve producer demand in shale plays, especially in thePermian Basin , as the decline in the price of crude oil has reduced rig counts, signaling decreased drilling activity. Although we expect current conditions to temporarily depress production growth in thePermian Basin in the near-term, we believe our system has geological advantages over other shale plays, including lower production costs and higher product quality, that should benefit our assets as crude demand, price and production begin to recover. While overall demand for refined petroleum products has declined from the impact of stay-home orders, which would tend to reduce the demand for terminal services in certain markets, the impact of lower activity is somewhat mitigated by our storage segment contracts, including our contracted rates for storage and minimum throughput agreements. In addition, because of the contango market created by the near-term decline of crude oil prices combined with the expectation those prices will rise in the future, during March and April, we entered into new contracts with several customers at certain of our terminals, mainly in our Northeast region, which has resulted in our lease of all of our available storage capacity across our asset footprint. We expect the strong contango uplift in our storage segment to be more than offset by a decrease in refined product and crude oil demand in our pipeline segment. Going forward, we expect to continually evaluate our capital projects and operating expenses, and make changes as economic conditions warrant. Although we extended the maturity on our revolving credit agreement fromOctober 2021 toOctober 2023 and entered into a$750.0 million three-year unsecured term loan, we plan to continue to monitor the debt capital markets for opportunities to raise additional capital at favorable terms. Ongoing uncertainty surrounding the COVID-19 pandemic, including its duration and lingering impacts, and uncertainty surrounding future production decisions by OPEC+, continue to cause volatility and could significantly impact management's estimates and assumptions. While many uncertainties remain, we expect to continue to address the impacts from COVID-19 and the global oil markets. 27 --------------------------------------------------------------------------------
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Other Events Selby Terminal Fire. OnOctober 15, 2019 , our terminal facility in Selby,California experienced a fire that destroyed two storage tanks and temporarily shut down the terminal. The property damage was isolated, and in the fourth quarter of 2019, we incurred losses of$5.4 million , which represent the aggregate amount of our deductibles under various insurance policies. We received insurance proceeds of$11.9 million in the first quarter of 2020 and$13.1 million inApril 2020 . Gains from business interruption insurance of$3.1 million for the three months endedMarch 31, 2020 are included in "Operating expenses" in the condensed consolidated statement of comprehensive loss. Insurance proceeds relate to cleanup costs and business interruption and are therefore included in "Cash flows from operating activities" in the consolidated statement of cash flows. We believe we have adequate insurance to offset additional costs in excess of the insurance deductibles. Completed Projects. In the third quarter of 2019, we completed construction of a 30-inch crude oil pipeline fromTaft, Texas to our CorpusChristi North Beach terminal to transport volumes from thePermian Basin toCorpus Christi, Texas for export. We also completed an expansion project on our Valley Pipeline System, which originates inCorpus Christi and runs south to theRio Grande Valley , and reactivated our refined products pipeline inSouth Texas to transport diesel to ourNuevo Laredo terminal inMexico . Sale of St. Eustatius Operations. OnJuly 29, 2019 , we sold our St. Eustatius terminal and bunkering operations (the St. Eustatius Operations) for net proceeds of approximately$230.0 million (the St. Eustatius Disposition). The St. Eustatius Disposition included a 14.3 million barrel storage and terminalling facility and related assets on the island of St. Eustatius in theCaribbean . We previously reported the terminal operations in our storage segment and the bunkering operations in our fuels marketing segment. The unaudited condensed consolidated statement of comprehensive loss for the three months endedMarch 31, 2019 reflects the St. Eustatius Operations as discontinued operations. The consolidated statement of cash flows for the three months endedMarch 31, 2019 has not been adjusted to separately disclose cash flows related to discontinued operations. Please refer to Note 3 of the Condensed Notes to Consolidated Financial Statements in Item 1. "Financial Statements" for additional information on discontinued operations. In the first quarter of 2019, we recorded long-lived asset and goodwill impairment charges of$297.3 million and$31.1 million , respectively, in discontinued operations related to the St. Eustatius Operations. Please refer to Note 3 of the Condensed Notes to Consolidated Financial Statements in Item 1. "Financial Statements" for further discussion of the impairment charges.
Operations
We conduct our operations through our subsidiaries, primarilyNuStar Logistics, L.P. (NuStar Logistics ) andNuStar Pipeline Operating Partnership L.P. (NuPOP). Our operations consist of three reportable business segments: pipeline, storage and fuels marketing. Pipeline. We own 3,205 miles of refined product pipelines and 2,160 miles of crude oil pipelines, as well as 5.6 million barrels of storage capacity, which comprise our Central West System. In addition, we own 2,600 miles of refined product pipelines, consisting of the East and North Pipelines, and a 2,000-mile ammonia pipeline (the Ammonia Pipeline), which comprise our Central East System. The East and North Pipelines have storage capacity of 7.4 million barrels. 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 the Ammonia Pipeline. Storage. Our storage segment includes the operations of our terminal and storage facilities inthe United States ,Canada andMexico , with 62.0 million barrels of storage capacity. Revenues for the storage segment include fees for tank storage agreements, under which a customer agrees to pay for a certain amount of storage in a tank over a period of time (storage terminal revenues), and throughput agreements, under which a customer pays a fee per barrel for volumes moved through our terminals (throughput terminal revenues). Fuels Marketing. The fuels marketing segment includes our bunkering operations in theGulf Coast , as well as certain of our blending operations associated with our Central East System. The results of operations for the fuels marketing segment depend largely on the margin between our costs 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 pipeline and storage segments. We enter into derivative contracts to attempt to mitigate the effects of commodity price fluctuations. The financial impacts of the derivative financial instruments associated with commodity price risk were not material for any periods presented. 28 --------------------------------------------------------------------------------
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Factors That Affect Results of Operations The following factors affect the results of our operations: • industry factors, such as changes in the prices of petroleum products that
affect demand and the operations of our competitors;
• economic factors and price volatility;
• factors that impact the operations served by our pipeline and storage
assets, such as utilization rates and maintenance turnaround schedules of
our refining company customers and drilling activity by our crude oil
production customers;
• company-specific factors, such as facility integrity issues, maintenance
requirements and outages that impact the throughput rates of our assets;
and
• seasonal factors that affect the demand for products transported by and/or
stored in our assets and the demand for products we sell.
Increases or decreases in the price of crude oil affect sectors across the
energy industry, including our customers in crude oil production, refining and
trading, in different ways at different points in any given price cycle. For
example, during periods of sustained low prices, as is currently the case,
producers tend to reduce their capital spending and drilling activity and narrow
their focus to assets in the most cost-advantaged regions. Refiners, on the
other hand, can benefit from lower crude oil prices if they are able to take
advantage of lower feedstock prices in areas with healthy regional demand;
however, as refined product inventories increase, refiners typically reduce
their production rate, which may reduce the degree to which they are able to
benefit from low crude prices. Crude oil traders focus less on the current
market commodity price than on whether that price is higher or lower than
expected future market prices: if the future price for a product is believed to
be higher than the current market price, or a "contango market," as is currently
the case, traders are more likely to purchase and store products to sell in the
future at the higher price. On the other hand, when the current price of crude
oil nears or exceeds the expected future market price, or "backwardation,"
traders are no longer incentivized to purchase and store product for future
sale.
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RESULTS OF OPERATIONS Three Months EndedMarch 31, 2020 Compared to Three Months EndedMarch 31, 2019 Financial Highlights (Unaudited, Thousands of Dollars, Except Per Unit Data) Three Months Ended March 31, 2020 2019 Change Statement of Income Data: Revenues: Service revenues$ 316,746 $ 259,027 $ 57,719 Product sales 76,045 88,799 (12,754 ) Total revenues 392,791 347,826 44,965 Costs and expenses: Costs associated with service revenues 168,243 160,229 8,014 Cost of product sales 67,450 86,182 (18,732 ) Goodwill impairment loss 225,000 - 225,000 General and administrative expenses 22,971 25,691 (2,720 ) Other depreciation and amortization expense 2,186 2,119 67 Total costs and expenses 485,850 274,221 211,629 Operating (loss) income (93,059 ) 73,605 (166,664 ) Interest expense, net (47,494 ) (44,291 ) (3,203 ) Other (expense) income, net (6,489 ) 791 (7,280 ) (Loss) income from continuing operations before income tax expense (147,042 ) 30,105 (177,147 ) Income tax expense 599 1,182 (583 ) (Loss) income from continuing operations (147,641 ) 28,923 (176,564 ) Loss from discontinued operations, net of tax - (306,786 ) 306,786 Net loss$ (147,641 ) $ (277,863 ) $ 130,222 Basic and diluted net loss per common unit: Continuing operations$ (1.68 ) $ (0.06 ) $ (1.62 ) Discontinued operations - (2.85 ) 2.85 Total$ (1.68 ) $ (2.91 ) $ 1.23 Overview We incurred a loss from continuing operations of$147.6 million for the three months endedMarch 31, 2020 , mainly due to a non-cash goodwill impairment charge of$225.0 million related to our crude oil pipelines reporting unit, compared to income from continuing operations of$28.9 million for the three months endedMarch 31, 2019 . This impairment charge was partially offset by higher revenues from the pipeline and storage segments and higher operating income from the fuels marketing segment for the three months endedMarch 31, 2020 , compared to the three months endedMarch 31, 2019 . We incurred a loss from discontinued operations, net of tax, of$306.8 million for the three months endedMarch 31, 2019 , mainly due to non-cash impairment charges totaling$328.4 million related to the St. Eustatius operations. Please see Note 3 of the Condensed Notes to Consolidated Financial Statements in Item 1. "Financial Statements" for additional information on the impairment charges. 30 -------------------------------------------------------------------------------- Table of Contents Segment Operating Highlights (Thousands of Dollars, Except Barrels/Day Information) Three Months Ended March 31, 2020 2019 Change Pipeline: Crude oil pipelines throughput (barrels/day) 1,532,046 1,018,608 513,438 Refined products and ammonia pipelines throughput (barrels/day) 594,432 503,485 90,947 Total throughput (barrels/day) 2,126,478 1,522,093 604,385 Throughput and other revenues$ 195,681 $ 156,251 $ 39,430 Operating expenses 50,246 48,098 2,148 Depreciation and amortization expense 43,359 40,849 2,510 Goodwill impairment loss 225,000 - 225,000 Segment operating (loss) income$ (122,924 ) $ 67,304 $ (190,228 ) Storage: Throughput (barrels/day) 678,830 364,854 313,976 Throughput terminal revenues$ 38,723 $ 21,686 $ 17,037 Storage terminal revenues 84,494 81,814 2,680 Total revenues 123,217 103,500 19,717 Operating expenses 49,936 47,313 2,623 Depreciation and amortization expense 24,702 23,969 733 Segment operating income$ 48,579 $ 32,218 $ 16,361 Fuels Marketing: Product sales$ 73,902 $ 88,079 $ (14,177 ) Cost of goods 66,954 85,501 (18,547 ) Gross margin 6,948 2,578 4,370 Operating expenses 505 653 (148 ) Segment operating income $ 6,443$ 1,925 $ 4,518 Consolidation and Intersegment Eliminations: Revenues $ (9 )$ (4 ) $ (5 ) Cost of goods (9 ) 28 (37 ) Total $ -$ (32 ) $ 32 Consolidated Information: Revenues$ 392,791 $ 347,826 $ 44,965 Costs associated with service revenues: Operating expenses 100,182 95,411 4,771 Depreciation and amortization expense 68,061 64,818 3,243 Total costs associated with service revenues 168,243 160,229 8,014 Cost of product sales 67,450 86,182 (18,732 ) Goodwill impairment loss 225,000 - 225,000 Segment operating (loss) income (67,902 ) 101,415 (169,317 ) General and administrative expenses 22,971 25,691 (2,720 ) Other depreciation and amortization expense 2,186 2,119 67 Consolidated operating (loss) income$ (93,059 ) $ 73,605 $ (166,664 ) 31
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Pipeline
Total revenues increased$39.4 million and throughputs increased 604,385 barrels per day for the three months endedMarch 31, 2020 , compared to the three months endedMarch 31, 2019 , primarily due to: • an increase in revenues of$12.7 million and an increase in throughputs of
97,808 barrels per day resulting from increased customer production
supplying our Permian Crude System and the completion of new pipeline
connections with higher tariffs and expansion projects;
• an increase in revenues of
66,422 barrels per day due to operational issues at the refinery served by
our McKee System pipelines in the first quarter of 2019;
• an increase in revenues of
15,812 barrels per day on our Valley Pipeline System, mainly due to the
completion of an expansion project in the third quarter of 2019 and a new
customer contract;
• an increase in revenues of
388,689 barrels per day on our Corpus Christi Crude Pipeline System due to
completion of the 30-inch crude oil pipeline from Taft, Texas to our
Corpus Christi North Beach terminal in the third quarter of 2019, a
turnaround at a customer's refinery in the first quarter of 2020 thatresulted in crude oil volumes from the Eagle Ford being diverted to Corpus
Christi instead of the refinery and completion of a new pipeline
connection in the fourth quarter of 2019; and
• an increase in revenues of
26,088 barrels per day on our Three Rivers System, partially due to the
turnaround at a customer's refinery mentioned above, which resulted in
higher volumes of refined product shipped from Corpus Christi, Texas tosupply demand in markets served by the system and the reactivation of our
refined products pipeline to transport diesel to our
in
service at the end of the first quarter of 2020.
Operating expenses increased$2.1 million for the three months endedMarch 31, 2020 , compared to the three months endedMarch 31, 2019 , primarily due to an increase in maintenance and regulatory expenses on the Ammonia Pipeline.
Depreciation and amortization expense increased
Storage
Throughput terminal revenues increased$17.0 million and throughputs increased 313,976 barrels per day for the three months endedMarch 31, 2020 , compared to the three months endedMarch 31, 2019 , mainly due to an increase in throughput terminal revenues of$16.8 million and an increase in throughputs of 315,340 barrels per day at our CorpusChristi North Beach terminal, consistent with higher volumes on our Corpus Christi Crude Pipeline System. Storage terminal revenues increased$2.7 million for the three months endedMarch 31, 2020 , compared to the three months endedMarch 31, 2019 , primarily due to the following: • an increase in revenues of$4.4 million at ourGulf Coast terminals, mainly due to an increase in revenues of$2.5 million at ourTexas City Terminal , primarily due to new customer contracts, rate escalations and higher reimbursable revenues, and an increase in revenues at ourSt. James terminal of$2.3 million , mainly due to higher unit train activity; and
• an increase in revenues of
mainly due to completed storage projects and higher throughput and
handling fees.
These increases were partially offset by lower revenues of $3.8 million at our
North East and Point Tupper terminals, mainly due to decreases in customer base
and lower throughput and handling fees.
Operating expenses increased $2.6 million for the three months ended March 31,
2020 , compared to the three months ended March 31, 2019 , primarily due to
increases in reimbursable expenses of $4.6 million and $0.6 million in
contractor services, resulting mainly from increased dockage and wharfage
activity at our Corpus Christi North Beach terminal and increased customer
activity at our Texas City Terminal . These increases were partially offset by
the business interruption insurance recovery of $3.1 million in the first
quarter of 2020 related to the fire at our Selby terminal in the fourth quarter
of 2019.
Fuels Marketing
Segment operating income increased $4.5 million for the three months ended
March 31, 2020 , compared to the three months ended March 31, 2019 , mainly due to
an increase in operating income of $2.3 million from our blending operations and
other product sales and $2.2 million from higher margins from our bunkering
business.
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General
General and administrative expenses decreased$2.7 million for the three months endedMarch 31, 2020 , compared to the three months endedMarch 31, 2019 , mainly due to lower compensation costs. Interest expense, net, increased$3.2 million for the three months endedMarch 31, 2020 , compared to the three months endedMarch 31, 2019 , mainly due to the issuance of$500.0 million of 6.0% senior notes in May of 2019, partially offset by lower borrowings under our revolving credit agreement after applying the proceeds from the St. Eustatius Disposition inJuly 2019 .
Other expense, net of
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LIQUIDITY AND CAPITAL RESOURCES Overview Our primary cash requirements are for debt service, distributions to our partners, capital expenditures, acquisitions and operating expenses. Due to the negative impacts of, and the continued uncertainty related to, the COVID-19 pandemic and actions taken by OPEC+, we have taken steps to preserve and enhance our liquidity. As further described below, by deferring certain planned capital expenditures, we have reduced our 2020 planned capital expenditures by an additional 45% below our previous expectations. Planned 2020 capital expenditures had already been drastically reduced from 2019 as we completed several large pipeline expansion projects in the second half of 2019. We also have identified ways that we believe will reduce our operating expenditures, which should further reduce our overall cash requirements. At the same time, we enhanced our sources of liquidity by extending the maturity on our revolving credit agreement fromOctober 2021 toOctober 2023 and entering into a$750.0 million three-year unsecured term loan, which provide us with the financial flexibility to address our near-term debt maturities inSeptember 2020 andFebruary 2021 . Our partnership agreement requires that we distribute all "Available Cash" to our common limited partners each quarter. "Available Cash" is defined in the partnership agreement generally as cash on hand at the end of the quarter, plus certain permitted borrowings made subsequent to the end of the quarter, less cash reserves determined by our board of directors, subject to requirements for distributions for our preferred units. The distribution related to the first quarter 2020 was lowered to$0.40 per common unit. Each year, our objective is to fund our reliability capital expenditures and distribution requirements with net cash provided by operating activities during that year. If we do not generate sufficient cash from operations to meet that objective, we can use cash on hand or other sources of cash flow, which in the past have primarily included borrowings under our revolving credit agreement, sales of non-strategic assets and, to the extent necessary, funds raised through equity or debt offerings. We have typically funded our strategic capital expenditures and acquisitions from external sources, primarily borrowings under our revolving credit agreement or funds raised through equity or debt offerings. However, our ability to raise funds by issuing debt or equity depends on many factors beyond our control, including our ability to access such markets with the continued uncertainty surrounding the duration and severity of the impact from the COVID-19 pandemic and actions by OPEC+. Our risk factors in Item 1A of our Annual Report on Form 10-K for the year endedDecember 31, 2019 and in Part II of this report describe the risks inherent to these sources of funding and the availability thereof. Although the Term Loan provides us the financial flexibility to fund debt maturities in the near term, we plan to continue to monitor the debt capital markets for opportunities to raise additional capital at favorable terms.
For 2020, we expect to generate sufficient cash from operations to fund our distribution requirements, reliability capital expenditures and a portion of our strategic capital expenditures.
Cash Flows for the Three Months Ended
Three Months Ended March 31,
2020 2019
(Thousands of Dollars)
Net cash provided by (used in):
Operating activities $ 151,428 $ 103,568
Investing activities (71,424 ) (139,949 )
Financing activities (77,089 ) 47,117
Effect of foreign exchange rate changes on cash (1,403 ) 154
Net increase in cash, cash equivalents and restricted cash
Net cash provided by operating activities for the three months endedMarch 31, 2020 was$151.4 million , compared to$103.6 million for the three months endedMarch 31, 2019 , primarily due to higher earnings and changes in working capital. Our working capital increased by$9.8 million for the three months endedMarch 31, 2020 , compared to$33.4 million for the three months endedMarch 31, 2019 . Working capital requirements are mainly affected by our accounts receivable and accounts payables balances, which vary depending on the timing of payments. For the three months endedMarch 31, 2019 , accrued liabilities decreased$30.9 million , mainly due to revenue recognized during the period that was included in a contract liability 34 --------------------------------------------------------------------------------
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at the beginning of the year, as discussed in Note 4 of the Condensed Notes to Consolidated Financial Statements in Item 1. "Financial Statements."
For the three months endedMarch 31, 2020 , the net cash provided by operating activities was used to fund our distributions to unitholders of$95.6 million , reliability capital expenditures of$3.6 million and a portion of our strategic capital expenditures. Net proceeds from debt borrowings were used to fund the remainder of our strategic capital expenditures, which are described in the Capital Requirements section below. For the three months endedMarch 31, 2019 , the net cash provided by operating activities and cash on hand were used to fund our distributions to unitholders of$94.8 million and reliability capital expenditures of$9.5 million , and net proceeds from debt borrowings were used to fund our strategic capital expenditures of$149.9 million , as described in the Capital Requirements section below. Debt Sources of Liquidity Term Loan. OnApril 19, 2020 ,NuStar Energy andNuStar Logistics entered into an unsecured term loan credit agreement with certain lenders andOaktree Fund Administration, LLC , as administrative agent for the lenders (the Term Loan). The Term Loan provides for an aggregate commitment of up to$750.0 million pursuant to a three-year unsecured term loan credit facility.NuStar Logistics drew$500.0 million (the Initial Loan) onApril 21, 2020 (the Initial Loan Funding Date), leaving an additional aggregate principal amount of$250.0 million , whichNuStar Logistics may elect to draw, on or prior toApril 19, 2021 , in one or more draws, subject to certain conditions. We utilized the net proceeds of the Initial Loan to repay outstanding borrowings under our Revolving Credit Agreement. The Term Loan also bolsters our liquidity to address our senior note maturities in 2020 and early 2021. Outstanding borrowings bear interest at an aggregate rate of 12.0% per annum. The Initial Loan under the Term Loan was issued with an original issue discount in an amount equal to 3.0% of the total commitment. Additionally,NuStar Logistics will pay a commitment fee in the amount of 5.0% per annum on the average daily undrawn amount. The obligations under the Term Loan are fully and unconditionally guaranteed byNuStar Energy and NuPOP.NuStar Logistics is required to make mandatory prepayment in an amount equal to 100.0% of the proceeds received as a result of certain events, subject to certain exclusions and adjustments, such as the incurrence of additional indebtedness (excluding additional borrowings on the Revolving Credit Agreement), the issuance of equity securities and the sale of property or assets. Depending on the amount of time that has passed since the Initial Loan Funding Date, if there is a payment or prepayment (subject to certain exceptions),NuStar Logistics is required to pay, as liquidated damages and compensation for the costs of making funds available, a make-whole premium or similar amount. From the Initial Loan Funding Date through the 18-month anniversary of the Initial Loan Funding Date, such premium will be the sum of (i) the make-whole amount and (ii) 6.25% of the aggregate principal amount of borrowings then paid, prepaid or accelerated. After the 18-month anniversary of the Initial Loan Funding Date through the 30-month anniversary of the Initial Loan Funding Date, such premium will be 6.25% of the aggregate principal amount of borrowings then paid, prepaid or accelerated. Prepayments made in connection with one or more asset sales of up to an aggregate amount of$250.0 million will be subject to a lower prepayment premium. For asset sale prepayments from the Initial Loan Funding Date through the 18-month anniversary of the Initial Loan Funding Date, such premium will be 5.0% of the aggregate principal amount of borrowings then paid, prepaid or accelerated. After the 18-month anniversary of the Initial Loan Funding Date through the 30-month anniversary of the Initial Loan Funding Date, such premium will be 3.0% of the aggregate principal amount of borrowings then paid, prepaid or accelerated. There will be no premium for any prepayments of borrowings after the 30-month anniversary of the Initial Loan Funding Date. The Term Loan contains customary covenants (including ratio requirements) regardingNuStar Energy and its subsidiaries that are generally based upon and are comparable to those contained in the Revolving Credit Agreement and also contains customary events of default. Revolving Credit Agreement. OnMarch 6, 2020 ,NuStar Logistics amended its Revolving Credit Agreement to, among other things, extend the maturity date fromOctober 29, 2021 toOctober 27, 2023 , reduce the total amount available for borrowing from$1.2 billion to$1.0 billion and increase the rates included in the definition of Applicable Rate contained in the Revolving Credit Agreement. OnApril 6, 2020 ,NuStar Logistics amended the Revolving Credit Agreement to allow for certain transactions related to the revenue bonds issued pursuant to the Gulf Opportunity Zone Act of 2005 (the GoZone Bonds). 35 --------------------------------------------------------------------------------
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The Revolving Credit Agreement is subject to maximum consolidated debt coverage ratio and minimum consolidated interest coverage ratio requirements, which may limit the amount we can borrow to an amount less than the total amount available for borrowing. For the rolling period of four quarters endingMarch 31, 2020 , the consolidated debt coverage ratio (as defined in the Revolving Credit Agreement) could not exceed 5.00-to-1.00 and the consolidated interest coverage ratio (as defined in the Revolving Credit Agreement) must not be less than 1.75-to-1.00. As ofMarch 31, 2020 , our consolidated debt coverage ratio was 3.73x and our consolidated interest coverage ratio was 2.59x. As ofMarch 31, 2020 , we had$495.9 million available for borrowing. In March of 2020, S&P Global Ratings changed our rating outlook from stable to negative, and back to stable inApril 2020 . In April of 2020,Fitch, Inc. downgraded our credit rating from BB to BB- and placed our rating on Rating Watch Negative. Also in April of 2020,Moody's Investor Service Inc. placed our ratings under review for downgrade. Per the terms of the Revolving Credit Agreement, these changes did not impact the interest rate on our Revolving Credit Agreement, which is the only debt arrangement with an interest rate that is subject to adjustment if our debt rating is downgraded (or upgraded) by certain credit rating agencies. The following table reflects the current ratings and outlook that have been assigned to our debt: Moody's Investor S&P Fitch, Inc. Service Inc. Global Ratings Ratings BB- Ba2 BB- Outlook Rating Watch Negative Rating Under Review Stable Receivables Financing Agreement.NuStar Energy andNuStar Finance LLC (NuStar Finance), a special purpose entity and wholly owned subsidiary ofNuStar Energy , are parties to a$125.0 million receivables financing agreement with third-party lenders (the Receivables Financing Agreement) and agreements with certain ofNuStar Energy's wholly owned subsidiaries (collectively with the Receivables Financing Agreement, the Securitization Program). The amount available for borrowing under the Receivables Financing Agreement is limited to$125.0 million and is based on the availability of eligible receivables and other customary factors and conditions. LOC Agreement. We are also a party to a$100.0 million uncommitted letter of credit agreement, which provides for standby letters of credit or guarantees with a term of up to one year (LOC Agreement). As ofMarch 31, 2020 , we had no letters of credit issued under the LOC Agreement.
Please refer to Note 5 of the Condensed Notes to Consolidated Financial Statements in Item 1. "Financial Statements" for a discussion of certain of our debt agreements.
Capital Requirements Our operations require significant investments to maintain, upgrade or enhance the operating capacity of our existing assets. Our capital expenditures consist of: • strategic capital expenditures, such as those to expand or upgrade the
operating capacity, increase efficiency or increase the earnings potential
of existing assets, whether through construction or acquisition, as well
as certain capital expenditures related to support functions; and
• reliability capital expenditures, such as those required to maintain the
current operating capacity of existing assets or extend their useful
lives, as well as those required to maintain equipment reliability and
safety.
The following table summarizes our capital expenditures for the three months
ended
Strategic Capital Reliability Capital
Expenditures Expenditures Total
(Thousands of Dollars)
For the three months ended March
31:
2020 $ 52,654 $ 3,629 $ 56,283
2019 $ 149,885 $ 9,544 $ 159,429
Expected for the year ended $ 165,000 -
December 31, 2020 195,000 $ 40,000 - 50,000
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Strategic capital expenditures for the three months endedMarch 31, 2020 and 2019 mainly consisted of expansion projects on our Permian Crude System and Corpus Christi Crude System, as well as ourNorthern Mexico refined products supply projects. Reliability capital expenditures primarily relate to maintenance upgrade projects at our terminals, including costs to repair the property damage at the St. Eustatius terminal prior to its sale inJuly 2019 . For the year endedDecember 31, 2020 , in response to the impacts from the COVID-19 pandemic and the actions of OPEC+, we have reduced our expected strategic capital expenditures by 45% from our previous expectations. We expect a significant portion of our remaining strategic capital spending to relate to completing our expansion projects on our Permian Crude System andCorpus Christi Crude System that began in 2019 and are near completion, projects to handle bio-fuels demand on theWest Coast and projects to increase flexibility at ourSt. James and other terminals. We continue to evaluate our capital budget and make changes as economic conditions warrant, and our actual capital expenditures for 2020 may increase or decrease from the expected amounts noted above. We believe cash on hand, combined with the sources of liquidity previously described, will be sufficient to fund our capital expenditures in 2020, and our internal growth projects can be accelerated or scaled back depending on market conditions or customer demand.
Distributions
Common Units. Distribution payments are made to our common limited partners
within 45 days after the end of each quarter as of a record date that is set
after the end of each quarter. The following table summarizes information about
quarterly cash distributions to our common limited partners:
Cash
Distributions Total Cash
Quarter Ended Per Unit Distributions Record Date Payment Date
(Thousands of
Dollars)
March 31, 2020 $ 0.40 $ 43,730 May 11, 2020 May 15, 2020
December 31, 2019 $ 0.60 $ 65,128 February 10, 2020 February 14, 2020
Preferred Units. Distributions on our preferred units are payable out of any
legally available funds, accrue and are cumulative from the original issuance
dates, and are payable on the 15th day (or next business day) of each of March,
June, September and December of each year to holders of record on the first
business day of each payment month.
The following table provides the terms related to distributions for our Series
A, Series B and Series C Fixed-to-Floating Rate Cumulative Redeemable Perpetual
Preferred Units (collectively, the Series A, B and C Preferred Units):
Fixed
Distribution
Rate Per Floating Annual
Annum (as a Optional Rate (as a
Percentage Redemption Percentage of
of the Date/Date at the
$25.00 Which $25.00
Liquidation Fixed Distribution Distribution Liquidation
Preference Rate Per Unit Per Fixed Distribution Rate Becomes Preference Per
Units Per Unit) Annum Per Annum Floating Unit)
(Thousands of
Dollars)
Three-month
Series A December 15, LIBOR plus
Preferred Units 8.50% $ 2.125 $ 19,252 2021 6.766%
Three-month
Series B LIBOR plusPreferred Units 7.625% $ 1.90625 $ 29,357
June 15, 2022 5.643% Series C December 15, Three-month Preferred Units 9.00% $ 2.25 $ 15,525 2022 LIBOR plus 6.88% The distribution rate on our Series D Cumulative Convertible Preferred Units (the Series D Preferred Units) is: (i) 9.75% per annum (or$0.619 per unit per distribution period) for the first two years (beginning with theSeptember 17, 2018 distribution); (ii) 10.75% per annum (or$0.682 per unit per distribution period) for years three through five; and (iii) the greater of 13.75% per annum (or$0.872 per unit per distribution period) or the distribution per common unit thereafter. While the Series D Preferred Units are outstanding, the Partnership will be prohibited from paying distributions on any junior securities, including the common units, unless full cumulative distributions on the Series D Preferred Units (and any parity securities) have been, or contemporaneously are being, paid or set aside for payment through the most recent Series D Preferred Unit distribution payment date. Any Series D Preferred Unit distributions in excess of$0.635 may be paid, in the Partnership's sole discretion, in additional Series D Preferred Units, with the remainder paid in cash. 37 --------------------------------------------------------------------------------
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InApril 2020 , our board of directors declared distributions with respect to the Series A, B and C Preferred Units and the Series D Preferred Units to be paid onJune 15, 2020 .
Debt Obligations
Our debt obligations as of
borrowings outstanding as of
• 4.80% senior notes due
million; 6.75% senior notes due
of
of
value of
•
• Receivables Financing Agreement due
of borrowings outstanding as of
As discussed in the "Debt Sources of Liquidity" section above, inApril 2020 we entered into the Term Loan, and we utilized the net proceeds from the initial$500.0 million loan under the Term Loan to repay outstanding borrowings under the Revolving Credit Agreement. Please refer to Note 14 of the Condensed Notes to Consolidated Financial Statements in Item 1. "Financial Statements" for additional information on the Term Loan. We expect to fund senior note maturities in 2020 and 2021 by utilizing proceeds from senior note issuances in the capital markets, borrowings under our Revolving Credit Agreement or the Term Loan we entered into inApril 2020 , which is defined and described in Note 14 of the Condensed Notes to Consolidated Financial Statements in Item 1. "Financial Statements." Although the Term Loan provides us the financial flexibility to fund these maturities in the near term, we plan to continue to monitor the debt capital markets for opportunities to raise additional capital at favorable terms. The interest rates on the GoZone Bonds currently are based on a weekly tax-exempt bond market interest rate. At the option ofNuStar Logistics , during any period when the bonds bear interest at a daily or weekly rate, the GoZone Bonds may be redeemed in whole or in part on any interest payment date for 100% of the outstanding principal amount plus accrued interest to the redemption date. In addition, the holders of the GoZone Bonds may periodically require that the GoZone Bonds be repurchased, in whole or in part, requiring us to remarket the bonds. Since their issuance, the GoZone Bonds have been remarketed on a regular basis and are expected to continue to be remarketed; however, if they were not, then we would be required to repurchase and hold those instruments until they are remarketed. Management believes that, as ofMarch 31, 2020 , we are in compliance with the ratios and covenants contained in our debt instruments. A default under certain of our debt agreements would be considered an event of default under other of our debt instruments. Please refer to Notes 5 and 14 of the Condensed Notes to Consolidated Financial Statements in Item 1. "Financial Statements" for a discussion of certain of our debt agreements. Interest Rate Swaps As ofMarch 31, 2020 andDecember 31, 2019 , we were a party to forward-starting interest rate swap agreements that terminate inSeptember 2020 , for the purpose of hedging interest rate risk related to a forecasted debt issuance. As ofMarch 31, 2020 , these forward-starting interest rate swaps have an aggregate notional amount of$250.0 million and a fair value of$49.0 million recorded in "Accrued liabilities" on the consolidated balance sheet. Please refer to Note 7 of the Condensed Notes to Consolidated Financial Statements in Item 1. "Financial Statements" for a more detailed discussion of our interest rate swaps. Environmental, Health and Safety Our operations are subject to extensive international, federal, state and local environmental laws and regulations, in theU.S. and in the other countries in which we operate, including those relating to the discharge of materials into the environment, waste management, remediation, the characteristics and composition of fuels, climate change and greenhouse gases. Our operations are also subject to extensive health, safety and security laws and regulations, including those relating to worker and pipeline safety, pipeline and storage tank integrity and operations security. Because more stringent environmental and safety laws and regulations are continuously being enacted or proposed, the level of expenditures required for environmental, health and safety matters is expected to increase in the future. 38 --------------------------------------------------------------------------------
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Contingencies
We are subject to certain loss contingencies, and we believe that the resolution of any particular claim or proceeding, or all matters in the aggregate, would not have a material adverse effect on our results of operations, financial position or liquidity, as further disclosed in Note 6 of the Condensed Notes to Consolidated Financial Statements in Item 1. "Financial Statements." CRITICAL ACCOUNTING POLICIES The preparation of financial statements in accordance withU.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Ongoing uncertainty surrounding the COVID-19 pandemic, including its duration and lingering impacts, and uncertainty surrounding future production decisions by oil producing nations continue to cause volatility and could significantly impact management's estimates and assumptions. Our remaining critical accounting policies are disclosed in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . Impairment ofGoodwill We perform an assessment of goodwill annually or more frequently if events or changes in circumstances warrant. We have the option to first perform a qualitative annual assessment to determine whether it is necessary to perform a quantitative goodwill impairment test. We performed a qualitative assessment as ofOctober 1, 2019 , and determined it was not more likely than not that the estimated fair value of each reporting unit exceeded its carrying value; thus, goodwill was not impaired. InMarch 2020 , the COVID-19 pandemic and actions taken by OPEC+ resulted in severe disruptions in the capital and commodities markets, which led to significant decline in our unit price. As a result, our equity market capitalization fell significantly. The decline in crude oil prices and demand for petroleum products also led to a decline in expected earnings from some of our goodwill reporting units. These factors and others related to COVID-19 and OPEC+ caused us to conclude there were triggering events that occurred in March that required us to perform a goodwill impairment test as ofMarch 31, 2020 . In order to estimate the fair value of goodwill, management must make certain estimates and assumptions that affect the total fair value of the reporting unit. Management's estimates are based on numerous assumptions about future operations and market conditions, which we believe to be reasonable but are inherently uncertain. The uncertainties underlying our assumptions and estimates could differ significantly from actual results, including with respect to the duration and severity of the COVID-19 pandemic, the extent of travel restrictions, business closures and other efforts to control the spread of COVID-19 in impacted areas and actions by OPEC+, and could cause a different conclusion about the fair value of our assets. If that were to occur, and we determined goodwill was impaired, the amount of impairment could be material to our results of operations. We recognized a goodwill impairment charge of$225.0 million associated with our crude oil pipelines in the first quarter of 2020. Our assessment did not identify any other reporting units at risk of a goodwill impairment. Please refer to Note 3 of the Condensed Notes to Consolidated Financial Statements in Item 1. "Financial Statements" for discussion of the impairment charges and our assumptions and estimates. NEW ACCOUNTING PRONOUNCEMENTS Please refer to Note 2 of the Condensed Notes to Consolidated Financial Statements in Item 1. "Financial Statements" for a discussion of new accounting pronouncements. 39 --------------------------------------------------------------------------------
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