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EX-32.02 - EXHIBIT 32.02 - NuStar Energy L.P.ns2q1710-qex3202.htm
EX-32.01 - EXHIBIT 32.01 - NuStar Energy L.P.ns2q1710-qex3201.htm
EX-31.02 - EXHIBIT 31.02 - NuStar Energy L.P.ns2q1710-qex3102.htm
EX-31.01 - EXHIBIT 31.01 - NuStar Energy L.P.ns2q1710-qex3101.htm
EX-12.01 - EXHIBIT 12.01 - NuStar Energy L.P.ns2q1710-qex1201.htm
EX-10.02 - EXHIBIT 10.02 - NuStar Energy L.P.ns2q1710-qex1002.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 _________________________________________
 FORM 10-Q
 _________________________________________
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2017
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______            
Commission File Number 1-16417
  _________________________________________
nslogo1q17a01a01a04.jpg
NUSTAR ENERGY L.P.
(Exact name of registrant as specified in its charter)
  _________________________________________
 
Delaware
 
74-2956831
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
19003 IH-10 West
San Antonio, Texas
 
78257
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code (210) 918-2000
 _________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer
 
x
Accelerated filer
 
o
 
 
 
 
 
 
Non-accelerated filer
 
o  (Do not check if a smaller reporting company)
Smaller reporting company
 
o
 
 
 
 
 
 
 
 
 
Emerging growth company
 
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    o   
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o   No  x
The number of common units outstanding as of July 31, 2017 was 93,031,036.



NUSTAR ENERGY L.P.
FORM 10-Q
TABLE OF CONTENTS
 

2


PART I – FINANCIAL INFORMATION

Item 1.
Financial Statements
NUSTAR ENERGY L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars, Except Unit Data)
 
June 30,
2017
 
December 31,
2016
 
(Unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
29,191

 
$
35,942

Accounts receivable, net of allowance for doubtful accounts of $7,768
and $7,756 as of June 30, 2017 and December 31, 2016, respectively
147,548

 
170,293

Receivable from related party
86

 
317

Inventories
25,772

 
37,945

Other current assets
28,265

 
132,686

Total current assets
230,862

 
377,183

Property, plant and equipment, at cost
5,974,427

 
5,435,278

Accumulated depreciation and amortization
(1,827,094
)
 
(1,712,995
)
Property, plant and equipment, net
4,147,333

 
3,722,283

Intangible assets, net
857,616

 
127,083

Goodwill
1,023,359

 
696,637

Deferred income tax asset
1,359

 
2,051

Other long-term assets, net
98,795

 
105,308

Total assets
$
6,359,324

 
$
5,030,545

Liabilities and Partners’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
92,668

 
$
118,686

Short-term debt
45,000

 
54,000

Current portion of long-term debt
403,075

 

Accrued interest payable
40,232

 
34,030

Accrued liabilities
55,986

 
60,485

Taxes other than income tax
16,709

 
15,685

Income tax payable
847

 
6,510

Total current liabilities
654,517

 
289,396

Long-term debt
3,073,864

 
3,014,364

Deferred income tax liability
22,863

 
22,204

Other long-term liabilities
107,031

 
92,964

Commitments and contingencies (Note 5)

 

Partners’ equity:
 
 
 
Series A preferred limited partners (9,060,000 preferred units outstanding as of June 30, 2017 and December 31, 2016)
218,340

 
218,400

Series B preferred limited partners (15,400,000 preferred units outstanding as of June 30, 2017)
371,613

 

Common limited partners (93,030,988 and 78,616,228 common units outstanding
as of June 30, 2017 and December 31, 2016, respectively)
1,958,435

 
1,455,642

General partner
41,944

 
31,752

Accumulated other comprehensive loss
(89,283
)
 
(94,177
)
Total partners’ equity
2,501,049

 
1,611,617

Total liabilities and partners’ equity
$
6,359,324

 
$
5,030,545

See Condensed Notes to Consolidated Financial Statements.

3


NUSTAR ENERGY L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited, Thousands of Dollars, Except Unit and Per Unit Data)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Revenues:
 
 
 
 
 
 
 
Service revenues
$
283,700

 
$
270,403

 
$
550,162

 
$
536,969

Product sales
151,788

 
167,401

 
372,756

 
306,538

Total revenues
435,488

 
437,804

 
922,918

 
843,507

Costs and expenses:
 
 
 
 
 
 
 
Cost of product sales
144,479

 
157,617

 
352,285

 
286,607

Operating expenses:
 
 
 
 
 
 
 
Third parties
116,400

 
112,662

 
217,426

 
196,202

Related party

 

 

 
21,681

Total operating expenses
116,400

 
112,662

 
217,426

 
217,883

General and administrative expenses:
 
 
 
 
 
 
 
Third parties
33,604

 
22,657

 
58,199

 
35,949

Related party

 

 

 
10,493

Total general and administrative expenses
33,604

 
22,657

 
58,199

 
46,442

Depreciation and amortization expense
67,601

 
53,651

 
124,465

 
106,793

Total costs and expenses
362,084

 
346,587

 
752,375

 
657,725

Operating income
73,404

 
91,217

 
170,543

 
185,782

Interest expense, net
(45,612
)
 
(34,229
)
 
(82,026
)
 
(68,352
)
Other income (expense), net
88

 
(201
)
 
228

 
(372
)
Income before income tax expense
27,880

 
56,787

 
88,745

 
117,058

Income tax expense
1,630

 
4,270

 
4,555

 
7,140

Net income
$
26,250

 
$
52,517

 
$
84,190

 
$
109,918

 
 
 
 
 
 
 
 
Basic and diluted net income per common unit (Note 11)
$
0.05

 
$
0.52

 
$
0.51

 
$
1.09

Basic weighted-average common units outstanding
90,345,469

 
77,886,219

 
84,526,506

 
77,886,148

Diluted weighted-average common units outstanding
90,345,469

 
77,939,279

 
84,526,506

 
77,943,702

 
 
 
 
 
 
 
 
Comprehensive income
$
27,381

 
$
29,178

 
$
89,084

 
$
71,801

See Condensed Notes to Consolidated Financial Statements.

4


NUSTAR ENERGY L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, Thousands of Dollars)
 
Six Months Ended June 30,
 
2017
 
2016
Cash Flows from Operating Activities:
 
 
 
Net income
$
84,190

 
$
109,918

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization expense
124,465

 
106,793

Unit-based compensation expense
5,117

 
2,869

Amortization of debt related items
3,146

 
3,965

Gain from sale or disposition of assets
(36
)
 
(2
)
Deferred income tax expense
23

 
2,562

Changes in current assets and current liabilities (Note 12)
(15,344
)
 
(15,274
)
Other, net
7,427

 
4,202

Net cash provided by operating activities
208,988

 
215,033

Cash Flows from Investing Activities:
 
 
 
Capital expenditures
(108,849
)
 
(95,361
)
Change in accounts payable related to capital expenditures
6,851

 
(12,674
)
Proceeds from sale or disposition of assets
1,966

 

Proceeds from Axeon term loan
110,000

 

Acquisitions
(1,476,719
)
 

Net cash used in investing activities
(1,466,751
)
 
(108,035
)
Cash Flows from Financing Activities:
 
 
 
Proceeds from long-term debt borrowings
1,037,161

 
348,904

Proceeds from short-term debt borrowings
565,000

 
279,000

Proceeds from note offering, net of issuance costs
543,313

 

Long-term debt repayments
(1,122,239
)
 
(184,192
)
Short-term debt repayments
(574,000
)
 
(363,000
)
Proceeds from issuance of preferred units, net of issuance costs
371,802

 

Proceeds from issuance of common units, net of issuance costs
643,858

 

Contributions from general partner
13,597

 

Distributions to preferred unitholders
(10,696
)
 

Distributions to common unitholders and general partner
(216,139
)
 
(196,102
)
Increase (decrease) in cash book overdrafts
1,321

 
(11,166
)
Other, net
(2,615
)
 
(674
)
Net cash provided by (used in) financing activities
1,250,363

 
(127,230
)
Effect of foreign exchange rate changes on cash
649

 
4,389

Net decrease in cash and cash equivalents
(6,751
)
 
(15,843
)
Cash and cash equivalents as of the beginning of the period
35,942

 
118,862

Cash and cash equivalents as of the end of the period
$
29,191

 
$
103,019

See Condensed Notes to Consolidated Financial Statements.

5


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

1. ORGANIZATION AND BASIS OF PRESENTATION

Organization and Operations
NuStar Energy L.P. (NYSE: NS) is a publicly held Delaware limited partnership 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 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 or NSH) (NYSE: NSH) owns our general partner, Riverwalk Logistics, L.P., and owns an approximate 11% common limited partner interest in us as of June 30, 2017.

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

Recent Developments
Navigator Acquisition and Financing Transactions. On May 4, 2017, we completed the acquisition of Navigator Energy Services, LLC for approximately $1.5 billion (the Navigator Acquisition), subject to customary adjustments at and following closing. In order to fund the purchase price, we issued 14,375,000 common units for net proceeds of $657.5 million, issued $550.0 million of 5.625% senior notes for net proceeds of $543.3 million and issued 15,400,000 of our 7.625% Series B Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Units (Series B Preferred Units) for net proceeds of $371.8 million. Please refer to Notes 3, 4 and 10 for further discussion.

Axeon Term Loan. On February 22, 2017, we settled and terminated the $190.0 million term loan to Axeon Specialty Products, LLC (the Axeon Term Loan), pursuant to which we also provided credit support, such as guarantees, letters of credit and cash collateral, as applicable, of up to $125.0 million to Axeon Specialty Products, LLC (Axeon). We received $110.0 million in settlement of the Axeon Term Loan, and our obligation to provide ongoing credit support to Axeon ceased. Please refer to Note 6 for further discussion of the Axeon Term Loan and credit support.

Basis of Presentation
These unaudited condensed consolidated financial statements include the accounts of the Partnership and subsidiaries in which the Partnership has a controlling interest. Inter-partnership balances and transactions have been eliminated in consolidation.

These unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to the Quarterly Report on Form 10-Q and Article 10 of Regulation S-X of the Securities Exchange Act of 1934. Accordingly, they do not include all of the information and notes required by GAAP for complete consolidated financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included, and all disclosures are adequate. All such adjustments are of a normal recurring nature unless disclosed otherwise. Financial information for the three and six months ended June 30, 2017 and 2016 included in these Condensed Notes to Consolidated Financial Statements is derived from our unaudited condensed consolidated financial statements. Operating results for the three and six months ended June 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. The consolidated balance sheet as of December 31, 2016 has been derived from the audited consolidated financial statements as of that date. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2016.

2. NEW ACCOUNTING PRONOUNCEMENTS

Unit-Based Payments
In May 2017, the Financial Accounting Standards Board (FASB) issued amended guidance that clarifies when a change to the terms and conditions of a unit-based payment award is accounted for as a modification. Under the amended guidance, an entity will apply modification accounting if the value, vesting or classification of the unit-based payment award changes. The guidance is effective for annual and interim periods beginning after December 15, 2017, and amendments should be applied prospectively. We will adopt these provisions January 1, 2018, and we do not expect the guidance to have a material impact on our financial position, results of operations or disclosures.


6

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

Defined Benefit Plans
In March 2017, the FASB issued amended guidance that changes the presentation of net periodic pension cost related to defined benefit plans. Under the amended guidance, the service cost component of net periodic benefit cost will be presented in the same income statement line items as other current employee compensation costs, but the remaining components of net periodic benefit cost will be presented outside of operating income. The changes are effective for annual and interim periods beginning after December 15, 2017, and amendments should be applied retrospectively. We will adopt these provisions January 1, 2018, and we do not expect the guidance to have a material impact on our financial position, results of operations or disclosures.

Goodwill
In January 2017, the FASB issued amended guidance that simplifies the accounting for goodwill impairment by eliminating step 2 of the goodwill impairment test. Under the amended guidance, goodwill impairment will be measured as the excess of the reporting unit’s carrying value over its fair value, not to exceed the carrying amount of goodwill for that reporting unit. The changes are effective for annual and interim periods beginning after December 15, 2019, and amendments should be applied prospectively. Early adoption is permitted for any impairment tests performed after January 1, 2017, and we are currently evaluating whether we will adopt these provisions early. Regardless of our decision, we do not expect the guidance to have a material impact on our financial position, results of operations or disclosures.

Definition of a Business
In January 2017, the FASB issued amended guidance that clarifies the definition of a business used in evaluating whether a set of transferred assets and activities constitutes a business. Under the amended guidance, if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets, the set of transferred assets and activities would not represent a business. To be considered a business, the set of assets transferred is also required to include at least one substantive process that together significantly contribute to the ability to create outputs. In addition, the amended guidance narrows the definition of outputs to be consistent with how outputs are described in the new revenue recognition standard. The changes are effective for annual and interim periods beginning after December 15, 2017, and amendments should be applied prospectively. We are currently evaluating whether we will early adopt these provisions. We do not expect the guidance to have a material impact on our financial position, results of operations or disclosures.

Statement of Cash Flows
In August 2016, the FASB issued amended guidance that clarifies how entities should present certain cash receipts and cash payments on the statement of cash flows, including but not limited to debt prepayment or debt extinguishment costs, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims and distributions received from equity method investees. The changes are effective for annual and interim periods beginning after December 15, 2017, and amendments should be applied retrospectively. We will adopt these provisions January 1, 2018, and we do not expect the guidance to have a material impact on our statements of cash flows or disclosures.

Credit Losses
In June 2016, the FASB issued amended guidance that requires the use of a “current expected loss” model for financial assets measured at amortized cost and certain off-balance sheet credit exposures. Under this model, entities will be required to estimate the lifetime expected credit losses on such instruments based on historical experience, current conditions, and reasonable and supportable forecasts. This amended guidance also expands the disclosure requirements to enable users of financial statements to understand an entity’s assumptions, models and methods for estimating expected credit losses. The changes are effective for annual and interim periods beginning after December 15, 2019, and amendments should be applied using a modified retrospective approach. We currently expect to adopt the amended guidance on January 1, 2020 and are assessing the impact of this amended guidance on our financial position, results of operations and disclosures. We plan to provide additional information about the expected financial impact at a future date.

Leases
In February 2016, the FASB issued amended guidance that requires lessees to recognize the assets and liabilities that arise from most leases on the balance sheet. For lessors, this amended guidance modifies the classification criteria and the accounting for sales-type and direct financing leases. The changes are effective for annual and interim periods beginning after December 15,
2018, and amendments should be applied using a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements, with the option to use certain expedients. We currently expect to adopt these provisions on January 1, 2019. We have initiated a project to assess the impact of this amended guidance on our financial position, results of operations, disclosures and internal controls and plan to provide additional information about the expected financial impact at a future date.


7

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

Financial Instruments
In January 2016, the FASB issued new guidance that addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The changes are effective for annual and interim periods beginning after December 15, 2017, and amendments should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. We will adopt these provisions January 1, 2018, and we do not expect the guidance to have a material impact on our financial position, results of operations or disclosures.

Revenue Recognition
In May 2014, the FASB and the International Accounting Standards Board jointly issued a comprehensive new revenue recognition standard. In August 2015, the FASB deferred the effective date by one year. The standard is now effective for public entities for annual and interim periods beginning after December 15, 2017, using one of two retrospective transition methods. Early adoption is permitted, but not before the original effective date. The FASB has subsequently issued several updates that amend and/or clarify the new revenue recognition standard. We expect to complete implementation of the new revenue recognition standard by the end of 2017. Based on our analysis completed to date, we do not believe the standard will significantly impact the amount or timing of revenues recognized under the vast majority of our revenue contracts. We currently expect to adopt the new guidance using the modified retrospective approach, under which the cumulative effect of initially applying the new guidance is recognized as an adjustment to the opening balance of retained earnings, in the first quarter of 2018. We are continuing to evaluate the impact of this new guidance on our financial position, results of operations and disclosures, including customer contracts associated with our recently closed Navigator Acquisition.

3. ACQUISITIONS

Navigator Acquisition
On April 11, 2017, we entered into a Membership Interest Purchase and Sale Agreement (the Acquisition Agreement) with FR Navigator Holdings LLC to acquire all of the issued and outstanding limited liability company interests in Navigator Energy Services, LLC (Navigator) for approximately $1.5 billion, subject to customary adjustments at and following closing. We closed on the Navigator Acquisition on May 4, 2017 and funded the purchase price with the net proceeds of the equity and debt issuances described in Notes 4 and 10. We acquired crude oil transportation, pipeline gathering and storage assets located in the Midland Basin of West Texas consisting of: (i) more than 500 miles of crude oil gathering and transportation pipelines with approximately 92,000 barrels per day ship-or-pay volume commitments and deliverability of approximately 412,000 barrels per day; (ii) a pipeline gathering system with more than 200 connected producer tank batteries capable of more than 400,000 barrels per day of pumping capacity covering over 500,000 dedicated acres with fixed fee contracts; and (iii) approximately 1.0 million barrels of crude oil storage capacity with 440,000 barrels contracted to third parties. We collectively refer to the acquired assets as our Permian Crude System. The assets acquired are included in our pipeline segment.

The Navigator Acquisition broadens our geographic footprint by marking our entry into the Permian Basin and complements our existing asset base. We believe the Permian Crude System will provide a strong growth platform that, when coupled with our assets in the Eagle Ford region, serve to solidify our presence in two of the most prolific basins in the United States.


8

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

We accounted for the Navigator Acquisition using the acquisition method. The estimates of fair value of the assets acquired and liabilities assumed are based on preliminary assumptions, pending the completion of an independent appraisal and other evaluations as information becomes available to us. The following table reflects the preliminary purchase price allocation:
 
Preliminary Purchase Price Allocation
 
(Thousands of Dollars)
Accounts receivable
$
4,916

Other current assets
2,476

Property, plant and equipment, net
396,603

Intangible assets (a)
750,000

Goodwill (b)
326,722

Other long-term assets, net
2,125

Current liabilities
(26,971
)
Preliminary purchase price allocation, net of cash acquired
1,455,871

Pending closing adjustment
20,848

Cash disbursed at closing
$
1,476,719

(a)
Intangible assets, which consist of customer contracts and relationships, are expected to be amortized over a weighted average period of 20 years.
(b)
The goodwill acquired represents the expected benefit from entering new geographic areas and the anticipated opportunities to generate future cash flows from the assets acquired and potential future projects.

The values used in the purchase price allocation above and estimated useful lives are preliminary and subject to change after we finalize our review of the specific types, nature and condition of Navigator’s property, plant and equipment and intangible assets and pending the completion of an independent appraisal. A change in the value used for property, plant and equipment or intangible assets may be significant and would cause a corresponding increase or decrease in goodwill.

The condensed statements of income include the results of operations for the Navigator commencing on May 4, 2017. For the three months ended June 30, 2017, we recognized $9.5 million in revenues and an operating loss of $3.4 million related to the Navigator Acquisition. Additionally, we incurred transaction costs of $10.2 million included in “General and administrative expenses” and $3.7 million included in “Interest expense, net” on the condensed consolidated statements of comprehensive income for the three months ended June 30, 2017.

The unaudited pro forma information for the three and six months ended June 30, 2017 and 2016 presented below combines the historical financial information for Navigator and the Partnership for those periods. The information assumes we completed the Navigator Acquisition on January 1, 2016 and the following:
we issued approximately 14.4 million common units;
we received a contribution from our general partner of $13.6 million to maintain its 2% interest;
we issued 15.4 million Series B Preferred Units;
we issued $550.0 million of 5.625% senior notes;
additional depreciation and amortization that would have been incurred assuming the fair value adjustments to property, plant and equipment and intangible assets reflected in the preliminary purchase price allocation above have been applied; and
we satisfied Navigator’s outstanding obligations under its revolving credit agreement.

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(Thousands of Dollars, Except Per Unit Data)
Revenues
$
439,933

 
$
443,314

 
$
937,317

 
$
852,169

Net income
$
21,211

 
$
33,378

 
$
63,659

 
$
70,118

 
 
 
 
 
 
 
 
Basic and diluted net (loss) income per common unit
$
(0.03
)
 
$
0.15

 
$
0.16

 
$
0.34


9

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

The pro forma information for the three and six months ended June 30, 2017 includes transaction costs of approximately $14.0 million, which were directly attributable to the Navigator Acquisition. The pro forma information is unaudited and is not necessarily indicative of the results of operations that actually would have resulted had the Navigator Acquisition occurred on January 1, 2016 or that may result in the future.

4. DEBT

Issuance of 5.625% Senior Notes
On April 28, 2017, NuStar Logistics issued $550.0 million of 5.625% senior notes due April 28, 2027. We used the net proceeds of $543.3 million from the offering to fund a portion of the purchase price for the Navigator Acquisition and to pay related fees and expenses. The interest on the 5.625% senior notes is payable semi-annually in arrears on April 28 and October 28 of each year beginning on October 28, 2017. The 5.625% senior notes do not have sinking fund requirements. These notes rank equally with existing senior unsecured indebtedness and senior to existing subordinated indebtedness of NuStar Logistics. The 5.625% senior notes contain restrictions on NuStar Logistics’ ability to incur secured indebtedness unless the same security is also provided for the benefit of holders of the senior notes. In addition, the senior notes limit NuStar Logistics’ ability to incur indebtedness secured by certain liens, engage in certain sale-leaseback transactions and engage in certain consolidations, mergers or asset sales. The 5.625% senior notes are fully and unconditionally guaranteed by NuStar Energy and NuPOP.

At the option of NuStar Logistics, the 5.625% senior notes may be redeemed in whole or in part at any time at a redemption price, plus accrued and unpaid interest to the redemption date. If we undergo a change of control, followed by a ratings decline within 60 days of a change of control, each holder of the notes may require us to repurchase all or a portion of its notes at a price equal to 101% of the principal amount of the notes, plus any accrued and unpaid interest to the date of repurchase.

Revolving Credit Agreement
During the six months ended June 30, 2017, the balance under our $1.5 billion five-year revolving credit agreement (the Revolving Credit Agreement) decreased by $74.2 million. The Revolving Credit Agreement matures on October 29, 2019 and bears interest, at our option, based on an alternative base rate, a LIBOR-based rate or a EURIBOR-based rate. The interest rate on the Revolving Credit Agreement is subject to adjustment if our debt rating is downgraded (or upgraded) by certain credit rating agencies. As of June 30, 2017, our weighted-average interest rate related to borrowings under the Revolving Credit Agreement was 2.8%, and we had $764.8 million outstanding.

As of June 30, 2017, our consolidated debt coverage ratio (as defined in the Revolving Credit Agreement) could not exceed 5.50-to-1.00 as a result of the Navigator Acquisition. The requirement not to exceed a maximum consolidated debt coverage ratio may limit the amount we can borrow under the Revolving Credit Agreement to an amount less than the total amount available for borrowing. As of June 30, 2017, letters of credit issued under the Revolving Credit Agreement totaled $7.7 million, and we had $727.5 million available for borrowing. We believe that we are in compliance with the covenants in the Revolving Credit Agreement as of June 30, 2017.

Gulf Opportunity Zone Revenue Bonds
In 2008, 2010 and 2011, the Parish of St. James, Louisiana issued, pursuant to the Gulf Opportunity Zone Act of 2005, an aggregate $365.4 million of tax-exempt revenue bonds (the GoZone Bonds) associated with our St. James, Louisiana terminal expansions. The GoZone Bonds bear interest based on a weekly tax-exempt bond market interest rate, and interest is paid monthly. The weighted-average interest rate was 0.9% as of June 30, 2017. Following the issuances, the proceeds were deposited with a trustee and are disbursed to us upon our request for reimbursement of expenditures related to our St. James terminal expansions. We include the amount remaining in trust in “Other long-term assets, net,” and we include the amount of bonds issued in “Long-term debt” on the consolidated balance sheets. For the six months ended June 30, 2017, we did not receive any proceeds from the trustee, and as of June 30, 2017, the amount remaining in trust totaled $42.4 million.

Receivables Financing Agreement
NuStar Energy and NuStar Finance LLC (NuStar Finance), a special purpose entity and wholly owned subsidiary of NuStar Energy, are parties to a $125.0 million receivables financing agreement with third-party lenders (the Receivables Financing Agreement) and agreements with certain of NuStar Energy’s wholly owned subsidiaries (collectively with the Receivables Financing Agreement, the Securitization Program). NuStar Finance’s sole business consists of purchasing receivables from certain of NuStar Energy’s wholly owned subsidiaries and providing these receivables as collateral under the Securitization Program. NuStar Finance is a separate legal entity and the assets of NuStar Finance, including these accounts receivable, are not available to satisfy the claims of creditors of NuStar Energy, its subsidiaries selling receivables under the Securitization

10

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

Program or their affiliates. The amount available for borrowing is based on the availability of eligible receivables and other customary factors and conditions.

Borrowings by NuStar Finance under the Receivables Financing Agreement bear interest at either the applicable commercial paper rate or the applicable bank rate, each as defined under the Receivables Financing Agreement. The Securitization Program has an initial termination date of June 15, 2018, with the option to renew for additional 364-day periods thereafter. As of June 30, 2017, $81.7 million of our accounts receivable are included in the Securitization Program. The amount of borrowings outstanding under the Receivables Financing Agreement totaled $53.3 million as of June 30, 2017, which is included in “Current portion of long-term debt” on the consolidated balance sheet.

5. COMMITMENTS AND CONTINGENCIES

We have contingent liabilities resulting from various litigation, claims and commitments. We record accruals for loss contingencies when losses are considered probable and can be reasonably estimated. Legal fees associated with defending the Partnership in legal matters are expensed as incurred. We had an accrual of $1.7 million for contingent losses as of June 30, 2017 and none as of December 31, 2016. The amount that will ultimately be paid may differ from the recorded accruals, and the timing of such payments is uncertain. In addition, due to the inherent uncertainty of litigation, there can be no assurance that the resolution of any particular claim or proceeding would not have a material adverse effect on our results of operations, financial position or liquidity.

6. FAIR VALUE MEASUREMENTS

We segregate the inputs used in measuring fair value into three levels: Level 1, defined as observable inputs, such as quoted prices for identical assets or liabilities in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable, such as quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in markets that are not active; and Level 3, defined as unobservable inputs for which little or no market data exists. We consider counterparty credit risk and our own credit risk in the determination of all estimated fair values.

Recurring Fair Value Measurements
The following assets and liabilities are measured at fair value on a recurring basis:
 
June 30, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(Thousands of Dollars)
Assets:
 
 
 
 
 
 
 
Other current assets:
 
 
 
 
 
 
 
Product imbalances
$
5,249

 
$

 
$

 
$
5,249

Total
$
5,249

 
$

 
$

 
$
5,249

Liabilities:
 
 
 
 
 
 
 
Accrued liabilities:
 
 
 
 
 
 
 
Product imbalances
$
(3,031
)
 
$

 
$

 
$
(3,031
)
Commodity derivatives
(451
)
 

 

 
(451
)
Interest rate swaps

 
(6,392
)
 

 
(6,392
)
Other long-term liabilities:
 
 
 
 
 
 
 
Interest rate swaps

 
(2,867
)
 

 
(2,867
)
Total
$
(3,482
)
 
$
(9,259
)
 
$

 
$
(12,741
)

11

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

 
December 31, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(Thousands of Dollars)
Assets:
 
 
 
 
 
 
 
Other current assets:
 
 
 
 
 
 
 
Product imbalances
$
1,551

 
$

 
$

 
$
1,551

Commodity derivatives

 
155

 

 
155

Other long-term assets, net:
 
 
 
 
 
 
 
Interest rate swaps

 
1,314

 

 
1,314

Total
$
1,551

 
$
1,469

 
$

 
$
3,020

Liabilities:
 
 
 
 
 
 
 
Accrued liabilities:
 
 
 
 
 
 
 
Product imbalances
$
(1,577
)
 
$

 
$

 
$
(1,577
)
Commodity derivatives
(4,887
)
 
(165
)
 

 
(5,052
)
Other long-term liabilities:
 
 
 
 
 
 
 
Guarantee liability

 

 
(1,230
)
 
(1,230
)
Interest rate swaps

 
(2,632
)
 

 
(2,632
)
Total
$
(6,464
)
 
$
(2,797
)
 
$
(1,230
)
 
$
(10,491
)

Product Imbalances. Since we value our assets and liabilities related to product imbalances using quoted market prices in active markets as of the reporting date, we include these product imbalances in Level 1 of the fair value hierarchy.

Commodity Derivatives. We base the fair value of certain of our commodity derivative instruments on quoted prices on an exchange; accordingly, we include these items in Level 1 of the fair value hierarchy. We also have derivative instruments for which we determine fair value using industry pricing services and other observable inputs, such as quoted prices on an exchange for similar derivative instruments, and we include these derivative instruments in Level 2 of the fair value hierarchy. See Note 7 for a discussion of our derivative instruments.

Interest Rate Swaps. Because we estimate the fair value of our forward-starting interest rate swaps using discounted cash flows, which use observable inputs such as time to maturity and market interest rates, we include these interest rate swaps in Level 2 of the fair value hierarchy.

Guarantees. In 2014, we sold our remaining 50% ownership interest in Axeon and agreed to provide them with credit support, such as guarantees, letters of credit and cash collateral, as applicable, of up to $125.0 million. As of December 31, 2016, we provided guarantees totaling $54.1 million, and one guarantee that did not specify a maximum amount. Our estimate of the fair value was based on significant inputs not observable in the market and thus fell within Level 3 of the fair value hierarchy. In conjunction with the termination of the Axeon Term Loan discussed in the following section, our obligation to provide credit support to Axeon ceased.

Fair Value of Financial Instruments
We recognize cash equivalents, receivables, payables and debt in our consolidated balance sheets at their carrying amounts. The fair values of these financial instruments, except for long-term debt, approximate their carrying amounts.

The estimated fair values and carrying amounts of long-term debt, including the current portion, and the Axeon Term Loan were as follows:
 
June 30, 2017
 
December 31, 2016
 
Long-term Debt
 
Long-term Debt
 
Axeon Term Loan
 
(Thousands of Dollars)
Fair value
$
3,591,708

 
$
3,084,762

 
$
110,000

Carrying amount
$
3,476,939

 
$
3,014,364

 
$
110,000



12

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

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

Axeon Term Loan. In December 2016, Lindsay Goldberg LLC, the private investment firm that owned Axeon, informed us that they entered into an agreement to sell Axeon’s retail asphalt sales and distribution business (the Axeon Sale), and we entered into an agreement with Axeon (the Axeon Letter Agreement) to settle and terminate the Axeon Term Loan for $110.0 million upon closing of the Axeon Sale. Therefore, we reduced the carrying amount of the Axeon Term Loan to $110.0 million and reclassified the Axeon Term Loan from “Other long-term assets, net” to “Other current assets” on the consolidated balance sheet as of December 31, 2016. The Axeon Sale closed on February 22, 2017, at which time we received the $110.0 million payment in accordance with the Axeon Letter Agreement. Furthermore, the Axeon Term Loan and our obligation to provide ongoing credit support to Axeon all terminated concurrently on February 22, 2017.

7. DERIVATIVES AND RISK MANAGEMENT ACTIVITIES

We utilize various derivative instruments to manage our exposure to interest rate risk and commodity price risk. Our risk management policies and procedures are designed to monitor interest rates, futures and swap positions and over-the-counter positions, as well as physical commodity volumes, grades, locations and delivery schedules, to help ensure that our hedging activities address our market risks.
Interest Rate Risk
We are a party to certain interest rate swap agreements to manage our exposure to changes in interest rates, which include forward-starting interest rate swap agreements related to forecasted debt issuances in 2018 and 2020. We entered into these swaps in order to hedge the risk of changes in the interest payments attributable to changes in the benchmark interest rate during the period from the effective date of the swap to the issuance of the forecasted debt. Under the terms of the swaps, we pay a fixed rate and receive a rate based on the three-month USD LIBOR. These swaps qualify as cash flow hedges, and we designate them as such. We record the effective portion of mark-to-market adjustments as a component of “Accumulated other comprehensive income (loss)” (AOCI), and the amount in AOCI will be recognized in “Interest expense, net” as the forecasted interest payments occur or if the interest payments are probable not to occur. As of June 30, 2017 and December 31, 2016, the aggregate notional amount of forward-starting interest rate swaps totaled $600.0 million.

Commodity Price Risk
We are exposed to market risks related to the volatility of crude oil and refined product prices. In order to reduce the risk of commodity price fluctuations with respect to our crude oil and refined product inventories and related firm commitments to purchase and/or sell such inventories, we utilize commodity futures and swap contracts, which qualify, and we designate, as fair value hedges. Derivatives that are intended to hedge our commodity price risk, but fail to qualify as fair value or cash flow hedges, are considered economic hedges, and we record associated gains and losses in net income. Our risk management committee oversees our trading controls and procedures and certain aspects of commodity and trading risk management. Our risk management committee also reviews all new commodity and trading risk management strategies in accordance with our risk management policy, as approved by our board of directors.

The volume of commodity contracts is based on open derivative positions and represents the combined volume of our long and short open positions on an absolute basis, which totaled 2.3 million barrels and 4.7 million barrels as of June 30, 2017 and December 31, 2016, respectively. We had $0.3 million and $1.8 million of margin deposits as of June 30, 2017 and December 31, 2016, respectively.


13

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

The fair values of our derivative instruments included in our consolidated balance sheets were as follows:
 
 
 
Asset Derivatives
 
Liability Derivatives
 
Balance Sheet Location
 
June 30,
2017
 
December 31,
2016
 
June 30,
2017
 
December 31,
2016
 
 
 
(Thousands of Dollars)
Derivatives Designated as
Hedging Instruments:
 
 
 
 
 
 
 
 
 
Interest rate swaps
Other long-term assets, net
 
$

 
$
1,314

 
$

 
$

Commodity contracts
Accrued liabilities
 
162

 
144

 
(188
)
 
(3,566
)
Interest rate swaps
Accrued liabilities
 

 

 
(6,392
)
 

Interest rate swaps
Other long-term liabilities
 

 

 
(2,867
)
 
(2,632
)
Total
 
 
162

 
1,458

 
(9,447
)
 
(6,198
)
 
 
 
 
 
 
 
 
 
 
Derivatives Not Designated
as Hedging Instruments:
 
 
 
 
 
 
 
 
 
Commodity contracts
Other current assets
 

 
265

 

 
(110
)
Commodity contracts
Accrued liabilities
 
1,387

 
9,128

 
(1,812
)
 
(10,758
)
Total
 
 
1,387

 
9,393

 
(1,812
)
 
(10,868
)
 
 
 
 
 
 
 
 
 
 
Total Derivatives
 
 
$
1,549

 
$
10,851

 
$
(11,259
)
 
$
(17,066
)
 
Certain of our derivative instruments are eligible for offset in the consolidated balance sheets and subject to master netting arrangements. Under our master netting arrangements, there is a legally enforceable right to offset amounts, and we intend to settle such amounts on a net basis. The following are the net amounts presented on the consolidated balance sheets:
Commodity Contracts
 
June 30,
2017
 
December 31,
2016
 
 
(Thousands of Dollars)
Net amounts of assets presented in the consolidated balance sheets
 
$

 
$
155

Net amounts of liabilities presented in the consolidated balance sheets
 
$
(451
)
 
$
(5,052
)

We recognize the impact of our commodity contracts on earnings in “Cost of product sales” on the condensed consolidated statements of comprehensive income, and that impact was as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(Thousands of Dollars)
Derivatives Designated as Fair Value Hedging Instruments:
 
 
 
 
 
 
 
Gain (loss) recognized in income on derivative
$
364

 
$
(5,792
)
 
$
2,461

 
$
(6,804
)
(Loss) gain recognized in income on hedged item
(313
)
 
6,938

 
(2,147
)
 
9,804

Gain recognized in income for ineffective portion
51

 
1,146

 
314

 
3,000

 
 
 
 
 
 
 
 
Derivatives Not Designated as Hedging Instruments:
 
 
 
 
 
 
 
Gain (loss) recognized in income on derivative
$
52

 
$
(724
)
 
$
(86
)
 
$
(4
)


14

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

Our interest rate swaps had the following impact on earnings:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(Thousands of Dollars)
Derivatives Designated as Cash Flow Hedging Instruments:
 
 
 
 
 
 
 
Loss recognized in other comprehensive income on derivative (effective portion)
$
(7,980
)
 
$
(20,200
)
 
$
(7,941
)
 
$
(50,178
)
Loss reclassified from AOCI into interest expense, net (effective portion)
$
(1,729
)
 
$
(2,158
)
 
$
(3,528
)
 
$
(4,380
)

As of June 30, 2017, we expect to reclassify a loss of $5.8 million to “Interest expense, net” within the next twelve months associated with unwound forward-starting interest rate swaps.

8. RELATED PARTY TRANSACTIONS

Employee Transfer from NuStar GP, LLC. On March 1, 2016, NuStar GP, LLC, the general partner of our general partner and a wholly owned subsidiary of NuStar GP Holdings, transferred and assigned to NuStar Services Company LLC (NuStar Services Co), a wholly owned subsidiary of NuStar Energy, all of NuStar GP, LLC’s employees and related benefit plans, programs, contracts and policies (the Employee Transfer). As a result of the Employee Transfer, we pay employee costs directly and sponsor the long-term incentive plan and other employee benefit plans. Please refer to Note 9 for a discussion of our employee benefit plans.

GP Services Agreement. Prior to the Employee Transfer, our operations were managed by NuStar GP, LLC under a services agreement effective January 1, 2008, pursuant to which employees of NuStar GP, LLC performed services for our U.S. operations. Employees of NuStar GP, LLC provided services to us and NuStar GP Holdings; therefore, we reimbursed NuStar GP, LLC for all employee costs incurred prior to the Employee Transfer, other than the expenses allocated to NuStar GP Holdings. For the six months ended June 30, 2016, we reimbursed NuStar GP, LLC $21.7 million and $10.5 million for operating expenses and general and administrative expenses, respectively.

In conjunction with the Employee Transfer, we entered into an Amended and Restated Services Agreement with NuStar GP, LLC, effective March 1, 2016 (the Amended GP Services Agreement). The Amended GP Services Agreement provides that we will furnish administrative services necessary to conduct the business of NuStar GP Holdings. NuStar GP Holdings will compensate us for these services through an annual fee of $1.0 million, subject to adjustment based on the annual merit increase percentage applicable to our employees for the most recently completed fiscal year and for changes in level of service. The Amended GP Services Agreement will terminate on March 1, 2020 and will automatically renew for successive two-year terms, unless terminated by either party.

9. EMPLOYEE BENEFIT PLANS

Effective March 1, 2016, in connection with the Employee Transfer, we assumed sponsorship and responsibility for the defined benefit plans and defined contribution plans described below. Prior to the Employee Transfer, NuStar GP, LLC sponsored and maintained these employee benefit plans and we reimbursed all costs incurred by NuStar GP, LLC related to these employee benefit plans at cost.

The NuStar Pension Plan (the Pension Plan) is a qualified non-contributory defined benefit pension plan that provides eligible U.S. employees with retirement income as calculated under a cash balance formula. The NuStar Excess Pension Plan (the Excess Pension Plan) is a nonqualified deferred compensation plan that provides benefits to a select group of management or other highly compensated employees. The Pension Plan and Excess Pension Plan are collectively referred to as the Pension Plans.

We also sponsor a contributory medical benefits plan for U.S. employees that retired prior to April 1, 2014. For employees that retire on or after April 1, 2014, we provide partial reimbursement for eligible third-party health care premiums.


15

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

The following table summarizes the components of net periodic benefit costs for the Pension Plans and other postretirement benefits on a combined basis for periods prior to the Employee Transfer and after the Employee Transfer:
 
Pension Plans
 
Other Postretirement
Benefits
 
2017
 
2016
 
2017
 
2016
 
(Thousands of Dollars)
For the three months ended June 30:
 
 
 
 
 
 
 
Service cost
$
2,239

 
$
1,926

 
$
113

 
$
105

Interest cost
1,127

 
1,006

 
108

 
100

Expected return on assets
(1,602
)
 
(1,351
)
 

 

Amortization of prior service credit
(516
)
 
(516
)
 
(286
)
 
(286
)
Amortization of net loss
371

 
273

 
48

 
45

Net periodic benefit cost (income)
$
1,619

 
$
1,338

 
$
(17
)
 
$
(36
)
 
 
 
 
 
 
 
 
For the six months ended June 30:
 
 
 
 
 
 
 
Service cost
$
4,478

 
$
3,852

 
$
226

 
$
210

Interest cost
2,254

 
2,012

 
216

 
200

Expected return on assets
(3,205
)
 
(2,703
)
 

 

Amortization of prior service credit
(1,031
)
 
(1,033
)
 
(572
)
 
(572
)
Amortization of net loss
742

 
546

 
96

 
90

Net periodic benefit cost (income)
$
3,238

 
$
2,674

 
$
(34
)
 
$
(72
)

10. PARTNERS’ EQUITY

Amendment of Partnership Agreement
Our general partner amended and restated our partnership agreement in connection with the issuance of the Series B Preferred Units as described below and the Navigator Acquisition to waive up to an aggregate $22.0 million of the quarterly incentive distributions to our general partner for any NS common units issued from the date of the Acquisition Agreement (other than those attributable to NS common units issued under any equity compensation plan) for ten consecutive quarters, starting with the distributions for the second quarter of 2017.

Issuance of Common Units
On April 18, 2017, we issued 14,375,000 common units representing limited partner interests at a price of $46.35 per unit. We used the net proceeds from this offering of $657.5 million, including a contribution of $13.6 million from our general partner to maintain its 2% general partner interest, to fund a portion of the purchase price for the Navigator Acquisition.

Issuance of Series B Preferred Units
On April 28, 2017, we issued 15,400,000 of our Series B Preferred Units representing limited partner interests at a price of $25.00 per unit. We used the net proceeds of $371.8 million from the issuance of the Series B Preferred Units to fund a portion of the purchase price for the Navigator Acquisition and to pay related fees and expenses.

Distributions on the Series B Preferred Units are payable out of any legally available funds, accrue and are cumulative from the date of original issuance of the Series B Preferred Units and are payable on the 15th day of each of March, June, September and December of each year (beginning on September 15, 2017) to holders of record on the first day of each payment month. The initial distribution rate on the Series B Preferred Units to, but not including, June 15, 2022 is 7.625% per annum of the $25.00 liquidation preference per unit (equal to $1.90625 per unit per annum). On and after June 15, 2022, distributions on the Series B Preferred Units accumulate at a percentage of the $25.00 liquidation preference equal to an annual floating rate of the three-month LIBOR plus a spread of 5.643%. The Series B Preferred Units rank equal to our Series A Preferred Units and senior to our common units with respect to distribution rights and rights upon liquidation.

At any time on or after June 15, 2022, we may redeem our Series B Preferred Units, in whole or in part, at a redemption price of $25.00 per unit plus an amount equal to all accumulated and unpaid distributions to, but not including, the date of redemption, whether or not declared. We may also redeem the Series B Preferred Units upon the occurrence of certain rating

16

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

events or a change of control as defined in our partnership agreement. In the case of the latter instance, if we choose not to redeem the Series B Preferred Units, the preferred unitholders may have the ability to convert the Series B Preferred Units to common units at the then applicable conversion rate. Holders of the Series B Preferred Units have no voting rights except for certain exceptions set forth in our partnership agreement.

Partners’ Equity Activity
The following table summarizes changes to our partners’ equity (in thousands of dollars):
Balance as of January 1, 2017
$
1,611,617

Net income
84,190

Unit-based compensation expense
2,564

Other comprehensive income
4,894

Distributions to partners
(230,902
)
Issuance of preferred and common units, including contribution from general partner
1,029,257

Other
(571
)
Balance as of June 30, 2017
$
2,501,049


Accumulated Other Comprehensive Income (Loss)
The balance of and changes in the components included in AOCI were as follows:
 
Foreign
Currency
Translation
 
Cash Flow
Hedges
 
Pension and
Other
Postretirement
Benefits
 
Total
 
(Thousands of Dollars)
Balance as of January 1, 2017
$
(69,069
)
 
$
(22,258
)
 
$
(2,850
)
 
$
(94,177
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Other comprehensive income (loss) before
   reclassification adjustments
10,072

 
(7,941
)
 

 
2,131

Net gain on pension costs reclassified into operating
   expense

 

 
(572
)
 
(572
)
Net gain on pension costs reclassified into general and
   administrative expense

 

 
(193
)
 
(193
)
Net loss on cash flow hedges reclassified into interest
   expense, net

 
3,528

 

 
3,528

Other comprehensive income (loss)
10,072

 
(4,413
)
 
(765
)
 
4,894

Balance as of June 30, 2017
$
(58,997
)
 
$
(26,671
)
 
$
(3,615
)
 
$
(89,283
)


17

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

Allocations of Net Income
Our partnership agreement sets forth the calculation to be used to determine the amount and priority of cash distributions that the unitholders and general partner will receive. The partnership agreement also contains provisions for the allocation of net income to the unitholders and the general partner. Our net income for each quarterly reporting period is first allocated to the preferred limited partner unitholders in an amount equal to the earned distributions for the respective reporting period and then to the general partner in an amount equal to the general partner’s incentive distribution calculated based upon the declared distribution for the respective reporting period. We allocate the remaining net income or loss among the common unitholders (98%) and general partner (2%), as set forth in our partnership agreement.

The following table details the calculation of net income applicable to the general partner:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(Thousands of Dollars, Except Percentage Data)
Net income attributable to NuStar Energy L.P.
$
26,250

 
$
52,517

 
$
84,190

 
$
109,918

Less preferred limited partner interest
9,950

 

 
14,763

 

Less general partner incentive distribution
10,912

 
10,805

 
23,824

 
21,610

Net income after general partner incentive distribution and preferred limited partner interest
5,388

 
41,712

 
45,603

 
88,308

General partner interest allocation
2
%
 
2
%
 
2
%
 
2
%
General partner interest allocation of net income
108

 
834

 
912

 
1,766

General partner incentive distribution
10,912

 
10,805

 
23,824

 
21,610

Net income applicable to general partner
$
11,020

 
$
11,639

 
$
24,736

 
$
23,376



18

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

Cash Distributions
General and Common Limited Partners. The following table reflects the allocation of total cash distributions to the general partner and common limited partners applicable to the period in which the distributions were earned:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(Thousands of Dollars, Except Per Unit Data)
General partner interest
$
2,302

 
$
1,961

 
$
4,645

 
$
3,922

General partner incentive distribution
10,912

 
10,805

 
23,824

 
21,610

Total general partner distribution
13,214

 
12,766

 
28,469

 
25,532

Common limited partners’ distribution
101,869

 
85,285

 
203,782

 
170,570

Total cash distributions
$
115,083

 
$
98,051

 
$
232,251

 
$
196,102

 
 
 
 
 
 
 
 
Cash distributions per unit applicable to common limited partners
$
1.095

 
$
1.095

 
$
2.190

 
$
2.190


The following table summarizes information related to our quarterly cash distributions to our general partner and common limited partners:
Quarter Ended
 
Cash
Distributions
Per Unit
 
Total Cash
Distributions
 
Record Date
 
Payment Date
 
 
 
 
(Thousands of Dollars)
 
 
 
 
June 30, 2017 (a)
 
$
1.095

 
$
115,083

 
August 7, 2017
 
August 11, 2017
March 31, 2017
 
$
1.095

 
$
117,168

 
May 8, 2017
 
May 12, 2017
December 31, 2016
 
$
1.095

 
$
98,971

 
February 8, 2017
 
February 13, 2017
(a)
The distribution was announced on July 28, 2017.

Preferred Units. The following table summarizes information related to our quarterly cash distributions on our Series A and Series B Preferred Units:
Period
 
Cash
Distributions
Per Unit
 
Total Cash
Distributions
 
Record Date
 
Payment Date
 
 
 
 
(Thousands of Dollars)
 
 
 
 
Series A Preferred Units:
 
 
 
 
 
 
 
 
June 15, 2017 - September 14, 2017 (a)
 
$
0.53125

 
$
4,813

 
September 1, 2017
 
September 15, 2017
March 15, 2017 - June 14, 2017
 
$
0.53125

 
$
4,813

 
June 1, 2017
 
June 15, 2017
November 25, 2016 - March 14, 2017
 
$
0.64930556

 
$
5,883

 
March 1, 2017
 
March 15, 2017
 
 
 
 
 
 
 
 
 
Series B Preferred Units:
 
 
 
 
 
 
 
 
April 28, 2017 - September 14, 2017 (a)
 
$
0.725434028

 
$
11,172

 
September 1, 2017
 
September 15, 2017
(a)
The distribution was announced on July 28, 2017.


19

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

11. NET INCOME PER COMMON UNIT

Basic and diluted net income per common unit is determined pursuant to the two-class method. Under this method, all earnings are allocated to our common limited partners and participating securities based on their respective rights to receive distributions earned during the period. Participating securities include our general partner interest and restricted units awarded under our long-term incentive plan.

We compute basic net income per common unit by dividing net income attributable to common units by the weighted-average number of common units outstanding during the period. We compute diluted net income per common unit by dividing net income attributable to our common limited partners by the sum of (i) the weighted-average number of common units outstanding during the period and (ii) the effect of dilutive potential common units outstanding during the period. Dilutive potential common units include contingently issuable performance units awarded under our long-term incentive plan.

The following table details the calculation of net income per common unit:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(Thousands of Dollars, Except Unit and Per Unit Data)
Net income attributable to NuStar Energy L.P.
$
26,250

 
$
52,517

 
$
84,190

 
$
109,918

Less: Distributions to general partner (including incentive
    distribution rights)
13,214

 
12,766

 
28,469

 
25,532

Less: Distributions to common limited partners
101,869

 
85,285

 
203,782

 
170,570

Less: Distributions to preferred limited partners
9,950

 

 
14,763

 

Less: Distribution equivalent rights to restricted units
712

 
657

 
1,427

 
1,319

Distributions in excess of earnings
$
(99,495
)
 
$
(46,191
)
 
$
(164,251
)
 
$
(87,503
)
 
 
 
 
 
 
 
 
Net income attributable to common units:
 
 
 
 
 
 
 
Distributions to common limited partners
$
101,869

 
$
85,285

 
$
203,782

 
$
170,570

Allocation of distributions in excess of earnings
(97,505
)
 
(45,267
)
 
(160,966
)
 
(85,752
)
Total
$
4,364

 
$
40,018

 
$
42,816

 
$
84,818

 
 
 
 
 
 
 
 
Basic weighted-average common units outstanding
90,345,469

 
77,886,219

 
84,526,506

 
77,886,148

 
 
 
 
 
 
 
 
Diluted common units outstanding:
 
 
 
 
 
 
 
Basic weighted-average common units outstanding
90,345,469

 
77,886,219

 
84,526,506

 
77,886,148

Effect of dilutive potential common units

 
53,060

 

 
57,554

Diluted weighted-average common units outstanding
90,345,469

 
77,939,279

 
84,526,506

 
77,943,702

 
 
 
 
 
 
 
 
Basic and diluted net income per common unit
$
0.05

 
$
0.52

 
$
0.51

 
$
1.09



20

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

12. STATEMENTS OF CASH FLOWS

Changes in current assets and current liabilities were as follows:
 
Six Months Ended June 30,
 
2017
 
2016
 
(Thousands of Dollars)
Decrease (increase) in current assets:
 
 
 
Accounts receivable
$
48,875

 
$
(572
)
Receivable from related party
231

 

Inventories
13,005

 
99

Other current assets
(2,388
)
 
5,064

Increase (decrease) in current liabilities:
 
 
 
Accounts payable
(57,822
)
 
(4,717
)
Payable to related party, net

 
697

Accrued interest payable
6,234

 
(393
)
Accrued liabilities
(14,703
)
 
(12,321
)
Taxes other than income tax
(3,094
)
 
(348
)
Income tax payable
(5,682
)
 
(2,783
)
Changes in current assets and current liabilities
$
(15,344
)
 
$
(15,274
)
The above changes in current assets and current liabilities differ from changes between amounts reflected in the applicable consolidated balance sheets due to:
current assets and current liabilities acquired during the period;
the change in the amount accrued for capital expenditures; and
the effect of foreign currency translation.

Cash flows related to interest and income taxes were as follows:
 
Six Months Ended June 30,
 
2017
 
2016
 
(Thousands of Dollars)
Cash paid for interest, net of amount capitalized
$
70,119

 
$
70,280

Cash paid for income taxes, net of tax refunds received
$
9,556

 
$
8,826


13. SEGMENT INFORMATION

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

21

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

Results of operations for the reportable segments were as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(Thousands of Dollars)
Revenues:
 
 
 
 
 
 
 
Pipeline
$
126,740

 
$
121,575

 
$
247,980

 
$
240,448

Storage:
 
 
 
 
 
 
 
Third parties
154,830

 
146,367

 
298,318

 
292,751

Intersegment
3,729

 
5,507

 
7,672

 
11,522

Total storage
158,559

 
151,874

 
305,990

 
304,273

Fuels marketing
153,918

 
169,862

 
376,620

 
310,308

Consolidation and intersegment eliminations
(3,729
)
 
(5,507
)
 
(7,672
)
 
(11,522
)
Total revenues
$
435,488

 
$
437,804

 
$
922,918

 
$
843,507

 
 
 
 
 
 
 
 
Operating income:
 
 
 
 
 
 
 
Pipeline
$
52,868

 
$
63,552

 
$
117,896

 
$
127,817

Storage
56,049

 
51,063

 
109,808

 
108,076

Fuels marketing
289

 
1,392

 
5,429

 
619

Consolidation and intersegment eliminations
1

 
1

 
1

 
1

Total segment operating income
109,207

 
116,008

 
233,134

 
236,513

General and administrative expenses
33,604

 
22,657

 
58,199

 
46,442

Other depreciation and amortization expense
2,199

 
2,134

 
4,392

 
4,289

Total operating income
$
73,404

 
$
91,217

 
$
170,543

 
$
185,782


Total assets by reportable segment were as follows:
 
June 30,
2017
 
December 31,
2016
 
(Thousands of Dollars)
Pipeline
$
3,458,700

 
$
2,024,633

Storage
2,605,122

 
2,522,586

Fuels marketing
103,623

 
168,347

Total segment assets
6,167,445

 
4,715,566

Other partnership assets
191,879

 
314,979

Total consolidated assets
$
6,359,324

 
$
5,030,545

 

22

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

14. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

NuStar Energy has no operations and its assets consist mainly of its 100% indirectly owned subsidiaries, NuStar Logistics and NuPOP. The senior and subordinated notes issued by NuStar Logistics are fully and unconditionally guaranteed by NuStar Energy and NuPOP. As a result, the following condensed consolidating financial statements are presented as an alternative to providing separate financial statements for NuStar Logistics and NuPOP.

Condensed Consolidating Balance Sheets
June 30, 2017
(Thousands of Dollars)
 
NuStar
Energy
 
NuStar
Logistics
 
NuPOP
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
867

 
$
64

 
$

 
$
28,260

 
$

 
$
29,191

Receivables, net

 
93

 

 
147,541

 

 
147,634

Inventories

 
1,977

 
3,254

 
20,541

 

 
25,772

Other current assets
69

 
12,623

 
5,475

 
10,134

 
(36
)
 
28,265

Intercompany receivable

 
3,088,723

 

 

 
(3,088,723
)
 

Total current assets
936

 
3,103,480

 
8,729

 
206,476

 
(3,088,759
)
 
230,862

Property, plant and equipment, net

 
1,911,890

 
578,504

 
1,656,939

 

 
4,147,333

Intangible assets, net

 
63,163

 

 
794,453

 

 
857,616

Goodwill

 
149,453

 
170,652

 
703,254

 

 
1,023,359

Investment in wholly owned
subsidiaries
3,085,078

 
28,711

 
1,270,678

 
842,841

 
(5,227,308
)
 

Deferred income tax asset

 

 

 
1,359

 

 
1,359

Other long-term assets, net
378

 
60,588

 
28,039

 
9,790

 

 
98,795

Total assets
$
3,086,392

 
$
5,317,285

 
$
2,056,602

 
$
4,215,112

 
$
(8,316,067
)
 
$
6,359,324

Liabilities and Partners’ Equity
 
 
 
 
 
 
 
 
 
 
 
Accounts payable
$
6,330

 
$
21,064

 
$
5,573

 
$
59,701

 
$

 
$
92,668

Short-term debt

 
45,000

 

 

 

 
45,000

Current portion of long-term debt

 
350,021

 

 
53,054

 

 
403,075

Accrued interest payable

 
40,206

 

 
26

 

 
40,232

Accrued liabilities
720

 
19,929

 
11,434

 
23,903

 

 
55,986

Taxes other than income tax
8

 
5,867

 
3,819

 
7,015

 

 
16,709

Income tax payable

 

 
2

 
881

 
(36
)
 
847

Intercompany payable
489,002

 

 
1,182,082

 
1,417,639

 
(3,088,723
)
 

Total current liabilities
496,060

 
482,087

 
1,202,910

 
1,562,219

 
(3,088,759
)
 
654,517

Long-term debt

 
3,073,864

 

 

 

 
3,073,864

Deferred income tax liability

 
1,862

 
13

 
20,988

 

 
22,863

Other long-term liabilities

 
43,538

 
10,973

 
52,520

 

 
107,031

Total partners’ equity
2,590,332

 
1,715,934

 
842,706

 
2,579,385

 
(5,227,308
)
 
2,501,049

Total liabilities and
partners’ equity
$
3,086,392

 
$
5,317,285

 
$
2,056,602

 
$
4,215,112

 
$
(8,316,067
)
 
$
6,359,324









23

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

Condensed Consolidating Balance Sheets
December 31, 2016
(Thousands of Dollars)
 
NuStar
Energy
 
NuStar
Logistics
 
NuPOP
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
870

 
$
5

 
$

 
$
35,067

 
$

 
$
35,942

Receivables, net

 
3,040

 

 
167,570

 

 
170,610

Inventories

 
2,216

 
2,005

 
33,724

 

 
37,945

Other current assets
61