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EX-32.02 - EXHIBIT 32.02 - NuStar Energy L.P.ns3q1610-qex3202.htm
EX-32.01 - EXHIBIT 32.01 - NuStar Energy L.P.ns3q1610-qex3201.htm
EX-31.02 - EXHIBIT 31.02 - NuStar Energy L.P.ns3q1610-qex3102.htm
EX-31.01 - EXHIBIT 31.01 - NuStar Energy L.P.ns3q1610-qex3101.htm
EX-12.01 - EXHIBIT 12.01 - NuStar Energy L.P.ns3q1610-qex1201.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 September 30, 2016
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
  _________________________________________
nslogo3q16a01a01a04.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
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o   No  x
The number of common units outstanding as of October 31, 2016 was 78,486,144.
 
 
 
 
 



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)
 
September 30,
2016
 
December 31,
2015
 
(Unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
32,662

 
$
118,862

Accounts receivable, net of allowance for doubtful accounts of $7,827
and $8,473 as of September 30, 2016 and December 31, 2015, respectively
159,978

 
145,064

Receivable from related party
83

 

Inventories
35,051

 
38,749

Other current assets
26,231

 
31,176

Total current assets
254,005

 
333,851

Property, plant and equipment, at cost
5,342,360

 
5,209,160

Accumulated depreciation and amortization
(1,669,471
)
 
(1,525,589
)
Property, plant and equipment, net
3,672,889

 
3,683,571

Intangible assets, net
101,630

 
112,011

Goodwill
696,637

 
696,637

Deferred income tax asset
2,186

 
2,858

Other long-term assets, net
263,071

 
296,597

Total assets
$
4,990,418

 
$
5,125,525

Liabilities and Partners’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
105,311

 
$
125,147

Payable to related party

 
14,799

Short-term debt
7,000

 
84,000

Accrued interest payable
27,614

 
34,286

Accrued liabilities
52,520

 
55,194

Taxes other than income tax
16,621

 
12,810

Income tax payable
2,064

 
5,977

Total current liabilities
211,130

 
332,213

Long-term debt
3,153,049

 
3,055,612

Long-term payable to related party

 
32,080

Deferred income tax liability
26,635

 
24,810

Other long-term liabilities
129,611

 
70,966

Commitments and contingencies (Note 4)

 

Partners’ equity:
 
 
 
Limited partners (78,486,144 and 77,886,078 common units outstanding
as of September 30, 2016 and December 31, 2015, respectively)
1,565,307

 
1,661,900

General partner
34,086

 
36,738

Accumulated other comprehensive loss
(129,400
)
 
(88,794
)
Total partners’ equity
1,469,993

 
1,609,844

Total liabilities and partners’ equity
$
4,990,418

 
$
5,125,525

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 September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Revenues:
 
 
 
 
 
 
 
Service revenues
$
277,758

 
$
288,574

 
$
814,727

 
$
833,128

Product sales
163,660

 
204,992

 
470,198

 
785,993

Total revenues
441,418

 
493,566

 
1,284,925

 
1,619,121

Costs and expenses:
 
 
 
 
 
 
 
Cost of product sales
155,129

 
193,958

 
441,736

 
738,074

Operating expenses:
 
 
 
 
 
 
 
Third parties
117,432

 
87,730

 
313,634

 
254,658

Related party

 
34,904

 
21,681

 
100,761

Total operating expenses
117,432

 
122,634

 
335,315

 
355,419

General and administrative expenses:
 
 
 
 
 
 
 
Third parties
26,957

 
8,535

 
62,906

 
25,188

Related party

 
15,144

 
10,493

 
50,237

Total general and administrative expenses
26,957

 
23,679

 
73,399

 
75,425

Depreciation and amortization expense
53,946

 
52,301

 
160,739

 
157,523

Total costs and expenses
353,464

 
392,572

 
1,011,189

 
1,326,441

Operating income
87,954

 
100,994

 
273,736

 
292,680

Interest expense, net
(35,022
)
 
(33,448
)
 
(103,374
)
 
(98,309
)
Other income (expense), net
362

 
1,776

 
(10
)
 
61,892

Income from continuing operations before income
    tax expense
53,294

 
69,322

 
170,352

 
256,263

Income tax expense
2,153

 
4,306

 
9,293

 
9,797

Income from continuing operations
51,141

 
65,016

 
161,059

 
246,466

Income from discontinued operations, net of tax

 

 

 
774

Net income
$
51,141

 
$
65,016

 
$
161,059

 
$
247,240

Basic and diluted net income per unit applicable to
    limited partners:
 
 
 
 
 
 
 
Continuing operations
$
0.49

 
$
0.68

 
$
1.58

 
$
2.68

Discontinued operations

 

 

 
0.01

Total (Note 11)
$
0.49

 
$
0.68

 
$
1.58

 
$
2.69

Basic weighted-average limited partner units outstanding
78,031,053

 
77,886,078

 
77,934,802

 
77,886,078

 
 
 
 
 
 
 
 
Diluted weighted-average limited partner units outstanding
78,062,889

 
77,886,078

 
77,981,299

 
77,886,078

 
 
 
 
 
 
 
 
Comprehensive income
$
48,652

 
$
38,878

 
$
120,453

 
$
231,843

See Condensed Notes to Consolidated Financial Statements.

4


NUSTAR ENERGY L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, Thousands of Dollars)
 
Nine Months Ended September 30,
 
2016
 
2015
Cash Flows from Operating Activities:
 
 
 
Net income
$
161,059

 
$
247,240

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization expense
160,739

 
157,523

Unit-based compensation expense
4,820

 

Amortization of debt related items
5,762

 
6,693

Gain from sale or disposition of assets
(14
)
 
(1,632
)
Gain associated with the Linden Acquisition

 
(56,277
)
Deferred income tax expense
2,989

 
626

Distributions of equity in earnings of joint venture

 
2,500

Changes in current assets and current liabilities (Note 12)
(12,477
)
 
19,803

Other, net
(8,329
)
 
(352
)
Net cash provided by operating activities
314,549

 
376,124

Cash Flows from Investing Activities:
 
 
 
Capital expenditures
(145,414
)
 
(240,671
)
Change in accounts payable related to capital expenditures
(15,504
)
 
(7,802
)
Acquisitions

 
(142,500
)
Investment in other long-term assets

 
(3,587
)
Proceeds from sale or disposition of assets

 
17,125

Net cash used in investing activities
(160,918
)
 
(377,435
)
Cash Flows from Financing Activities:
 
 
 
Proceeds from long-term debt borrowings
523,982

 
747,779

Proceeds from short-term debt borrowings
462,000

 
622,000

Long-term debt repayments
(410,750
)
 
(365,410
)
Short-term debt repayments
(539,000
)
 
(657,000
)
Proceeds from issuance of common units, net of issuance costs
27,710

 

Contributions from general partner
575

 

Distributions to unitholders and general partner
(294,153
)
 
(294,153
)
Decrease in cash book overdrafts
(12,181
)
 
(12,281
)
Other, net
(1,418
)
 
(792
)
Net cash (used in) provided by financing activities
(243,235
)
 
40,143

Effect of foreign exchange rate changes on cash
3,404

 
(10,319
)
Net (decrease) increase in cash and cash equivalents
(86,200
)
 
28,513

Cash and cash equivalents as of the beginning of the period
118,862

 
87,912

Cash and cash equivalents as of the end of the period
$
32,662

 
$
116,425

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, the terminalling and storage of petroleum products and the 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 15% total interest in us as of September 30, 2016.

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
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 7 for a discussion of this transfer and our related party agreements, Note 8 for a discussion of our employee benefit plans and Note 9 for a discussion of our long-term incentive plan.

Linden Acquisition. On January 2, 2015, we acquired full ownership of ST Linden Terminal, LLC (Linden), which owns a refined products terminal in Linden, NJ with 4.3 million barrels of storage capacity (the Linden Acquisition). Prior to the Linden Acquisition, Linden operated as a joint venture between us and Linden Holding Corp., with each party owning 50%. On the acquisition date, we remeasured our existing 50% equity investment in Linden to its fair value of $128.0 million and we recognized a gain of $56.3 million in “Other income (expense), net” in the condensed consolidated statements of comprehensive income for the nine months ended September 30, 2015.

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. We account for investment in joint ventures using the equity method of accounting.

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 nine months ended September 30, 2016 and 2015 included in these Condensed Notes to Consolidated Financial Statements is derived from our unaudited condensed consolidated financial statements. Operating results for the three and nine months ended September 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016. The consolidated balance sheet as of December 31, 2015 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, 2015.

Certain previously reported amounts in the 2015 consolidated financial statements and condensed notes have been reclassified to conform to 2016 presentation.


6

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

2. NEW ACCOUNTING PRONOUNCEMENTS

Statement of Cash Flows
In August 2016, the Financial Accounting Standards Board (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 are currently assessing the impact of this amended guidance on our financial position, results of operations and disclosures.

Unit-Based Payments
In March 2016, the FASB issued amended guidance that simplifies certain aspects of accounting for unit-based payments to employees, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The changes are effective for annual and interim periods beginning after December 15, 2016, and early adoption is permitted. Prior to the Employee Transfer discussed in Note 1 above, we did not sponsor a unit-based compensation plan. Upon completion of the Employee Transfer, we adopted this amended guidance effective January 1, 2016 on a prospective basis, which did not have a material impact on our financial position, results of operations or disclosures. Please refer to Note 9 for a discussion of our long-term incentive plan.

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 are currently assessing the impact of this amended guidance on our financial position, results of operations and disclosures.

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.

Inventory
In July 2015, the FASB issued amended guidance that requires inventory to be measured at the lower of cost or net realizable value. The changes are effective for annual and interim periods beginning after December 15, 2016, and must be applied prospectively after the date of adoption. We will adopt these provisions January 1, 2017, and we do not expect the amended guidance to have a material impact on our financial position, results of operations or disclosures.

Debt Issuance Costs
In April 2015, the FASB issued amended guidance for the presentation of debt issuance costs. Under the amended guidance, debt issuance costs will be presented on the balance sheet as a deduction from the carrying value of the associated debt liability. In August 2015, the FASB issued amended guidance that would allow debt issuance costs related to line-of-credit agreements to continue to be presented as an asset on the balance sheet. The changes are effective for annual and interim periods beginning after December 15, 2015, and retrospective application is required. On January 1, 2016, we retrospectively adopted this

7

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

guidance. As a result, we reclassified $23.7 million of deferred debt issuance costs from “Other long-term assets, net” to “Long-term debt” on the consolidated balance sheet as of December 31, 2015.

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 are continuing to assess the impact of this new guidance on our financial position, results of operations and disclosures. However, based on our initial assessment, we do not believe the standard will significantly impact the amount or timing of revenues recognized under the vast majority of our revenue contracts.

3. DEBT

Revolving Credit Agreement
During the nine months ended September 30, 2016, the balance under our $1.5 billion five-year revolving credit agreement (the Revolving Credit Agreement) increased by $109.6 million, which we used for general partnership purposes and to fund our capital expenditures. 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 September 30, 2016, our weighted-average interest rate related to borrowings under the Revolving Credit Agreement was 2.3%, and we had $992.2 million outstanding.

As of September 30, 2016, our consolidated debt coverage ratio (as defined in the Revolving Credit Agreement) could not exceed 5.00-to-1.00. 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 September 30, 2016, letters of credit issued under the Revolving Credit Agreement totaled $15.8 million, and we had $491.9 million available for borrowing. Our management believes that we are in compliance with the covenants in the Revolving Credit Agreement as of September 30, 2016.

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 September 30, 2016. 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 nine months ended September 30, 2016 and 2015, the amount received from the trustee totaled $12.0 million and $13.6 million, respectively. As of September 30, 2016, the amount remaining in trust totaled $42.8 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 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 September 30, 2016, $102.5 million of our accounts receivable are included in the Securitization Program. The amount of

8

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

borrowings outstanding under the Receivables Financing Agreement totaled $43.2 million as of September 30, 2016, which is included in “Long-term debt” on the consolidated balance sheet.

4. COMMITMENTS AND CONTINGENCIES

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 have accrued $0.5 million and $4.8 million for contingent losses as of September 30, 2016 and December 31, 2015, respectively. 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.

5. 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:
 
September 30, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(Thousands of Dollars)
Assets:
 
 
 
 
 
 
 
Other current assets:
 
 
 
 
 
 
 
Product imbalances
$
1,008

 
$

 
$

 
$
1,008

Commodity derivatives

 
704

 

 
704

Total
$
1,008

 
$
704

 
$

 
$
1,712

Liabilities:
 
 
 
 
 
 
 
Accrued liabilities:
 
 
 
 
 
 
 
Product imbalances
$
(1,344
)
 
$

 
$

 
$
(1,344
)
Commodity derivatives
(301
)
 
(701
)
 

 
(1,002
)
Other long-term liabilities:
 
 
 
 
 
 
 
Guarantee liability

 

 
(1,736
)
 
(1,736
)
Interest rate swaps

 
(50,910
)
 

 
(50,910
)
Total
$
(1,645
)
 
$
(51,611
)
 
$
(1,736
)
 
$
(54,992
)

9

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

 
December 31, 2015
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(Thousands of Dollars)
Assets:
 
 
 
 
 
 
 
Other current assets:
 
 
 
 
 
 
 
Product imbalances
$
179

 
$

 
$

 
$
179

Commodity derivatives
11,325

 
77

 

 
11,402

Other long-term assets, net:
 
 
 
 
 
 
 
Interest rate swaps

 
2,755

 

 
2,755

Total
$
11,504

 
$
2,832

 
$

 
$
14,336

Liabilities:
 
 
 
 
 
 
 
Accrued liabilities:
 
 
 
 
 
 
 
Product imbalances
$
(419
)
 
$

 
$

 
$
(419
)
Commodity derivatives

 
(120
)
 

 
(120
)
Other long-term liabilities:
 
 
 
 
 
 
 
Guarantee liability

 

 
(1,697
)
 
(1,697
)
Interest rate swaps

 
(1,452
)
 

 
(1,452
)
Total
$
(419
)
 
$
(1,572
)
 
$
(1,697
)
 
$
(3,688
)

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 6 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 NuStar Asphalt LLC, which then changed its name to Axeon Specialty Products LLC (Axeon). We provide credit support, such as guarantees, letters of credit and cash collateral, as applicable, of up to $125.0 million to Axeon. As of September 30, 2016, we have provided $16.7 million in letters of credit on behalf of Axeon. As of September 30, 2016 and December 31, 2015, we provided guarantees mainly for commodity purchases, lease obligations and certain utilities for Axeon with an aggregate maximum potential exposure of $75.5 million and $71.9 million, respectively, and one guarantee that does not specify a maximum amount as of September 30, 2016. As of December 31, 2015, we provided two guarantees that did not specify a maximum amount. A majority of these guarantees have no expiration date. We estimated the fair value considering the probability of default by Axeon and an estimate of the amount we would be obligated to pay under the guarantees at the time of default based on the guarantees outstanding as of September 30, 2016 and December 31, 2015. Our estimate of the fair value is based on significant inputs not observable in the market and thus falls within Level 3 of the fair value hierarchy.

The following table summarizes the activity in our Level 3 liabilities:
 
Nine Months Ended September 30, 2016
 
(Thousands of Dollars)
Beginning balance
$
1,697

Adjustments to guarantee liability
39

Ending balance
$
1,736


10

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

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 a $190.0 million term loan to Axeon (the Axeon Term Loan) and long-term debt, approximate their carrying amounts.

The estimated fair values and carrying amounts of the long-term debt and the Axeon Term Loan were as follows:
 
September 30, 2016
 
December 31, 2015
 
Fair Value
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
(Thousands of Dollars)
Long-term debt
$
3,214,845

 
$
3,153,049

 
$
2,929,438

 
$
3,055,612

Axeon Term Loan
$
175,717

 
$
170,391

 
$
172,123

 
$
170,352


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.
We estimated the fair value of the Axeon Term Loan using discounted cash flows, which use observable inputs such as time to maturity and market interest rates, and determined that the fair value falls in Level 2 of the fair value hierarchy. As of September 30, 2016, the carrying amount of the Axeon Term Loan is $170.4 million, consisting of the following: (i) the outstanding principal amount from the Axeon Term Loan of $190.0 million; (ii) plus the fair value of guarantees of $1.7 million as of September 30, 2016; (iii) less equity losses from our investment in Axeon of $21.3 million incurred prior to the 2014 sale of our remaining ownership interest in Axeon and after the carrying value of our equity investment in Axeon was reduced to zero. The carrying value of the Axeon Term Loan is included in “Other long-term assets, net” on the consolidated balance sheets. We review the financial information of Axeon monthly for possible credit loss indicators. In 2015 and 2014, Axeon failed to make two scheduled principal payments, which, under the provisions of the Axeon Term Loan, increases the interest rate payable by Axeon until Axeon makes those outstanding payments.

6. 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 three-month USD LIBOR. These swaps qualified, and we designated them, as cash flow hedges. 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 September 30, 2016 and December 31, 2015, 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 finished product inventories and related firm commitments to purchase and/or sell such inventories, we utilize commodity futures and swap contracts, which qualify and we designate 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.

11

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


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 5.9 million barrels and 8.0 million barrels as of September 30, 2016 and December 31, 2015, respectively. As of September 30, 2016, we had $1.5 million of margin deposits; we had no margin deposits as of December 31, 2015. The fair values of our derivative instruments included in our consolidated balance sheets were as follows:
 
 
 
Asset Derivatives
 
Liability Derivatives
 
Balance Sheet Location
 
September 30,
2016
 
December 31,
2015
 
September 30,
2016
 
December 31,
2015
 
 
 
(Thousands of Dollars)
Derivatives Designated as
Hedging Instruments:
 
 
 
 
 
 
 
 
 
Commodity contracts
Other current assets
 
$

 
$
1,937

 
$

 
$
(23
)
Interest rate swaps
Other long-term assets, net
 

 
2,755

 

 

Commodity contracts
Accrued liabilities
 
280

 

 
(2,543
)
 

Interest rate swaps
Other long-term liabilities
 

 

 
(50,910
)
 
(1,452
)
Total
 
 
280

 
4,692

 
(53,453
)
 
(1,475
)
 
 
 
 
 
 
 
 
 
 
Derivatives Not Designated
as Hedging Instruments:
 
 
 
 
 
 
 
 
 
Commodity contracts
Other current assets
 
704

 
34,016

 

 
(24,528
)
Commodity contracts
Accrued liabilities
 
7,034

 
117

 
(5,773
)
 
(237
)
Total
 
 
7,738

 
34,133

 
(5,773
)
 
(24,765
)
 
 
 
 
 
 
 
 
 
 
Total Derivatives
 
 
$
8,018

 
$
38,825

 
$
(59,226
)
 
$
(26,240
)
 
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
 
September 30,
2016
 
December 31,
2015
 
 
(Thousands of Dollars)
Net amounts of assets presented in the consolidated balance sheets
 
$
704

 
$
11,402

Net amounts of liabilities presented in the consolidated balance sheets
 
$
(1,002
)
 
$
(120
)

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 September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(Thousands of Dollars)
Derivatives Designated as Fair Value Hedging Instruments:
 
 
 
 
 
 
 
Gain (loss) recognized in income on derivative
$
558

 
$
16,005

 
$
(6,246
)
 
$
11,506

Gain (loss) recognized in income on hedged item
329

 
(15,479
)
 
10,134

 
(8,748
)
Gain recognized in income for ineffective portion
887

 
526

 
3,888

 
2,758

 
 
 
 
 
 
 
 
Derivatives Not Designated as Hedging Instruments:
 
 
 
 
 
 
 
(Loss) gain recognized in income on derivative
$
(153
)
 
$
1,151

 
$
(157
)
 
$
1,142



12

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

Our interest rate swaps also had the following impact on earnings:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(Thousands of Dollars)
Derivatives Designated as Cash Flow Hedging Instruments:
 
 
 
 
 
 
 
(Loss) gain recognized in other comprehensive income on derivative (effective portion)
$
(2,035
)
 
$
(16,757
)
 
$
(52,213
)
 
$
1,996

Loss reclassified from AOCI into interest expense, net (effective portion)
$
(2,011
)
 
$
(2,405
)
 
$
(6,391
)
 
$
(7,449
)

As of September 30, 2016, we expect to reclassify a loss of $7.1 million to “Interest expense, net” within the next twelve months associated with unwound forward-starting interest rate swaps.

7. RELATED PARTY TRANSACTIONS

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, as summarized below:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(Thousands of Dollars)
Operating expenses
$

 
$
34,904

 
$
21,681

 
$
100,761

General and administrative expenses
$

 
$
15,144

 
$
10,493

 
$
50,237


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.

Assignment and Assumption Agreement. Also on March 1, 2016 and in connection with the Employee Transfer, we entered into an Assignment and Assumption Agreement with NuStar GP, LLC (the Assignment Agreement). Under the Assignment Agreement, NuStar GP, LLC assigned all of its employee benefit plans, programs, contracts, policies, and various of its other agreements and contracts with certain employees, affiliates and third-party service providers (collectively, the Assigned Programs) to NuStar Services Co. In addition, NuStar Services Co agreed to assume the sponsorship of and all obligations relating to the ongoing maintenance and administration of each of the plans and agreements in the Assigned Programs.


13

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

The following table summarizes the related party transactions and changes to amounts reported on our consolidated balance sheet as a result of the Employee Transfer on March 1, 2016 (thousands of dollars):
Decrease in related party payable:
 
Current
$
16,014

Long-term
32,656

Decrease in related party payable
$
48,670

 
 
Changes to our consolidated balance sheet:
 
Current and long-term assets
$
2,154

Current liabilities
5,609

Other long-term liabilities
34,042

Limited partner’s equity
2,664

Accumulated other comprehensive loss
4,201

Changes to our consolidated balance sheet
$
48,670


Balance Sheet Items. We had a receivable from related party of $0.1 million as of September 30, 2016, mainly comprised of service fees and expenses paid on behalf of NuStar GP Holdings. As of December 31, 2015, we had a payable to related party of $14.8 million, mainly comprised of payroll, employee benefit plan expenses and unit-based compensation prior to the Employee Transfer, and none as of September 30, 2016. We also had a long-term payable to related party as of December 31, 2015 of $32.1 million, representing long-term employee benefits prior to the Employee Transfer, and none as of September 30, 2016.

8. EMPLOYEE BENEFIT PLANS

Prior to the Employee Transfer, NuStar GP, LLC sponsored and maintained the defined benefit plans and defined contribution plans described below. Effective March 1, 2016, in connection with the Employee Transfer, we assumed sponsorship and responsibility for these defined benefit plans and defined contribution plans, which include both qualified and nonqualified plans. The Employee Transfer did not have an impact on the benefits received by our employees.

Defined Benefit Plans
NuStar Pension Plan. 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. Under the cash balance formula, benefits are based on age, service and interest credits, and employees become fully vested in their benefits upon attaining three years of vesting service.

NuStar Excess Pension Plan. 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 Excess Pension Plan is not intended to constitute either a qualified plan under the provisions of Section 401 of the Internal Revenue Code of 1986, as amended (the Code), or a funded plan subject to the Employee Retirement Income Security Act of 1974, as amended (ERISA).

The Pension Plan and Excess Pension Plan are collectively referred to as the Pension Plans.

Other Postretirement Benefits. 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.

We estimate pension and other postretirement benefit obligations and costs from actuarial valuations. The actuarial valuations require the use of certain assumptions, including discount rates, expected long-term rates of return on plan assets and expected rates of compensation increase. The amortization of actuarial gains and losses reflects a corridor based on 10% of the greater of the projected benefit obligation or the market-related value of the pension plan assets.


14

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

The annual measurement date for our pension and other postretirement benefit plans is December 31, and we recognize the overfunded or underfunded status of our defined benefit pension or other postretirement benefit plans as an asset or a liability as of the balance sheet dates. We record changes in the funded status of our plans as a component of comprehensive income in the year the changes occur. The reconciliation of funded status for the Pension Plans and other postretirement benefit plans as of December 31, 2015 was as follows:
 
Pension Plans
 
Other Postretirement
Benefits
 
(Thousands of Dollars)
Fair value of plan assets
$
87,706

 
$

Less: Benefit obligation
109,202

 
10,042

Funded status
$
(21,496
)
 
$
(10,042
)

On March 1, 2016, and in conjunction with the Employee Transfer, we assumed $22.5 million and $10.2 million in benefit obligations associated with the Pension Plans and other postretirement benefits, respectively. Prior to the Employee Transfer, we reimbursed all costs incurred by NuStar GP, LLC related to these employee benefit plans at cost. 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
 
2016
 
2015
 
2016
 
2015
 
(Thousands of Dollars)
For the three months ended September 30:
 
 
 
 
 
 
 
Service cost
$
1,926

 
$
1,919

 
$
105

 
$
118

Interest cost
1,006

 
1,097

 
100

 
111

Expected return on assets
(1,353
)
 
(1,254
)
 

 

Amortization of prior service credit
(516
)
 
(516
)
 
(286
)
 
(285
)
Amortization of net loss
273

 
461

 
45

 
67

Net periodic benefit cost (income)
$
1,336

 
$
1,707

 
$
(36
)
 
$
11

 
 
 
 
 
 
 
 
For the nine months ended September 30:
 
 
 
 
 
 
 
Service cost
$
5,778

 
$
5,757

 
$
315

 
$
354

Interest cost
3,018

 
3,291

 
300

 
334

Expected return on assets
(4,056
)
 
(3,762
)
 

 

Amortization of prior service credit
(1,549
)
 
(1,547
)
 
(858
)
 
(857
)
Amortization of net loss
819

 
1,383

 
135

 
201

Net periodic benefit cost (income)
$
4,010

 
$
5,122

 
$
(108
)
 
$
32


In August 2016, we contributed $15.6 million to the Pension Plans.

Defined Contribution Plans
NuStar Thrift Plan. The NuStar Thrift Plan (the Thrift Plan) is a qualified defined contribution plan and participation in the Thrift Plan is voluntary and open to substantially all our employees upon their date of hire. Thrift Plan participants can contribute from 1% up to 30% of their total annual compensation to the Thrift Plan in the form of pre-tax and/or after tax employee contributions. We make matching contributions in an amount equal to 100% of each participant’s employee contributions up to a maximum of 6% of the participant’s total annual compensation.

NuStar Excess Thrift Plan. The NuStar Excess Thrift Plan (the Excess Thrift Plan) is a nonqualified deferred compensation plan that provides benefits to those employees whose compensation and/or annual contributions under the Thrift Plan are subject to the limitations applicable to qualified retirement plans under the Code. The Excess Thrift Plan is not intended to constitute either a qualified plan under the provisions of Section 401 of the Code or a funded plan subject to ERISA.


15

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

We also sponsor several other defined contribution plans for certain international employees located in Canada, the Netherlands and the United Kingdom.

9. UNIT-BASED COMPENSATION

Overview
On January 28, 2016, our unitholders approved the Fifth Amended and Restated 2000 Long-Term Incentive Plan (the Amended 2000 LTIP) which, among other items, provides that we may use newly issued units from NuStar Energy to satisfy unit awards and extends the term of the Amended 2000 LTIP to January 28, 2026. Prior to the Employee Transfer, NuStar GP, LLC sponsored the Amended 2000 LTIP, and we reimbursed NuStar GP, LLC for awards under this plan. Upon the approval of the Amended 2000 LTIP, along with the Employee Transfer, most of our currently outstanding awards are now equity-classified awards.

Effective March 1, 2016, we assumed sponsorship of the Amended 2000 LTIP, which provides the Compensation Committee of the Board of Directors of NuStar GP, LLC (the Compensation Committee) with the right to issue and award up to 3,250,000 of our common units to employees and non-employee directors. Awards available under the Amended 2000 LTIP include restricted units, performance units, unit options, unit awards and distribution equivalent rights (DER). The Compensation Committee may also include a tandem grant of a DER that will entitle the participant to receive cash equal to cash distributions made on any award prior to its vesting. As of March 1, 2016, common units that remained available to be awarded under the Amended 2000 LTIP totaled 1,200,261.

On March 1, 2016, we assumed all outstanding awards under the Amended 2000 LTIP, which represented 688,647 units. The transfer of the outstanding awards qualifies as a plan modification. Therefore, we measured the fair value of the outstanding awards based on the unit price on the transfer date.

Our significant unit-based compensation awards are discussed below.
 
Restricted Units
We account for restricted units expected to result in the issuance of our common units upon vesting as equity-classified awards. These restricted units are mainly granted to domestic employees and non-employee directors and represented 604,153 units on the Employee Transfer date. The outstanding restricted units granted to domestic employees generally vest over five years beginning one year after the grant date. The fair value of a restricted unit award for domestic employees is measured at the transfer date or grant date. Restricted units granted to non-employee directors generally vest over three years and the fair value of such award is measured at each reporting period. DERs paid with respect to outstanding, unvested restricted units reduce partners’ equity, similar to cash distributions to unitholders. We record compensation expense ratably over the vesting period based on the fair value of the units at the grant date (for domestic employees) or the fair value of the units measured at each reporting period (for non-employee directors).

The outstanding restricted units granted to international employees are cash-settled and accounted for as liability-classified awards. These restricted units represented 49,121 units on the Employee Transfer date and vest over three to five years. We record compensation expense over the requisite service or vesting period based on the fair value of the award measured at each reporting period. The liability for restricted units granted to international employees is included in “Accrued liabilities” on our consolidated balance sheets.

Performance Units
Performance units are equity-classified awards issued to certain of our key employees and represent rights to receive our common units upon achieving an objective performance measure for the performance period. The objective performance measure is determined each year by the NuStar GP, LLC Compensation Committee for the following year. Our achievement of the performance measure determines the rate at which the performance units convert into our common units, which can range from zero to 200%.

The performance units represented 35,373 units on the Employee Transfer date. Performance units vest in three annual increments (tranches), based upon our achievement of the performance measure set by the Compensation Committee during the one-year performance periods that end on December 31 of each year following the date of grant. Therefore, performance units are not considered granted until the Compensation Committee has set the performance measure for each tranche of awards. The fair value of our performance units is equal to the grant date fair value reduced by expected distributions over the vesting period as these awards do not receive DERs. We record compensation expense ratably for each vesting tranche over its requisite

16

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

service period (one year) if it is probable that the specified performance measure will be achieved. Additionally, changes in the actual or estimated outcomes that affect the quantity of performance units expected to be converted are recognized as a cumulative adjustment.

We include compensation expense for the outstanding restricted units and performance units in “General and administrative expenses” on the condensed consolidated statements of comprehensive income.

10. PARTNERS’ EQUITY

Issuance of Common Units
During the nine months ended September 30, 2016, we issued 595,050 common units representing limited partner interests at an average price of $47.39 per unit for proceeds of $28.3 million, net of $0.5 million of issuance costs. We used these proceeds, which includes a contribution of $0.6 million from our general partner to maintain its 2% general partner interest, for general partnership purposes, including repayments of outstanding borrowings under our Revolving Credit Agreement.

Partners’ Equity Activity
The following table summarizes changes to our partners’ equity (in thousands of dollars):
Balance as of January 1, 2016
$
1,609,844

Net income
161,059

Unit-based compensation expense
5,564

Other comprehensive loss
(40,606
)
Cash distributions to partners
(294,153
)
Issuance of common units, including contribution from general partner
28,285

Balance as of September 30, 2016
$
1,469,993


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, 2016
$
(60,826
)
 
$
(27,968
)
 
$

 
$
(88,794
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Employee Transfer

 

 
4,201

 
4,201

Deferred income tax adjustments

 

 
2,414

 
2,414

Other comprehensive loss before
   reclassification adjustments
(270
)
 
(52,213
)
 

 
(52,483
)
Net gain on pension costs reclassified into operating
   expense

 

 
(839
)
 
(839
)
Net gain on pension costs reclassified into general and
   administrative expense

 

 
(290
)
 
(290
)
Net loss on cash flow hedges reclassified into interest
   expense, net

 
6,391

 

 
6,391

Other comprehensive (loss) income
(270
)
 
(45,822
)
 
5,486

 
(40,606
)
Balance as of September 30, 2016
$
(61,096
)
 
$
(73,790
)
 
$
5,486

 
$
(129,400
)

Allocations of Net Income
General Partner. Our partnership agreement, as amended, sets forth the calculation to be used to determine the amount and priority of cash distributions that the limited partner unitholders and the general partner will receive. The partnership agreement also contains provisions for the allocation of net income and loss to the unitholders and the general partner. For purposes of maintaining partner capital accounts, the partnership agreement specifies that items of income and loss shall be allocated among the partners in accordance with their respective percentage interests. Normal allocations according to percentage

17

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

interests are made after giving effect to priority income allocations, if any, in an amount equal to incentive cash distributions allocated 100% to the general partner.

The following table details the calculation of net income applicable to the general partner:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(Thousands of Dollars)
Net income applicable to general partner and
    limited partners’ interest
$
51,141

 
$
65,016

 
$
161,059

 
$
247,240

Less general partner incentive distribution
10,890

 
10,805

 
32,500

 
32,415

Net income after general partner incentive distribution
40,251

 
54,211

 
128,559

 
214,825

General partner interest
2
%
 
2
%
 
2
%
 
2
%
General partner allocation of net income after general
    partner incentive distribution
805

 
1,084

 
2,571

 
4,297

General partner incentive distribution
10,890

 
10,805

 
32,500

 
32,415

Net income applicable to general partner
$
11,695

 
$
11,889

 
$
35,071

 
$
36,712


Cash Distributions
The following table reflects the allocation of total cash distributions to the general and limited partners applicable to the period in which the distributions were earned:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(Thousands of Dollars, Except Per Unit Data)
General partner interest
$
1,976

 
$
1,961

 
$
5,898

 
$
5,883

General partner incentive distribution
10,890

 
10,805

 
32,500

 
32,415

Total general partner distribution
12,866

 
12,766

 
38,398

 
38,298

Limited partners’ distribution
85,943

 
85,285

 
256,513

 
255,855

Total cash distributions
$
98,809

 
$
98,051

 
$
294,911

 
$
294,153

 
 
 
 
 
 
 
 
Cash distributions per unit applicable to limited partners
$
1.095

 
$
1.095

 
$
3.285

 
$
3.285


The following table summarizes information related to our quarterly cash distributions:
Quarter Ended
 
Cash
Distributions
Per Unit
 
Total Cash
Distributions
 
Record Date
 
Payment Date
 
 
 
 
(Thousands of Dollars)
 
 
 
 
September 30, 2016 (a)
 
$
1.095

 
$
98,809

 
November 8, 2016
 
November 14, 2016
June 30, 2016
 
$
1.095

 
$
98,051

 
August 9, 2016
 
August 12, 2016
March 31, 2016
 
$
1.095

 
$
98,051

 
May 9, 2016
 
May 13, 2016
December 31, 2015
 
$
1.095

 
$
98,051

 
February 8, 2016
 
February 12, 2016
(a)
The distribution was announced on October 28, 2016.

11. NET INCOME PER UNIT

Basic and diluted net income per unit is determined pursuant to the two-class method. Under this method, all earnings are allocated to our limited partner unitholders and participating securities based on their respective rights to receive distributions earned during the period. Participating securities include our general partner interest, including incentive distribution rights, and restricted units awarded under our Amended 2000 LTIP.


18

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

Basic net income per unit is computed by dividing net income attributable to our limited partner unitholders by the weighted-average number of limited partner units outstanding during the period.

Diluted net income per unit is computed by dividing net income attributable to our limited partner unitholders by the sum of (i) the weighted-average number of limited partner units outstanding during the period and (ii) the effect of dilutive potential limited partner units outstanding during the period. Dilutive potential limited partner units include contingently issuable performance units awarded under our Amended 2000 LTIP.

The following table details the calculation of earnings per unit:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(Thousands of Dollars,
Except Unit and Per Unit Data)
Net income attributable to NuStar Energy L.P.
$
51,141

 
$
65,016

 
$
161,059

 
$
247,240

Less: Distributions to general partner (including incentive
    distribution rights)
12,866

 
12,766

 
38,398

 
38,298

Less: Distributions to limited partner
85,943

 
85,285

 
256,513

 
255,855

Less: DERs to restricted units
650

 

 
1,969

 

Distributions in excess of earnings
$
(48,318
)
 
$
(33,035
)
 
$
(135,821
)
 
$
(46,913
)
 
 
 
 
 
 
 
 
Net income attributable to limited partner units:
 
 
 
 
 
 
 
Distributions to limited partner
$
85,943

 
$
85,285

 
$
256,513

 
$
255,855

Allocation of distributions in excess of earnings
(47,351
)
 
(32,374
)
 
(133,103
)
 
(45,974
)
Total
$
38,592

 
$
52,911

 
$
123,410

 
$
209,881

 
 
 
 
 
 
 
 
Basic weighted-average limited partner units outstanding
78,031,053

 
77,886,078

 
77,934,802

 
77,886,078

 
 
 
 
 
 
 
 
Diluted units outstanding:
 
 
 
 
 
 
 
Basic weighted-average limited partner units outstanding
78,031,053

 
77,886,078

 
77,934,802

 
77,886,078

Effect of dilutive participating securities
31,836

 

 
46,497

 

Diluted weighted-average limited partner units outstanding
78,062,889

 
77,886,078

 
77,981,299

 
77,886,078

 
 
 
 
 
 
 
 
Basic and diluted net income per unit applicable to
    limited partners
$
0.49

 
$
0.68

 
$
1.58

 
$
2.69



19

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:
 
Nine Months Ended September 30,
 
2016
 
2015
 
(Thousands of Dollars)
Decrease (increase) in current assets:
 
 
 
Accounts receivable
$
(15,200
)
 
$
75,532

Inventories
3,767

 
1,654

Other current assets
4,809

 
1,660

Increase (decrease) in current liabilities:
 
 
 
Accounts payable
7,706

 
(45,626
)
Payable to related party, net
806

 
743

Accrued interest payable
(6,672
)
 
(5,424
)
Accrued liabilities
(7,477
)
 
(12,338
)
Taxes other than income tax
3,670

 
3,239

Income tax payable
(3,886
)
 
363

Changes in current assets and current liabilities
$
(12,477
)
 
$
19,803


The above changes in current assets and current liabilities differ from changes between amounts reflected in the applicable consolidated balance sheets due to the change in the amount accrued for capital expenditures and the effect of foreign currency translation. In addition, see Note 7 for non-cash related party transactions associated with the Employee Transfer.

Cash flows related to interest and income taxes were as follows:
 
Nine Months Ended September 30,
 
2016
 
2015
 
(Thousands of Dollars)
Cash paid for interest, net of amount capitalized
$
112,796

 
$
105,340

Cash paid for income taxes, net of tax refunds received
$
9,873

 
$
8,987


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.

20

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

Results of operations for the reportable segments were as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(Thousands of Dollars)
Revenues:
 
 
 
 
 
 
 
Pipeline
$
122,481

 
$
131,395

 
$
362,929

 
$
378,030

Storage:
 
 
 
 
 
 
 
Third parties
152,746

 
155,475

 
445,497

 
450,372

Intersegment
5,021

 
6,628

 
16,543

 
19,707

Total storage
157,767

 
162,103

 
462,040

 
470,079

Fuels marketing
166,191

 
206,696

 
476,499

 
790,719

Consolidation and intersegment eliminations
(5,021
)
 
(6,628
)
 
(16,543
)
 
(19,707
)
Total revenues
$
441,418

 
$
493,566

 
$
1,284,925

 
$
1,619,121

 
 
 
 
 
 
 
 
Operating income (loss):
 
 
 
 
 
 
 
Pipeline
$
58,922

 
$
68,536

 
$
186,739

 
$
201,996

Storage
58,420

 
59,986

 
166,496

 
161,715

Fuels marketing
(337
)
 
(1,819
)
 
282

 
10,756

Consolidation and intersegment eliminations
(1
)
 
(1
)
 

 
41

Total segment operating income
117,004

 
126,702

 
353,517

 
374,508

General and administrative expenses
26,957

 
23,679

 
73,399

 
75,425

Other depreciation and amortization expense
2,093

 
2,029

 
6,382

 
6,403

Total operating income
$
87,954

 
$
100,994

 
$
273,736

 
$
292,680


Total assets by reportable segment were as follows:
 
September 30,
2016
 
December 31,
2015
 
(Thousands of Dollars)
Pipeline
$
2,014,710

 
$
2,014,098

Storage
2,462,597

 
2,476,389

Fuels marketing
143,438

 
156,866

Total segment assets
4,620,745

 
4,647,353

Other partnership assets
369,673

 
478,172

Total consolidated assets
$
4,990,418

 
$
5,125,525

 

21

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 investments in NuStar Logistics and NuPOP, both wholly owned subsidiaries. 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
September 30, 2016
(Thousands of Dollars)
 
NuStar
Energy
 
NuStar
Logistics
 
NuPOP
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
811

 
$
3

 
$

 
$
31,848

 
$

 
$
32,662

Receivables, net

 
257

 

 
159,804

 

 
160,061

Inventories

 
2,285

 
3,514

 
29,252

 

 
35,051

Other current assets
107

 
13,749

 
1,496

 
10,880

 
(1
)
 
26,231

Intercompany receivable

 
1,495,783

 

 
120,677

 
(1,616,460
)
 

Total current assets
918

 
1,512,077

 
5,010

 
352,461

 
(1,616,461
)
 
254,005

Property, plant and equipment, net

 
1,892,540

 
591,145

 
1,189,204

 

 
3,672,889

Intangible assets, net

 
43,830

 

 
57,800

 

 
101,630

Goodwill

 
149,453

 
170,652

 
376,532

 

 
696,637

Investment in wholly owned
subsidiaries
2,073,996

 
43,185

 
1,281,325

 
899,317

 
(4,297,823
)
 

Deferred income tax asset

 

 

 
2,186

 

 
2,186

Other long-term assets, net
1,273

 
222,491

 
26,329

 
12,978

 

 
263,071

Total assets
$
2,076,187

 
$
3,863,576

 
$
2,074,461

 
$
2,890,478

 
$
(5,914,284
)
 
$
4,990,418

Liabilities and Partners’ Equity
 
 
 
 
 
 
 
 
 
 
 
Payables
$
29

 
$
19,939

 
$
12,456

 
$
72,887

 
$

 
$
105,311

Short-term debt

 
7,000

 

 

 

 
7,000

Accrued interest payable

 
27,597

 

 
17

 

 
27,614

Accrued liabilities
683

 
7,930

 
9,528

 
34,379

 

 
52,520

Taxes other than income tax
62

 
6,976

 
4,604

 
4,979

 

 
16,621

Income tax payable

 
540

 

 
1,525

 
(1
)
 
2,064

Intercompany payable
476,020

 

 
1,140,440

 

 
(1,616,460
)
 

Total current liabilities
476,794

 
69,982

 
1,167,028

 
113,787

 
(1,616,461
)
 
211,130

Long-term debt

 
3,110,288

 

 
42,761

 

 
3,153,049

Deferred income tax liability

 
1,862

 
13

 
24,760

 

 
26,635

Other long-term liabilities

 
80,608

 
8,131

 
40,872

 

 
129,611

Total partners’ equity
1,599,393

 
600,836

 
899,289

 
2,668,298

 
(4,297,823
)
 
1,469,993

Total liabilities and
partners’ equity
$
2,076,187

 
$
3,863,576

 
$
2,074,461

 
$
2,890,478

 
$
(5,914,284
)
 
$
4,990,418




22

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

Condensed Consolidating Balance Sheets
December 31, 2015
(Thousands of Dollars)
 
NuStar
Energy
 
NuStar
Logistics
 
NuPOP
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
885

 
$
4

 
$

 
$
117,973

 
$

 
$
118,862

Receivables, net

 
419

 

 
144,645

 

 
145,064

Inventories

 
1,776

 
3,648

 
33,325

 

 
38,749

Other current assets
140

 
11,026

 
497

 
19,513

 

 
31,176

Intercompany receivable

 
1,610,370

 

 

 
(1,610,370
)