Document

Table of Contents

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 _________________________________________
 FORM 10-Q
 _________________________________________
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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
  _________________________________________
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 Rule12b-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 July 31, 2016 was 77,886,442.
 
 
 
 
 


Table of Contents

NUSTAR ENERGY L.P.
FORM 10-Q
TABLE OF CONTENTS
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
Item 6.
 
 

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Table of Contents

PART I – FINANCIAL INFORMATION

Item 1.
Financial Statements
NUSTAR ENERGY L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars, Except Unit Data)
 
June 30,
2016
 
December 31,
2015
 
(Unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
103,019

 
$
118,862

Accounts receivable, net of allowance for doubtful accounts of $7,826
and $8,473 as of June 30, 2016 and December 31, 2015, respectively
145,340

 
145,064

Receivable from related party
186

 
—

Inventories
38,700

 
38,749

Other current assets
25,913

 
31,176

Total current assets
313,158

 
333,851

Property, plant and equipment, at cost
5,294,602

 
5,209,160

Accumulated depreciation and amortization
(1,620,230
)
 
(1,525,589
)
Property, plant and equipment, net
3,674,372

 
3,683,571

Intangible assets, net
105,091

 
112,011

Goodwill
696,637

 
696,637

Deferred income tax asset
2,193

 
2,858

Other long-term assets, net
263,768

 
296,597

Total assets
$
5,055,219

 
$
5,125,525

Liabilities and Partners’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
96,807

 
$
125,147

Payable to related party
—

 
14,799

Short-term debt
—

 
84,000

Accrued interest payable
33,893

 
34,286

Accrued liabilities
47,777

 
55,194

Taxes other than income tax
12,613

 
12,810

Income tax payable
3,186

 
5,977

Total current liabilities
194,276

 
332,213

Long-term debt
3,205,693

 
3,055,612

Long-term payable to related party
—

 
32,080

Deferred income tax liability
26,485

 
24,810

Other long-term liabilities
138,870

 
70,966

Commitments and contingencies (Note 4)

 

Partners’ equity:
 
 
 
Limited partners (77,886,316 and 77,886,078 common units outstanding
as of June 30, 2016 and December 31, 2015, respectively)
1,582,224

 
1,661,900

General partner
34,582

 
36,738

Accumulated other comprehensive loss
(126,911
)
 
(88,794
)
Total partners’ equity
1,489,895

 
1,609,844

Total liabilities and partners’ equity
$
5,055,219

 
$
5,125,525

See Condensed Notes to Consolidated Financial Statements.

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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,
 
2016
 
2015
 
2016
 
2015
Revenues:
 
 
 
 
 
 
 
Service revenues
$
270,403

 
$
274,581

 
$
536,969

 
$
544,554

Product sales
167,401

 
296,030

 
306,538

 
581,001

Total revenues
437,804

 
570,611

 
843,507

 
1,125,555

Costs and expenses:
 
 
 
 
 
 
 
Cost of product sales
157,617

 
281,610

 
286,607

 
544,116

Operating expenses:
 
 
 
 
 
 
 
Third parties
112,662

 
82,568

 
196,202

 
166,928

Related party
—

 
34,570

 
21,681

 
65,857

Total operating expenses
112,662

 
117,138

 
217,883

 
232,785

General and administrative expenses:
 
 
 
 
 
 
 
Third parties
22,657

 
8,986

 
35,949

 
16,653

Related party
—

 
17,707

 
10,493

 
35,093

Total general and administrative expenses
22,657

 
26,693

 
46,442

 
51,746

Depreciation and amortization expense
53,651

 
52,765

 
106,793

 
105,222

Total costs and expenses
346,587

 
478,206

 
657,725

 
933,869

Operating income
91,217

 
92,405

 
185,782

 
191,686

Interest expense, net
(34,229
)
 
(32,824
)
 
(68,352
)
 
(64,861
)
Other (expense) income, net
(201
)
 
(2,152
)
 
(372
)
 
60,116

Income from continuing operations before income
    tax expense
56,787

 
57,429

 
117,058

 
186,941

Income tax expense
4,270

 
3,104

 
7,140

 
5,491

Income from continuing operations
52,517

 
54,325

 
109,918

 
181,450

Income from discontinued operations, net of tax
—

 
—

 
—

 
774

Net income
$
52,517

 
$
54,325

 
$
109,918

 
$
182,224

Basic and diluted net income per unit applicable to
    limited partners:
 
 
 
 
 
 
 
Continuing operations
$
0.52

 
$
0.54

 
$
1.09

 
$
2.00

Discontinued operations
—

 
—

 
—

 
0.01

Total (Note 11)
$
0.52

 
$
0.54

 
$
1.09

 
$
2.01

Basic weighted-average limited partner units outstanding
77,886,219

 
77,886,078

 
77,886,148

 
77,886,078

 
 
 
 
 
 
 
 
Diluted weighted-average limited partner units outstanding
77,939,279

 
77,886,078

 
77,943,702

 
77,886,078

 
 
 
 
 
 
 
 
Comprehensive income
$
29,178

 
$
85,167

 
$
71,801

 
$
192,965

See Condensed Notes to Consolidated Financial Statements.

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NUSTAR ENERGY L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, Thousands of Dollars)
 
Six Months Ended June 30,
 
2016
 
2015
Cash Flows from Operating Activities:
 
 
 
Net income
$
109,918

 
$
182,224

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization expense
106,793

 
105,222

Unit-based compensation expense
2,869

 
—

Amortization of debt related items
3,965

 
4,485

Gain from sale or disposition of assets
(2
)
 
(165
)
Gain associated with the Linden Acquisition
—

 
(56,277
)
Deferred income tax expense
2,562

 
368

Distributions of equity in earnings of joint venture
—

 
2,500

Changes in current assets and current liabilities (Note 12)
(15,274
)
 
(8,502
)
Other, net
4,202

 
7,332

Net cash provided by operating activities
215,033

 
237,187

Cash Flows from Investing Activities:
 
 
 
Capital expenditures
(95,361
)
 
(153,621
)
Change in accounts payable related to capital expenditures
(12,674
)
 
(7,954
)
Acquisitions
—

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

 
(3,444
)
Proceeds from sale or disposition of assets
—

 
1,307

Net cash used in investing activities
(108,035
)
 
(306,212
)
Cash Flows from Financing Activities:
 
 
 
Proceeds from long-term debt borrowings
348,904

 
609,735

Proceeds from short-term debt borrowings
279,000

 
432,000

Long-term debt repayments
(184,192
)
 
(270,292
)
Short-term debt repayments
(363,000
)
 
(463,000
)
Distributions to unitholders and general partner
(196,102
)
 
(196,102
)
Decrease in cash book overdrafts
(11,166
)
 
(13,695
)
Other, net
(674
)
 
(565
)
Net cash (used in) provided by financing activities
(127,230
)
 
98,081

Effect of foreign exchange rate changes on cash
4,389

 
(5,331
)
Net (decrease) increase in cash and cash equivalents
(15,843
)
 
23,725

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
$
103,019

 
$
111,637

See Condensed Notes to Consolidated Financial Statements.

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

1. ORGANIZATION AND BASIS OF PRESENTATION

Organization 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 June 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 (expense) income, net” in the condensed consolidated statements of comprehensive income for the six months ended June 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 six months ended June 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 six months ended June 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.


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

2. NEW ACCOUNTING PRONOUNCEMENTS

Credit Losses
In June 2016, the Financial Accounting Standards Board (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 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

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

amend and/or clarify the new revenue recognition standard. We are currently assessing the impact of this new guidance on our financial position, results of operations and disclosures, and we have not yet selected a transition method.

3. DEBT

Revolving Credit Agreement
During the six months ended June 30, 2016, the balance under our $1.5 billion five-year revolving credit agreement (the Revolving Credit Agreement) increased by $148.1 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 June 30, 2016, our weighted-average interest rate related to borrowings under the Revolving Credit Agreement was 2.2%, and we had $1,030.8 million outstanding.

As of June 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 June 30, 2016, letters of credit issued under the Revolving Credit Agreement totaled $16.5 million, and we had $452.7 million available for borrowing. Our management believes that we are in compliance with the covenants in the Revolving Credit Agreement as of June 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 0.4% as of June 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 six months ended June 30, 2016 and 2015, the amount received from the trustee totaled $11.3 million and $7.7 million, respectively. As of June 30, 2016, the amount remaining in trust totaled $43.6 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 June 30, 2016, $106.1 million of our accounts receivable are included in the Securitization Program. The amount of borrowings outstanding under the Receivables Financing Agreement totaled $56.7 million as of June 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 $3.4 million and $4.8 million for contingent losses as of June 30, 2016 and December 31, 2015, respectively. The amount that will ultimately be paid may differ from the recorded

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

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:
 
June 30, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(Thousands of Dollars)
Assets:
 
 
 
 
 
 
 
Other current assets:
 
 
 
 
 
 
 
Product imbalances
$
142

 
$
—

 
$
—

 
$
142

Commodity derivatives
—

 
224

 
—

 
224

Total
$
142

 
$
224

 
$
—

 
$
366

Liabilities:
 
 
 
 
 
 
 
Accrued liabilities:
 
 
 
 
 
 
 
Product imbalances
$
(407
)
 
$
—

 
$
—

 
$
(407
)
Commodity derivatives
(4,860
)
 
(238
)
 
—

 
(5,098
)
Other long-term liabilities:
 
 
 
 
 
 
 
Guarantee liability
—

 
—

 
(1,805
)
 
(1,805
)
Interest rate swaps
—

 
(48,875
)
 
—

 
(48,875
)
Total
$
(5,267
)
 
$
(49,113
)
 
$
(1,805
)
 
$
(56,185
)

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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 June 30, 2016, we have provided $25.5 million in letters of credit on behalf of Axeon. As of June 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 $76.5 million and $71.9 million, respectively, and one guarantee that does not specify a maximum amount as of June 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 June 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:
 
Six Months Ended June 30, 2016
 
(Thousands of Dollars)
Beginning balance
$
1,697

Adjustments to guarantee liability
108

Ending balance
$
1,805


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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:
 
June 30, 2016
 
December 31, 2015
 
Fair Value
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
(Thousands of Dollars)
Long-term debt
$
3,204,542

 
$
3,205,693

 
$
2,929,438

 
$
3,055,612

Axeon Term Loan
$
174,397

 
$
170,460

 
$
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 June 30, 2016, the carrying amount of the Axeon Term Loan is $170.5 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 $1.8 million as of June 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 June 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.

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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 7.1 million barrels and 8.0 million barrels as of June 30, 2016 and December 31, 2015, respectively. As of June 30, 2016, we had $1.9 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
 
June 30,
2016
 
December 31,
2015
 
June 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
 
333

 
—

 
(484
)
 
—

Interest rate swaps
Other long-term liabilities
 
—

 
—

 
(48,875
)
 
(1,452
)
Total
 
 
333

 
4,692

 
(49,359
)
 
(1,475
)
 
 
 
 
 
 
 
 
 
 
Derivatives Not Designated
as Hedging Instruments:
 
 
 
 
 
 
 
 
 
Commodity contracts
Other current assets
 
224

 
34,016

 
—

 
(24,528
)
Commodity contracts
Accrued liabilities
 
8,306

 
117

 
(13,253
)
 
(237
)
Total
 
 
8,530

 
34,133

 
(13,253
)
 
(24,765
)
 
 
 
 
 
 
 
 
 
 
Total Derivatives
 
 
$
8,863

 
$
38,825

 
$
(62,612
)
 
$
(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
 
June 30,
2016
 
December 31,
2015
 
 
(Thousands of Dollars)
Net amounts of assets presented in the consolidated balance sheets
 
$
224

 
$
11,402

Net amounts of liabilities presented in the consolidated balance sheets
 
$
(5,098
)
 
$
(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 June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(Thousands of Dollars)
Derivatives Designated as Fair Value Hedging Instruments:
 
 
 
 
 
 
 
Loss recognized in income on derivative
$
(5,792
)
 
$
(6,663
)
 
$
(6,804
)
 
$
(4,499
)
Gain recognized in income on hedged item
6,938

 
8,407

 
9,804

 
6,731

Gain recognized in income for ineffective portion
1,146

 
1,744

 
3,000

 
2,232

 
 
 
 
 
 
 
 
Derivatives Not Designated as Hedging Instruments:
 
 
 
 
 
 
 
Loss recognized in income on derivative
$
(724
)
 
$
(339
)
 
$
(4
)
 
$
(9
)


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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,
 
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)
$
(20,200
)
 
$
20,788

 
$
(50,178
)
 
$
18,753

Loss reclassified from AOCI into interest expense, net (effective portion)
$
(2,158
)
 
$
(2,506
)
 
$
(4,380
)
 
$
(5,044
)

As of June 30, 2016, we expect to reclassify a loss of $7.5 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 June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(Thousands of Dollars)
Operating expenses
$
—

 
$
34,570

 
$
21,681

 
$
65,857

General and administrative expenses
$
—

 
$
17,707

 
$
10,493

 
$
35,093


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.


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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 $0.2 million as of June 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 June 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 June 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.


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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 June 30:
 
 
 
 
 
 
 
Service cost
$
1,926

 
$
1,919

 
$
105

 
$
118

Interest cost
1,006

 
1,097

 
100

 
111

Expected return on assets
(1,351
)
 
(1,254
)
 
—

 
—

Amortization of prior service credit
(516
)
 
(515
)
 
(286
)
 
(286
)
Amortization of net loss
273

 
461

 
45

 
67

Net periodic benefit cost (income)
$
1,338

 
$
1,708

 
$
(36
)
 
$
10

 
 
 
 
 
 
 
 
For the six months ended June 30:
 
 
 
 
 
 
 
Service cost
$
3,852

 
$
3,838

 
$
210

 
$
236

Interest cost
2,012

 
2,194

 
200

 
223

Expected return on assets
(2,703
)
 
(2,508
)
 
—

 
—

Amortization of prior service credit
(1,033
)
 
(1,031
)
 
(572
)
 
(572
)
Amortization of net loss
546

 
922

 
90

 
134

Net periodic benefit cost (income)
$
2,674

 
$
3,415

 
$
(72
)
 
$
21


During 2016, we expect to contribute approximately $16.0 million to our pension and other postretirement benefit 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.


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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 classified as 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 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 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. The performance units are not considered granted until the Compensation Committee has set the performance measure for each tranche of awards. Therefore, performance units are equity-classified awards measured at the grant date fair value. In addition, since the performance units granted do not receive DERs, the estimated fair value of these awards does not include the per unit distributions expected to be paid to unitholders during the vesting period. We record compensation expense ratably for each vesting tranche over its

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

requisite 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

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

Net income
109,918

Unit-based compensation expense
4,352

Other comprehensive loss
(38,117
)
Cash distributions to partners
(196,102
)
Balance as of June 30, 2016
$
1,489,895

 
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 income (loss) before
   reclassification adjustments
1,711

 
(50,178
)
 
—

 
(48,467
)
Net gain on pension costs reclassified into operating
   expense
—

 
—

 
(479
)
 
(479
)
Net gain on pension costs reclassified into general and
   administrative expense
—

 
—

 
(166
)
 
(166
)
Net loss on cash flow hedges reclassified into interest
   expense, net
—

 
4,380

 
—

 
4,380

Other comprehensive income (loss)
1,711

 
(45,798
)
 
5,970

 
(38,117
)
Balance as of June 30, 2016
$
(59,115
)
 
$
(73,766
)
 
$
5,970

 
$
(126,911
)

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 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.


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

The following table details the calculation of net income applicable to the general partner:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(Thousands of Dollars)
Net income applicable to general partner and
    limited partners’ interest
$
52,517

 
$
54,325

 
$
109,918

 
$
182,224

Less general partner incentive distribution
10,805

 
10,805

 
21,610

 
21,610

Net income after general partner incentive distribution
41,712

 
43,520

 
88,308

 
160,614

General partner interest
2
%
 
2
%
 
2
%
 
2
%
General partner allocation of net income after general
    partner incentive distribution
834

 
871

 
1,766

 
3,213

General partner incentive distribution
10,805

 
10,805

 
21,610

 
21,610

Net income applicable to general partner
$
11,639

 
$
11,676

 
$
23,376

 
$
24,823


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 June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(Thousands of Dollars, Except Per Unit Data)
General partner interest
$
1,961

 
$
1,961

 
$
3,922

 
$
3,922

General partner incentive distribution
10,805

 
10,805

 
21,610

 
21,610

Total general partner distribution
12,766

 
12,766

 
25,532

 
25,532

Limited partners’ distribution
85,285

 
85,285

 
170,570

 
170,570

Total cash distributions
$
98,051

 
$
98,051

 
$
196,102

 
$
196,102

 
 
 
 
 
 
 
 
Cash distributions per unit applicable to limited partners
$
1.095

 
$
1.095

 
$
2.190

 
$
2.190


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)
 
 
 
 
June 30, 2016 (a)
 
$
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 July 29, 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.

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

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

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 June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(Thousands of Dollars,
Except Unit and Per Unit Data)
Net income attributable to NuStar Energy L.P.
$
52,517

 
$
54,325

 
$
109,918

 
$
182,224

Less: Distributions to general partner (including incentive
    distribution rights)
12,766

 
12,766

 
25,532

 
25,532

Less: Distributions to limited partner
85,285

 
85,285

 
170,570

 
170,570

Less: DERs to restricted units
657

 
—

 
1,319

 
—

Distributions in excess of earnings
$
(46,191
)
 
$
(43,726
)
 
$
(87,503
)
 
$
(13,878
)
 
 
 
 
 
 
 
 
Net income attributable to limited partner units:
 
 
 
 
 
 
 
Distributions to limited partner
$
85,285

 
$
85,285

 
$
170,570

 
$
170,570

Allocation of distributions in excess of earnings
(45,267
)
 
(42,851
)
 
(85,752
)
 
(13,600
)
Total
$
40,018

 
$
42,434

 
$
84,818

 
$
156,970

 
 
 
 
 
 
 
 
Basic weighted-average limited partner units outstanding
77,886,219

 
77,886,078

 
77,886,148

 
77,886,078

 
 
 
 
 
 
 
 
Diluted units outstanding:
 
 
 
 
 
 
 
Basic weighted-average limited partner units outstanding
77,886,219

 
77,886,078

 
77,886,148

 
77,886,078

Effect of dilutive participating securities
53,060

 
—

 
57,554

 
—

Diluted weighted-average limited partner units outstanding
77,939,279

 
77,886,078

 
77,943,702

 
77,886,078

 
 
 
 
 
 
 
 
Basic and diluted net income per unit applicable to
    limited partners
$
0.52

 
$
0.54

 
$
1.09

 
$
2.01



19
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NUSTAR ENERGY L.P. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

12. STATEMENTS OF CASH FLOWS

Changes in current assets and current liabilities were as follows:
 
Six Months Ended June 30,
 
2016
 
2015
 
(Thousands of Dollars)
Decrease (increase) in current assets:
 
 
 
Accounts receivable
$
(572
)
 
$
45,431

Inventories
99

 
(9,653
)
Other current assets
5,064

 
1,711

Increase (decrease) in current liabilities:
 
 
 
Accounts payable
(4,717
)
 
(34,851
)
Payable to related party, net
697

 
5,175

Accrued interest payable
(393
)
 
337

Accrued liabilities
(12,321
)
 
(15,058
)
Taxes other than income tax
(348
)
 
(500
)
Income tax payable
(2,783
)
 
(1,094
)
Changes in current assets and current liabilities
$
(15,274
)
 
$
(8,502
)

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:
 
Six Months Ended June 30,
 
2016
 
2015
 
(Thousands of Dollars)
Cash paid for interest, net of amount capitalized
$
70,280

 
$
65,378

Cash paid for income taxes, net of tax refunds received
$
8,826

 
$
6,335


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.

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

Results of operations for the reportable segments were as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(Thousands of Dollars)
Revenues:
 
 
 
 
 
 
 
Pipeline
$
121,575

 
$
122,210

 
$
240,448

 
$
246,635

Storage:
 
 
 
 
 
 
 
Third parties
146,367

 
150,812

 
292,751

 
294,897

Intersegment
5,507

 
6,830

 
11,522

 
13,079

Total storage
151,874

 
157,642

 
304,273

 
307,976

Fuels Marketing
169,862

 
297,589

 
310,308

 
584,023

Consolidation and intersegment eliminations
(5,507
)
 
(6,830
)
 
(11,522
)
 
(13,079
)
Total revenues
$
437,804

 
$
570,611

 
$
843,507

 
$
1,125,555

 
 
 
 
 
 
 
 
Operating income:
 
 
 
 
 
 
 
Pipeline
$
63,552

 
$
64,820

 
$
127,817

 
$
133,460

Storage
51,063

 
53,751

 
108,076

 
101,729

Fuels marketing
1,392

 
2,650

 
619

 
12,575

Consolidation and intersegment eliminations
1

 
(1
)
 
1

 
42

Total segment operating income
116,008

 
121,220

 
236,513

 
247,806

General and administrative expenses
22,657

 
26,693

 
46,442

 
51,746

Other depreciation and amortization expense
2,134

 
2,122

 
4,289

 
4,374

Total operating income
$
91,217

 
$
92,405

 
$
185,782

 
$
191,686


Total assets by reportable segment were as follows:
 
June 30,
2016
 
December 31,
2015
 
(Thousands of Dollars)
Pipeline
$
2,004,850

 
$
2,014,098

Storage
2,466,104

 
2,476,389

Fuels marketing
140,150

 
156,866

Total segment assets
4,611,104

 
4,647,353

Other partnership assets
444,115

 
478,172

Total consolidated assets
$
5,055,219

 
$
5,125,525

 

21
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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
June 30, 2016
(Thousands of Dollars)
 
NuStar
Energy
 
NuStar
Logistics
 
NuPOP
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
663

 
$
3

 
$
—

 
$
102,353

 
$
—

 
$
103,019

Receivables, net
—

 
252

 
—

 
145,274

 
—

 
145,526

Inventories
—

 
2,167

 
2,409

 
34,124

 
—

 
38,700

Other current assets
77

 
11,772

 
353

 
13,711

 
—

 
25,913

Intercompany receivable
—

 
1,547,576

 
—

 
—

 
(1,547,576
)
 
—

Total current assets
740

 
1,561,770

 
2,762

 
295,462

 
(1,547,576
)
 
313,158

Property, plant and equipment, net
—

 
1,912,598

 
574,879

 
1,186,895

 
—

 
3,674,372

Intangible assets, net
—

 
45,541

 
—

 
59,550

 
—

 
105,091

Goodwill
—

 
149,453

 
170,652

 
376,532

 
—

 
696,637

Investment in wholly owned
subsidiaries
2,120,652

 
43,229

 
1,052,106

 
905,142

 
(4,121,129
)
 
—

Deferred income tax asset
—

 
—

 
—

 
3,372

 
(1,179
)
 
2,193

Other long-term assets, net
1,188

 
223,037

 
26,329

 
13,214

 
—

 
263,768

Total assets
$
2,122,580

 
$
3,935,628

 
$
1,826,728

 
$
2,840,167

 
$
(5,669,884
)
 
$
5,055,219

Liabilities and Partners’ Equity
 
 
 
 
 
 
 
 
 
 
 
Payables
$
31

 
$
22,398

 
$
10,485

 
$
63,893

 
$
—

 
$
96,807

Accrued interest payable
—

 
33,877

 
—

 
16

 
—

 
33,893

Accrued liabilities
644

 
7,393

 
8,136

 
31,604

 
—

 
47,777

Taxes other than income tax
—

 
5,450

 
3,153

 
4,010

 
—

 
12,613

Income tax payable
—

 
669

 
5

 
2,512

 
—

 
3,186

Intercompany payable
505,099

 
—

 
892,556

 
149,921

 
(1,547,576
)
 
—

Total current liabilities
505,774

 
69,787

 
914,335

 
251,956

 
(1,547,576
)
 
194,276

Long-term debt
—

 
3,149,496

 
—

 
56,197

 
—

 
3,205,693

Deferred income tax liability
—

 
1,143

 
36

 
26,485

 
(1,179
)
 
26,485

Other long-term liabilities
—

 
73,483

 
7,248

 
58,139

 
—

 
138,870

Total partners’ equity
1,616,806

 
641,719

 
905,109

 
2,447,390

 
(4,121,129
)
 
1,489,895

Total liabilities and
partners’ equity
$
2,122,580

 
$
3,935,628

 
$
1,826,728

 
$
2,840,167

 
$
(5,669,884
)
 
$
5,055,219




22
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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
)
 
—

Total current assets
1,025

 
1,623,595

 
4,145

 
315,456

 
(1,610,370
)
 
333,851

Property, plant and equipment, net
—

 
1,915,370

 
570,415

 
1,197,786

 
—

 
3,683,571

Intangible assets, net
—

 
48,961

 
—

 
63,050

 
—

 
112,011

Goodwill
—

 
149,453

 
170,652

 
376,532

 
—

 
696,637

Investment in wholly owned
subsidiaries
2,205,904

 
48,547

 
1,031,162

 
915,115

 
(4,200,728
)
 
—

Deferred income tax asset
—

 
—

 
—

 
4,037

 
(1,179
)
 
2,858

Other long-term assets, net
933

 
255,957

 
26,329

 
13,378

 
—

 
296,597

Total assets
$
2,207,862

 
$
4,041,883

 
$
1,802,703

 
$
2,885,354

 
$
(5,812,277
)
 
$
5,125,525

Liabilities and Partners’ Equity
 
 
 
 
 
 
 
 
 
 
 
Payables
$
12

 
$
52,650

 
$
11,193

 
$
76,091

 
$
—

 
$
139,946

Short-term debt
—

 
84,000

 
—

 
—

 
—

 
84,000

Accrued interest payable
—

 
34,271

 
—

 
15

 
—

 
34,286

Accrued liabilities
723

 
32,816

 
5,753

 
15,902

 
—

 
55,194

Taxes other than income tax
126

 
6,452

 
3,325

 
2,907

 
—

 
12,810

Income tax payable
—

 
1,362

 
9

 
4,606

 
—

 
5,977

Intercompany payable
508,363

 
—

 
858,018

 
243,989

 
(1,610,370
)
 
—

Total current liabilities
509,224

 
211,551

 
878,298

 
343,510

 
(1,610,370
)
 
332,213

Long-term debt
—

 
3,002,743

 
—

 
52,869

 
—

 
3,055,612

Long-term payable to related party
—

 
26,638

 
—

 
5,442

 
—

 
32,080

Deferred income tax liability
—

 
1,143

 
36

 
24,810

 
(1,179
)
 
24,810

Other long-term liabilities
—

 
37,209

 
9,294

 
24,463

 
—

 
70,966

Total partners’ equity
1,698,638

 
762,599

 
915,075

 
2,434,260

 
(4,200,728
)
 
1,609,844

Total liabilities and
partners’ equity
$
2,207,862

 
$
4,041,883

 
$
1,802,703

 
$
2,885,354

 
$
(5,812,277
)
 
$
5,125,525




23
Table of Contents
NUSTAR ENERGY L.P. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Condensed Consolidating Statements of Comprehensive Income (Loss)
For the Three Months Ended June 30, 2016
(Thousands of Dollars)
 
NuStar
Energy
 
NuStar
Logistics
 
NuPOP
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenues
$
—

 
$
125,562

 
$
58,129

 
$
254,489

 
$
(376
)
 
$
437,804

Costs and expenses
434

 
73,505

 
35,986

 
237,038

 
(376
)
 
346,587

Operating (loss) income
(434
)
 
52,057

 
22,143

 
17,451

 
—

 
91,217

Equity in earnings (loss) of
subsidiaries
52,929

 
(2,203
)
 
20,171

 
44,346

 
(115,243
)
 
—

Interest (expense) income, net
—

 
(41,155
)
 
2,026

 
549

 
4,351

 
(34,229
)
Other income (expense), net
22

 
21

 
7

 
(251
)
 
—

 
(201
)
Income before income tax
expense
52,517

 
8,720

 
44,347

 
62,095

 
(110,892
)
 
56,787

Income tax expense
—

 
347

 
3

 
3,920

 
—

 
4,270

Net income
$
52,517

 
$
8,373

 
$
44,344

 
$
58,175

 
$
(110,892
)
 
$
52,517

 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income (loss)
$
52,517

 
$
(9,669
)
 
$
44,344

 
$
52,878

 
$
(110,892
)
 
$
29,178


Condensed Consolidating Statements of Comprehensive Income
For the Three Months Ended June 30, 2015
(Thousands of Dollars)
 
NuStar
Energy
 
NuStar
Logistics
 
NuPOP
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenues
$
—

 
$
137,170

 
$
48,722

 
$
385,331

 
$
(612
)
 
$
570,611

Costs and expenses
438

 
76,335

 
31,740

 
370,306

 
(613
)
 
478,206

Operating (loss) income
(438
)
 
60,835

 
16,982

 
15,025

 
1

 
92,405

Equity in earnings (loss) of
     subsidiaries
54,763

 
(1,224
)
 
12,636

 
29,664

 
(95,839
)
 
—

Interest (expense) income, net
—

 
(32,779
)
 
55

 
(100
)
 
—

 
(32,824
)
Other (expense) income, net
—

 
(665
)
 
7

 
(1,494
)
 
—

 
(2,152
)
Income before income tax
expense
54,325

 
26,167

 
29,680

 
43,095

 
(95,838
)
 
57,429

Income tax expense
—

 
1,082

 
18

 
2,004

 
—

 
3,104

Net income
$
54,325

 
$
25,085

 
$
29,662

 
$
41,091

 
$
(95,838
)
 
$
54,325

 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income
$
54,325

 
$
48,379

 
$
29,662

 
$
48,639

 
$
(95,838
)
 
$
85,167

 

24
Table of Contents
NUSTAR ENERGY L.P. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Condensed Consolidating Statements of Comprehensive Income (Loss)
For the Six Months Ended June 30, 2016
(Thousands of Dollars)
 
NuStar
Energy
 
NuStar
Logistics
 
NuPOP
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenues
$
—

 
$
252,140

 
$
106,114

 
$
485,965

 
$
(712
)
 
$
843,507

Costs and expenses
952

 
142,396

 
67,001

 
448,088

 
(712
)
 
657,725

Operating (loss) income
(952
)
 
109,744

 
39,113

 
37,877

 
—

 
185,782

Equity in earnings (loss) of
subsidiaries
110,851

 
(5,318
)
 
45,454

 
88,089

 
(239,076
)
 
—

Interest (expense) income, net
—

 
(80,787
)
 
3,534

 
8,901

 
—

 
(68,352
)
Other income (expense), net
22

 
22

 
(10
)
 
(406
)
 
—

 
(372
)
Income before income tax
expense
109,921

 
23,661

 
88,091

 
134,461

 
(239,076
)
 
117,058

Income tax expense
3

 
693

 
5

 
6,439

 
—

 
7,140

Net income
$
109,918

 
$
22,968

 
$
88,086

 
$
128,022

 
$
(239,076
)
 
$
109,918

 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income (loss)
$
109,918

 
$
(22,830
)
 
$
88,086

 
$
135,703

 
$
(239,076
)
 
$
71,801


Condensed Consolidating Statements of Comprehensive Income
For the Six Months Ended June 30, 2015
(Thousands of Dollars)
 
NuStar
Energy
 
NuStar
Logistics
 
NuPOP
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenues
$
—

 
$
271,206

 
$
101,296

 
$
753,992

 
$
(939
)
 
$
1,125,555

Costs and expenses
928

 
149,241

 
64,864

 
719,818

 
(982
)
 
933,869

Operating (loss) income
(928
)
 
121,965

 
36,432

 
34,174

 
43

 
191,686

Equity in earnings (loss) of
      subsidiaries
183,152

 
(5,388
)
 
94,335

 
130,937

 
(403,036
)
 
—

Interest (expense) income, net
—

 
(64,953
)
 
174

 
(82
)
 
—

 
(64,861
)
Other income, net
—

 
675

 
9

 
59,432

 
—

 
60,116

Income from continuing
operations before income tax
expense
182,224

 
52,299

 
130,950

 
224,461

 
(402,993
)
 
186,941

Income tax expense
—

 
56

 
18

 
5,417

 
—

 
5,491

Income from continuing
operations
182,224

 
52,243

 
130,932

 
219,044

 
(402,993
)
 
181,450

Income from discontinued
operations, net of tax
—

 
—

 
—

 
774

 
—

 
774

Net income
$
182,224

 
$
52,243

 
$
130,932

 
$
219,818

 
$
(402,993
)
 
$
182,224

 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income
$
182,224

 
$
76,040

 
$
130,932

 
$
206,762

 
$
(402,993
)
 
$
192,965


25
Table of Contents
NUSTAR ENERGY L.P. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Condensed Consolidating Statements of Cash Flows
For the Six Months Ended June 30, 2016
(Thousands of Dollars)
 
NuStar
Energy
 
NuStar
Logistics
 
NuPOP
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net cash provided by operating
     activities
$
194,793

 
$
58,160

 
$
79,728

 
$
201,026

 
$
(318,674
)
 
$
215,033

Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
 
 
Capital expenditures
—

 
(47,672
)
 
(19,474
)
 
(28,215
)
 
—

 
(95,361
)
Change in accounts payable
    related to capital expenditures
—

 
(12,230
)
 
3,357

 
(3,801
)
 
—

 
(12,674
)
Net cash used in investing activities
—

 
(59,902
)
 
(16,117
)
 
(32,016
)
 
—

 
(108,035
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
 
 
Debt borrowings
—

 
610,504

 
—

 
17,400

 
—

 
627,904

Debt repayments
—

 
(532,992
)
 
—

 
(14,200
)
 
—

 
(547,192
)
Distributions to unitholders
and general partner
(196,102
)
 
(98,051
)
 
(98,051
)
 
(98,062
)
 
294,164

 
(196,102
)
(Distributions to) contributions
from affiliates
—

 
—

 
—

 
(24,510
)
 
24,510

 
—

Net intercompany activity
1,755

 
24,561

 
34,440

 
(60,756
)
 
—

 
—

Other, net
(668
)
 
(2,281
)
 
—

 
(8,891
)
 
—

 
(11,840
)
Net cash (used in) provided by
financing activities
(195,015
)
 
1,741

 
(63,611
)
 
(189,019
)
 
318,674

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

 
—

 
—

 
4,389

 
—

 
4,389

Net decrease in cash
and cash equivalents
(222
)
 
(1
)
 
—

 
(15,620
)
 
—

 
(15,843
)
Cash and cash equivalents as of the
beginning of the period
885

 
4

 
—

 
117,973

 
—

 
118,862

Cash and cash equivalents as of the
end of the period
$
663

 
$
3

 
$
—

 
$
102,353

 
$
—

 
$
103,019

 



26
Table of Contents
NUSTAR ENERGY L.P. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Condensed Consolidating Statements of Cash Flows
For the Six Months Ended June 30, 2015
(Thousands of Dollars)
 
NuStar
Energy
 
NuStar
Logistics
 
NuPOP
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net cash provided by operating
activities
$
194,802

 
$
73,389

 
$
52,154

 
$
211,006

 
$
(294,164
)
 
$
237,187

Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
 
 
Capital expenditures
—

 
(108,591
)
 
(12,344
)
 
(32,686
)
 
—

 
(153,621
)
Change in accounts payable
    related to capital expenditures
—

 
(8,082
)
 
506

 
(378
)
 
—

 
(7,954
)
Acquisitions
—

 
—

 
—

 
(142,500
)
 
—

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

 
—

 
—

 
(3,444
)
 
—

 
(3,444
)
Proceeds from sale or disposition
of assets
—

 
62

 
14

 
1,231

 
—

 
1,307

Net cash used in investing activities
—

 
(116,611
)
 
(11,824
)
 
(177,777
)
 
—

 
(306,212
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
 
 
Debt borrowings
—

 
952,835

 
—

 
88,900

 
—

 
1,041,735

Debt repayments
—

 
(733,292
)
 
—

 
—

 
—

 
(733,292
)
Distributions to unitholders and
general partner
(196,102
)
 
(98,051
)
 
(98,051
)
 
(98,062
)
 
294,164

 
(196,102
)
Net intercompany activity
1,241

 
(72,816
)
 
57,721

 
13,854

 
—

 
—

Other, net
—

 
(5,454
)
 
—

 
(8,806
)
 
—

 
(14,260
)
Net cash (used in) provided by
     financing activities
(194,861
)
 
43,222

 
(40,330
)
 
(4,114
)
 
294,164

 
98,081

Effect of foreign exchange rate
changes on cash
—

 
—

 
—

 
(5,331
)
 
—

 
(5,331
)
Net decrease (increase) in cash and
cash equivalents
(59
)
 
—

 
—

 
23,784

 
—

 
23,725

Cash and cash equivalents as of the
beginning of the period
923

 
6

 
—

 
86,983

 
—

 
87,912

Cash and cash equivalents as of the
end of the period
$
864

 
$
6

 
$
—

 
$
110,767

 
$
—

 
$
111,637





27

Table of Contents

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

FORWARD-LOOKING STATEMENTS
This Form 10-Q contains certain estimates, predictions, projections, assumptions and other forward-looking statements that involve various risks and uncertainties. While these forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect our current judgment regarding the direction of our business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested in this report. These forward-looking statements can generally be identified by the words “anticipates,” “believes,” “expects,” “plans,” “intends,” “estimates,” “forecasts,” “budgets,” “projects,” “will,” “could,” “should,” “may” and similar expressions. These statements reflect our current views with regard to future events and are subject to various risks, uncertainties and assumptions. Please read our Annual Report on Form 10-K for the year ended December 31, 2015, Part I, Item 1A “Risk Factors,” as well as our subsequent current and quarterly reports, for a discussion of certain of those risks, uncertainties and assumptions.

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

OVERVIEW
NuStar Energy L.P. (NuStar Energy) (NYSE: NS) is 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 June 30, 2016. Our Management’s Discussion and Analysis of Financial Condition and Results of Operations is presented in seven sections:
•
Overview
•
Results of Operations
•
Trends and Outlook
•
Liquidity and Capital Resources
•
Related Party Transactions
•
Critical Accounting Policies
•
New Accounting Pronouncements

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). The Employee Transfer did not materially change our results of operations since we previously reimbursed NuStar GP, LLC for all employee costs attributable to us. However, 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 of the Condensed Notes to Consolidated Financial Statements in Item 1. “Financial Statements” for further discussion on the Employee Transfer.

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 (expense) income, net” in the condensed consolidated statements of comprehensive income for the six months ended June 30, 2015.



28

Table of Contents

Operations
We conduct our operations through our subsidiaries, primarily NuStar Logistics, L.P. (NuStar Logistics) and NuStar Pipeline Operating Partnership L.P. (NuPOP). Our operations consist of three reportable business segments: pipeline, storage and fuels marketing.
Pipeline. We own 3,140 miles of refined product pipelines and 1,200 miles of crude oil pipelines, as well as approximately 4.0 million barrels of storage capacity, which comprise our Central West System. In addition, we own 2,360 miles of refined product pipelines, consisting of the East and North Pipelines, and a 2,000 mile ammonia pipeline (the Ammonia Pipeline), which comprise our Central East System. The East and North Pipelines have storage capacity of approximately 6.4 million barrels. We charge tariffs on a per barrel basis for transporting refined products, crude oil and other feedstocks in our refined product and crude oil pipelines and on a per ton basis for transporting anhydrous ammonia in the Ammonia Pipeline.

Storage. We own terminals and storage facilities in the United States, Canada, Mexico, the Netherlands, including St. Eustatius in the Caribbean, and the United Kingdom (UK), with approximately 83.7 million barrels of storage capacity. Revenues for the storage segment include fees for tank storage agreements, whereby a customer agrees to pay for a certain amount of storage in a tank over a period of time (storage terminal revenues), and throughput agreements, whereby a customer pays a fee per barrel for volumes moving through our terminals for which we charge additional fees (throughput terminal revenues).
Fuels Marketing. Within our fuels marketing operations, we purchase crude oil and refined petroleum products for resale. The results of operations for the fuels marketing segment depend largely on the margin between our cost and the sales prices of the products we market. Therefore, the results of operations for this segment are more sensitive to changes in commodity prices compared to the operations of the pipeline and storage segments. We enter into derivative contracts to attempt to mitigate the effects of commodity price fluctuations.

The following factors affect the results of our operations:
•
company-specific factors, such as facility integrity issues and maintenance requirements that impact the throughput rates of our assets;
•
seasonal factors that affect the demand for products transported by and/or stored in our assets and the demand for products we sell;
•
industry factors, such as changes in the prices of petroleum products that affect demand and operations of our competitors;
•
other factors, such as commodity price volatility that impact our fuels marketing segment; and
•
other factors that impact the operations served by our pipeline and storage assets, such as utilization rates and maintenance turnaround schedules of our refining company customers and drilling activity by our crude oil production customers.

Current Market Conditions
During 2015 and early 2016, the price of crude oil declined sharply, at times reaching lows not seen in over a decade. While the price has made a modest recovery, many energy industry experts predict continued price volatility.

Increases or decreases in the price of crude oil affect various sectors of the energy industry, including our customers in crude oil production, refining and trading, in different ways. For example, the sustained period of low prices has forced some of our crude oil production customers to reduce their capital spending and drilling activity and narrow their focus to assets in the most cost-advantaged regions. However, while some of our refining company customers have benefitted from lower crude oil prices, particularly to the extent the lower feedstock price has been coupled with higher demand for certain refined products in some regional markets, recent increases in refined product inventory may cause some of our refining company customers to reduce their production levels.

Continued low crude oil prices seem to have been having a direct, negative impact on the unit price of many master limited partnerships, including our own, although recently that impact appears to be diminishing. Partly as a result of lower unit prices, earlier this year, we reduced our overall capital spending in order to minimize our need to access the public capital markets due to the prohibitively high costs of public debt and equity financing at the time; however, as financial markets have improved, costs have begun to drop. If market conditions continue to improve, we plan to reevaluate our financing plans and access the markets as needed.



29

Table of Contents

RESULTS OF OPERATIONS
Three Months Ended June 30, 2016 Compared to Three Months Ended June 30, 2015
Financial Highlights
(Unaudited, Thousands of Dollars, Except Unit and Per Unit Data)
 
Three Months Ended June 30,
 
Change
 
2016
 
2015
 
Statement of Income Data:
 
 
 
 
 
Revenues:
 
 
 
 
 
Service revenues
$
270,403

 
$
274,581

 
$
(4,178
)
Product sales
167,401

 
296,030

 
(128,629
)
Total revenues
437,804

 
570,611

 
(132,807
)
 
 
 
 
 
 
Costs and expenses:
 
 
 
 
 
Cost of product sales
157,617

 
281,610

 
(123,993
)
Operating expenses
112,662

 
117,138

 
(4,476
)
General and administrative expenses
22,657

 
26,693

 
(4,036
)
Depreciation and amortization expense
53,651

 
52,765

 
886

Total costs and expenses
346,587

 
478,206

 
(131,619
)
 
 
 
 
 
 
Operating income
91,217

 
92,405

 
(1,188
)
Interest expense, net
(34,229
)
 
(32,824
)
 
(1,405
)
Other expense, net
(201
)
 
(2,152
)
 
1,951

Income before income tax expense
56,787

 
57,429

 
(642
)
Income tax expense
4,270

 
3,104

 
1,166

Net income
$
52,517

 
$
54,325

 
$
(1,808
)
Basic and diluted net income per unit applicable to limited partners
$
0.52

 
$
0.54

 
$
(0.02
)
Basic weighted-average limited partner units outstanding
77,886,219

 
77,886,078

 
141


Overview
Net income decreased $1.8 million for the three months ended June 30, 2016, compared to the three months ended June 30, 2015, mainly due to a decrease of $5.2 million in segment operating income, which was partially offset by a decrease in general and administrative expenses of $4.0 million.

30

Table of Contents

Segment Operating Highlights
(Thousands of Dollars, Except Barrels/Day Information)
 
Three Months Ended June 30,
 
Change
 
2016
 
2015
 
Pipeline:
 
 
 
 
 
Refined products pipelines throughput (barrels/day)
538,996

 
499,333

 
39,663

Crude oil pipelines throughput (barrels/day)
399,372

 
468,431

 
(69,059
)
Total throughput (barrels/day)
938,368

 
967,764

 
(29,396
)
Throughput revenues
$
121,575

 
$
122,210

 
$
(635
)
Operating expenses
36,159

 
36,634

 
(475
)
Depreciation and amortization expense
21,864

 
20,756

 
1,108

Segment operating income
$
63,552

 
$
64,820

 
$
(1,268
)
Storage:
 
 
 
 
 
Throughput (barrels/day)
727,857

 
957,452

 
(229,595
)
Throughput terminal revenues
$
28,668

 
$
34,623

 
$
(5,955
)
Storage terminal revenues
123,206

 
123,019

 
187

Total revenues
151,874

 
157,642

 
(5,768
)
Operating expenses
71,158

 
74,004

 
(2,846
)
Depreciation and amortization expense
29,653

 
29,887

 
(234
)
Segment operating income
$
51,063

 
$
53,751

 
$
(2,688
)
Fuels Marketing:
 
 
 
 
 
Product sales and other revenue
$
169,862

 
$
297,589

 
$
(127,727
)
Cost of product sales
160,557

 
285,862

 
(125,305
)
Gross margin
9,305

 
11,727

 
(2,422
)
Operating expenses
7,913

 
9,077

 
(1,164
)
Segment operating income
$
1,392

 
$
2,650

 
$
(1,258
)
Consolidation and Intersegment Eliminations:
 
 
 
 
 
Revenues
$
(5,507
)
 
$
(6,830
)
 
$
1,323

Cost of product sales
(2,940
)
 
(4,252
)
 
1,312

Operating expenses
(2,568
)
 
(2,577
)
 
9

Total
$
1

 
$
(1
)
 
$
2

Consolidated Information:
 
 
 
 
 
Revenues
$
437,804

 
$
570,611

 
$
(132,807
)
Cost of product sales
157,617

 
281,610

 
(123,993
)
Operating expenses
112,662

 
117,138

 
(4,476
)
Depreciation and amortization expense
51,517

 
50,643

 
874

Segment operating income
116,008

 
121,220

 
(5,212
)
General and administrative expenses
22,657

 
26,693

 
(4,036
)
Other depreciation and amortization expense
2,134

 
2,122

 
12

Consolidated operating income
$
91,217

 
$
92,405

 
$
(1,188
)

31

Table of Contents

Pipeline
Total revenues remained flat for the three months ended June 30, 2016, compared to the three months ended June 30, 2015, despite a decrease in throughputs of 29,396 barrels per day. Revenues decreased $10.5 million and throughputs decreased 81,677 barrels per day on our Eagle Ford System due to reduced production resulting from a sustained low crude oil price environment.

These decreases were mostly offset by increases from our McKee System pipelines and East Pipeline. Revenues increased $5.2 million and throughputs increased 27,688 barrels per day on our McKee System crude and refined products pipelines mainly due to increased production at the McKee refinery and increased volumes on pipelines with higher average tariffs, as well as a result of a partial turnaround at the McKee refinery in the second quarter of 2015. Revenues increased $4.4 million and throughputs increased 26,355 barrels per day on our East Pipeline due to the completion of expansion projects in the fourth quarter of 2015. In addition, the second quarter of 2015 was negatively affected by unfavorable pricing differentials in markets served by the East Pipeline and adverse weather conditions that negatively affected demand related to the planting season.

Depreciation and amortization expense increased $1.1 million for the three months ended June 30, 2016, compared to the three months ended June 30, 2015, mainly due to the completion of pipeline projects.

Storage
Total storage segment revenues decreased $5.8 million for the three months ended June 30, 2016, compared to the three months ended June 30, 2015, mainly due to decreases in throughput terminal revenues of $6.0 million, while storage terminal revenues remained flat.

Throughput terminal revenues decreased $6.0 million and throughputs decreased 229,595 barrels per day for the three months ended June 30, 2016, compared to the three months ended June 30, 2015, primarily due to:
•
a decrease in revenues of $3.6 million and a decrease in throughputs of 104,658 barrels per day at our Corpus Christi North Beach terminal due to a decrease in Eagle Ford Shale crude oil being shipped to Corpus Christi, consistent with the decrease in pipeline throughputs; and
•
a decrease in revenues of $2.0 million and a decrease in throughputs of 111,141 barrels per day due to turnarounds at the refineries served by our Corpus Christi and Texas City crude oil storage tank facilities, as well as operational issues at the Corpus Christi refinery in 2016.

Storage terminal revenues remained flat for the three months ended June 30, 2016, compared to the three months ended June 30, 2015. Domestic revenues increased $2.2 million, mainly from new customer contracts and higher throughput and related handling fees at our Selby, CA, Pittsburgh, CA and Linden, NJ terminals. These increases were mostly offset by the negative impact of foreign exchange rate fluctuations of $1.0 million at our UK terminal and decreased reimbursable revenues of $0.9 million at our St. Eustatius terminal facility.

Operating expenses decreased $2.8 million for the three months ended June 30, 2016, compared to the three months ended June 30, 2015, primarily due to a decrease in employee benefit costs.

Fuels Marketing
Segment operating income decreased $1.3 million for the three months ended June 30, 2016, compared to the three months ended June 30, 2015, primarily due to lower product margins from our fuel oil operations.

Consolidation and Intersegment Eliminations
Revenue and operating expense eliminations primarily relate to storage fees charged to the fuels marketing segment by the storage segment. Cost of product sales eliminations represent expenses charged to the fuels marketing segment for costs associated with inventory that are expensed once the inventory is sold.

General
General and administrative expenses decreased $4.0 million for the three months ended June 30, 2016, compared to the three months ended June 30, 2015, primarily due to lower employee benefit costs, as well as lower compensation expense associated with our long-term incentive plan. The fair value of a majority of our outstanding unit awards was based on our unit price at the date of the Employee Transfer, which was lower than the unit price at end of the second quarter of last year.

Interest expense, net increased $1.4 million for the three months ended June 30, 2016, compared to the three months ended June 30, 2015, mainly due to increased interest costs associated with higher borrowings under our revolving credit agreement.


32

Table of Contents

Other expense, net decreased $2.0 million for the three months ended June 30, 2016, compared to the three months ended June 30, 2015, primarily due to a reduction of U.S. dollars held by certain of our foreign subsidiaries, which reduced our exposure to foreign currency exchange rate fluctuations.

Six Months Ended June 30, 2016 Compared to Six Months Ended June 30, 2015
Financial Highlights
(Unaudited, Thousands of Dollars, Except Unit and Per Unit Data)

 
Six Months Ended June 30,
 
Change
 
2016
 
2015
 
Statement of Income Data:
 
 
 
 
 
Revenues:
 
 
 
 
 
Service revenues
$
536,969

 
$
544,554

 
$
(7,585
)
Product sales
306,538

 
581,001

 
(274,463
)
Total revenues
843,507

 
1,125,555

 
(282,048
)
 
 
 
 
 
 
Costs and expenses:
 
 
 
 
 
Cost of product sales
286,607

 
544,116

 
(257,509
)
Operating expenses
217,883

 
232,785

 
(14,902
)
General and administrative expenses
46,442

 
51,746

 
(5,304
)
Depreciation and amortization expense
106,793

 
105,222

 
1,571

Total costs and expenses
657,725

 
933,869

 
(276,144
)
 
 
 
 
 
 
Operating income
185,782

 
191,686

 
(5,904
)
Interest expense, net
(68,352
)
 
(64,861
)
 
(3,491
)
Other (expense) income, net
(372
)
 
60,116

 
(60,488
)
Income from continuing operations before income tax expense
117,058

 
186,941

 
(69,883
)
Income tax expense
7,140

 
5,491

 
1,649

Income from continuing operations
109,918

 
181,450

 
(71,532
)
Income from discontinued operations, net of tax
—

 
774

 
(774
)
Net income
$
109,918

 
$
182,224

 
$
(72,306
)
Basic and diluted net income per unit applicable to limited partners:
 
 
 
 
 
Continuing operations
$
1.09

 
$
2.00

 
$
(0.91
)
Discontinued operations
—

 
0.01

 
(0.01
)
Total
$
1.09

 
$
2.01

 
$
(0.92
)
Basic weighted-average limited partner units outstanding
77,886,148

 
77,886,078

 
70


Overview
Net income decreased $72.3 million for the six months ended June 30, 2016, compared to the six months ended June 30, 2015, mainly due to a $56.3 million gain in 2015 associated with the Linden Acquisition and a decrease of $11.3 million in segment operating income, resulting mainly from reductions in operating income for the pipeline and fuels marketing segments.

33

Table of Contents

Segment Operating Highlights
(Thousands of Dollars, Except Barrels/Day Information)
 
Six Months Ended June 30,
 
Change
 
2016
 
2015
 
Pipeline:
 
 
 
 
 
Refined products pipelines throughput (barrels/day)
530,134

 
502,838

 
27,296

Crude oil pipelines throughput (barrels/day)
405,241

 
487,246

 
(82,005
)
Total throughput (barrels/day)
935,375

 
990,084

 
(54,709
)
Throughput revenues
$
240,448

 
$
246,635

 
$
(6,187
)
Operating expenses
69,163

 
71,942

 
(2,779
)
Depreciation and amortization expense
43,468

 
41,233

 
2,235

Segment operating income
$
127,817

 
$
133,460

 
$
(5,643
)
Storage:
 
 
 
 
 
Throughput (barrels/day)
778,092

 
919,075

 
(140,983
)
Throughput terminal revenues
$
58,068

 
$
66,314

 
$
(8,246
)
Storage terminal revenues
246,205

 
241,662

 
4,543

Total revenues
304,273

 
307,976

 
(3,703
)
Operating expenses
137,161

 
146,632

 
(9,471
)
Depreciation and amortization expense
59,036

 
59,615

 
(579
)
Segment operating income
$
108,076

 
$
101,729

 
$
6,347

Fuels Marketing:
 
 
 
 
 
Product sales and other revenue
$
310,308

 
$
584,023

 
$
(273,715
)
Cost of product sales
293,138

 
552,080

 
(258,942
)
Gross margin
17,170

 
31,943

 
(14,773
)
Operating expenses
16,551

 
19,368

 
(2,817
)
Segment operating income
$
619

 
$
12,575

 
$
(11,956
)
Consolidation and Intersegment Eliminations:
 
 
 
 
 
Revenues
$
(11,522
)
 
$
(13,079
)
 
$
1,557

Cost of product sales
(6,531
)
 
(7,964
)
 
1,433

Operating expenses
(4,992
)
 
(5,157
)
 
165

Total
$
1

 
$
42

 
$
(41
)
Consolidated Information:
 
 
 
 
 
Revenues
$
843,507

 
$
1,125,555

 
$
(282,048
)
Cost of product sales
286,607

 
544,116

 
(257,509
)
Operating expenses
217,883

 
232,785

 
(14,902
)
Depreciation and amortization expense
102,504

 
100,848

 
1,656

Segment operating income
236,513

 
247,806

 
(11,293
)
General and administrative expenses
46,442

 
51,746

 
(5,304
)
Other depreciation and amortization expense
4,289

 
4,374

 
(85
)
Consolidated operating income
$
185,782

 
$
191,686

 
$
(5,904
)


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Pipeline
Total revenues decreased $6.2 million and total throughputs decreased 54,709 barrels per day for the six months ended June 30, 2016, compared to the six months ended June 30, 2015, primarily due to a decrease in revenues of $20.2 million and a decrease in throughputs of 81,838 barrels per day on our Eagle Ford System due to reduced production resulting from a sustained low crude oil price environment. Revenues also decreased $2.4 million and throughputs decreased 5,991 barrels per day on our Ammonia Pipeline partly due to a shipper’s facility reconfiguration, resulting in fewer barrels available for transportation.

Those decreases in pipeline revenues and throughputs were partially offset by:
•
an increase in revenues of $7.2 million and an increase in throughputs of 11,187 barrels per day on our McKee System crude and refined products pipelines due to increased production at the McKee refinery, higher average tariffs resulting from the annual index adjustments and increased volumes on pipelines with higher average tariffs;
•
an increase in revenues of $5.5 million and an increase in throughputs of 15,782 barrels per day on our East Pipeline mainly due to unfavorable pricing differentials in markets served by the East Pipeline in 2015; and
•
an increase in revenues of $4.2 million and an increase in throughputs of 3,262 barrels per day on our North Pipeline due to increased refinery production and higher average tariffs resulting from the annual index adjustments and increased long-haul deliveries.

Operating expenses decreased $2.8 million for the six months ended June 30, 2016, compared to the six months ended June 30, 2015, primarily due to lower rental and power costs on our South Texas Crude System.

Depreciation and amortization expense increased $2.2 million for the six months ended June 30, 2016, compared to the six months ended June 30, 2015, mainly due to the completion of pipeline projects.

Storage
Total storage segment revenues decreased $3.7 million for the six months ended June 30, 2016, compared to the six months ended June 30, 2015, due to decreases in throughput terminal revenues of $8.2 million, partially offset by increases in storage terminal revenues of $4.5 million.

Throughput terminal revenues decreased $8.2 million and throughputs decreased 140,983 barrels per day for the six months ended June 30, 2016, compared to the six months ended June 30, 2015, primarily due to:
•
a decrease in revenues of $6.6 million and a decrease in throughputs of 93,040 barrels per day at our Corpus Christi North Beach terminal due to a decrease in Eagle Ford Shale crude oil being shipped to Corpus Christi, consistent with the decrease in pipeline throughputs; and
•
a decrease in revenues of $2.4 million and a decrease in throughputs of 48,969 barrels per day due to turnarounds at the refineries served by our Benicia and Corpus Christi crude oil storage tank facilities, as well as operational issues at the Corpus Christi refinery in 2016.

Storage terminal revenues increased $4.5 million primarily due to an increase of $7.9 million in domestic revenues, mainly from new customer contracts and higher throughput and related handling fees at our Selby, CA, Pittsburgh, CA and Linden, NJ terminals. These increases were partially offset by decreased reimbursable revenues of $2.0 million at our St. Eustatius terminal facility and the negative impact of foreign exchange rate fluctuations of $1.3 million at our UK terminal.

Operating expenses decreased $9.5 million for the six months ended June 30, 2016, compared to the six months ended June 30, 2015, primarily due to:
•
a decrease of $6.9 million in operating expenses at our St. Eustatius terminal facility, mainly associated with property taxes in the first quarter of 2015 and lower regulatory, maintenance and reimbursable expenses in 2016;
•
a decrease of $1.1 million resulting from lower wharfage and dockage costs at our Corpus Christi North Beach terminal; and
•
a decrease of $1.1 million at one of our Linden terminals due to a property tax valuation adjustment.

Fuels Marketing
Segment operating income decreased $12.0 million for the six months ended June 30, 2016, compared to the six months ended June 30, 2015, primarily due to a decrease in operating income of $6.6 million from our bunker fuel operations, mainly resulting from a decrease in product margins from sales at our Texas City location. Operating income from our fuel oil operations decreased $3.6 million mainly due to lower product margins.


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Consolidation and Intersegment Eliminations
Revenue and operating expense eliminations primarily relate to storage fees charged to the fuels marketing segment by the storage segment. Cost of product sales eliminations represent expenses charged to the fuels marketing segment for costs associated with inventory that are expensed once the inventory is sold.

General
General and administrative expenses decreased $5.3 million for the six months ended June 30, 2016, compared to the six months ended June 30, 2015, primarily due to lower compensation expense associated with our long-term incentive plan, as well as lower employee benefit costs. The fair value of a majority of our outstanding unit awards was based on our unit price at the date of the Employee Transfer, which was lower than the unit price at end of the second quarter of last year.

Interest expense, net increased $3.5 million for the six months ended June 30, 2016, compared to the six months ended June 30, 2015, primarily due to increased interest costs associated with higher borrowings under our revolving credit agreement, as well as lower capitalized interest resulting from fewer capital projects.

For the six months ended June 30, 2016, we recorded other expense, net of $0.4 million, compared to other income, net of $60.1 million for the six months ended June 30, 2015. For the six months ended June 30, 2015, we recognized a $56.3 million gain associated with the Linden Acquisition and a $3.7 million net foreign exchange gain.

TRENDS AND OUTLOOK
We believe that the fact that NuStar provides both storage and pipeline services, for crude and refined products, to customers in sectors across the energy industry, throughout the country and around the world, serves to offer some insulation from the impact of market fluctuations on our results of operations. Since high crude oil prices have tended to benefit our producer customers, high prices have also correlated with increased demand for our crude oil pipeline services. On the other hand, depressed crude oil prices, when coupled with an industry expectation of higher prices in the future, or a contango market, has historically correlated with increased demand from trading companies for our storage services.

Because of the geographic diversity of our assets, our results of operations are not dependent on the regions or markets that have been hardest hit by depressed crude oil prices, the domestic shale play regions, which was demonstrated by the fact that, in 2015, revenue from our Eagle Ford pipeline and storage assets constituted less than 16% of our total pipeline and storage segment revenue. Although our assets in the Eagle Ford region have experienced lower throughputs as production has slowed, the fact that we have minimum volume throughput contracts with large, creditworthy customers has minimized the negative impact of that slowdown on our results of operations.

In addition to the diversity of our customers, our assets, the services we offer and the markets we serve, we believe our contracts, many of which are long-term, take-or-pay arrangements for committed storage or throughput capacity, also help to blunt the impact of volatility of crude oil prices on our results of operations. In the locations at which our assets are integrated physically with the refineries the assets serve, we believe the results generated by those assets depend to a greater degree on the refinery’s continuing need to receive, store and transport the crude and refined products than on crude or refined product prices.

Pipeline Segment
We expect earnings for our pipeline segment to benefit from higher forecasted volumes on our refined product pipelines. However, we expect these increases to be more than offset by reduced throughput volumes on our Eagle Ford crude pipelines due to lower domestic shale production, higher maintenance expenses and turnaround activity at one of our customer’s refineries resulting in lower earnings in the third quarter and full-year 2016 as compared to the comparable periods of 2015.

Storage Segment
We expect earnings at many of our terminals to benefit from favorable storage contract renewals and higher forecasted throughput volumes. However, we expect these increases to be more than offset by higher maintenance expenses and lower throughputs at our Corpus Christi North Beach terminal resulting in lower earnings in the third quarter and full-year 2016 as compared to 2015.

Fuels Marketing Segment
We expect third quarter 2016 results for our fuels marketing segment to be slightly higher than the third quarter of 2015 due to better margins in our bunker fuel operations. However, earnings in this segment, as in any margin-based business, are subject to many factors that can increase or reduce margins, which may cause the segment’s actual results to vary significantly from our forecast.


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Our outlook for the partnership, both overall and for any of our segments, may change, as we base our expectations on our continuing evaluation of a number of factors, many of which are outside our control. These factors include, but are not limited to, the state of the economy and the capital markets, changes to our customers’ refinery maintenance schedules and unplanned refinery downtime, supply of and demand for crude oil, refined products and anhydrous ammonia, demand for our transportation and storage services and changes in laws or regulations affecting our assets.

LIQUIDITY AND CAPITAL RESOURCES
Overview
Primary Cash Requirements. Our primary cash requirements are for distributions to our partners, capital expenditures, debt service and operating expenses.

Our partnership agreement requires that we distribute all “Available Cash” to our partners each quarter, and this term is defined in the partnership agreement as cash on hand at the end of the quarter, plus certain permitted borrowings made subsequent to the end of the quarter, less cash reserves determined by our board of directors.

Sources of Funds. Each year, our objective is to fund our total annual reliability capital expenditures and distribution requirements with our net cash provided by operating activities during that year. If we do not generate sufficient cash from operations to meet that objective, we utilize cash on hand or other sources of cash flow, which in the past have primarily included borrowings under our revolving credit agreement, sales of non-strategic assets and, to the extent necessary, funds raised through equity or debt offerings under our shelf registration statements. We have typically funded our strategic capital expenditures and acquisitions from external sources, primarily borrowings under our revolving credit agreement or funds raised through equity or debt offerings. However, our ability to raise funds by issuing debt or equity depends on many factors beyond our control. Our risk factors in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2015 describe the risks inherent to these sources of funding and the availability thereof.

During periods when our cash flow from operations is less than our distribution and reliability capital requirements, we may maintain our distribution level because we can utilize other sources of Available Cash, as provided in our partnership agreement, including borrowings under our revolving credit agreement and proceeds from the sales of assets. Our risk factors in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2015 describe the risks inherent in our ability to maintain or grow our distribution.

For 2016, we currently expect to continue to generate cash from operations in excess of our distribution and reliability capital requirements.

Cash Flows for the Six Months Ended June 30, 2016 and 2015
The following table summarizes our cash flows from operating, investing and financing activities:
 
Six Months Ended June 30,
 
2016
 
2015
 
(Thousands of Dollars)
Net cash provided by (used in):
 
 
 
Operating activities
$
215,033

 
$
237,187

Investing activities
(108,035
)
 
(306,212
)
Financing activities
(127,230
)
 
98,081

Effect of foreign exchange rate changes on cash
4,389

 
(5,331
)
Net (decrease) increase in cash and cash equivalents
$
(15,843
)
 
$
23,725


Net cash provided by operating activities for the six months ended June 30, 2016 was $215.0 million, compared to $237.2 million for the six months ended June 30, 2015, primarily due to lower net income in 2016. In addition, our working capital increased by $15.3 million for the six months ended June 30, 2016, compared to $8.5 million for the six months ended June 30, 2015. See “Working Capital Requirements” below.

For the six months ended June 30, 2016, net cash provided by operating activities was used to fund our distributions to unitholders and our general partner in the aggregate amount of $196.1 million and reliability capital expenditures of $17.3 million. The proceeds from debt borrowings, net of repayments, and cash on hand were used to fund our strategic capital expenditures.


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For the six months ended June 30, 2015, net cash provided by operating activities was used to fund our distributions to unitholders and our general partner and reliability capital expenditures. Proceeds from debt borrowings, net of repayments, were used to fund the Linden Acquisition and strategic capital expenditures.

Revolving Credit Agreement
As of June 30, 2016, our consolidated debt coverage ratio (as defined in our revolving credit agreement) cannot 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 our revolving credit agreement to an amount less than the total amount available for borrowing. As of June 30, 2016, our consolidated debt coverage ratio was 4.6x, and we had $452.7 million available for borrowing. Letters of credit issued under our revolving credit agreement totaled $16.5 million as of June 30, 2016. Please refer to Note 3 of the Condensed Notes to Consolidated Financial Statements in Item 1. “Financial Statements” for a discussion on our revolving credit agreement.

Other Sources of Liquidity
Other sources of liquidity as of June 30, 2016 consist of the following:
•
$365.4 million in revenue bonds pursuant to the Gulf Opportunity Zone Act of 2005 (the GoZone Bonds), with $43.6 million remaining in trust as of June 30, 2016, supported by $370.2 million in letters of credit;
•
a $125.0 million receivables financing agreement between NuStar Energy, NuStar Finance LLC and third-party lenders (the Receivables Financing Agreement), with the amount available for borrowing based on the availability of eligible receivables and other customary factors and conditions; and
•
a short-term line of credit agreement with an uncommitted borrowing capacity of up to $40.0 million and no borrowings outstanding as of June 30, 2016.

Please refer to Note 3 of the Condensed Notes to Consolidated Financial Statements in Item 1. “Financial Statements” for a discussion of certain of our debt agreements.

LOC Agreement
NuStar Logistics is a party to a $100.0 million uncommitted letter of credit agreement, which provides for standby letters of credit or guarantees with a term of up to one year (LOC Agreement). As of June 30, 2016, letters of credit issued under the LOC Agreement totaled $17.8 million.

Capital Requirements
Our operations require significant investments to maintain, upgrade or enhance the operating capacity of our existing assets. Our capital expenditures consist of:
•
reliability capital expenditures, such as those required to maintain the existing operating capacity of existing assets or extend their useful lives, as well as those required to maintain equipment reliability and safety; and
•
strategic capital expenditures, such as those to expand or upgrade the operating capacity, increase efficiency or increase the earnings potential of existing assets, whether through construction or acquisition, as well as certain capital expenditures related to support functions.

The following table summarizes our capital expenditures, and the amount we expect to spend for 2016:
 
Reliability Capital Expenditures
 
Strategic Capital Expenditures
 
Total
 
(Thousands of Dollars)
For the six months ended June 30:
 
 
 
 
 
2015
$
12,827

 
$
286,738

 
$
299,565

2016
$
17,322

 
$
78,039

 
$
95,361

 
 
 
 
 
 
Expected for the year ended December 31, 2016
$ 35,000 - 45,000

 
$ 180,000 - 200,000

 
$ 215,000 - 245,000


Reliability capital expenditures mainly include maintenance upgrade projects at our terminals. In 2015, reliability capital expenditures also included dry-docking costs on one of our marine vessels. In 2016, strategic capital expenditures mainly included projects associated with the conversion and expansion of existing assets. In 2015, our strategic capital expenditures primarily related to the Linden Acquisition, projects associated with the Eagle Ford Shale region in South Texas and the reactivation and conversion of our 200-mile pipeline between Mont Belvieu and Corpus Christi, Texas.


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For the full year 2016, we continue to evaluate our capital budget and make changes as economic conditions warrant, and our actual capital expenditures for 2016 may increase or decrease from the budgeted amounts. During the six months ended June 30, 2016, largely in response to market conditions, we reduced our strategic capital expenditures expected for the year ended December 31, 2016 by approximately 50%. We believe we can fund our currently expected capital expenditures with cash on hand and borrowings under our revolving credit agreement. Our internal growth projects can be accelerated or scaled back depending on market conditions or customer demand.

Working Capital Requirements
Working capital requirements, particularly in our fuels marketing segment, may vary with the seasonality of demand and the volatility of commodity prices for the products we market. This seasonality in demand and the volatility of commodity prices affect our accounts receivable and accounts payable balances, which vary depending on the timing of payments.

Axeon Term Loan and Credit Support
We are a party to the $190.0 million term loan to Axeon Specialty Products, LLC (the Axeon Term Loan), and we provide 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). As of June 30, 2016, we provided guarantees for Axeon with an aggregate maximum potential exposure of $76.5 million, plus one guarantee to suppliers that does not specify a maximum amount, but for which we believe any amount due would be minimal. As of June 30, 2016, we have also provided $25.5 million in letters of credit on behalf of Axeon. Please refer to Note 5 of the Condensed Notes to Consolidated Financial Statements in Item 1. “Financial Statements” for a discussion of the Axeon Term Loan and credit support.

Defined Benefit Plans Funded Status
During 2016, we expect to contribute approximately $16.0 million to our pension and other postretirement benefit plans.

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 June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(Thousands of Dollars, Except Per Unit Data)
General partner interest
$
1,961

 
$
1,961

 
$
3,922

 
$
3,922

General partner incentive distribution
10,805

 
10,805

 
21,610

 
21,610

Total general partner distribution
12,766

 
12,766

 
25,532

 
25,532

Limited partners’ distribution
85,285

 
85,285

 
170,570

 
170,570

Total cash distributions
$
98,051

 
$
98,051

 
$
196,102

 
$
196,102

 
 
 
 
 
 
 
 
Cash distributions per unit applicable to limited partners
$
1.095

 
$
1.095

 
$
2.190

 
$
2.190


Distributions declared for the quarter are paid within 45 days following the end of each quarter based on the partnership interests outstanding as of a record date that is set after the end of each quarter. 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)
 
 
 
 
June 30, 2016 (a)
 
$
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 July 29, 2016.

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Table of Contents

Debt Obligations
As of June 30, 2016, we were a party to the following debt agreements:
•
revolving credit agreement due October 29, 2019, with $1,030.8 million of borrowings outstanding as of June 30, 2016;
•
7.65% senior notes due April 15, 2018 with a face value of $350.0 million; 4.80% senior notes due September 1, 2020 with a face value of $450.0 million; 6.75% senior notes due February 1, 2021 with a face value of $300.0 million; 4.75% senior notes due February 1, 2022 with a face value of $250.0 million; and 7.625% subordinated notes due January 15, 2043 with a face value of $402.5 million;
•
$365.4 million in GoZone Bonds due from 2038 to 2041;
•
$40.0 million line of credit agreement with no borrowings outstanding as of June 30, 2016; and
•
Receivables Financing Agreement due June 15, 2018, with $56.7 million of borrowings outstanding as of June 30, 2016.

Management believes that, as of June 30, 2016, we are in compliance with the ratios and covenants contained under our debt instruments. A default under certain of our debt agreements would be considered an event of default under other of our debt instruments. Please refer to Note 3 of the Condensed Notes to Consolidated Financial Statements in Item 1. “Financial Statements” for a discussion of certain of our debt agreements.

Interest Rate Swaps
As of June 30, 2016 and December 31, 2015, we were a party to forward-starting interest rate swap agreements for the purpose of hedging interest rate risk. As of June 30, 2016 and December 31, 2015, the aggregate notional amount of these forward-starting interest rate swaps was $600.0 million. Please refer to Note 6 of the Condensed Notes to Consolidated Financial Statements in Item 1. “Financial Statements” for a more detailed discussion of our interest rate swaps.

Environmental, Health and Safety
We are subject to extensive federal, state and local environmental laws and regulations, including those relating to the discharge of materials into the environment, waste management and pollution prevention measures, among others. Our operations are also subject to extensive federal, state and local health and safety laws and regulations, including those relating to worker and pipeline safety, pipeline integrity and operator qualifications. Because more stringent environmental and safety laws and regulations are continuously being enacted or proposed, the level of future expenditures required for environmental, health and safety matters is expected to increase in the future.

Contingencies
We are subject to certain loss contingencies, the outcomes of which could have an adverse effect on our cash flows and results of operations, as further disclosed in Note 4 of the Condensed Notes to Consolidated Financial Statements in Item 1. “Financial Statements.”

RELATED PARTY TRANSACTIONS
Please refer to Note 7 of the Condensed Notes to Consolidated Financial Statements in Item 1. “Financial Statements” for a discussion of our related party transactions.
 
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Our critical accounting policies are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2015. We adopted the following accounting policy in connection with the Employee Transfer, and we consider this policy critical due to judgments made by management and the sensitivity of these estimates to deviations in actual results from management’s assumptions.

Defined Benefit Plans
We estimate pension and other postretirement benefit obligations and costs based on actuarial valuations. The annual measurement date for our pension and other postretirement benefit plans is December 31. 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. Changes in these assumptions are primarily influenced by factors outside our control. The discount rate is based on a hypothetical yield curve represented by a series of annualized individual discount rates. Each bond issue underlying the hypothetical yield curve required an average rating of double-A, when averaging all available ratings by Moody’s Investor Service Inc., Standard & Poor’s Ratings Services and Fitch, Inc. The resulting discount rates were 4.61% and

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Table of Contents

4.75% for pension and other postretirement benefit plans, respectively, as of December 31, 2015. The expected long-term rate of return on plan assets is based on the weighted averages of the expected long-term rates of return for each asset class of investments held in our plans as determined using historical data and the assumption that capital markets are informationally efficient. The expected rate of compensation increase represents average long-term salary increases.

These assumptions can have an effect on the amounts reported in our consolidated financial statements. The effect of a 0.25% change in the specified assumptions would have the following effects (in thousands):
 
Pension 
Benefits
Change in net periodic benefit cost for the year ending December 31, 2016 resulting from:
 
Discount rate decrease
$
500

Expected long-term rate of return on plan assets decrease
200

Compensation rate increase
400


NEW ACCOUNTING PRONOUNCEMENTS
Please refer to Note 2 of the Condensed Notes to Consolidated Financial Statements in Item 1. “Financial Statements” for a discussion of new accounting pronouncements.


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Table of Contents

Item 3.
Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk
We manage our exposure to changing interest rates principally through the use of a combination of fixed-rate debt and variable-rate debt. In addition, we utilize forward-starting interest rate swap agreements to lock in the rate on the interest payments related to forecasted debt issuances. Borrowings under our variable-rate debt expose us to increases in interest rates.

Please refer to Note 6 of the Condensed Notes to Consolidated Financial Statements in Item 1. “Financial Statements” for a more detailed discussion of our interest rate swaps. The following tables present principal cash flows and related weighted-average interest rates by expected maturity dates for our long-term debt:
 
June 30, 2016
 
Expected Maturity Dates
 
 
 
 
 
2016
 
2017
 
2018
 
2019
 
2020
 
There-
after
 
Total
 
Fair
Value
 
(Thousands of Dollars, Except Interest Rates)
Long-term Debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-rate
$
—

 
$
—

 
$
350,000

 
$
—

 
$
450,000

 
$
952,500

 
$
1,752,500

 
$
1,750,494

Weighted-average
interest rate
—

 
—

 
8.2
%
 
—

 
4.8
%
 
6.6
%
 
6.4
%
 
 
Variable-rate
$
—

 
$
—

 
$
56,700

 
$1,030,771
 
$
—

 
$
365,440

 
$
1,452,911

 
$
1,454,048

Weighted-average
interest rate
—

 
—

 
1.3
%
 
2.2
%
 
—

 
0.4
%
 
1.7
%
 
 

 
December 31, 2015
 
Expected Maturity Dates
 
 
 
 
 
2016
 
2017
 
2018
 
2019
 
2020
 
There-
after
 
Total
 
Fair
Value
 
(Thousands of Dollars, Except Interest Rates)
Long-term Debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-rate
$
—

 
$
—

 
$
350,000

 
$
—

 
$
450,000

 
$
952,500

 
$
1,752,500

 
$
1,626,785

Weighted-average
interest rate
—

 
—

 
8.2
%
 
—

 
4.8
%
 
6.6
%
 
6.4
%
 
 
Variable-rate
$
—

 
$
—

 
$
53,500

 
$
882,664

 
$
—

 
$
365,440

 
$
1,301,604

 
$
1,302,653

Weighted-average
interest rate
—

 
—

 
1.2
%
 
2.1
%
 
—

 
0.1
%
 
1.5
%
 
 

The following table presents information regarding our forward-starting interest rate swap agreements:
Notional Amount
 
 
 
Weighted-Average Fixed Rate
 
Fair Value
June 30, 2016
 
December 31, 2015
 
Period of Hedge
 
June 30, 2016
 
December 31, 2015
 
June 30, 2016
 
December 31, 2015
(Thousands of Dollars)
 
 
 
 
 
 
 
(Thousands of Dollars)
$
350,000

 
$
350,000

 
04/2018 - 04/2028
 
2.6
%
 
2.6
%
 
$
(30,945
)
 
$
140

250,000

 
250,000

 
09/2020 - 09/2030
 
2.8
%
 
2.8
%
 
(17,930
)
 
1,163

$
600,000

 
$
600,000

 
 
 
2.7
%
 
2.7
%
 
$
(48,875
)
 
$
1,303





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Table of Contents

Commodity Price Risk
Since the operations of our fuels marketing segment expose us to commodity price risk, we use derivative instruments to attempt to mitigate the effects of commodity price fluctuations. The derivative instruments we use consist primarily of commodity futures and swap contracts. We have a risk management committee that oversees our trading policies and procedures and certain aspects of risk management. Our risk management committee also reviews all new risk management strategies in accordance with our risk management policy, as approved by our board of directors.
We record commodity derivative instruments in the consolidated balance sheets at fair value. We recognize mark-to-market adjustments for derivative instruments designated and qualifying as fair value hedges (Fair Value Hedges) and the related change in the fair value of the associated hedged physical inventory or firm commitment within “Cost of product sales.” For derivative instruments that have associated underlying physical inventory but do not qualify for hedge accounting (Economic Hedges and Other Derivatives), we record the mark-to-market adjustments in “Cost of product sales.”
The commodity contracts disclosed below represent only those contracts exposed to commodity price risk at the end of the period. Please refer to Note 6 of Condensed Notes to Consolidated Financial Statement in Item 1. “Financial Statements” for the volume and related fair value of all commodity contracts.
 
June 30, 2016
 
Contract
Volumes
 
Weighted Average
 
Fair Value of
Current
Asset (Liability)
Pay Price
 
Receive Price
 
 
(Thousands
of Barrels)
 
 
 
 
 
(Thousands of
Dollars)
Fair Value Hedges:
 
 
 
 
 
 
 
Futures – long:
 
 
 
 
 
 
 
(crude oil and refined products)
71

 
$
59.92

 
N/A

 
$
(52
)
Futures – short:
 
 
 
 
 
 
 
(crude oil and refined products)
204

 
N/A

 
$
57.42

 
$
198

Swaps - long:
 
 
 
 
 
 
 
(refined products)
198

 
$
36.39

 
N/A

 
$
(3
)
Swaps - short:
 
 
 
 
 
 
 
(refined products)
672

 
N/A

 
$
35.98

 
$
(295
)
 
 
 
 
 
 
 
 
Economic Hedges and Other Derivatives:
 
 
 
 
 
 
 
Futures – long:
 
 
 
 
 
 
 
(crude oil and refined products)
104

 
$
51.18

 
N/A

 
$
(145
)
Futures – short:
 
 
 
 
 
 
 
(crude oil and refined products)
111

 
N/A

 
$
51.89

 
$
145

Swaps – long:
 
 
 
 
 
 
 
(refined products)
1,377

 
$
33.15

 
N/A

 
$
4,029

Swaps – short:
 
 
 
 
 
 
 
(refined products)
1,362

 
N/A

 
$
30.66

 
$
(7,372
)
Forward purchase contracts:
 
 
 
 
 
 
 
(crude oil)
310

 
$
48.49

 
N/A

 
$
252

Forward sales contracts:
 
 
 
 
 
 
 
(crude oil)
310

 
N/A

 
$
48.46

 
$
(263
)
 
 
 
 
 
 
 
 
Total fair value of open positions exposed to
commodity price risk
 
 
 
 
 
 
$
(3,506
)



43

Table of Contents

 
December 31, 2015
 
Contract
Volumes
 
Weighted Average
 
Fair Value of
Current
Asset (Liability)
Pay Price
 
Receive Price
 
 
(Thousands
of Barrels)
 
 
 
 
 
(Thousands of
Dollars)
Fair Value Hedges:
 
 
 
 
 
 
 
Futures – long:
 
 
 
 
 
 
 
(crude oil and refined products)
38

 
$
37.85

 
N/A

 
$
1

Futures – short:
 
 
 
 
 
 
 
(crude oil and refined products)
59

 
N/A

 
$
39.07

 
$
68

Swaps – long:
 
 
 
 
 
 
 
(refined products)
129

 
$
23.83

 
N/A

 
$
(18
)
Swaps – short:
 
 
 
 
 
 
 
(refined products)
784

 
N/A

 
$
26.28

 
$
1,864

 
 
 
 
 
 
 
 
Economic Hedges and Other Derivatives:
 
 
 
 
 
 
 
Futures – long:
 
 
 
 
 
 
 
(crude oil and refined products)
87

 
$
44.81

 
N/A

 
$
(48
)
Futures – short:
 
 
 
 
 
 
 
(crude oil and refined products)
196

 
N/A

 
$
43.54

 
$
149

Swaps – long:
 
 
 
 
 
 
 
(refined products)
1,532

 
$
28.19

 
N/A

 
$
(8,529
)
Swaps – short:
 
 
 
 
 
 
 
(refined products)
1,435

 
N/A

 
$
33.01

 
$
14,931

Forward purchase contracts:
 
 
 
 
 
 
 
(crude oil)
248

 
$
36.99

 
N/A

 
$
193

Forward sales contracts:
 
 
 
 
 
 
 
(crude oil)
248

 
N/A

 
$
36.82

 
$
(235
)
 
 
 
 
 
 
 
 
Total fair value of open positions exposed to
commodity price risk
 
 
 
 
 
 
$
8,376



44

Table of Contents

Item 4.
Controls and Procedures

(a)
Evaluation of disclosure controls and procedures.
Our management has evaluated, with the participation of the principal executive officer and principal financial officer of NuStar GP, LLC, the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report, and has concluded that our disclosure controls and procedures were effective as of June 30, 2016.
(b)
Changes in internal control over financial reporting.
There has been no change in our internal control over financial reporting that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

45

Table of Contents

PART II - OTHER INFORMATION


Item 6.
Exhibits

Exhibit
Number
 
Description
 
 
 
*3.01
 
Third Amendment to First Amended and Restated Limited Liability Company Agreement of NuStar GP, LLC, dated as of July 29, 2016 and effective as of March 21, 2007
 
 
 
*10.01
 
Eighth Amendment to Letter of Credit Agreement, dated as of May 6, 2016, among NuStar Logistics, L.P., NuStar Energy L.P., the Lenders party thereto and Mizuho Bank, Ltd., as Issuing Bank and Administrative Agent
 
 
 
*10.02
 
Maturity Extension Letter (Amendment No. 3) to Letter of Credit Agreement and Subsidiary Guaranty Agreement dated as of July 15, 2016 among NuStar Logistics, L.P., NuStar Energy L.P., the Lenders party thereto and The Bank of Tokyo-Mitsubishi UFJ, Ltd., as Issuing Bank and Administrative Agent
 
 
 
*12.01
 
Statement of Computation of Ratio of Earnings to Fixed Charges
 
 
*31.01
 
Rule 13a-14(a) Certification (under Section 302 of the Sarbanes-Oxley Act of 2002) of principal executive officer
 
 
*31.02
 
Rule 13a-14(a) Certification (under Section 302 of the Sarbanes-Oxley Act of 2002) of principal financial officer
 
 
**32.01
 
Section 1350 Certification (under Section 906 of the Sarbanes-Oxley Act of 2002) of principal executive officer
 
 
**32.02
 
Section 1350 Certification (under Section 906 of the Sarbanes-Oxley Act of 2002) of principal financial officer
 
 
*101.INS
 
XBRL Instance Document
 
 
 
*101.SCH
 
XBRL Taxonomy Extension Schema Document
 
 
 
*101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
*101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
 
 
 
*101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
*101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
*
Filed herewith.
**
Furnished herewith.



46

Table of Contents

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
NUSTAR ENERGY L.P.
(Registrant)

By: Riverwalk Logistics, L.P., its general partner
By: NuStar GP, LLC, its general partner
 
By:
 
/s/ Bradley C. Barron
 
 
Bradley C. Barron
 
 
President and Chief Executive Officer
 
 
August 8, 2016
 
 
 
By:
 
/s/ Thomas R. Shoaf
 
 
Thomas R. Shoaf
 
 
Executive Vice President and Chief Financial Officer
 
 
August 8, 2016
 
 
 
By:
 
/s/ Jorge A. del Alamo
 
 
Jorge A. del Alamo
 
 
Senior Vice President and Controller
 
 
August 8, 2016

47