10-Q

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 March 31, 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 April 30, 2016 was 77,886,078.
 
 
 
 
 



Table of Contents

NUSTAR ENERGY L.P.
FORM 10-Q
TABLE OF CONTENTS
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
Item 2.
 
 
 
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)
 
March 31,
2016
 
December 31,
2015
 
(Unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
130,917

 
$
118,862

Accounts receivable, net of allowance for doubtful accounts of $7,978
and $8,473 as of March 31, 2016 and December 31, 2015, respectively
133,469

 
145,064

Receivable from related party
2,295

 

Inventories
41,173

 
38,749

Other current assets
25,719

 
31,176

Total current assets
333,573

 
333,851

Property, plant and equipment, at cost
5,264,120

 
5,209,160

Accumulated depreciation and amortization
(1,577,433
)
 
(1,525,589
)
Property, plant and equipment, net
3,686,687

 
3,683,571

Intangible assets, net
108,551

 
112,011

Goodwill
696,637

 
696,637

Deferred income tax asset
502

 
2,858

Other long-term assets, net
269,599

 
296,597

Total assets
$
5,095,549

 
$
5,125,525

Liabilities and Partners’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
100,782

 
$
125,147

Payable to related party

 
14,799

Short-term debt
81,000

 
84,000

Accrued interest payable
27,897

 
34,286

Accrued liabilities
43,355

 
55,194

Taxes other than income tax
13,599

 
12,810

Income tax payable
6,157

 
5,977

Total current liabilities
272,790

 
332,213

Long-term debt
3,125,650

 
3,055,612

Long-term payable to related party

 
32,080

Deferred income tax liability
25,841

 
24,810

Other long-term liabilities
113,616

 
70,966

Commitments and contingencies (Note 4)

 

Partners’ equity:
 
 
 
Limited partners (77,886,078 common units outstanding
as of March 31, 2016 and December 31, 2015)
1,625,515

 
1,661,900

General partner
35,709

 
36,738

Accumulated other comprehensive loss
(103,572
)
 
(88,794
)
Total partners’ equity
1,557,652

 
1,609,844

Total liabilities and partners’ equity
$
5,095,549

 
$
5,125,525

See Condensed Notes to Consolidated Financial Statements.

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Table of Contents

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 March 31,
 
2016
 
2015
Revenues:
 
 
 
Service revenues
$
266,566

 
$
269,973

Product sales
139,137

 
284,971

Total revenues
405,703

 
554,944

Costs and expenses:
 
 
 
Cost of product sales
128,990

 
262,506

Operating expenses:
 
 
 
Third parties
83,540

 
84,360

Related party
21,681

 
31,287

Total operating expenses
105,221

 
115,647

General and administrative expenses:
 
 
 
Third parties
13,365

 
7,667

Related party
10,420

 
17,386

Total general and administrative expenses
23,785

 
25,053

Depreciation and amortization expense
53,142

 
52,457

Total costs and expenses
311,138

 
455,663

Operating income
94,565

 
99,281

Interest expense, net
(34,123
)
 
(32,037
)
Other (expense) income, net
(171
)
 
62,268

Income from continuing operations before income tax expense
60,271

 
129,512

Income tax expense
2,870

 
2,387

Income from continuing operations
57,401

 
127,125

Income from discontinued operations, net of tax

 
774

Net income
$
57,401

 
$
127,899

Basic and diluted net income per unit applicable to limited partners:
 
 
 
Continuing operations
$
0.57

 
$
1.46

Discontinued operations

 
0.01

Total (Note 11)
$
0.57

 
$
1.47

Basic weighted-average limited partner units outstanding
77,886,078

 
77,886,078

 
 
 
 
Diluted weighted-average limited partner units outstanding
77,956,824

 
77,886,078

 
 
 
 
Comprehensive income
$
42,623

 
$
107,798

See Condensed Notes to Consolidated Financial Statements.

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Table of Contents

NUSTAR ENERGY L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, Thousands of Dollars)
 
Three Months Ended March 31,
 
2016
 
2015
Cash Flows from Operating Activities:
 
 
 
Net income
$
57,401

 
$
127,899

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization expense
53,142

 
52,457

Unit-based compensation expense
1,086

 

Amortization of debt related items
2,017

 
2,237

Loss (gain) from sale or disposition of assets
4

 
(75
)
Gain associated with the Linden Acquisition

 
(56,277
)
Deferred income tax expense (benefit)
456

 
(535
)
Distributions of equity in earnings of joint venture

 
2,500

Changes in current assets and current liabilities (Note 12)
(12,490
)
 
(7,774
)
Other, net
111

 
2,150

Net cash provided by operating activities
101,727

 
122,582

Cash Flows from Investing Activities:
 
 
 
Capital expenditures
(46,176
)
 
(72,880
)
Change in accounts payable related to capital expenditures
(12,663
)
 
(13,464
)
Acquisitions

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

 
(2,177
)
Proceeds from sale or disposition of assets

 
1,185

Net cash used in investing activities
(58,839
)
 
(229,836
)
Cash Flows from Financing Activities:
 
 
 
Proceeds from long-term debt borrowings
168,089

 
330,532

Proceeds from short-term debt borrowings
134,000

 
163,000

Long-term debt repayments
(93,709
)
 
(83,166
)
Short-term debt repayments
(137,000
)
 
(194,000
)
Distributions to unitholders and general partner
(98,051
)
 
(98,051
)
Decrease in cash book overdrafts
(8,799
)
 
(14,294
)
Other, net
(5
)
 
(10
)
Net cash (used in) provided by financing activities
(35,475
)
 
104,011

Effect of foreign exchange rate changes on cash
4,642

 
(6,486
)
Net increase (decrease) in cash and cash equivalents
12,055

 
(9,729
)
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
$
130,917

 
$
78,183

See Condensed Notes to Consolidated Financial Statements.

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Table of Contents

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 March 31, 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 three months ended March 31, 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. Noncontrolling interests are separately disclosed on the financial statements. 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 months ended March 31, 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 months ended March 31, 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.

2. NEW ACCOUNTING PRONOUNCEMENTS

Unit-Based Payments
In March 2016, the Financial Accounting Standards Board (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

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

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. In March 2016, the FASB issued final amendments to clarify the principal versus agent guidance within this comprehensive new revenue recognition standard. In April 2016, the FASB issued final amendments to clarify when a promised good or service is distinct within the context of a contract. 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 three months ended March 31, 2016, the balance under our $1.5 billion five-year revolving credit agreement (the Revolving Credit Agreement) increased by $75.6 million, which we used for general partnership purposes and to fund our capital expenditures. The Revolving Credit Agreement matures on October 29, 2019 and bears interest, at our option, based on an alternative base rate, a LIBOR-based rate or a EURIBOR-based rate. The interest rate on the Revolving Credit Agreement is subject to adjustment if our debt rating is downgraded (or upgraded) by certain credit rating agencies. As of March 31, 2016, our weighted-average interest rate related to borrowings under the Revolving Credit Agreement was 2.2% and we had $958.3 million outstanding.


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

As of March 31, 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 March 31, 2016, our consolidated debt coverage ratio was 4.6x, and we had $523.2 million available for borrowing. Letters of credit issued under the Revolving Credit Agreement totaled $18.5 million as of March 31, 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, 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 March 31, 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 three months ended March 31, 2016 and 2015, the amount received from the trustee totaled $5.5 million and $0.5 million, respectively. As of March 31, 2016, the amount remaining in trust totaled $49.3 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 March 31, 2016, $81.3 million of our accounts receivable are included in the Securitization Program. The amount of borrowings outstanding under the Receivables Financing Agreement totaled $48.5 million as of March 31, 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. As of March 31, 2016, we have accrued $4.4 million for contingent losses. The amount that will ultimately be paid may differ from the recorded accruals, and the timing of such payments is uncertain. In addition, due to the inherent uncertainty of litigation, there can be no assurance that the resolution of any particular claim or proceeding would not have a material adverse effect on our results of operations, financial position or liquidity.

5. FAIR VALUE MEASUREMENTS

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


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

Recurring Fair Value Measurements
The following assets and liabilities are measured at fair value on a recurring basis:
 
March 31, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(Thousands of Dollars)
Assets:
 
 
 
 
 
 
 
Other current assets:
 
 
 
 
 
 
 
Product imbalances
$
4,321

 
$

 
$

 
$
4,321

Commodity derivatives
1,671

 
69

 

 
1,740

Total
$
5,992

 
$
69

 
$

 
$
6,061

Liabilities:
 
 
 
 
 
 
 
Accrued liabilities:
 
 
 
 
 
 
 
Product imbalances
$
(433
)
 
$

 
$

 
$
(433
)
Commodity derivatives
(751
)
 
(133
)
 

 
(884
)
Other long-term liabilities:
 
 
 
 
 
 
 
Guarantee liability

 

 
(1,400
)
 
(1,400
)
Interest rate swaps

 
(28,675
)
 

 
(28,675
)
Total
$
(1,184
)
 
$
(28,808
)
 
$
(1,400
)
 
$
(31,392
)

 
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. We value our assets and liabilities related to product imbalances using quoted market prices in active markets as of the reporting date. Therefore, 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. Therefore, we include these derivative instruments in Level 2 of the fair value hierarchy. See Note 6 for a discussion of our derivative instruments.

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

Interest Rate Swaps. 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. Therefore, 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 March 31, 2016, we have provided $19.7 million in letters of credit on behalf of Axeon. As of March 31, 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 $59.3 million and $71.9 million, respectively, and one guarantee that does 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 March 31, 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:
 
Three Months Ended March 31, 2016
 
(Thousands of Dollars)
Beginning balance
$
1,697

Adjustments to guarantee liability
(297
)
Ending balance
$
1,400


Fair Value of Financial Instruments
We recognize cash equivalents, receivables, note receivables, payables and debt in our consolidated balance sheets at their carrying amounts. The fair values of these financial instruments, except for the $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:
 
March 31, 2016
 
December 31, 2015
 
Fair Value
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
(Thousands of Dollars)
Long-term debt
$
2,980,166

 
$
3,125,650

 
$
2,929,438

 
$
3,055,612

Axeon Term Loan
$
173,197

 
$
170,055

 
$
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. The carrying value of the Axeon Term Loan is included in “Other long-term assets, net” on the consolidated balance sheets.
As of March 31, 2016, the carrying amount of the Axeon Term Loan is $170.1 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 $1.4 million as of March 31, 2016; and (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, increasing the interest rate payable by Axeon, until Axeon makes the payments.


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

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” (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 March 31, 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.

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 4.8 million barrels and 8.0 million barrels as of March 31, 2016 and December 31, 2015, respectively. As of March 31, 2016, we had $2.0 million of margin deposits and none 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
 
March 31,
2016
 
December 31, 2015
 
March 31,
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
 
88

 

 
(358
)
 

Interest rate swaps
Other long-term liabilities
 

 

 
(28,675
)
 
(1,452
)
Total
 
 
88

 
4,692

 
(29,033
)
 
(1,475
)
 
 
 
 
 
 
 
 
 
 
Derivatives Not Designated
as Hedging Instruments:
 
 
 
 
 
 
 
 
 
Commodity contracts
Other current assets
 
2,773

 
34,016

 
(1,033
)
 
(24,528
)
Commodity contracts
Accrued liabilities
 
1,135

 
117

 
(1,749
)
 
(237
)
Total
 
 
3,908

 
34,133

 
(2,782
)
 
(24,765
)
 
 
 
 
 
 
 
 
 
 
Total Derivatives
 
 
$
3,996

 
$
38,825

 
$
(31,815
)
 
$
(26,240
)
 

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

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
 
March 31,
2016
 
December 31, 2015
 
 
(Thousands of Dollars)
Net amounts of assets presented in the consolidated balance sheets
 
$
1,740

 
$
11,402

Net amounts of liabilities presented in the consolidated balance sheets
 
$
(884
)
 
$
(120
)

The earnings impact of our commodity contracts, for which gains and/or losses are recognized in “Cost of product sales” on the condensed consolidated statements of comprehensive income, was as follows:
 
Three Months Ended March 31,
 
2016
 
2015
 
(Thousands of Dollars)
Derivatives Designated as Fair Value Hedging Instruments:
 
 
 
Gain (loss) recognized in income on derivative
$
(1,012
)
 
$
2,164

Gain (loss) recognized in income on hedged item
2,866

 
(1,676
)
Gain (loss) recognized in income for ineffective portion
1,854

 
488

 
 
 
 
Derivatives Not Designated as Hedging Instruments:
 
 
 
Gain (loss) recognized in income on derivative
$
720

 
$
330


The earnings impact of our interest rate swaps was as follows:
 
Three Months Ended March 31,
 
2016
 
2015
 
(Thousands of Dollars)
Derivatives Designated as Cash Flow Hedging Instruments:
 
 
 
Gain (loss) recognized in other comprehensive income on derivative (effective portion)
$
(29,978
)
 
$
(2,035
)
Gain (loss) reclassified from AOCI into interest expense, net (effective portion) (a)
$
(2,222
)
 
$
(2,538
)

(a)
As of March 31, 2016, we expect to reclassify a loss of $7.9 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, other than the expenses allocated to NuStar GP Holdings.

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.


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

The following table summarizes information pertaining to related party transactions:
 
Three Months Ended March 31,
 
2016
 
2015
 
(Thousands of Dollars)
Operating expenses
$
21,681

 
$
31,287

General and administrative expenses
$
10,420

 
$
17,386


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 and all obligations relating to the ongoing maintenance and administration of each of the plans and agreements in the Assigned Programs.

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


We had a receivable from related party of $2.3 million as of March 31, 2016, mainly representing 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 representing payroll, employee benefit plan expenses and unit-based compensation prior to the Employee Transfer and none as of March 31, 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 March 31, 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 benefits received by our employees were not impacted by the Employee Transfer.

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

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

Code of 1986, as amended (the Code), or a funded plan subject to the Employee Retirement Income Security Act. 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.

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 March 31:
 
 
 
 
 
 
 
Service cost
$
1,926

 
$
1,919

 
$
105

 
$
118

Interest cost
1,006

 
1,097

 
100

 
112

Expected return on assets
(1,352
)
 
(1,254
)
 

 

Amortization of prior service credit
(517
)
 
(516
)
 
(286
)
 
(286
)
Amortization of net loss
273

 
461

 
45

 
67

Net periodic benefit cost (income)
$
1,336

 
$
1,707

 
$
(36
)
 
$
11


Contributions to the Pension Plans and Other Postretirement Benefits. During 2016, approximately $8.1 million and $0.3 million is expected to be contributed to the Pension Plans and other postretirement benefits, respectively, which principally represents contributions either required by regulations or laws, or with respect to unfunded plans, necessary to fund current benefits.

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.


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

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 the Employee Retirement Income Security Act.

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. The approval of the Amended 2000 LTIP, coupled with the Employee Transfer, resulted in the classification of most of our currently outstanding and subsequently issued awards 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 31, 2016, common units that remained available to be awarded under the Amended 2000 LTIP totaled 1,201,757.

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 the 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 for the outstanding performance unit awards is a specific distribution coverage ratio (DCR) determined each year by the NuStar GP, LLC Compensation Committee for the following year. Our DCR determines the rate at which the performance units convert into our common units which can range from zero to 200%.


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

The performance units represented 35,373 units on the Employee Transfer date. Performance units vest in three annual increments (tranches), based upon our DCR 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 DCR 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 requisite service period (one-year) if it is probable that the specified DCR 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 December 31, 2015
$
1,609,844

Net income
57,401

Unit-based compensation
3,236

Other comprehensive loss
(14,778
)
Cash distributions to partners
(98,051
)
Balance as of March 31, 2016
$
1,557,652

 
Accumulated Other Comprehensive 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

Other comprehensive income (loss) before
   reclassification adjustments
8,938

 
(29,978
)
 

 
(21,040
)
Net gain on pension costs reclassified into operating
   expense

 

 
(120
)
 
(120
)
Net gain on pension costs reclassified into general and
   administrative expense

 

 
(41
)
 
(41
)
Net loss on cash flow hedges reclassified into interest
   expense, net

 
2,222

 

 
2,222

Other comprehensive income (loss)
8,938

 
(27,756
)
 
4,040

 
(14,778
)
Balance as of March 31, 2016
$
(51,888
)
 
$
(55,724
)
 
$
4,040

 
$
(103,572
)

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 March 31,
 
2016
 
2015
 
(Thousands of Dollars)
Net income applicable to general partner and limited partners’ interest
$
57,401

 
$
127,899

Less general partner incentive distribution
10,805

 
10,805

Net income after general partner incentive distribution
46,596

 
117,094

General partner interest
2
%
 
2
%
General partner allocation of net income after general partner incentive distribution
932

 
2,342

General partner incentive distribution
10,805

 
10,805

Net income applicable to general partner
$
11,737

 
$
13,147


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 March 31,
 
2016
 
2015
 
(Thousands of Dollars, Except Per Unit Data)
General partner interest
$
1,961

 
$
1,961

General partner incentive distribution
10,805

 
10,805

Total general partner distribution
12,766

 
12,766

Limited partners’ distribution
85,285

 
85,285

Total cash distributions
$
98,051

 
$
98,051

 
 
 
 
Cash distributions per unit applicable to limited partners
$
1.095

 
$
1.095


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)
 
 
 
 
March 31, 2016 (a)
 
$
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 April 27, 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 limited partner units outstanding during the period. Dilutive potential limited partner units include contingently issuable performance units under awarded our Amended 2000 LTIP.


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

The following table details the calculation of earnings per unit:

 
Three Months Ended March 31,
 
2016
 
2015
 
(Thousands of Dollars,
Except Unit and Per Unit Data)
Net income attributable to NuStar Energy L.P.
$
57,401

 
$
127,899

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

 
12,766

Less: DERs to restricted units
713

 

Less: Distributions to limited partner
85,285

 
85,285

Distributions (in excess of) less than earnings
$
(41,363
)
 
$
29,848

 
 
 
 
Net income attributable to limited parter units:
 
 
 
Distributions to limited partner
$
85,285

 
$
85,285

Allocation of distributions (in excess of) less than earnings
(40,535
)
 
29,251

Total
$
44,750

 
$
114,536

 
 
 
 
Basic weighted-average limited partner units outstanding
77,886,078

 
77,886,078

 
 
 
 
Diluted units outstanding:
 
 
 
Basic weighted-average limited partner units outstanding
77,886,078

 
77,886,078

Effect of dilutive participating securities
70,746

 

Diluted weighted-average limited partner units outstanding
77,956,824

 
77,886,078

 
 
 
 
Basic and diluted net income per unit applicable to limited partners
$
0.57

 
$
1.47



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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:
 
Three Months Ended March 31,
 
2016
 
2015
 
(Thousands of Dollars)
Decrease (increase) in current assets:
 
 
 
Accounts receivable
$
11,706

 
$
19,654

Inventories
(2,398
)
 
11,997

Other current assets
5,613

 
10,963

Increase (decrease) in current liabilities:
 
 
 
Accounts payable
(3,370
)
 
(21,776
)
Payable to related party, net
(1,575
)
 
1,145

Accrued interest payable
(6,389
)
 
(5,948
)
Accrued liabilities
(16,859
)
 
(23,191
)
Taxes other than income tax
593

 
(1,738
)
Income tax payable
189

 
1,120

Changes in current assets and current liabilities
$
(12,490
)
 
$
(7,774
)

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:
 
Three Months Ended March 31,
 
2016
 
2015
 
(Thousands of Dollars)
Cash paid for interest, net of amount capitalized
$
41,079

 
$
38,044

Cash paid for income taxes, net of tax refunds received
$
2,742

 
$
1,738


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 lease rates consistent with rates charged to third parties for storage.

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Table of Contents
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 March 31,
 
2016
 
2015
 
(Thousands of Dollars)
Revenues:
 
 
 
Pipeline
$
118,873

 
$
124,425

Storage:
 
 
 
Third parties
146,384

 
144,085

Intersegment
6,015

 
6,249

Total storage
152,399

 
150,334

Fuels Marketing
140,446

 
286,434

Consolidation and intersegment eliminations
(6,015
)
 
(6,249
)
Total revenues
$
405,703

 
$
554,944

 
 
 
 
Operating income (loss):
 
 
 
Pipeline
$
64,265

 
$
68,640

Storage
57,013

 
47,978

Fuels marketing
(773
)
 
9,925

Consolidation and intersegment eliminations

 
43

Total segment operating income
120,505

 
126,586

General and administrative expenses
23,785

 
25,053

Other depreciation and amortization expense
2,155

 
2,252

Total operating income
$
94,565

 
$
99,281


Total assets by reportable segment were as follows:
 
March 31,
2016
 
December 31,
2015
 
(Thousands of Dollars)
Pipeline
$
1,999,202

 
$
2,014,098

Storage
2,471,658

 
2,476,389

Fuels marketing
144,921

 
156,866

Total segment assets
4,615,781

 
4,647,353

Other partnership assets
479,768

 
478,172

Total consolidated assets
$
5,095,549

 
$
5,125,525

 

20

Table of Contents
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
March 31, 2016
(Thousands of Dollars)
 
NuStar
Energy
 
NuStar
Logistics
 
NuPOP
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
879

 
$
4

 
$

 
$
130,034

 
$

 
$
130,917

Receivables, net

 
727

 

 
135,037

 

 
135,764

Inventories

 
1,929

 
5,755

 
33,489

 

 
41,173

Other current assets
93

 
8,088

 
4,402

 
13,136

 

 
25,719

Intercompany receivable

 
1,574,862

 

 

 
(1,574,862
)
 

Total current assets
972

 
1,585,610

 
10,157

 
311,696

 
(1,574,862
)
 
333,573

Property, plant and equipment, net

 
1,919,232

 
568,355

 
1,199,100

 

 
3,686,687

Intangible assets, net

 
47,251

 

 
61,300

 

 
108,551

Goodwill

 
149,453

 
170,652

 
376,532

 

 
696,637

Investment in wholly owned
subsidiaries
2,165,781

 
45,432

 
1,056,445

 
909,821

 
(4,177,479
)
 

Deferred income tax asset

 

 

 
1,681

 
(1,179
)
 
502

Other long-term assets, net
939

 
228,901

 
26,329

 
13,430

 

 
269,599

Total assets
$
2,167,692

 
$
3,975,879

 
$
1,831,938

 
$
2,873,560

 
$
(5,753,520
)
 
$
5,095,549

Liabilities and Partners’ Equity
 
 
 
 
 
 
 
 
 
 
 
Payables
$

 
$
25,923

 
$
7,470

 
$
67,389

 
$

 
$
100,782

Short-term debt

 
81,000

 

 

 

 
81,000

Accrued interest payable

 
27,874

 

 
23

 

 
27,897

Accrued liabilities
645

 
7,778

 
8,235

 
26,697

 

 
43,355

Taxes other than income tax
189

 
4,128

 
4,345

 
4,937

 

 
13,599

Income tax payable

 
1,708

 
12

 
4,437

 

 
6,157

Intercompany payable
505,634

 

 
894,589

 
174,639

 
(1,574,862
)
 

Total current liabilities
506,468

 
148,411

 
914,651

 
278,122

 
(1,574,862
)
 
272,790

Long-term debt

 
3,077,717

 

 
47,933

 

 
3,125,650

Deferred income tax liability

 
1,143

 
36

 
25,841

 
(1,179
)
 
25,841

Other long-term liabilities

 
48,194

 
7,460

 
57,962

 

 
113,616

Total partners’ equity
1,661,224

 
700,414

 
909,791

 
2,463,702

 
(4,177,479
)
 
1,557,652

Total liabilities and
partners’ equity
$
2,167,692

 
$
3,975,879

 
$
1,831,938

 
$
2,873,560

 
$
(5,753,520
)
 
$
5,095,549




21

Table of Contents
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




22

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

Condensed Consolidating Statements of Comprehensive Income
For the Three Months Ended March 31, 2016
(Thousands of Dollars)
 
NuStar
Energy
 
NuStar
Logistics
 
NuPOP
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenues
$

 
$
126,578

 
$
47,985

 
$
231,476

 
$
(336
)
 
$
405,703

Costs and expenses
518

 
68,891

 
31,015

 
211,050

 
(336
)
 
311,138

Operating (loss) income
(518
)
 
57,687

 
16,970

 
20,426

 

 
94,565

Equity in earnings (loss) of
subsidiaries
57,922

 
(3,115
)
 
25,283

 
43,743

 
(123,833
)
 

Interest (expense) income, net

 
(39,632
)
 
1,508

 
8,352

 
(4,351
)
 
(34,123
)
Other income (expense), net

 
1

 
(17
)
 
(155
)
 

 
(171
)
Income before income tax
expense
57,404

 
14,941

 
43,744

 
72,366

 
(128,184
)
 
60,271

Income tax expense
3

 
346

 
2

 
2,519

 

 
2,870

Net income
$
57,401

 
$
14,595

 
$
43,742

 
$
69,847

 
$
(128,184
)
 
$
57,401

 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income (loss)
$
57,401

 
$
(13,161
)
 
$
43,742

 
$
82,825

 
$
(128,184
)
 
$
42,623

 

Condensed Consolidating Statements of Comprehensive Income
For the Three Months Ended March 31, 2015
(Thousands of Dollars)
 
NuStar
Energy
 
NuStar
Logistics
 
NuPOP
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenues
$

 
$
134,036

 
$
52,574

 
$
368,661

 
$
(327
)
 
$
554,944

Costs and expenses
490

 
72,906

 
33,124

 
349,512

 
(369
)
 
455,663

Operating (loss) income
(490
)
 
61,130

 
19,450

 
19,149

 
42

 
99,281

Equity in earnings (loss) of
     subsidiaries
128,389

 
(4,164
)
 
81,699

 
101,273

 
(307,197
)
 

Interest (expense) income, net

 
(32,174
)
 
119

 
18

 

 
(32,037
)
Other income, net

 
1,340

 
2

 
60,926

 

 
62,268

Income from continuing
operations before income tax
(benefit) expense
127,899

 
26,132

 
101,270

 
181,366

 
(307,155
)
 
129,512

Income tax (benefit) expense

 
(1,026
)
 

 
3,413

 

 
2,387

Income from continuing
operations
127,899

 
27,158

 
101,270

 
177,953

 
(307,155
)
 
127,125

Income from discontinued
operations, net of tax

 

 

 
774

 

 
774

Net income
$
127,899

 
$
27,158

 
$
101,270

 
$
178,727

 
$
(307,155
)
 
$
127,899

 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income
$
127,899

 
$
27,661

 
$
101,270

 
$
158,123

 
$
(307,155
)
 
$
107,798

 


 
 

23

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

Condensed Consolidating Statements of Cash Flows
For the Three Months Ended March 31, 2016
(Thousands of Dollars)