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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, 2018
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______            
Commission File Number 1-16417
  _________________________________________
nslogo1q17a01a01a04.jpg
NUSTAR ENERGY L.P.
(Exact name of registrant as specified in its charter)
  _________________________________________
 
Delaware
 
74-2956831
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
19003 IH-10 West
San Antonio, Texas
 
78257
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code (210) 918-2000
 _________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer
 
x
Accelerated filer
 
o
 
 
 
 
 
 
Non-accelerated filer
 
o  (Do not check if a smaller reporting company)
Smaller reporting company
 
o
 
 
 
 
 
 
 
 
 
Emerging growth company
 
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    o   
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o   No  x
The number of common units outstanding as of April 30, 2018 was 93,183,029.



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)
 
March 31,
2018
 
December 31,
2017
 
(Unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
15,128

 
$
24,292

Accounts receivable, net of allowance for doubtful accounts of $10,344
and $9,948 as of March 31, 2018 and December 31, 2017, respectively
157,269

 
176,570

Receivable from related party
72

 
205

Inventories
29,549

 
26,857

Other current assets
25,979

 
22,508

Total current assets
227,997

 
250,432

Property, plant and equipment, at cost
6,388,927

 
6,243,481

Accumulated depreciation and amortization
(2,001,703
)
 
(1,942,548
)
Property, plant and equipment, net
4,387,224

 
4,300,933

Intangible assets, net
771,623

 
784,479

Goodwill
1,094,661

 
1,097,475

Deferred income tax asset

 
233

Other long-term assets, net
105,208

 
101,681

Total assets
$
6,586,713

 
$
6,535,233

Liabilities and Partners’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
122,040

 
$
145,932

Short-term debt
70,000

 
35,000

Current portion of long-term debt
349,973

 
349,990

Accrued interest payable
43,974

 
40,449

Accrued liabilities
47,520

 
61,578

Taxes other than income tax
12,751

 
14,385

Income tax payable
6,378

 
4,172

Total current liabilities
652,636

 
651,506

Long-term debt, less current portion
3,306,093

 
3,263,069

Deferred income tax liability
23,032

 
22,272

Other long-term liabilities
112,895

 
118,297

Commitments and contingencies (Note 6)

 

Partners’ equity (Note 11):
 
 
 
Series A preferred limited partners (9,060,000 preferred units outstanding as of March 31, 2018 and December 31, 2017)
218,307

 
218,307

Series B preferred limited partners (15,400,000 preferred units outstanding as of March 31, 2018 and December 31, 2017)
371,634

 
371,634

Series C preferred limited partners (6,900,000 preferred units outstanding as of March 31, 2018 and December 31, 2017)
166,553

 
166,662

Common limited partners (93,182,045 and 93,176,683 common units outstanding
as of March 31, 2018 and December 31, 2017, respectively)
1,772,874

 
1,770,587

General partner
26,692

 
37,826

Accumulated other comprehensive loss
(64,003
)
 
(84,927
)
Total partners’ equity
2,492,057

 
2,480,089

Total liabilities and partners’ equity
$
6,586,713

 
$
6,535,233

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,
 
2018
 
2017
Revenues:
 
 
 
Service revenues
$
291,413

 
$
266,462

Product sales
184,468

 
220,968

Total revenues
475,881

 
487,430

Costs and expenses:
 
 
 
Costs associated with service revenues:
 
 
 
Operating expenses (excluding depreciation and amortization expense)
108,884

 
101,026

Depreciation and amortization expense
69,897


54,671

Total costs associated with service revenues
178,781

 
155,697

Cost of product sales
176,728


207,806

General and administrative expenses (excluding depreciation and amortization expense)
19,774

 
24,595

Other depreciation and amortization expense
2,118

 
2,193

Total costs and expenses
377,401

 
390,291

Operating income
98,480

 
97,139

Interest expense, net
(47,772
)
 
(36,414
)
Other income, net
79,752

 
140

Income before income tax expense
130,460

 
60,865

Income tax expense
4,327

 
2,925

Net income
$
126,133

 
$
57,940

 
 
 
 
Basic net income per common unit (Note 13)
$
1.15

 
$
0.49

Basic weighted-average common units outstanding
93,181,781

 
78,642,888

 
 
 
 
Comprehensive income
$
147,057

 
$
61,703

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)
 
Three Months Ended March 31,
 
2018
 
2017
Cash Flows from Operating Activities:
 
 
 
Net income
$
126,133

 
$
57,940

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization expense
72,015

 
56,864

Unit-based compensation expense
2,091

 
2,790

Amortization of debt related items
1,413

 
1,568

Gain from sale or disposition of assets
(19
)
 
(48
)
Gain from insurance recoveries
(78,756
)
 

Deferred income tax expense
842

 
291

Changes in current assets and current liabilities (Note 14)
10,691

 
(39,142
)
Other, net
(11,246
)
 
3,717

Net cash provided by operating activities
123,164

 
83,980

Cash Flows from Investing Activities:
 
 
 
Capital expenditures
(137,874
)
 
(45,732
)
Change in accounts payable related to capital expenditures
(12,018
)
 
(6,820
)
Proceeds from sale or disposition of assets
19

 
1,859

Proceeds from Axeon term loan

 
110,000

Proceeds from insurance recoveries
78,419

 

Net cash (used in) provided by investing activities
(71,454
)
 
59,307

Cash Flows from Financing Activities:
 
 
 
Proceeds from long-term debt borrowings
119,711

 
144,266

Proceeds from short-term debt borrowings
230,000

 
266,000

Long-term debt repayments
(79,421
)
 
(207,194
)
Short-term debt repayments
(195,000
)
 
(248,000
)
Distributions to preferred unitholders
(16,680
)
 
(5,883
)
Distributions to common unitholders and general partner
(115,272
)
 
(99,021
)
Decrease in cash book overdrafts
(1,009
)
 
(283
)
Other, net
(3,175
)
 
(1,935
)
Net cash used in financing activities
(60,846
)
 
(152,050
)
Effect of foreign exchange rate changes on cash
(28
)
 
26

Net decrease in cash and cash equivalents
(9,164
)
 
(8,737
)
Cash and cash equivalents as of the beginning of the period
24,292

 
35,942

Cash and cash equivalents as of the end of the period
$
15,128

 
$
27,205

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, and the terminalling, storage and marketing of petroleum products. Unless otherwise indicated, the terms “NuStar Energy,” “NS,” “the Partnership,” “we,” “our” and “us” are used in this report to refer to NuStar Energy L.P., to one or more of our consolidated subsidiaries or to all of them taken as a whole. NuStar GP Holdings, LLC (NuStar GP Holdings or NSH) (NYSE: NSH) owns our general partner, Riverwalk Logistics, L.P., and owns an approximate 11% common limited partner interest in us as of March 31, 2018.

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
Hurricane Activity. In the third quarter of 2017, several of our facilities were affected by the hurricanes in the Caribbean and Gulf of Mexico, including our St. Eustatius terminal, which experienced the most damage and was temporarily shut down. The damage caused by the Caribbean hurricane resulted in lower revenues for our bunker fuel operations in our fuels marketing segment and lower throughput and associated handling fees in our storage segment in 2017 and in the first quarter of 2018. In January 2018, we received $87.5 million of insurance proceeds in settlement of our property damage claim for our St. Eustatius terminal, of which $9.1 million related to business interruption. Proceeds from business interruption insurance are included in “Operating expenses” in the consolidated statements of income and in “Cash flows from operating activities” in the consolidated statements of cash flows. We recorded a $78.8 million gain in “Other income, net” in the consolidated statements of income in the first quarter of 2018 for the amount by which the insurance proceeds exceeded our expenses incurred during the period. We expect that the costs to repair the property damage at the terminal will not exceed the amount of insurance proceeds received.

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

These unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to the Quarterly Report on Form 10-Q and Article 10 of Regulation S-X of the Securities Exchange Act of 1934. Accordingly, they do not include all of the information and notes required by GAAP for complete consolidated financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included, and all disclosures are adequate. All such adjustments are of a normal recurring nature unless disclosed otherwise. Financial information for the three months ended March 31, 2018 and 2017 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, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018. The consolidated balance sheet as of December 31, 2017 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, 2017.

Certain previously reported amounts in the 2017 consolidated financial statements have been reclassified to conform to the 2018 presentation.

2. MERGER AGREEMENT

On February 7, 2018, NuStar Energy, Riverwalk Logistics, L.P., NuStar GP, LLC, Marshall Merger Sub LLC, a wholly owned subsidiary of NuStar Energy (Merger Sub), Riverwalk Holdings, LLC and NuStar GP Holdings entered into an Agreement and Plan of Merger (the Merger Agreement) pursuant to which Merger Sub will merge with and into NuStar GP Holdings with NuStar GP Holdings being the surviving entity (the Merger), such that NuStar Energy will be the sole member of NuStar GP Holdings following the Merger. Pursuant to the Merger Agreement and at the effective time of the Merger, NuStar Energy’s partnership agreement will be amended and restated to, among other things, (i) cancel the incentive distribution rights held by our general partner, (ii) convert the 2% general partner interest in NuStar Energy held by our general partner into a non-

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

economic management interest and (iii) provide the holders of our common units with voting rights in the election of the members of the board of directors of NuStar GP, LLC at an annual meeting, beginning in 2019.

At the effective time of the Merger, each outstanding NuStar GP Holdings common unit, other than those held by NuStar GP Holdings or its subsidiaries, will be converted into the right to receive 0.55 of a NuStar Energy common unit. All NuStar GP Holdings common units, when converted, will cease to be outstanding and will automatically be cancelled and no longer exist. No fractional NuStar Energy common units will be issued in the Merger; instead, each holder of NuStar GP Holdings’ common units otherwise entitled to receive a fractional NuStar Energy common unit will receive cash in lieu thereof. Furthermore, the 10,214,626 NuStar Energy common units currently owned by subsidiaries of NuStar GP Holdings will be cancelled and will cease to exist.

At the effective time of the Merger, each outstanding award of NuStar GP Holdings restricted units will be converted, on the same terms and conditions as were applicable to the awards immediately prior to the Merger, into an award of NuStar Energy restricted units. The number of NuStar Energy restricted units subject to the converted awards will be determined as provided in the Merger Agreement. Each of our executive officers and directors has agreed and acknowledged that the Merger will not be deemed to trigger a “change of control” as defined under any NuStar Energy or NuStar GP Holdings plan or award, and has waived any rights to vesting, payment or other benefit thereunder that would arise upon a “change of control,” to which he or she might otherwise have been entitled.

The Merger Agreement contains customary representations and warranties and covenants by each of the parties. Completion of the Merger is conditioned upon, among other things: (i) approval of the Merger Agreement by the affirmative vote of holders of a Unit Majority, as defined in the Second Amended and Restated Limited Liability Company Agreement of NuStar GP Holdings, as amended; (ii) the effectiveness of a registration statement on Form S-4 with respect to the issuance by NuStar Energy of its common units in connection with the Merger; (iii) the absence of certain legal injunctions or impediments prohibiting the transactions; (iv) the receipt of certain tax opinions from a nationally recognized tax counsel; and (v) the approval for the listing of NuStar Energy’s common units to be issued in the Merger on the New York Stock Exchange.

NuStar Energy entered into a Support Agreement, dated as of February 7, 2018 (the Support Agreement), with Merger Sub, WLG Holdings, LLC, a Texas limited liability company controlled by Mr. Greehey (WLG Holdings), Mr. Greehey (together, WLG Holdings and Mr. Greehey are referred to as the Greehey Unitholders), and, for limited purposes, NuStar GP Holdings, pursuant to which the Greehey Unitholders have agreed to vote in favor of the approval and adoption of the Merger Agreement, the approval of the Merger and any other action required in furtherance thereof submitted for the vote or written consent of NuStar GP Holdings unitholders. The Greehey Unitholders collectively own approximately 21% of the outstanding NuStar GP Holdings units. The Support Agreement will terminate (i) at the effective time of the Merger, (ii) upon the termination of the Merger Agreement as provided therein, or (iii) at such time as NuStar Energy and the Greehey Unitholders agree in writing to terminate the Support Agreement.

After the Merger, the NuStar GP, LLC board of directors is expected to consist of nine members, initially composed of the six members of the NuStar GP, LLC board of directors and the three independent directors of the board of directors of NuStar GP Holdings.

NuStar Energy filed a registration statement on Form S-4, as amended, with respect to the common units to be issued by NuStar Energy in connection with the Merger.

3. NEW ACCOUNTING PRONOUNCEMENTS

Comprehensive Income
In February 2018, the Financial Accounting Standards Board (FASB) issued amended guidance which provides an entity the option to reclassify stranded tax effects caused by the Tax Cuts and Jobs Act of 2017 from accumulated other comprehensive income to retained earnings, and also requires certain additional disclosures about those stranded tax effects. The guidance is effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted. The new requirements should be applied using one of two retrospective transition methods. We are currently evaluating whether we will adopt these provisions early, but we do not expect the guidance to have a material impact on our financial position, results of operations or disclosures.


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

Derivatives and Hedging
In August 2017, the FASB issued amended guidance intended to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. The amended guidance also makes certain targeted improvements to simplify the application of current hedge accounting guidance. The guidance is effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted. Certain of the new requirements should be applied prospectively while others should be applied using a modified retrospective transition method. We currently expect to adopt the amended guidance on January 1, 2019. We do not expect the guidance to have a material impact on our financial position or results of operations, and we are assessing the impact on our disclosures.

Defined Benefit Plans
In March 2017, the FASB issued amended guidance that changes the presentation of net periodic pension cost related to defined benefit plans. Under the amended guidance, the service cost component of net periodic benefit cost will be presented in the same income statement line items as other current employee compensation costs, but the remaining components of net periodic benefit cost will be presented outside of operating income. The changes are effective for annual and interim periods beginning after December 15, 2017, and amendments should be applied retrospectively. We began reporting the remaining components of net periodic benefit cost in “Other income, net” in the consolidated statements of comprehensive income upon adoption of the amended guidance on January 1, 2018. We applied the amended guidance prospectively as it did not have a material impact on previous periods.

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

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

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

Revenue Recognition
In May 2014, the FASB and the International Accounting Standards Board jointly issued a comprehensive new revenue recognition standard that requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods or services. The standard is effective for public entities for annual and interim periods beginning after December 15, 2017, using one of two retrospective transition methods. We adopted these provisions January 1, 2018 using the modified retrospective approach. The

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

transition adjustment related to the adoption was immaterial, and we do not expect the adoption of this standard to materially impact the amount or timing of our revenue going forward. Please refer to Note 12 for further discussion.

4. ACQUISITIONS

Navigator Acquisition
On April 11, 2017, we entered into a Membership Interest Purchase and Sale Agreement (the Acquisition Agreement) with FR Navigator Holdings LLC to acquire all of the issued and outstanding limited liability company interests in Navigator Energy Services, LLC (Navigator) for approximately $1.5 billion. We closed the Navigator Acquisition on May 4, 2017. We acquired crude oil transportation, pipeline gathering and storage assets located in the Midland Basin of West Texas that we collectively refer to as our Permian Crude System. The assets acquired are included in our pipeline segment. The condensed consolidated statements of comprehensive income include the results of operations for Navigator commencing on May 4, 2017.

We accounted for the Navigator Acquisition using the acquisition method. The following table reflects the final purchase price allocation:
 
Purchase Price Allocation
 
(Thousands of Dollars)
Accounts receivable
$
4,747

Other current assets
2,359

Property, plant and equipment, net
376,690

Intangible assets (a)
700,000

Goodwill (b)
398,024

Other long-term assets, net
2,199

Current liabilities
(22,300
)
Purchase price allocation, net of cash acquired
$
1,461,719

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

The unaudited pro forma information for the three months ended March 31, 2017 presented below combines the historical financial information for Navigator and the Partnership for that period. The information assumes we completed the Navigator Acquisition on January 1, 2017 and the following:
we issued approximately 14.4 million common units;
we received a contribution from our general partner of $13.6 million to maintain its 2% interest;
we issued 15.4 million Series B Preferred Units;
we issued $550.0 million of 5.625% senior notes;
additional depreciation and amortization that would have been incurred assuming the fair value adjustments to property, plant and equipment and intangible assets reflected in the purchase price allocation above; and
we satisfied Navigator’s outstanding obligations under its revolving credit agreement.
 
Three Months Ended
March 31, 2017
 
(Thousands of Dollars, Except Per Unit Data)
Revenues
$
497,384

Net income
$
42,448

 
 
Basic net income per common unit
$
0.19


The pro forma information for the three months ended March 31, 2017 does not include transaction costs of approximately $14.0 million, which were directly attributable to the Navigator Acquisition and paid in the second quarter of 2017. The pro

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

forma information is unaudited and is not necessarily indicative of the results of operations that would have resulted had the Navigator Acquisition occurred on January 1, 2017 or that may result in the future.

5. DEBT

Revolving Credit Agreement
On March 28, 2018, NuStar Logistics amended its $1.75 billion revolving credit agreement (the Revolving Credit Agreement), to increase the maximum allowed consolidated debt coverage ratio (as defined in the Revolving Credit Agreement) to 5.25-to-1.00 for the rolling periods ending June 30, 2018 through December 31, 2018. Subsequently, the maximum allowed consolidated debt coverage ratio may not exceed 5.00-to-1.00 for any rolling periods ending on or after March 31, 2019. The Revolving Credit Agreement was also amended, to, among other things, change the definition of Change in Control in the Revolving Credit Agreement such that the proposed Merger discussed in Note 2 will not constitute a Change in Control for purposes of the Revolving Credit Agreement.

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, 2018, letters of credit issued under the Revolving Credit Agreement totaled $3.7 million, and we had $804.9 million available for borrowing. As of March 31, 2018, our consolidated debt coverage ratio could not exceed 5.50-to-1.00. We believe that we are in compliance with the covenants in the Revolving Credit Agreement as of March 31, 2018.

During the three months ended March 31, 2018, the balance under the Revolving Credit Agreement increased by $48.1 million. The Revolving Credit Agreement 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. In February 2018, Moody’s Investor Service Inc. (Moody’s) lowered our credit rating from Ba1 to Ba2. This rating downgrade caused the interest rate on our Revolving Credit Agreement to increase by 0.25% effective February 2018. As of March 31, 2018, our weighted-average interest rate related to borrowings under the Revolving Credit Agreement was 3.6%, and we had $941.4 million outstanding.

NuStar Logistics Senior Notes
The credit rating downgrade by Moody’s in February 2018 increased the interest rate on our $350.0 million of 7.65% senior notes by 0.25%, resulting in an interest rate of 8.65% applicable to the interest payment due April 15, 2018. We repaid our $350.0 million of 7.65% senior notes due April 15, 2018 with borrowings under our Revolving Credit Agreement at maturity.

NuStar Logistics Subordinated Notes
Effective January 15, 2018, the interest rate on NuStar Logistics’ $402.5 million of fixed-to-floating rate subordinated notes due January 15, 2043 switched from a fixed annual rate of 7.625%, payable quarterly in arrears, to an annual rate equal to the sum of the three-month LIBOR rate for the related quarterly interest period, plus 6.734% payable quarterly, commencing with the interest payment due April 15, 2018. As of March 31, 2018, the floating interest rate was 8.5%.

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 activity consists of purchasing receivables from NuStar Energy’s wholly owned subsidiaries that participate in the Securitization Program and providing these receivables as collateral for NuStar Finance’s revolving borrowings 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. The amendment to the Revolving Credit Agreement also limits the amount of borrowings under the Receivables Financing Agreement to $125.0 million.

Borrowings by NuStar Finance under the Receivables Financing Agreement bear interest at the applicable bank rate, as defined under the Receivables Financing Agreement. The weighted average interest rate related to outstanding borrowings under the Securitization Program as of March 31, 2018 was 2.8%. As of March 31, 2018, $91.8 million of our accounts receivable, net of allowance for doubtful accounts, are included in the Securitization Program. The amount of borrowings outstanding under the Receivables Financing Agreement totaled $57.8 million as of March 31, 2018, which is included in “Long-term debt” on the

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

consolidated balance sheet. On March 28, 2018, the Receivables Financing Agreement was amended to change the definition of Change in Control in the Receivables Financing Agreement such that the proposed Merger discussed in Note 2 will not be a Change in Control for purposes of the Receivables Financing Agreement.

6. COMMITMENTS AND CONTINGENCIES

We have contingent liabilities resulting from various litigation, claims and commitments. We record accruals for loss contingencies when losses are considered probable and can be reasonably estimated. Legal fees associated with defending the Partnership in legal matters are expensed as incurred. We accrued $2.7 million for contingent losses as of March 31, 2018 and $7.3 million as of December 31, 2017. The amount that will ultimately be paid related to such matters may differ from the recorded accruals, and the timing of such payments is uncertain. We evaluate each contingent loss at least quarterly, and more frequently as each matter progresses and develops over time, and we do not believe that the resolution of any particular claim or proceeding, or all matters in the aggregate, would have a material adverse effect on our results of operations, financial position or liquidity.

7. 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:
 
March 31, 2018
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(Thousands of Dollars)
Assets:
 
 
 
 
 
 
 
Other current assets:
 
 
 
 
 
 
 
Interest rate swaps
$

 
$
5,547

 
$

 
$
5,547

Other long-term assets, net:
 
 
 
 
 
 
 
Interest rate swaps

 
2,307

 

 
2,307

Total
$

 
$
7,854

 
$

 
$
7,854

Liabilities:
 
 
 
 
 
 
 
Accrued liabilities:
 
 
 
 
 
 
 
Commodity derivatives
$
(257
)
 
$

 
$

 
$
(257
)
Interest rate swaps

 
(114
)
 

 
(114
)
Other long-term liabilities:
 
 
 
 
 
 
 
Interest rate swaps

 
(307
)
 

 
(307
)
Total
$
(257
)
 
$
(421
)
 
$

 
$
(678
)


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

 
December 31, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(Thousands of Dollars)
Assets:
 
 
 
 
 
 
 
Other current assets:
 
 
 
 
 
 
 
Product imbalances
$
3,890

 
$

 
$

 
$
3,890

Liabilities:
 
 
 
 
 
 
 
Accrued liabilities:
 
 
 
 
 
 
 
Product imbalances
$
(1,534
)
 
$

 
$

 
$
(1,534
)
Commodity derivatives
(878
)
 

 

 
(878
)
Interest rate swaps

 
(5,394
)
 

 
(5,394
)
Other long-term liabilities:
 
 
 
 
 
 
 
Interest rate swaps

 
(4,594
)
 

 
(4,594
)
Total
$
(2,412
)
 
$
(9,988
)
 
$

 
$
(12,400
)

Product Imbalances. Pursuant to the new revenue recognition standard we adopted January 1, 2018, we no longer recognize the fair value of product imbalances on our consolidated balance sheets. Prior to adoption, we valued our assets and liabilities related to product imbalances using quoted market prices in active markets as of the reporting date; accordingly, we included 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 had derivative instruments for which we determined fair value using industry pricing services and other observable inputs, such as quoted prices on an exchange for similar derivative instruments, and we included these derivative instruments in Level 2 of the fair value hierarchy. See Note 8 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.

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

The estimated fair values and carrying amounts of long-term debt, including the current portion, were as follows:
 
March 31, 2018
 
December 31, 2017
 
(Thousands of Dollars)
Fair value
$
3,665,335

 
$
3,677,622

Carrying amount
$
3,656,066

 
$
3,613,059


We estimated the fair value of our publicly traded notes based upon quoted prices in active markets; therefore, we determined that the fair value of our publicly traded 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.

8. 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.

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

Interest Rate Risk
We are a party to certain interest rate swap agreements to manage our exposure to changes in interest rates, which include forward-starting interest rate swap agreements related to forecasted debt issuances in 2018 and 2020. We entered into these swaps in order to hedge the risk of changes in the interest payments attributable to changes in the benchmark interest rate during the period from the effective date of the swap to the issuance of the forecasted debt. Under the terms of the swaps, we pay a fixed rate and receive a rate based on the three-month USD LIBOR. These swaps qualify as cash flow hedges, and we designate them as such. We record the effective portion of mark-to-market adjustments as a component of “Accumulated other comprehensive income (loss)” (AOCI), and the amount in AOCI will be recognized in “Interest expense, net” as the forecasted interest payments occur or if the interest payments are probable not to occur. As of March 31, 2018 and December 31, 2017, the aggregate notional amount of forward-starting interest rate swaps totaled $600.0 million. In April 2018, in connection with the maturity of the 7.65% senior notes due April 15, 2018, we terminated forward-starting interest rate swaps with an aggregate notional amount of $350.0 million and received $8.0 million.

Commodity Price Risk
We are exposed to market risks related to the volatility of petroleum product prices. In order to reduce the risk of commodity price fluctuations with respect to our petroleum 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. We ceased marketing crude oil in the second quarter of 2017 and exited our heavy fuels trading operations in the third quarter of 2017, thereby reducing our overall hedging activity.

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 1.7 million barrels and 1.2 million barrels as of March 31, 2018 and December 31, 2017, respectively. We had $0.4 million and $0.3 million of margin deposits as of March 31, 2018 and December 31, 2017, respectively.

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,
2018
 
December 31,
2017
 
March 31,
2018
 
December 31,
2017
 
 
 
(Thousands of Dollars)
Derivatives Designated as
Hedging Instruments:
 
 
 
 
 
 
 
 
 
Interest rate swaps
Other current assets
 
$
5,547

 
$

 
$

 
$

Interest rate swaps
Other long-term assets, net
 
2,307

 

 

 

Commodity contracts
Accrued liabilities
 
20

 

 
(33
)
 
(112
)
Interest rate swaps
Accrued liabilities
 

 

 
(114
)
 
(5,394
)
Interest rate swaps
Other long-term liabilities
 

 

 
(307
)
 
(4,594
)
Total
 
 
7,874

 

 
(454
)
 
(10,100
)
 
 
 
 
 
 
 
 
 
 
Derivatives Not Designated
as Hedging Instruments:
 
 
 
 
 
 
 
 
 
Commodity contracts
Accrued liabilities
 
759

 
742

 
(1,003
)
 
(1,508
)
 
 
 
 
 
 
 
 
 
 
Total Derivatives
 
 
$
8,633

 
$
742

 
$
(1,457
)
 
$
(11,608
)
 

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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,
2018
 
December 31,
2017
 
 
(Thousands of Dollars)
Net amounts of assets presented in the consolidated balance sheets
 
$

 
$

Net amounts of liabilities presented in the consolidated balance sheets
 
$
(257
)
 
$
(878
)

We recognize the impact of our commodity contracts on earnings in “Cost of product sales” on the condensed consolidated statements of comprehensive income, as follows:
 
Three Months Ended March 31,
 
2018
 
2017
 
(Thousands of Dollars)
Derivatives Designated as Fair Value Hedging Instruments:
 
 
 
(Loss) gain recognized in income on derivative
$
(296
)
 
$
2,097

Gain (loss) recognized in income on hedged item
237

 
(1,834
)
(Loss) gain recognized in income for ineffective portion
$
(59
)
 
$
263

 
 
 
 
Derivatives Not Designated as Hedging Instruments:
 
 
 
Loss recognized in income on derivative
$
(141
)
 
$
(138
)

Our interest rate swaps had the following impact on earnings:
 
Three Months Ended March 31,
 
2018
 
2017
 
(Thousands of Dollars)
Derivatives Designated as Cash Flow Hedging Instruments:
 
 
 
Gain recognized in other comprehensive income on derivative (effective portion)
$
17,421

 
$
39

Loss reclassified from AOCI into interest expense, net (effective portion)
$
(1,390
)
 
$
(1,799
)

As of March 31, 2018, we expect to reclassify a loss of $4.8 million to “Interest expense, net” within the next twelve months associated with unwound forward-starting interest rate swaps.

9. RELATED PARTY TRANSACTIONS

Please refer to Note 2 for a discussion of the merger of a subsidiary of ours with and into NuStar GP Holdings, pursuant to which we will become the sole member of NuStar GP Holdings.

We are a party to the 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 expire on March 1, 2020 and will automatically renew for successive two-year terms, unless terminated by either party.

10. EMPLOYEE BENEFIT PLANS

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

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

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.

The components of net periodic benefit cost (income) related to our Pension Plans and other postretirement benefit plans were as follows:
 
Pension Plans
 
Other Postretirement Benefit Plans
 
2018
 
2017
 
2018
 
2017
 
(Thousands of Dollars)
For the three months ended March 31:
 
 
 
 
 
 
 
Service cost
$
2,406

 
$
2,239

 
$
126

 
$
113

Interest cost
1,206

 
1,127

 
108

 
108

Expected return on assets
(1,855
)
 
(1,603
)
 

 

Amortization of prior service credit
(514
)
 
(515
)
 
(287
)
 
(286
)
Amortization of net loss
544

 
371

 
54

 
48

Net periodic benefit cost (income)
$
1,787

 
$
1,619

 
$
1

 
$
(17
)

11. PARTNERS' EQUITY

Please refer to Note 2 for a discussion of the merger of a subsidiary of ours with and into NuStar GP Holdings, pursuant to which we will become the sole member of NuStar GP Holdings.

Partners’ Equity Activity
The following table summarizes changes to our partners’ equity (in thousands of dollars):
Balance as of January 1, 2018
$
2,480,089

Net income
126,133

Unit-based compensation
1,286

Other comprehensive income
20,924

Distributions to partners
(131,262
)
Other
(5,113
)
Balance as of March 31, 2018
$
2,492,057


Cash Distributions
General Partner and Common Limited Partners. We make quarterly distributions to common unitholders and the general partner of 100% of our available cash, generally defined as cash receipts less cash disbursements, including distributions to the 8.50% Series A, 7.625% Series B and 9.00% Series C Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Units (the Preferred Units), and cash reserves established by the general partner, in its sole discretion. These quarterly distributions are declared and paid within 45 days subsequent to each quarter-end. The common unitholders receive a distribution each quarter as determined by the board of directors, subject to limitation by the distributions in arrears, if any, on the Preferred Units. Our available cash is distributed based on the percentages shown below:
 
 
Percentage of Distribution
Quarterly Distribution Amount per Common Unit
 
Common
 Unitholders
 
General Partner
Including Incentive Distributions
Up to $0.60
 
98%
 
2%
Above $0.60 up to $0.66
 
90%
 
10%
Above $0.66
 
75%
 
25%

On April 26, 2018, we announced that the board of directors of NuStar GP, LLC reset our quarterly distribution per common unit to $0.60 ($2.40 on an annualized basis), starting with the first-quarter distribution payable on May 14, 2018.

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

The following table reflects the allocation of total cash distributions to the general partner and common limited partners applicable to the period in which the distributions were earned:
 
Three Months Ended March 31,
 
2018
 
2017
 
(Thousands of Dollars, Except Per Unit Data)
General partner interest
$
1,141

 
$
2,343

General partner incentive distribution

 
12,912

Total general partner distribution
1,141

 
15,255

Common limited partners’ distribution
55,916

 
101,913

Total cash distributions
$
57,057

 
$
117,168

 
 
 
 
Cash distributions per unit applicable to common limited partners
$
0.60

 
$
1.095


The following table summarizes information about our quarterly cash distributions to our general partner and common limited partners:
Quarter Ended
 
Cash
Distributions
Per Unit
 
Total Cash
Distributions
 
Record Date
 
Payment Date
 
 
 
 
(Thousands of Dollars)
 
 
 
 
March 31, 2018
 
$
0.600

 
$
57,057

 
May 8, 2018
 
May 14, 2018
December 31, 2017
 
$
1.095

 
$
115,267

 
February 8, 2018
 
February 13, 2018

Preferred Units. The following table summarizes information about our quarterly cash distributions on our Preferred Units:
Period
 
Cash
Distributions
Per Unit
 
Total Cash
Distributions
 
Record Date
 
Payment Date
 
 
 
 
(Thousands of Dollars)
 
 
 
 
Series A Preferred Units:
 
 
 
 
 
 
 
 
March 15, 2018 - June 14, 2018
 
$
0.53125

 
$
4,813

 
June 1, 2018
 
June 15, 2018
December 15, 2017 - March 14, 2018
 
$
0.53125

 
$
4,813

 
March 1, 2018
 
March 15, 2018
 
 
 
 
 
 
 
 
 
Series B Preferred Units:
 
 
 
 
 
 
 
 
March 15, 2018 to June 14, 2018
 
$
0.47657

 
$
7,339

 
June 1, 2018
 
June 15, 2018
December 15, 2017 to March 14, 2018
 
$
0.47657

 
$
7,339

 
March 1, 2018
 
March 15, 2018
 
 
 
 
 
 
 
 
 
Series C Preferred Units:
 
 
 
 
 
 
 
 
March 15, 2018 to June 14, 2018
 
$
0.56250

 
$
3,881

 
June 1, 2018
 
June 15, 2018
November 30, 2017 - March 14, 2018
 
$
0.65625

 
$
4,528

 
March 1, 2018
 
March 15, 2018

Allocations of Net Income
Our partnership agreement sets forth the calculation to be used to determine the amount and priority of cash distributions that the unitholders and general partner will receive. The partnership agreement also contains provisions for the allocation of net income to the unitholders and the general partner. Our net income for each quarterly reporting period is first allocated to the preferred limited partner unitholders in an amount equal to the earned distributions for the respective reporting period and then to the general partner in an amount equal to the general partner’s incentive distribution calculated based upon the declared distribution for the respective reporting period. We allocate the remaining net income or loss among the common unitholders (98%) and general partner (2%), as set forth in our partnership agreement. As a result of the distribution declared for the first quarter of 2018 of $0.60 per common unit (discussed above), the general partner did not receive an incentive distribution.

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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,
 
2018
 
2017
 
(Thousands of Dollars, Except Percentage Data)
Net income attributable to NuStar Energy L.P.
$
126,133

 
$
57,940

Less preferred limited partner interest
15,990

 
4,813

Less general partner incentive distribution

 
12,912

Net income after preferred limited partner interest and general partner incentive distribution
110,143

 
40,215

General partner interest allocation
2
%
 
2
%
General partner interest allocation of net income
2,203

 
804

General partner incentive distribution

 
12,912

Net income applicable to general partner
$
2,203

 
$
13,716


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, 2018
$
(51,603
)
 
$
(24,304
)
 
$
(9,020
)
 
$
(84,927
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Other comprehensive income before reclassification adjustments
2,312

 
17,421

 

 
19,733

Net gain on pension costs reclassified into other income, net

 

 
(203
)
 
(203
)
Net loss on cash flow hedges reclassified into interest
   expense, net

 
1,390

 

 
1,390

Other
60

 

 
(56
)
 
4

Other comprehensive income (loss)
2,372

 
18,811

 
(259
)
 
20,924

Balance as of March 31, 2018
$
(49,231
)
 
$
(5,493
)
 
$
(9,279
)
 
$
(64,003
)

12. REVENUE FROM CONTRACTS WITH CUSTOMERS

Transition
On January 1, 2018, we adopted Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers”
(ASC Topic 606) using the modified retrospective method and applying ASC Topic 606 to all revenue contracts with customers. Results for reporting periods beginning after January 1, 2018 are presented under ASC Topic 606. In accordance with the modified retrospective approach, prior period amounts were not adjusted and are reported under ASC Topic 605, “Revenue Recognition.” The adoption of ASC Topic 606 affected our consolidated statement of comprehensive income for the three months ended March 31, 2018 as follows:
 
As Reported
 
Without Adoption of ASC Topic 606
 
Effect of Change
Higher/(Lower)
 
(Thousands of Dollars)
Revenues
$
475,881

 
$
481,786

 
$
(5,905
)
Operating income
$
98,480

 
$
104,385

 
$
(5,905
)
Net income
$
126,133

 
$
132,038

 
$
(5,905
)
Basic net income per common unit
$
1.15

 
$
1.21

 
$
(0.06
)

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

Revenue-Generating Activities
Revenues for the pipeline segment are derived from interstate and intrastate pipeline transportation of refined products, crude oil and anhydrous ammonia and the applicable pipeline tariff.

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 (throughput terminal revenues). Our terminals also provide blending, additive injections, handling and filtering services for which we charge additional fees, and certain of our facilities charge fees to provide marine services such as pilotage, tug assistance, line handling, launch service, emergency response services and other ship services (all of which are considered optional services).

Revenues for the fuels marketing segment are derived from the sale of petroleum products.

Within our pipeline and storage segments, we provide services on an uninterruptible and interruptible basis. Uninterruptible services within our pipeline segment typically result from contracts that contain take-or-pay minimum volume commitments (MVCs) from the customer. Contracts with MVCs obligate the customer to pay for that minimum amount. If a customer fails to meet its MVC for the applicable service period, the customer is obligated to pay a deficiency fee based upon the shortfall between the actual volumes transported or stored and the MVC for that service period (deficiency payments). In exchange, those contracts with MVCs obligate us to stand ready to transport volumes up to the customer’s MVC.

Within our storage segment, uninterruptible services arise from contracts containing a fixed monthly fee for the portion of storage capacity reserved by the customer. These contracts require the customer to pay the fixed monthly fee, regardless of whether or not it uses our storage facility (i.e., take-or-pay obligation), while we are committed to stand ready to store that volume.

Interruptible services within our pipeline and storage segments are generally provided when and to the extent we determine the requested capacity is available. The customer typically pays a per-unit rate for the actual quantities of services it receives.

Revenue Recognition
After identifying a contract with a customer, ASC Topic 606 requires us to (i) identify the performance obligations in the contract; (ii) determine the transaction price; (iii) allocate the transaction price to the performance obligations; and (iv) recognize revenue when or as we satisfy a performance obligation. For the majority of our contracts, we recognize revenue in the amount to which we have a right to invoice. Generally, payment terms do not exceed 30 days.

Performance Obligations. The majority of our contracts contain a single performance obligation. For our pipeline segment, the single performance obligation encompasses multiple activities necessary to deliver our customers’ products to their destinations. Typically, we satisfy this performance obligation over time as the product volume is delivered in or out of the pipelines. Similarly, the performance obligation for our storage segment consists of multiple activities necessary to receive, store and deliver our customers’ products. We typically satisfy this performance obligation over time as the product volume is delivered in or out of the tanks (for throughput terminal revenues) or with the passage of time (for storage terminal revenues).

Certain of our pipeline segment customer contracts include an incentive pricing structure, which provides a discounted rate for the remainder of the contract once the customer exceeds a cumulative volume. The ability to receive discounted future services represents a material right to the customer, which results in a second performance obligation in those contracts.

Product sales contracts associated with our fuels marketing segment generally include a single performance obligation to deliver specified volumes of a commodity, which we satisfy at a point in time, when the product is delivered and the customer obtains control of the commodity.

Optional services do not provide a material right to the customer, and are not considered a separate performance obligation in the contract. If and when a customer elects an optional service, it becomes part of the existing performance obligation.

Transaction Price. For uninterruptible services, we determine the transaction price at contract inception based on the guaranteed minimum amount of revenue over the term of the contract. For interruptible services and optional services, we determine the transaction price based on our right to invoice the customer for the value of services provided to the customer for the applicable period.

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

In certain instances, our customers reimburse us for capital projects, also referred to as contributions in aid of construction (CIAC), typically as upfront payments for future services, which are included in the transaction price of the underlying service contract.

We collect taxes on certain revenue transactions to be remitted to governmental authorities, which may include sales, use, value-added and some excise taxes. These taxes are not included in the transaction price and are, therefore, excluded from revenues.

Allocation of Transaction Price. We allocate the transaction price to the single performance obligation that exists in the vast majority of our contracts with customers. For the few contracts that have a second performance obligation, such as those that include an incentive pricing structure, we calculate an average rate based on the estimated total volumes to be delivered over the term of the contract and the resulting estimated total revenue to be billed using the applicable rates in the contract. We allocate the transaction price to the two performance obligations by applying the average rate to product volumes as they are delivered to the customer over the term of the contract. Determining the timing and amount of volumes subject to these incentive pricing contracts requires judgment that can impact the amount of revenue allocated to the two separate performance obligations. We base our estimates on our analysis of expected future production information available from our customers or other sources, which we update at least quarterly.

Some of our MVC contracts include provisions that allow the customer to apply deficiency payments to future service periods (the carryforward period). In those instances, we have not satisfied our performance obligation as we still have the obligation to perform those services, subject to contractual and/or capacity constraints, at the customer’s request. At least quarterly, we assess the customer’s ability to utilize any deficiency payments during the carryforward period. If we receive a deficiency payment from a customer that we expect the customer to utilize during the carryforward period, we defer that amount as a contract liability. We will consider the performance obligation satisfied and allocate any deferred deficiency payments to our performance obligation when the customer utilizes the deficiency payment, the carryforward period ends or we determine the customer cannot or will not utilize the deficiency payment (i.e. breakage). If our contract does not allow the customer to apply deficiency payments to future service periods, we allocate the deficiency payment to the already satisfied portion of the performance obligation.

Contract Assets and Liabilities
The following table provides information about contract assets and contract liabilities from contracts with customers:
 
Contract Assets
 
Contract Liabilities
 
(Thousands of Dollars)
Balance as of January 1, 2018
$
2,127

 
$
(57,870
)
 
 
 
 
Additions
460

 
(2,386
)
Transfer to accounts receivable
(1,653
)
 

Transfer to revenues

 
2,935

Total activity
(1,193
)

549

 
 
 
 
 
 
 
 
Balance as of March 31, 2018
934

 
(57,321
)
Less current portion
749

 
(13,579
)
Noncurrent portion
$
185

 
$
(43,742
)

Contract assets relate to performance obligations satisfied in advance of scheduled billings. Current contract assets are included in “Other current assets” and noncurrent contract assets are included in “Other long-term assets, net” on the consolidated balance sheet. Contract liabilities relate to payments received in advance of satisfying performance obligations under a contract, which result from contracts with MVCs, contracts with an incentive pricing structure and CIAC payments. Current contract liabilities are included in “Accrued liabilities” and noncurrent contract liabilities are included in “Other long-term liabilities” on the consolidated balance sheet.

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

Remaining Performance Obligations
The following table presents our estimated revenue from contracts with customers for remaining performance obligations that has not yet been recognized, representing our contractually committed revenue as of March 31, 2018 (in thousands of dollars):
2018 (remaining)
 
$
377,456

2019
 
348,414

2020
 
202,526

2021
 
141,957

2022
 
105,769

Thereafter
 
333,881

Total
 
$
1,510,003


Our contractually committed revenue, for purposes of the tabular presentation above, is generally limited to service customer contracts which have fixed pricing and fixed volume terms and conditions, generally including contracts with minimum volume commitment payment obligations.
 
Disaggregation of Revenue
The following table disaggregates our revenues:
 
Three Months Ended March 31,
 
2018
 
2017
 
(Thousands of Dollars)
Pipeline segment:
 
 
 
Crude oil pipelines (excluding lessor revenues)
$
53,437

 
$
36,747

Refined products and ammonia pipelines
83,299

 
84,493

Total pipeline segment revenues from contracts with customers
136,736

 
121,240

Lessor revenues
54

 

Total pipeline segment revenues
136,790

 
121,240

 
 
 
 
Storage segment:
 
 
 
Throughput terminals
20,016

 
20,690

Storage terminals (excluding lessor revenues)
125,350

 
116,960

Total storage segment revenues from contracts with customers
145,366

 
137,650

Lessor revenues
9,962

 
9,781

Total storage segment revenues
155,328

 
147,431

 
 
 
 
Fuels marketing segment revenues from contracts with customers
185,838

 
222,702

 
 
 
 
Consolidation and intersegment eliminations:
(2,075
)
 
(3,943
)
 
 
 
 
Total revenues
$
475,881

 
$
487,430



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

13. NET INCOME PER COMMON UNIT

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

The following table details the calculation of net income per common unit:
 
Three Months Ended March 31,
 
2018
 
2017
 
(Thousands of Dollars, Except Unit and Per Unit Data)
Net income attributable to NuStar Energy L.P.
$
126,133

 
$
57,940

Less: Distributions to preferred limited partners
15,990

 
4,813

Less: Distributions to general partner (including incentive distribution rights)
1,141

 
15,255

Less: Distributions to common limited partners
55,916

 
101,913

Less: Distribution equivalent rights to restricted units
445

 
715

Distributions less than (in excess of) earnings
$
52,641

 
$
(64,756
)
 
 
 
 
Net income attributable to common units:
 
 
 
Distributions to common limited partners
$
55,916

 
$
101,913

Allocation of distributions less than (in excess of) earnings
51,148

 
(63,461
)
Total
$
107,064

 
$
38,452

 
 
 
 
Basic weighted-average common units outstanding
93,181,781

 
78,642,888

 
 
 
 
Basic net income per common unit
$
1.15

 
$
0.49



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

14. STATEMENTS OF CASH FLOWS

Changes in current assets and current liabilities were as follows:
 
Three Months Ended March 31,
 
2018
 
2017
 
(Thousands of Dollars)
Decrease (increase) in current assets:
 
 
 
Accounts receivable
$
19,525

 
$
3,544

Receivable from related party
133

 
237

Inventories
(2,687
)
 
1,658

Other current assets
3,224

 
307

Increase (decrease) in current liabilities:
 
 
 
Accounts payable
(7,681
)
 
(12,154
)
Accrued interest payable
3,552

 
(6,301
)
Accrued liabilities
(6,019
)
 
(21,006
)
Taxes other than income tax
(1,558
)
 
(2,752
)
Income tax payable
2,202

 
(2,675
)
Changes in current assets and current liabilities
$
10,691

 
$
(39,142
)
The above changes in current assets and current liabilities differ from changes between amounts reflected in the applicable consolidated balance sheets due to:
current assets and current liabilities acquired during the period;
the change in the amount accrued for capital expenditures;
the effect of foreign currency translation; and
changes in the fair values of our interest rate swap agreements.

Cash flows related to interest and income taxes were as follows:
 
Three Months Ended March 31,
 
2018
 
2017
 
(Thousands of Dollars)
Cash paid for interest, net of amount capitalized
$
42,549

 
$
42,146

Cash paid for income taxes, net of tax refunds received
$
2,635

 
$
4,828


15. SEGMENT INFORMATION

Our reportable business segments consist of the pipeline, storage and fuels marketing segments. 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, and the terminalling, storage and 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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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,
 
2018
 
2017
 
(Thousands of Dollars)
Revenues:
 
 
 
Pipeline
$
136,790

 
$
121,240

Storage:
 
 
 
Third parties
153,253

 
143,488

Intersegment
2,075

 
3,943

Total storage
155,328

 
147,431

Fuels marketing
185,838

 
222,702

Consolidation and intersegment eliminations
(2,075
)
 
(3,943
)
Total revenues
$
475,881

 
$
487,430

 
 
 
 
Operating income:
 
 
 
Pipeline
$
57,794

 
$
65,028

Storage
56,261

 
53,759

Fuels marketing
6,320

 
5,140

Consolidation and intersegment eliminations
(3
)
 

Total segment operating income
120,372

 
123,927

General and administrative expenses
19,774

 
24,595

Other depreciation and amortization expense
2,118

 
2,193

Total operating income
$
98,480

 
$
97,139


Total assets by reportable segment were as follows:
 
March 31,
2018
 
December 31,
2017
 
(Thousands of Dollars)
Pipeline
$
3,516,435

 
$
3,492,417

Storage
2,761,667

 
2,735,563

Fuels marketing
121,489

 
118,746

Total segment assets
6,399,591

 
6,346,726

Other partnership assets
187,122

 
188,507

Total consolidated assets
$
6,586,713

 
$
6,535,233

 

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

16. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

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

Condensed Consolidating Balance Sheets
March 31, 2018
(Thousands of Dollars)
 
NuStar
Energy
 
NuStar
Logistics
 
NuPOP
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
858

 
$
26

 
$

 
$
14,244

 
$

 
$
15,128

Receivables, net

 
623

 

 
156,718

 

 
157,341

Inventories

 
1,844

 
11,039

 
16,666

 

 
29,549

Other current assets
139

 
13,905

 
3,538

 
8,397

 

 
25,979

Intercompany receivable

 
3,132,310

 

 

 
(3,132,310
)
 

Total current assets
997

 
3,148,708

 
14,577

 
196,025

 
(3,132,310
)
 
227,997

Property, plant and equipment, net

 
1,874,347

 
585,056

 
1,927,821

 

 
4,387,224

Intangible assets, net

 
56,174

 

 
715,449

 

 
771,623

Goodwill

 
149,453

 
170,652

 
774,556

 

 
1,094,661

Investment in wholly owned
subsidiaries
2,881,187

 
19,795

 
1,413,835

 
851,975

 
(5,166,792
)
 

Other long-term assets, net
303

 
70,343

 
27,204

 
7,358

 

 
105,208

Total assets
$
2,882,487

 
$
5,318,820

 
$
2,211,324

 
$
4,473,184

 
$
(8,299,102
)
 
$
6,586,713

Liabilities and Partners’ Equity
 
 
 
 
 
 
 
 
 
 
 
Accounts payable
$
3,309

 
$
19,472

 
$
5,232

 
$
94,027

 
$

 
$
122,040

Short-term debt

 
70,000

 

 

 

 
70,000

Current portion of long-term debt

 
349,973

 

 

 

 
349,973

Accrued interest payable

 
43,921

 

 
53

 

 
43,974

Accrued liabilities
655

 
11,579

 
8,214

 
27,072

 

 
47,520

Taxes other than income tax
206

 
3,906

 
5,246

 
3,393

 

 
12,751

Income tax payable

 
902

 
4

 
5,472

 

 
6,378

Intercompany payable
322,257

 

 
1,326,659

 
1,483,394

 
(3,132,310
)
 

Total current liabilities
326,427

 
499,753

 
1,345,355

 
1,613,411

 
(3,132,310
)
 
652,636

Long-term debt, less current portion

 
3,248,763

 

 
57,330

 

 
3,306,093

Deferred income tax liability

 
1,262

 
12

 
21,758

 

 
23,032

Other long-term liabilities

 
43,854

 
14,191

 
54,850

 

 
112,895

Total partners’ equity
2,556,060

 
1,525,188

 
851,766

 
2,725,835

 
(5,166,792
)
 
2,492,057

Total liabilities and
partners’ equity
$
2,882,487

 
$
5,318,820

 
$
2,211,324

 
$
4,473,184

 
$
(8,299,102
)
 
$
6,586,713










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

Condensed Consolidating Balance Sheets
December 31, 2017
(Thousands of Dollars)
 
NuStar
Energy
 
NuStar
Logistics
 
NuPOP
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
885

 
$
29

 
$

 
$
23,378

 
$

 
$
24,292

Receivables, net

 
280

 

 
176,495

 

 
176,775

Inventories

 
1,686

 
8,611

 
16,560

 

 
26,857

Other current assets
61

 
11,412

 
4,191

 
6,844

 

 
22,508

Intercompany receivable

 
3,112,164

 

 

 
(3,112,164
)
 

Total current assets
946

 
3,125,571

 
12,802

 
223,277

 
(3,112,164
)
 
250,432

Property, plant and equipment, net

 
1,893,720

 
591,070

 
1,816,143

 

 
4,300,933

Intangible assets, net

 
58,530

 

 
725,949

 

 
784,479

Goodwill

 
149,453

 
170,652

 
777,370

 

 
1,097,475

Investment in wholly owned
subsidiaries
2,891,371

 
24,162

 
1,301,717

 
790,882

 
(5,008,132
)
 

Deferred income tax asset

 

 

 
233

 

 
233

Other long-term assets, net
303

 
65,684

 
27,493

 
8,201

 

 
101,681

Total assets
$
2,892,620

 
$
5,317,120

 
$
2,103,734

 
$
4,342,055

 
$
(8,120,296
)
 
$
6,535,233

Liabilities and Partners’ Equity
 
 
 
 
 
 
 
 
 
 
 
Accounts payable
$
4,078

 
$
27,642

 
$
13,160

 
$
101,052

 
$

 
$
145,932

Short-term debt

 
35,000

 

 

 

 
35,000

Current portion of long-term debt

 
349,990

 

 

 

 
349,990

Accrued interest payable

 
40,402

 

 
47

 

 
40,449

Accrued liabilities
1,105

 
17,628

 
9,450

 
33,395

 

 
61,578

Taxes other than income tax
125

 
7,110

 
3,794

 
3,356

 

 
14,385

Income tax payable

 
732

 
4

 
3,436

 

 
4,172

Intercompany payable
322,296

 

 
1,277,691

 
1,512,177

 
(3,112,164
)
 

Total current liabilities
327,604

 
478,504

 
1,304,099

 
1,653,463

 
(3,112,164
)
 
651,506

Long-term debt, less current portion

 
3,201,220

 

 
61,849

 

 
3,263,069

Deferred income tax liability

 
1,262

 
12

 
20,998

 

 
22,272

Other long-term liabilities

 
58,806

 
8,861

 
50,630

 

 
118,297

Total partners’ equity
2,565,016

 
1,577,328

 
790,762

 
2,555,115

 
(5,008,132
)
 
2,480,089

Total liabilities and
partners’ equity
$
2,892,620

 
$
5,317,120

 
$
2,103,734

 
$
4,342,055

 
$
(8,120,296
)
 
$
6,535,233




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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, 2018
(Thousands of Dollars)
 
NuStar
Energy
 
NuStar
Logistics
 
NuPOP
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenues
$

 
$
119,694

 
$
56,274

 
$
300,115

 
$
(202
)
 
$
475,881

Costs and expenses
612

 
72,416

 
35,181

 
269,394

 
(202
)
 
377,401

Operating (loss) income
(612
)
 
47,278

 
21,093

 
30,721

 

 
98,480

Equity in earnings (loss) of subsidiaries
126,713

 
(2,249
)
 
112,003

 
131,639

 
(368,106
)
 

Interest income (expense), net
32

 
(50,026
)
 
(1,571
)
 
3,793

 

 
(47,772
)
Other income, net

 
476

 
115

 
79,161

 

 
79,752

Income (loss) before income tax
expense
126,133

 
(4,521
)
 
131,640

 
245,314

 
(368,106
)
 
130,460

Income tax expense

 
170

 
1

 
4,156

 

 
4,327

Net income (loss)
$
126,133

 
$
(4,691
)
 
$
131,639

 
$
241,158

 
$
(368,106
)
 
$
126,133

 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income
$