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NuStar Energy L.P. - Quarter Report: 2019 June (Form 10-Q)


Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
 (Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
OR
☐
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
(Address of principal executive offices)
78257
(Zip Code)
Registrant’s telephone number, including area code (210) 918-2000
 _______________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common units
 
NS
 
New York Stock Exchange
Series A Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Units
 
NSprA
 
New York Stock Exchange
Series B Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Units
 
NSprB
 
New York Stock Exchange
Series C Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Units
 
NSprC
 
New York Stock Exchange
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 every Interactive Data File required to be submitted 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 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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer
 
x
Accelerated filer
 
☐
 
 
 
 
 
 
Non-accelerated filer
 
☐
Smaller reporting company
 
☐
 
 
 
 
 
 
 
 
 
Emerging growth company
 
☐
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  ☐   No  x
The number of common units outstanding as of July 31, 2019 was 107,763,602.


Table of Contents

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

2

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1.
Financial Statements
NUSTAR ENERGY L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited, Thousands of Dollars, Except Unit Data)
 
June 30,
2019
 
December 31,
2018
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
15,299

 
$
11,529

Accounts receivable, net of allowance for doubtful accounts of $9,452
and $9,412 as of June 30, 2019 and December 31, 2018, respectively
117,688

 
110,417

Inventories
9,454

 
8,434

Prepaid and other current assets
29,591

 
17,374

Assets held for sale
301,529

 
599,347

Total current assets
473,561

 
747,101

Property, plant and equipment, at cost
5,981,860

 
5,627,805

Accumulated depreciation and amortization
(1,961,046
)
 
(1,853,003
)
Property, plant and equipment, net
4,020,814

 
3,774,802

Intangible assets, net
707,344

 
733,056

Goodwill
1,005,853

 
1,005,853

Other long-term assets, net
172,119

 
88,328

Total assets
$
6,379,691

 
$
6,349,140

Liabilities, Mezzanine Equity and Partners’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
128,547

 
$
103,122

Short-term debt and current portion of finance leases
10,087

 
18,500

Accrued interest payable
38,929

 
36,293

Accrued liabilities
69,970

 
74,418

Taxes other than income tax
14,060

 
16,823

Income tax payable
1,920

 
4,445

Liabilities held for sale
68,616

 
69,834

Total current liabilities
332,129

 
323,435

Long-term debt
3,456,461

 
3,111,996

Deferred income tax liability
12,250

 
12,428

Other long-term liabilities
176,951

 
79,558

Total liabilities
3,977,791

 
3,527,417

 
 
 
 
Commitments and contingencies (Note 6)

 

 
 
 
 
Series D preferred limited partners (23,246,650 preferred units outstanding as of
June 30, 2019 and December 31, 2018) (Note 9)
572,597

 
563,992

 
 
 
 
Partners’ equity (Note 10):
 
 
 
Preferred limited partners
 
 
 
Series A (9,060,000 units outstanding as of June 30, 2019 and December 31, 2018)
218,307

 
218,307

Series B (15,400,000 units outstanding as of June 30, 2019 and December 31, 2018)
371,476

 
371,476

Series C (6,900,000 units outstanding as of June 30, 2019 and December 31, 2018)
166,518

 
166,518

Common limited partners (107,763,033 and 107,225,156 common units outstanding
as of June 30, 2019 and December 31, 2018, respectively)
1,140,665

 
1,556,308

Accumulated other comprehensive loss
(67,663
)
 
(54,878
)
Total partners’ equity
1,829,303

 
2,257,731

Total liabilities, mezzanine equity and partners’ equity
$
6,379,691

 
$
6,349,140

See Condensed Notes to Consolidated Financial Statements.

3

Table of Contents

NUSTAR ENERGY L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited, Thousands of Dollars, Except Unit and Per Unit Data)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Revenues:
 
 
 
 
 
 
 
Service revenues
$
282,472

 
$
259,599

 
$
541,499

 
$
507,668

Product sales
89,973

 
129,657

 
178,772

 
258,315

Total revenues
372,445

 
389,256

 
720,271

 
765,983

Costs and expenses:
 
 
 
 
 
 
 
Costs associated with service revenues:
 
 
 
 
 
 
 
Operating expenses (excluding depreciation and amortization expense)
101,095

 
102,241

 
196,506

 
190,320

Depreciation and amortization expense
64,991


61,777

 
129,809

 
121,601

Total costs associated with service revenues
166,086

 
164,018


326,315


311,921

Cost of product sales
86,389


119,939

 
172,571

 
245,089

General and administrative expenses (excluding depreciation and amortization expense)
24,868

 
26,754

 
50,559

 
44,896

Other depreciation and amortization expense
1,819

 
2,158

 
3,938

 
4,197

Total costs and expenses
279,162

 
312,869


553,383


606,103

Operating income
93,283

 
76,387

 
166,888

 
159,880

Interest expense, net
(45,693
)
 
(48,389
)
 
(89,984
)
 
(95,777
)
Other income, net
621

 
1,607

 
1,412

 
2,623

Income from continuing operations before income
tax expense
48,211

 
29,605

 
78,316

 
66,726

Income tax expense
1,296

 
2,696

 
2,478

 
6,584

Income from continuing operations, net of tax
46,915

 
26,909

 
75,838

 
60,142

(Loss) income from discontinued operations, net of tax
(964
)
 
2,490

 
(307,750
)
 
95,390

Net income (loss)
$
45,951

 
$
29,399

 
$
(231,912
)
 
$
155,532

 
 
 
 
 
 
 
 
Basic net income (loss) per common unit (Note 11):
 
 
 
 
 
 
 
Continuing operations
$
0.11

 
$
0.12

 
$
0.05

 
$
0.30

Discontinued operations
(0.01
)
 
0.03

 
(2.86
)
 
1.00

Total net income (loss) per common unit
$
0.10

 
$
0.15

 
$
(2.81
)
 
$
1.30

 
 
 
 
 
 
 
 
Basic weighted-average common units outstanding
107,763,016

 
93,192,238

 
107,647,957

 
93,187,038

 
 
 
 
 
 
 
 
Comprehensive income (loss)
$
37,992

 
$
26,778

 
$
(244,697
)
 
$
173,835

See Condensed Notes to Consolidated Financial Statements.

4

Table of Contents

NUSTAR ENERGY L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, Thousands of Dollars)
 
Six Months Ended June 30,
 
2019
 
2018
Cash Flows from Operating Activities:
 
 
 
Net (loss) income
$
(231,912
)
 
$
155,532

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 
 
 
Depreciation and amortization expense
142,283

 
147,879

Unit-based compensation expense
5,774

 
4,277

Amortization of debt related items
2,643

 
3,965

Gain from sale or disposition of assets
(1,300
)
 
(1,218
)
Asset impairment losses
305,715

 
—

Goodwill impairment loss
31,123

 
—

Gain from insurance recoveries
—

 
(78,756
)
Deferred income tax (benefit) expense
(575
)
 
1,142

Changes in current assets and current liabilities (Note 12)
(36,229
)
 
42,733

Decrease (increase) in other long-term assets
15,190

 
(11,224
)
Increase (decrease) in other long-term liabilities
9,157

 
(20,073
)
Other, net
(975
)
 
(407
)
Net cash provided by operating activities
240,894

 
243,850

Cash Flows from Investing Activities:
 
 
 
Capital expenditures
(319,961
)
 
(248,521
)
Change in accounts payable related to capital expenditures
16,144

 
(19,320
)
Proceeds from sale or disposition of assets
143

 
2,097

Proceeds from insurance recoveries
—

 
78,419

Acquisitions
—

 
(37,502
)
Net cash used in investing activities
(303,674
)
 
(224,827
)
Cash Flows from Financing Activities:
 
 
 
Proceeds from long-term debt borrowings
415,800

 
677,272

Proceeds from short-term debt borrowings
178,500

 
456,000

Proceeds from note offering, net of issuance costs
491,665

 
—

Long-term debt repayments
(616,800
)
 
(905,521
)
Short-term debt repayments
(191,000
)
 
(428,000
)
Proceeds from issuance of Series D preferred units
—

 
400,000

Payment of issuance costs for Series D preferred units
—

 
(29,289
)
Proceeds from issuance of common units
—

 
10,000

Distributions to preferred unitholders
(60,846
)
 
(32,713
)
Distributions to common unitholders and general partner
(129,025
)
 
(172,324
)
Proceeds from termination of interest rate swaps
—

 
8,048

Payment of tax withholding for unit-based compensation
(6,368
)
 
(69
)
Decrease in cash book overdrafts
(4,718
)
 
(436
)
Other, net
(3,451
)
 
(5,518
)
Net cash provided by (used in) financing activities
73,757

 
(22,550
)
Effect of foreign exchange rate changes on cash
261

 
(421
)
Net increase (decrease) in cash, cash equivalents and restricted cash
11,238

 
(3,948
)
Cash, cash equivalents and restricted cash as of the beginning of the period
13,644

 
24,292

Cash, cash equivalents and restricted cash as of the end of the period
$
24,882

 
$
20,344

See Condensed Notes to Consolidated Financial Statements.

5

Table of Contents

NUSTAR ENERGY L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS’ EQUITY AND MEZZANINE EQUITY
Three Months Ended June 30, 2019 and 2018
(Unaudited, Thousands of Dollars)
 
Limited Partners
 
 
 
 
 
 
 
Mezzanine Equity
 
 
 
Preferred
 
Common
 
General
Partner
 
Accumulated
Other
Comprehensive
Loss
 
Total Partners’ Equity
(Note 10)
 
Series D Preferred Limited Partners (Note 9)
 
Total
Balance as of March 31, 2019
$
756,301

 
$
1,192,080

 
$
—

 
$
(59,704
)
 
$
1,888,677

 
$
568,293

 
$
2,456,970

Net income
16,033

 
15,528

 
—

 
—

 
31,561

 
14,390

 
45,951

Other comprehensive loss
—

 
—

 
—

 
(7,959
)
 
(7,959
)
 
—

 
(7,959
)
Distributions to partners:
 
 
 
 
 
 
 
 
 
 
 
 
 
Series A, B and C preferred
(16,033
)
 
—

 
—

 
—

 
(16,033
)
 
—

 
(16,033
)
Common ($0.60 per unit)
—

 
(64,658
)
 
—

 
—

 
(64,658
)
 
—

 
(64,658
)
Series D preferred
—

 
—

 
—

 
—

 
—

 
(14,390
)
 
(14,390
)
Unit-based compensation
—

 
2,146

 
—

 
—

 
2,146

 
—

 
2,146

Series D preferred unit accretion
—

 
(4,446
)
 
—

 
—

 
(4,446
)
 
4,446

 
—

Other
—

 
15

 
—

 
—

 
15

 
(142
)
 
(127
)
Balance as of June 30, 2019
$
756,301

 
$
1,140,665

 
$
—

 
$
(67,663
)
 
$
1,829,303

 
$
572,597

 
$
2,401,900

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of March 31, 2018
$
756,494

 
$
1,772,874

 
$
26,692

 
$
(64,003
)
 
$
2,492,057

 
$
—

 
$
2,492,057

Net income
16,033

 
12,891

 
263

 
—

 
29,187

 
212

 
29,399

Other comprehensive loss
—

 
—

 
—

 
(2,621
)
 
(2,621
)
 
—

 
(2,621
)
Distributions to partners:
 
 
 
 
 
 
 
 
 
 
 
 


Series A, B and C preferred
(16,033
)
 
—

 
—

 
—

 
(16,033
)
 
—

 
(16,033
)
Common ($0.60 per unit)
and general partner
—

 
(55,911
)
 
(1,141
)
 
—

 
(57,052
)
 
—

 
(57,052
)
Series D preferred
—

 
—

 
—

 
—

 
—

 
(212
)
 
(212
)
Issuance of common units, including contribution from general partner
—

 
10,000

 
204

 
—

 
10,204

 
—

 
10,204

Issuance of Series D preferred units
—

 
—

 
—

 
—

 
—

 
370,711

 
370,711

Unit-based compensation
—

 
1,765

 
—

 
—

 
1,765

 
—

 
1,765

Other
(160
)
 
(851
)
 
(19
)
 
—

 
(1,030
)
 
—

 
(1,030
)
Balance as of June 30, 2018
$
756,334

 
$
1,740,768

 
$
25,999

 
$
(66,624
)
 
$
2,456,477

 
$
370,711

 
$
2,827,188

See Condensed Notes to Consolidated Financial Statements.

6

Table of Contents

NUSTAR ENERGY L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS’ EQUITY AND MEZZANINE EQUITY
Six Months Ended June 30, 2019 and 2018
(Unaudited, Thousands of Dollars)
 
Limited Partners
 
 
 
 
 
 
 
Mezzanine Equity
 
 
 
Preferred
 
Common
 
General
Partner
 
Accumulated
Other
Comprehensive
Loss
 
Total Partners’ Equity
(Note 10)
 
Series D Preferred Limited Partners (Note 9)
 
Total
Balance as of January 1, 2019
$
756,301

 
$
1,556,308

 
$
—

 
$
(54,878
)
 
$
2,257,731

 
$
563,992

 
$
2,821,723

Net income (loss)
32,066

 
(292,758
)
 
—

 
—

 
(260,692
)
 
28,780

 
(231,912
)
Other comprehensive loss
—

 
—

 
—

 
(12,785
)
 
(12,785
)
 
—

 
(12,785
)
Distributions to partners:
 
 
 
 
 
 
 
 

 
 
 

Series A, B and C preferred
(32,066
)
 
—

 
—

 
—

 
(32,066
)
 
—

 
(32,066
)
Common ($1.20 per unit)
—

 
(129,025
)
 
—

 
—

 
(129,025
)
 
—

 
(129,025
)
Series D preferred
—

 
—

 
—

 
—

 
—

 
(28,780
)
 
(28,780
)
Unit-based compensation
—

 
15,686

 
—

 
—

 
15,686

 
—

 
15,686

Series D preferred unit accretion
—

 
(8,748
)
 
—

 
—

 
(8,748
)
 
8,748

 
—

Other
—

 
(798
)
 
—

 
—

 
(798
)
 
(143
)
 
(941
)
Balance as of June 30, 2019
$
756,301

 
$
1,140,665

 
$
—

 
$
(67,663
)
 
$
1,829,303

 
$
572,597

 
$
2,401,900

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of January 1, 2018
$
756,603

 
$
1,770,587

 
$
37,826

 
$
(84,927
)
 
$
2,480,089

 
$
—

 
$
2,480,089

Net income
32,023

 
120,831

 
2,466

 
—

 
155,320

 
212

 
155,532

Other comprehensive income
—

 
—

 
—

 
18,303

 
18,303

 
—

 
18,303

Distributions to partners:
 
 
 
 
 
 
 
 

 
 
 


Series A, B and C preferred
(32,023
)
 
—

 
—

 
—

 
(32,023
)
 
—

 
(32,023
)
Common ($1.695 per unit)
and general partner
—

 
(157,945
)
 
(14,379
)
 
—

 
(172,324
)
 
—

 
(172,324
)
Series D preferred
—

 
—

 
—

 
—

 
—

 
(212
)
 
(212
)
Issuance of common units, including contribution from general partner
—

 
10,000

 
204

 
—

 
10,204

 
—

 
10,204

Issuance of Series D preferred units
—

 
—

 
—

 
—

 
—

 
370,711

 
370,711

Unit-based compensation
—

 
3,051

 
—

 
—

 
3,051

 
—

 
3,051

Other
(269
)
 
(5,756
)
 
(118
)
 
—

 
(6,143
)
 
—

 
(6,143
)
Balance as of June 30, 2018
$
756,334

 
$
1,740,768

 
$
25,999

 
$
(66,624
)
 
$
2,456,477

 
$
370,711

 
$
2,827,188

See Condensed Notes to Consolidated Financial Statements.

7

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, 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.

On July 20, 2018, we completed the merger of NuStar GP Holdings, LLC (NuStar GP Holdings or NSH) with a subsidiary of NS. Consequently, NSH, which indirectly owns our general partner, became a wholly owned subsidiary of ours. Under the terms of the merger agreement, NSH unitholders received 0.55 of a common unit representing a limited partner interest in NS in exchange for each NSH unit owned at the effective time of the merger, resulting in approximately 13.4 million incremental NS common units outstanding after the merger.

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
On July 29, 2019, we closed on the sale of the equity interests in our wholly owned subsidiaries that own the St. Eustatius terminal and bunkering operations for approximately $250.0 million, subject to adjustment. Please refer to Note 3 for additional discussion.

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. Operating results for the three and six months ended June 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. 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, 2018.

We have reclassified certain previously reported amounts in the consolidated financial statements and notes to conform to current-period presentation. As further discussed in Note 3, we reclassified certain balances to assets and liabilities held for sale and certain revenues and expenses to discontinued operations. The consolidated statements of cash flows have not been adjusted to separately disclose cash flows related to discontinued operations.

New Accounting Policy
As of June 30, 2019, we have restricted cash representing legally restricted funds that are unavailable for general use totaling $8.7 million, which is included in “Prepaid and other current assets” on the consolidated balance sheet.

2. NEW ACCOUNTING PRONOUNCEMENTS

Securities and Exchange Commission Disclosure Update and Simplification
In August 2018, the Securities and Exchange Commission (SEC) issued final rules regarding disclosure requirements that were redundant, duplicative, overlapping or superseded by other SEC requirements or GAAP. The final rules primarily eliminated or reduced certain disclosure requirements, although they also required some additional disclosures. The guidance became effective on November 5, 2018, with an exception for the new disclosure requirement to present changes in partners’ equity in interim periods, which permits entities to begin disclosing this information in the quarter that begins after the effective date of the final rules. We elected to utilize this exception, and began presenting statements of partners’ equity on an interim basis beginning with the quarter ending March 31, 2019. These final rules did not have an impact on our financial position or results of operations.

8
Table of Contents
NUSTAR ENERGY L.P. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Cloud Computing Arrangements
In August 2018, the Financial Accounting Standards Board (FASB) issued guidance addressing a customer’s accounting for implementation costs incurred in a cloud computing arrangement (CCA) that is considered a service contract. Under the new guidance, implementation costs for a CCA should be evaluated for capitalization using the same approach as implementation costs associated with internal-use software and expensed over the term of the hosting arrangement. The guidance is effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted. Prospective adoption for eligible costs incurred on or after the date of adoption or retrospective adoption are permitted. We are currently evaluating whether we will adopt these provisions early and whether we will elect prospective or retrospective adoption, but we do not expect the guidance to have a material impact on our financial position, results of operations or disclosures.

Disclosures for Defined Benefit Plans
In August 2018, the FASB issued amended guidance that makes minor changes to the disclosure requirements for employers that sponsor defined benefit pension and/or other postretirement benefit plans. The guidance is effective for annual periods beginning after December 15, 2020, with early adoption permitted, using a retrospective approach. 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.

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. We adopted the amended guidance during the first quarter of 2019 and applied the guidance to the goodwill impairment discussed in Note 3.

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 we 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 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 one of two modified retrospective transition methods. We adopted these provisions on January 1, 2019 through a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The transition adjustment related to the adoption was immaterial, and we do not expect the adoption of this guidance to impact the results of our operations going forward. Please refer to Note 7 for further discussion.

3. DISCONTINUED OPERATIONS AND IMPAIRMENTS

On May 9, 2019, we entered into a Share Purchase and Sale Agreement to sell the equity interests in our wholly owned subsidiaries that own the St. Eustatius terminal and bunkering operations (the St. Eustatius Operations), for approximately $250.0 million, subject to adjustment (the St. Eustatius Disposition). The St. Eustatius Disposition included a 14.3 million barrel storage and terminalling facility and related assets on the island of St. Eustatius in the Caribbean Netherlands. We closed the sale on July 29, 2019 and received net proceeds of approximately $234.0 million. We previously reported the terminal operations in our storage segment and the bunkering operations in our fuels marketing segment.

On November 30, 2018, we sold our European operations, which consisted of six liquids storage terminals in the United Kingdom and one facility in Amsterdam and related assets that were previously reported in our storage segment (the European Operations), for approximately $270.0 million (the European Disposition).

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

During the second quarter of 2019, we determined the assets and liabilities associated with the St. Eustatius Operations met the criteria to be classified as held for sale. We also determined the St. Eustatius Operations and the European Operations met the requirements to be reported as discontinued operations since the St. Eustatius Disposition and the European Disposition together represent a strategic shift that will have a major impact on our operations and financial results. These sales are part of our plan to improve our debt metrics and partially fund capital projects to grow our core business in North America. Accordingly, the consolidated balance sheets reflect the assets and liabilities associated with the St. Eustatius Operations as held for sale for all periods presented, and the condensed consolidated statements of comprehensive income reflect the St. Eustatius Operations and the European Operations as discontinued operations for all applicable periods presented.

Discontinued Operations
The following is a reconciliation of the major classes of line items included in “(Loss) income from discontinued operations, net of tax” on the condensed consolidated statements of comprehensive income (loss):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
(Thousands of Dollars)
Revenues
$
92,837

 
$
96,948

 
$
231,480

 
$
196,102

Costs and expenses:
 
 
 
 
 
 
 
Cost of revenues
86,278

 
92,177

 
202,880

 
174,633

Impairment losses
8,398

 
—

 
336,838

 
—

General and administrative expenses (excluding depreciation and amortization expense)
305

 
1,227

 
610

 
2,859

Other depreciation and amortization expense
—

 
93

 
—

 
172

Total costs and expenses
94,981

 
93,497

 
540,328

 
177,664

Operating (loss) income
(2,144
)

3,451


(308,848
)

18,438

Interest income (expense), net
9

 
(547
)
 
32

 
(931
)
Other income (expense), net
1,171

 
(195
)
 
1,167

 
78,541

(Loss) income from discontinued operations before income
tax expense
(964
)

2,709


(307,649
)

96,048

Income tax expense
—

 
219

 
101

 
658

(Loss) income from discontinued operations, net of tax
$
(964
)
 
$
2,490

 
$
(307,750
)
 
$
95,390



The following table presents selected cash flow information associated with our discontinued operations:
 
Six Months Ended June 30,
 
2019
 
2018
 
(Thousands of Dollars)
Capital expenditures
$
(23,635
)
 
$
(82,111
)
 
 
 
 
Significant noncash operating activities:
 
 
 
Depreciation and amortization expense
$
8,536

 
$
22,081

Asset impairment losses
$
305,715

 
$
—

Goodwill impairment loss
$
31,123

 
$
—

Gain from insurance recoveries
$
—

 
$
(78,756
)


Impairments
On January 28, 2019, the U.S. Department of the Treasury’s Office of Foreign Assets Control added Petroleos de Venezuela, S.A. (PDVSA), at the time a customer at our St. Eustatius facility, to its List of Specially Designated Nationals and Blocked Persons (the SDN List). The inclusion of PDVSA on the SDN List required us to wind down our contracts with PDVSA. Prior to winding down such contracts, PDVSA was the St. Eustatius terminal’s largest customer.


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The effect of the sanctions issued against PDVSA, combined with the progression in the sale negotiations that occurred during March 2019, resulted in triggering events that caused us to evaluate the long-lived assets and goodwill associated with the St. Eustatius terminal and bunkering operations for potential impairment.

With respect to the terminal operations long-lived assets, our estimates of future expected cash flows included the possibility of a near-term sale, as well as continuing to operate the terminal. The carrying value of the terminal’s long-lived assets exceeded our estimate of the total expected cash flows, indicating the long-lived assets were potentially impaired. To determine an impairment amount, we estimated the fair value of the long-lived assets for comparison to the carrying amount of those assets. Our estimate of the fair value considered the expected sales price as well as estimates generated from income and market approaches using a market participant’s assumptions. The estimated fair values resulting from the market and income approaches were consistent with the expected sales price. Therefore, we concluded that the estimated sales price, which was less than the carrying amount of the long-lived assets, represented the best estimate of fair value at March 31, 2019, and we recorded a long-lived asset impairment charge of $297.3 million in the first quarter of 2019 to reduce the carrying value of the assets to their estimated fair value. We recorded an additional impairment charge of $8.4 million in the second quarter of 2019, mainly due to additional capital expenditures incurred in the second quarter. Our estimate of the fair value is based on a transaction price in a market that is not active and thus falls within Level 2 of the fair value hierarchy.

With respect to the goodwill in the Statia Bunkering reporting unit, which consists of our bunkering operations at our St. Eustatius terminal facility, we estimated the fair value based on the expected sales price discussed above, which is inclusive of the bunkering operations. As a result, we concluded the goodwill was impaired. Consistent with FASB’s amended goodwill impairment guidance discussed in Note 2, which we adopted in the first quarter of 2019, we measured the goodwill impairment as the difference between the reporting unit’s carrying value and its fair value. Therefore, we recognized a goodwill impairment charge of $31.1 million in the first quarter of 2019 to reduce the goodwill to $0.

The impairment charges are included in “(Loss) income from discontinued operations, net of tax” on the condensed consolidated statements of comprehensive income (loss).

Assets and Liabilities Held for Sale
The following is a reconciliation of the carrying amounts of the major classes of assets and liabilities included in “Assets held for sale” and “Liabilities held for sale” on the consolidated balance sheets:
 
June 30,
2019
 
December 31,
2018
 
(Thousands of Dollars)
Total current assets
$
46,826

 
$
54,404

Property, plant and equipment, net
223,723

 
513,820

Goodwill
—

 
31,123

Other long-term assets, net
30,980

 
—

Assets held for sale
$
301,529

 
$
599,347

 
 
 
 
Total current liabilities
$
44,625

 
$
69,834

Total long-term liabilities
23,991

 
—

Liabilities held for sale
$
68,616

 
$
69,834




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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

4. REVENUE FROM CONTRACTS WITH CUSTOMERS

Contract Assets and Contract Liabilities
The following table provides information about contract assets and contract liabilities from contracts with customers:
 
2019
 
2018
 
Contract Assets
 
Contract Liabilities
 
Contract Assets
 
Contract Liabilities
 
(Thousands of Dollars)
Balances as of January 1:
 
 
 
 
 
 
 
Current portion
$
2,066

 
$
(21,579
)
 
$
1,956

 
$
(13,801
)
Noncurrent portion
539

 
(38,945
)
 
171

 
(46,361
)
Held for sale
—

 
(25,357
)
 
—

 
(302
)
Total
2,605

 
(85,881
)
 
2,127

 
(60,464
)
 
 
 
 
 
 
 
 
Activity:
 
 
 
 
 
 
 
Additions
2,674

 
(24,537
)
 
879

 
(20,820
)
Transfer to accounts receivable
(2,638
)
 
—

 
(2,397
)
 
—

Transfer to revenues, including amounts
reported in discontinued operations
—

 
46,757

 
—

 
28,466

Total
36

 
22,220

 
(1,518
)
 
7,646

 
 
 
 
 
 
 
 
Balances as of June 30:
 
 
 
 
 
 
 
Current portion
1,483

 
(23,688
)
 
327

 
(17,881
)
Noncurrent portion
1,158

 
(39,973
)
 
282

 
(34,669
)
Held for sale
—

 
—

 
—

 
(268
)
Total
$
2,641

 
$
(63,661
)
 
$
609

 
$
(52,818
)


As previously discussed in Note 3, the inclusion of PDVSA on the SDN List prevents us from providing services to PDVSA until such time as these sanctions are lifted or otherwise modified. As a result, in the first quarter of 2019 we accelerated the recognition of revenue totaling $16.3 million, representing the amount remaining from a third quarter 2018 settlement we entered into with PDVSA.

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 June 30, 2019 (in thousands of dollars):
2019 (remaining)
 
$
252,055

2020
 
422,044

2021
 
290,290

2022
 
241,784

2023
 
172,720

Thereafter
 
332,782

Total
 
$
1,711,675



Our contractually committed revenue, for purposes of the tabular presentation above, is generally limited to service customer contracts that have fixed pricing and fixed volume terms and conditions, generally including contracts with payment obligations for take-or-pay minimum volume commitments. The revenue shown above includes $9.4 million relating to the St. Eustatius Operations that were sold on July 29, 2019.


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Disaggregation of Revenues
The following table disaggregates our revenues:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
(Thousands of Dollars)
Pipeline segment:
 
 
 
 
 
 
 
Crude oil pipelines
$
77,293

 
$
60,507

 
$
145,771

 
$
113,944

Refined products and ammonia pipelines
92,534

 
89,769

 
177,640

 
173,068

Total pipeline segment revenues from contracts with customers
169,827

 
150,276


323,411


287,012

Lessor revenues
2,666

 
—

 
5,333

 
54

Total pipeline segment revenues
172,493

 
150,276


328,744


287,066

 
 
 
 
 
 
 
 
Storage segment:
 
 
 
 
 
 
 
Throughput terminals
23,170

 
20,140

 
44,856

 
40,157

Storage terminals
77,039

 
84,718

 
148,660

 
166,159

Total storage segment revenues from contracts with customers
100,209

 
104,858


193,516


206,316

Lessor revenues
10,194

 
9,962

 
20,387

 
19,924

Total storage segment revenues
110,403

 
114,820


213,903


226,240

 
 
 
 
 
 
 
 
Fuels marketing segment:
 
 
 
 
 
 
 
Revenues from contracts with customers
89,549

 
124,293

 
177,628

 
252,951

 
 
 
 
 
 
 
 
Consolidation and intersegment eliminations
—

 
(133
)
 
(4
)
 
(274
)
 
 
 
 
 
 
 
 
Total revenues
$
372,445

 
$
389,256


$
720,271


$
765,983



5. DEBT

Revolving Credit Agreement
As of June 30, 2019, we had $543.0 million outstanding under our $1.4 billion revolving credit agreement (the Revolving Credit Agreement). 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 the second quarter of 2019, our credit rating was downgraded by S&P Global Ratings from BB to BB-, and our outlook was changed from negative to stable by S&P Global Ratings, Moody’s Investor Service Inc. and Fitch, Inc. However, per the terms of the Revolving Credit Agreement, these changes did not impact the interest rate on our Revolving Credit Agreement, which is the only debt arrangement with an interest rate that is subject to adjustment if our debt rating is downgraded (or upgraded) by certain credit rating agencies. As of June 30, 2019, our weighted-average interest rate related to borrowings under the Revolving Credit Agreement was 4.4%.

For the rolling period of four quarters ending June 30, 2019, the consolidated debt coverage ratio (as defined in the Revolving Credit Agreement) could not exceed 5.00-to-1.00 and the consolidated interest coverage ratio (as defined in the Revolving Credit Agreement) must not be less than 1.75-to-1.00. The maximum consolidated debt coverage ratio and minimum consolidated interest coverage ratio requirements may limit the amount we can borrow under the Revolving Credit Agreement to an amount less than the total amount available for borrowing. As of June 30, 2019, we had $853.5 million available for borrowing, and we believe that we are in compliance with the covenants in the Revolving Credit Agreement.

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

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Agreement) and agreements with certain of NuStar Energy’s wholly owned subsidiaries (collectively with the Receivables Financing Agreement, the Securitization Program). On April 29, 2019, we amended the Receivables Financing Agreement to extend the scheduled termination date from September 20, 2020 to September 20, 2021 and to amend certain provisions with respect to receivables related to certain customers. 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.

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 June 30, 2019 was 3.3%. As of June 30, 2019, $100.3 million of our accounts receivable are included in the Securitization Program. The amount of borrowings outstanding under the Receivables Financing Agreement totaled $62.8 million as of June 30, 2019, which is included in “Long-term debt” on the consolidated balance sheet.

Issuance of Debt
On May 22, 2019, NuStar Logistics issued $500.0 million of 6.0% senior notes due June 1, 2026. We received net proceeds of approximately $491.7 million, which we initially used to repay outstanding borrowings under our Revolving Credit Agreement. The interest on the 6.0% senior notes is payable semi-annually in arrears on June 1 and December 1 of each year, beginning on December 1, 2019. The 6.0% senior notes do not have sinking fund requirements. These notes rank equally with existing senior unsecured indebtedness and senior to existing subordinated indebtedness of NuStar Logistics. The 6.0% senior notes contain restrictions on NuStar Logistics’ ability to incur secured indebtedness unless the same security is also provided for the benefit of holders of the senior notes. In addition, the senior notes limit NuStar Logistics’ ability to incur indebtedness secured by certain liens, engage in certain sale-leaseback transactions and engage in certain consolidations, mergers or asset sales. The 6.0% senior notes are fully and unconditionally guaranteed by NuStar Energy and NuPOP.

At the option of NuStar Logistics, the 6.0% senior notes may be redeemed in whole or in part at any time at a redemption price, plus accrued and unpaid interest to the redemption date. If we undergo a change of control, as defined in the supplemental indenture, each holder of the notes may require us to repurchase all or a portion of its notes at a price equal to 101% of the principal amount of the notes repurchased, plus any accrued and unpaid interest to the date of repurchase.

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 $2.8 million for contingent losses as of June 30, 2019 and December 31, 2018. 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. LEASE ASSETS AND LIABILITIES

Transition
On January 1, 2019, we adopted Accounting Standards Codification Topic 842, “Leases” (ASC Topic 842) using the modified retrospective method. Results for reporting periods beginning after January 1, 2019 are presented under ASC Topic 842. In accordance with the modified retrospective approach, prior period amounts were not adjusted and are reported under ASC Topic 840, “Leases.” As a result of the adoption of ASC Topic 842, we recorded right-of-use assets and lease liabilities of approximately $207.0 million and $192.0 million, respectively, as of January 1, 2019. The adoption of ASC Topic 842 had an immaterial impact on our results of operations and cash flows.

We elected the following practical expedients permitted under the transition guidance within the new standard:
•
the package of practical expedients, which, among other things, allowed us to carry forward historical lease classification;
•
the practical expedient specifically related to land easements, which, among other things, allowed us to carry forward our historical accounting treatment for existing land easement agreements;

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

•
the lessee practical expedient to combine lease and non-lease components for all of our asset classes except the other pipeline and terminal equipment asset class; and
•
the lessor practical expedient to combine lease and non-lease components and to account for the transaction based on the predominant component (i.e., ASC Topic 842 or ASC Topic 606, “Revenue from Contracts with Customers”). We apply this expedient to certain contracts in which we agree to provide both storage capacity and optional services to customers.

We record all leases on our consolidated balance sheet except for those leases with an initial term of 12 months or less, which are expensed on a straight-line basis over the lease term. We use judgment in determining the reasonably certain lease term and consider factors such as the nature and utility of the leased asset, as well as the importance of the leased asset to our operations. We calculate the present value of our lease liabilities based upon our incremental borrowing rate unless the rate implicit in the lease is readily determinable.

Lessee Arrangements
Our operating leases consist primarily of leases for tugs and barges utilized at the St. Eustatius facility for bunker fuel sales and land and dock leases at various terminal facilities. Tug and barge leases have remaining terms of 1 year to 9 years and include options to extend up to 10 years, and land and dock leases have remaining terms generally ranging from 3 years to 17 years and include options to extend up to 15 years. We are reasonably certain to exercise options to extend our land and dock leases.

The primary component of our finance lease portfolio is a dock at a terminal facility, which includes a commitment for minimum dockage and wharfage throughput volumes. The dock lease has a remaining initial term of 2 years and four additional five-year renewal periods, all of which we are reasonably certain to exercise. We historically accounted for the dock lease under legacy build-to-suit accounting guidance, which was eliminated by ASC Topic 842.

Certain of our leases are subject to variable payment arrangements, the most notable of which include:
•
dockage and wharfage charges, which are based on volumes moved over leased docks and are included in our calculation of our lease payments based on minimum throughput volume requirements. We recognize charges on excess throughput volumes in profit or loss in the period in which the obligation for those payments is incurred; and
•
consumer price index adjustments, which are measured and included in the calculation of our lease payments based on the consumer price index at the adoption date or, after adoption, at the commencement date. We recognize changes in lease payments as a result of changes in the consumer price index in profit or loss in the period in which those payments are made.

As of June 30, 2019, right-of-use assets and lease liabilities included in our consolidated balance sheet were as follows:
 
 
Balance Sheet Location
 
June 30, 2019
 
 
 
 
(Thousands of Dollars)
Right-of-Use Assets:
 
 
 
 
Operating
 
Other long-term assets, net
 
$
86,414

Operating
 
Assets held for sale
 
$
30,980

Finance
 
Property, plant and equipment, net of accumulated
amortization of $1,741
 
$
73,982

 
 
 
 
 
Lease Liabilities:
 
 
 
 
Operating:
 
 
 
 
Current
 
Accrued liabilities
 
$
11,832

Current
 
Liabilities held for sale
 
31,681

Noncurrent
 
Other long-term liabilities
 
73,723

Total operating lease liabilities
 
 
 
$
117,236

Finance:
 
 
 
 
Current
 
Short-term debt and current portion of finance leases
 
$
4,087

Noncurrent
 
Long-term debt
 
55,241

Total finance lease liabilities
 
 
 
$
59,328




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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

As of June 30, 2019, maturities of our operating and finance lease liabilities were as follows:
 
 
Operating Leases
 
Finance Leases
 
 
(Thousands of Dollars)
2019 (remaining)
 
$
13,042

 
$
3,022

2020
 
17,053

 
6,044

2021
 
13,180

 
4,594

2022
 
12,622

 
3,939

2023
 
11,654

 
3,896

Thereafter
 
79,789

 
63,281

Total lease payments
 
$
147,340

 
$
84,776

Less: Interest
 
30,104

 
25,448

Present value of lease liabilities
 
$
117,236

 
$
59,328



Costs incurred for leases were as follows:
 
 
Three Months Ended June 30, 2019
 
Six Months Ended June 30, 2019
 
 
(Thousands of Dollars)
Operating lease cost
 
$
9,477

 
$
18,941

Finance lease cost:
 
 
 
 
Amortization of right-of-use assets
 
900

 
1,741

Interest expense on lease liability
 
550

 
1,099

Short-term lease cost
 
5,609

 
9,923

Variable lease cost
 
977

 
1,788

Total lease cost
 
$
17,513

 
$
33,492



The table below presents additional information regarding our leases:
 
 
Operating Leases
 
Finance Leases
 
 
(Thousands of Dollars, Except Term and Rate Data)
For the six months ended June 30, 2019:
 
 
 
 
Cash outflows from operating activities
 
$
18,710

 
$
916

Cash outflows from financing activities
 

 
$
1,569

Right-of-use assets obtained in exchange for lease liabilities
 
$
1,352

 
$
1,452

As of June 30, 2019:
 
 
 
 
Weighted-average remaining lease term (in years)
 
13

 
22

Weighted-average discount rate
 
3.6
%
 
3.7
%


Lessor Arrangements
We have entered into certain revenue arrangements where we are considered to be the lessor. Under the largest of these arrangements, we lease certain of our storage tanks in exchange for a fixed fee, subject to an annual consumer price index adjustment. The operating leases commenced on January 1, 2017, and have initial terms of 10 years with successive automatic renewal terms. We recognized lease revenues from these leases of $20.4 million for the six months ended June 30, 2019, which are included in “Service revenues” in the consolidated statements of income. As of June 30, 2019, we expect to receive minimum lease payments totaling $293.0 million, based upon the consumer price index as of the adoption date. We will recognize these payments ratably over the remaining initial lease term. As of June 30, 2019, the cost and accumulated depreciation of lease storage assets, which are included in our “Pipeline, storage and terminals” asset class within property, plant and equipment and have an estimated useful life of 30 years, total $233.4 million and $117.3 million, respectively.


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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

8. DERIVATIVES AND FAIR VALUE MEASUREMENTS

Derivative Instruments
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. Derivative financial instruments associated with commodity price risk with respect to our petroleum product inventories and related firm commitments to purchase and/or sell such inventories were not material for any periods presented.

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 a forecasted debt issuance in 2020. We entered into these swaps in order to hedge the risk of fluctuations in the required 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 loss” (AOCI), and the amount in AOCI will be recognized in “Interest expense, net” as the forecasted interest payments occur or if the interest payments are probable not to occur. As of June 30, 2019 and December 31, 2018, the aggregate notional amount of forward-starting interest rate swaps totaled $250.0 million.

The fair values of our interest rate swaps included in our consolidated balance sheets were as follows:
 
 
Asset Derivatives
 
Liability Derivatives
Balance Sheet Location
 
June 30,
2019
 
December 31,
2018
 
June 30,
2019
 
December 31,
2018
 
 
(Thousands of Dollars)
Other long-term assets, net
 
$
—

 
$
627

 
$
—

 
$
—

Other long-term liabilities
 
$
—

 
$
—

 
$
(16,716
)
 
$
(751
)


Our interest rate swaps had the following impact on earnings:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
(Thousands of Dollars)
 
 
 
 
(Loss) gain recognized in other comprehensive income (loss) on derivative
$
(9,784
)
 
$
5,106

 
$
(16,592
)
 
$
22,527

Loss reclassified from AOCI into interest expense, net
$
(1,005
)
 
$
(1,162
)
 
$
(2,083
)
 
$
(2,552
)


As of June 30, 2019, we expect to reclassify a loss of $3.0 million to “Interest expense, net” within the next twelve months associated with unwound forward-starting interest rate swaps.

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. 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 interest rate swaps in Level 2 of the fair value hierarchy.

Non-recurring Fair Value Measurements. Please refer to Note 3 for a discussion of the non-recurring fair value measurement associated with the impairment of long-lived assets related to our St. Eustatius terminal.


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

Fair Value of Financial Instruments
We recognize cash equivalents, receivables, payables and debt in our consolidated balance sheets at their carrying amounts. The fair values of these financial instruments, except for long-term debt other than finance leases, approximate their carrying amounts. The estimated fair values and carrying amounts of long-term debt, excluding finance leases, were as follows:
 
June 30, 2019
 
December 31, 2018
 
(Thousands of Dollars)
Fair value
$
3,473,806

 
$
3,056,704

Carrying amount
$
3,401,220

 
$
3,111,996



We have 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. With regard to our other debt, for which a quoted market price is not available, we have 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.

9. SERIES D CUMULATIVE CONVERTIBLE PREFERRED UNITS

Distributions on the Series D Cumulative Convertible Preferred Units (Series D Preferred Units) are payable out of any legally available funds, accrue and are cumulative from the original issuance dates, and are payable on the 15th day (or next business day) of each of March, June, September and December, beginning September 17, 2018 to holders of record on the first business day of each payment month. The distribution rate on the Series D Preferred Units is: (i) 9.75% per annum (or $0.619 per unit per distribution period) for the first two years; (ii) 10.75% per annum (or $0.682 per unit per distribution period) for years three through five; and (iii) the greater of 13.75% per annum (or $0.872 per unit per distribution period) or the distribution per common unit thereafter. While the Series D Preferred Units are outstanding, the Partnership will be prohibited from paying distributions on any junior securities, including the common units, unless full cumulative distributions on the Series D Preferred Units (and any parity securities) have been, or contemporaneously are being, paid or set aside for payment through the most recent Series D Preferred Unit distribution payment date. Any Series D Preferred Unit distributions in excess of $0.635 per unit may be paid, in the Partnership’s sole discretion, in additional Series D Preferred Units, with the remainder paid in cash.

In July 2019, our board of directors declared distributions of $0.619 per Series D Preferred Unit to be paid on September 16, 2019.

In July 2018, our board of directors declared an initial distribution of $0.525 per Series D Preferred Unit issued on June 29, 2018 and an initial distribution of $0.431 per Series D Preferred Unit issued on July 13, 2018, which were both paid on September 17, 2018.

10. PARTNERS' EQUITY

Series A, B and C Preferred Units
We allocate net income to our 8.50% Series A, 7.625% Series B and 9.00% Series C Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Units (collectively, the Series A, B and C Preferred Units) based on their respective rights to receive distributions earned during the period. Distributions on our Series A, B and C Preferred Units are payable out of any legally available funds, accrue and are cumulative from the original issuance dates, and are payable on the 15th day (or next business day) of each of March, June, September and December of each year to holders of record on the first business day of each payment month as follows (until the distribution rate changes to a floating rate):
Units
 
Fixed Distribution Rate Per Unit Per Quarter
 
Fixed Distribution
Per Quarter
 
Date at Which Distribution
Rate Becomes Floating
 
 
 
 
(Thousands of Dollars)
 
 
Series A Preferred Units
 
$
0.53125

 
$
4,813

 
December 15, 2021
Series B Preferred Units
 
$
0.47657

 
$
7,339

 
June 15, 2022
Series C Preferred Units
 
$
0.56250

 
$
3,881

 
December 15, 2022


In July 2019, our board of directors declared distributions with respect to the Series A, B and C Preferred Units to be paid on September 16, 2019.


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

Common Limited Partners
We make quarterly distributions to common unitholders of 100% of our “Available Cash,” generally defined as cash receipts less cash disbursements, including distributions to our 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 our preferred units.

The following table summarizes information about quarterly cash distributions declared for our common limited partners:
Quarter Ended
 
Cash
Distributions
Per Unit
 
Total Cash
Distributions
 
Record Date
 
Payment Date
 
 
 
 
(Thousands of Dollars)
 
 
 
 
June 30, 2019
 
$
0.60

 
$
64,658

 
August 7, 2019
 
August 13, 2019
March 31, 2019
 
$
0.60

 
$
64,690

 
May 8, 2019
 
May 14, 2019


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, 2019
$
(47,299
)
 
$
(893
)
 
$
(6,686
)
 
$
(54,878
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Other comprehensive income (loss) before reclassification adjustments
2,868

 
(16,592
)
 
—

 
(13,724
)
Net gain on pension costs reclassified into other income, net
—

 
—

 
(1,157
)
 
(1,157
)
Net loss on cash flow hedges reclassified into interest
expense, net
—

 
2,083

 
—

 
2,083

Other
—

 
—

 
13

 
13

Other comprehensive income (loss)
2,868

 
(14,509
)
 
(1,144
)
 
(12,785
)
Balance as of June 30, 2019
$
(44,431
)
 
$
(15,402
)
 
$
(7,830
)
 
$
(67,663
)


11. NET INCOME (LOSS) PER COMMON UNIT

Basic net income (loss) 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 restricted units awarded under our long-term incentive plans. We compute basic net income (loss) per common unit by dividing net (loss) income attributable to common units by the weighted-average number of common units outstanding during the period.

Diluted net income (loss) per common unit is computed by dividing net income (loss) attributable to common units by the sum of (i) the weighted average number of common units outstanding during the period and (ii) the effect of dilutive potential common units outstanding during the period. Dilutive potential common units may include contingently issuable performance unit awards and the Series D Preferred Units.

The Series D Preferred Units are convertible into common units at the option of the holder at any time on or after June 29, 2028. As such, we calculated the dilutive effect of the Series D Preferred Units using the if-converted method. The effect of the assumed conversion of the Series D Preferred Units outstanding as of the end of each period presented was antidilutive; therefore, we did not include such conversion in the computation of diluted net income (loss) per common unit.


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

The following table details the calculation of net income (loss) per common unit:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
(Thousands of Dollars, Except Unit and Per Unit Data)
Net income (loss)
$
45,951

 
$
29,399

 
$
(231,912
)
 
$
155,532

Distributions to preferred limited partners
(30,423
)
 
(16,245
)
 
(60,846
)
 
(32,235
)
Distributions to general partner
—

 
—

 
—

 
(1,141
)
Distributions to common limited partners
(64,658
)
 
(64,205
)
 
(129,348
)
 
(120,121
)
Distribution equivalent rights to restricted units
(642
)
 
(480
)
 
(1,285
)
 
(925
)
Distributions (in excess of) less than income (loss)
$
(49,772
)

$
(51,531
)

$
(423,391
)

$
1,110

 
 
 
 
 
 
 
 
Distributions to common limited partners
$
64,658

 
$
64,205

 
$
129,348

 
$
120,121

Allocation of distributions (in excess of) less than income (loss)
(49,772
)

(50,500
)

(423,391
)

1,079

Series D Preferred Unit accretion
(4,446
)
 
—

 
(8,748
)
 
—

Net income (loss) attributable to common units
$
10,440

 
$
13,705

 
$
(302,791
)
 
$
121,200

 
 
 
 
 
 
 
 
Basic weighted-average common units outstanding
107,763,016

 
93,192,238

 
107,647,957

 
93,187,038

 
 
 
 
 
 
 
 
Basic net income (loss) per common unit
$
0.10

 
$
0.15

 
$
(2.81
)
 
$
1.30



12. STATEMENTS OF CASH FLOWS

Changes in current assets and current liabilities were as follows:
 
Six Months Ended June 30,
 
2019
 
2018
 
(Thousands of Dollars)
Decrease (increase) in current assets:
 
 
 
Accounts receivable
$
(3,146
)
 
$
34,518

Receivable from related party
—

 
130

Inventories
1,551

 
(1,233
)
Other current assets
(4,075
)
 
(2,494
)
Increase (decrease) in current liabilities:
 
 
 
Accounts payable
7,704

 
5,149

Accrued interest payable
2,636

 
(4,325
)
Accrued liabilities
(34,814
)
 
10,476

Taxes other than income tax
(3,556
)
 
1,329

Income tax payable
(2,529
)
 
(817
)
Changes in current assets and current liabilities
$
(36,229
)
 
$
42,733


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;
•
the effect of foreign currency translation;
•
changes in the fair values of our interest rate swap agreements;
•
the recognition of lease liabilities upon the adoption of ASC Topic 842; and
•
the reclassification of certain assets and liabilities to “Assets held for sale” and “Liabilities held for sale” on the consolidated balance sheets (please refer to Note 3 for additional discussion).

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

Cash flows related to interest and income taxes were as follows:
 
Six Months Ended June 30,
 
2019
 
2018
 
(Thousands of Dollars)
Cash paid for interest, net of amount capitalized
$
84,677

 
$
96,761

Cash paid for income taxes, net of tax refunds received
$
6,557

 
$
7,973



As of June 30, 2019, restricted cash is included in "Prepaid and other current assets" on the consolidated balance sheet. “Cash, cash equivalents and restricted cash” on the consolidated statements of cash flows were included in the consolidated balance sheets as follows:
 
June 30,
2019
 
December 31,
2018
 
(Thousands of Dollars)
Cash and cash equivalents
$
15,299

 
$
11,529

Prepaid and other current assets
8,744

 
—

Assets held for sale
839

 
2,115

Cash, cash equivalents and restricted cash
$
24,882

 
$
13,644



13. EMPLOYEE BENEFIT PLANS AND UNIT-BASED COMPENSATION

Employee Benefit Plans
NuStar’s 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. NuStar’s 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.

Our other postretirement benefit plans include a contributory medical benefits plan for U.S. employees who retired prior to April 1, 2014, and for employees who retire on or after April 1, 2014, a partial reimbursement for eligible third-party health care premiums.


21
Table of Contents
NUSTAR ENERGY L.P. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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
 
2019
 
2018
 
2019
 
2018
 
(Thousands of Dollars)
For the three months ended June 30:
 
 
 
 
 
 
 
Service cost
$
2,387

 
$
2,405

 
$
108

 
$
126

Interest cost
1,370

 
1,206

 
113

 
107

Expected return on assets
(2,003
)
 
(1,854
)
 
—

 
—

Amortization of prior service credit
(514
)
 
(514
)
 
(286
)
 
(286
)
Amortization of net loss
212

 
543

 
10

 
53

Net periodic benefit cost (income)
$
1,452

 
$
1,786

 
$
(55
)
 
$
—

 
 
 
 
 
 
 
 
For the six months ended June 30:
 
 
 
 
 
 
 
Service cost
$
4,775

 
$
4,811

 
$
215

 
$
252

Interest cost
2,740

 
2,412

 
227

 
215

Expected return on assets
(4,007
)
 
(3,709
)
 
—

 
—

Amortization of prior service credit
(1,028
)
 
(1,028
)
 
(573
)
 
(573
)
Amortization of net loss
423

 
1,087

 
21

 
107

Net periodic benefit cost (income)
$
2,903

 
$
3,573

 
$
(110
)
 
$
1



The service cost component of net periodic benefit cost (income) is presented in the same income statement line items as other current employee compensation costs, but the remaining components of net periodic benefit cost (income) are reported on the consolidated statements of comprehensive income in “Other income, net.”

Unit-Based Compensation
In April 2019, our common unitholders approved the 2019 Long-Term Incentive Plan (2019 LTIP) for eligible employees, consultants and directors of NuStar Energy L.P., and of NuStar GP, LLC, and their respective affiliates who perform services for us and our subsidiaries. The 2019 LTIP allows for the awarding of (i) options; (ii) restricted units; (iii) distribution equivalent rights; (iv) performance cash; (v) performance units; and (vi) unit awards. The 2019 LTIP permits the granting of awards totaling an aggregate of 2,500,000 common units, subject to adjustment as provided in the 2019 LTIP. The 2019 LTIP generally will be administered by the compensation committee of our board of directors.

14. 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.

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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 June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
(Thousands of Dollars)
Revenues:
 
 
 
 
 
 
 
Pipeline
$
172,493

 
$
150,276

 
$
328,744

 
$
287,066

Storage:
 
 
 
 
 
 
 
Third parties
110,403

 
114,687

 
213,899

 
225,966

Intersegment
—

 
133

 
4

 
274

Total storage
110,403

 
114,820

 
213,903

 
226,240

Fuels marketing
89,549

 
124,293

 
177,628

 
252,951

Consolidation and intersegment eliminations
—

 
(133
)
 
(4
)
 
(274
)
Total revenues
$
372,445

 
$
389,256

 
$
720,271

 
$
765,983

 
 
 
 
 
 
 
 
Operating income:
 
 
 
 
 
 
 
Pipeline
$
78,712

 
$
62,979

 
$
146,016

 
$
120,773

Storage
38,098

 
38,781

 
70,316

 
81,868

Fuels marketing
3,160

 
3,536

 
5,085

 
6,332

Consolidation and intersegment eliminations
—

 
3

 
(32
)
 
—

Total segment operating income
119,970

 
105,299

 
221,385

 
208,973

General and administrative expenses
24,868

 
26,754

 
50,559

 
44,896

Other depreciation and amortization expense
1,819

 
2,158

 
3,938

 
4,197

Total operating income
$
93,283

 
$
76,387

 
$
166,888

 
$
159,880



Total assets by reportable segment were as follows:
 
June 30,
2019
 
December 31,
2018
 
(Thousands of Dollars)
Pipeline
$
3,824,047

 
$
3,637,226

Storage
2,028,427

 
1,902,764

Fuels marketing
39,893

 
37,252

Total segment assets
5,892,367

 
5,577,242

Assets held for sale
301,529

 
599,347

Other partnership assets
185,795

 
172,551

Total consolidated assets
$
6,379,691

 
$
6,349,140


 

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

15. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

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

Condensed Consolidating Balance Sheets
June 30, 2019
(Thousands of Dollars)
 
NuStar
Energy
 
NuStar
Logistics
 
NuPOP
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
486

 
$
332

 
$
—

 
$
14,481

 
$
—

 
$
15,299

Receivables, net
—

 
1,692

 
—

 
115,996

 
—

 
117,688

Inventories
—

 
1,924

 
3,169

 
4,361

 
—

 
9,454

Prepaid and other current assets
110

 
25,619

 
1,059

 
2,803

 
—

 
29,591

Assets held for sale
—

 
—

 
—

 
301,529

 
—

 
301,529

Intercompany receivable
—

 
1,462,583

 
—

 
397,269

 
(1,859,852
)
 
—

Total current assets
596

 
1,492,150

 
4,228

 
836,439

 
(1,859,852
)
 
473,561

Property, plant and equipment, net
—

 
2,023,613

 
609,798

 
1,387,403

 
—

 
4,020,814

Intangible assets, net
—

 
44,395

 
—

 
662,949

 
—

 
707,344

Goodwill
—

 
149,453

 
170,652

 
685,748

 
—

 
1,005,853

Investment in wholly owned
subsidiaries
2,934,489

 
1,713,256

 
1,135,618

 
514,958

 
(6,298,321
)
 
—

Other long-term assets, net
57

 
103,408

 
32,557

 
36,097

 
—

 
172,119

Total assets
$
2,935,142

 
$
5,526,275

 
$
1,952,853

 
$
4,123,594

 
$
(8,158,173
)
 
$
6,379,691

Liabilities, Mezzanine Equity and Partners’ Equity
 
 
 
 
 
 
 
 
 
 
 
Accounts payable
$
5,586

 
$
51,193

 
$
6,287

 
$
65,481

 
$
—

 
$
128,547

Short-term debt and current portion of finance leases
—

 
9,940

 
131

 
16

 
—

 
10,087

Accrued interest payable
—

 
38,891

 
—

 
38

 
—

 
38,929

Accrued liabilities
866

 
28,558

 
8,942

 
31,604

 
—

 
69,970

Taxes other than income tax
8

 
6,090

 
5,955

 
2,007

 
—

 
14,060

Income tax payable
—

 
217

 
1

 
1,702

 
—

 
1,920

Liabilities held for sale
—

 
—

 
—

 
68,616

 
—

 
68,616

Intercompany payable
459,119

 
—

 
1,400,733

 
—

 
(1,859,852
)
 
—

Total current liabilities
465,579

 
134,889

 
1,422,049

 
169,464

 
(1,859,852
)
 
332,129

Long-term debt
—

 
3,393,447

 
512

 
62,502

 
—

 
3,456,461

Deferred income tax liability
—

 
1,675

 
9

 
10,566

 
—

 
12,250

Other long-term liabilities
—

 
88,772

 
15,471

 
72,708

 
—

 
176,951

Series D preferred units
572,597

 
—

 
—

 
—

 
—

 
572,597

Total partners’ equity
1,896,966

 
1,907,492

 
514,812

 
3,808,354

 
(6,298,321
)
 
1,829,303

Total liabilities, mezzanine equity and partners’ equity
$
2,935,142

 
$
5,526,275

 
$
1,952,853

 
$
4,123,594

 
$
(8,158,173
)
 
$
6,379,691






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

Condensed Consolidating Balance Sheets
December 31, 2018
(Thousands of Dollars)
 
NuStar
Energy
 
NuStar
Logistics
 
NuPOP
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
1,255

 
$
51

 
$
—

 
$
10,223

 
$
—

 
$
11,529

Receivables, net
—

 
2,212

 
—

 
108,205

 
—

 
110,417

Inventories
—

 
1,741

 
5,237

 
1,456

 
—

 
8,434

Prepaid and other current assets
61

 
14,422

 
908

 
1,983

 
—

 
17,374

Assets held for sale
—

 
—

 
—

 
599,347

 
—

 
599,347

Intercompany receivable
—

 
1,327,833

 
—

 
500,583

 
(1,828,416
)
 
—

Total current assets
1,316

 
1,346,259

 
6,145

 
1,221,797

 
(1,828,416
)
 
747,101

Property, plant and equipment, net
—

 
1,858,264

 
615,549

 
1,300,989

 
—

 
3,774,802

Intangible assets, net
—

 
49,107

 
—

 
683,949

 
—

 
733,056

Goodwill
—

 
149,453

 
170,652

 
685,748

 
—

 
1,005,853

Investment in wholly owned
subsidiaries
3,355,636

 
1,750,256

 
1,425,283

 
857,485

 
(7,388,660
)
 
—

Other long-term assets, net
304

 
54,429

 
26,716

 
6,879

 
—

 
88,328

Total assets
$
3,357,256

 
$
5,207,768

 
$
2,244,345

 
$
4,756,847

 
$
(9,217,076
)
 
$
6,349,140

Liabilities, Mezzanine Equity and Partners’ Equity
 
 
 
 
 
 
 
 
 
 
 
Accounts payable
$
6,460

 
$
39,680

 
$
6,331

 
$
50,651

 
$
—

 
$
103,122

Short-term debt
—

 
18,500

 
—

 
—

 
—

 
18,500

Accrued interest payable
—

 
36,253

 
—

 
40

 
—

 
36,293

Accrued liabilities
1,280

 
24,858

 
8,082

 
40,198

 
—

 
74,418

Taxes other than income tax
125

 
7,285

 
4,718

 
4,695

 
—

 
16,823

Income tax payable
—

 
457

 
2

 
3,986

 
—

 
4,445

Liabilities held for sale
—

 
—

 
—

 
69,834

 
—

 
69,834

Intercompany payable
472,790

 
—

 
1,355,626

 
—

 
(1,828,416
)
 
—

Total current liabilities
480,655

 
127,033

 
1,374,759

 
169,404

 
(1,828,416
)
 
323,435

Long-term debt
—

 
3,050,531

 
—

 
61,465

 
—

 
3,111,996

Deferred income tax liability
—

 
1,675

 
9

 
10,744

 
—

 
12,428

Other long-term liabilities
—

 
28,392

 
12,348

 
38,818

 
—

 
79,558

Series D preferred units
563,992

 
—

 
—

 
—

 
—

 
563,992

Total partners’ equity
2,312,609

 
2,000,137

 
857,229

 
4,476,416

 
(7,388,660
)
 
2,257,731

Total liabilities, mezzanine equity and partners’ equity
$
3,357,256

 
$
5,207,768

 
$
2,244,345

 
$
4,756,847

 
$
(9,217,076
)
 
$
6,349,140





25
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 June 30, 2019
(Thousands of Dollars)
 
NuStar
Energy
 
NuStar
Logistics
 
NuPOP
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenues
$
—

 
$
130,136

 
$
64,452

 
$
178,042

 
$
(185
)
 
$
372,445

Costs and expenses
699

 
83,029

 
41,235

 
154,384

 
(185
)
 
279,162

Operating (loss) income
(699
)
 
47,107

 
23,217

 
23,658

 
—

 
93,283

Equity in earnings of subsidiaries
47,499

 
10,990

 
13,785

 
35,339

 
(107,613
)
 
—

Interest income (expense), net
117

 
(47,016
)
 
(1,840
)
 
3,046

 
—

 
(45,693
)
Other income (expense), net
—

 
743

 
178

 
(300
)
 
—

 
621

Income from continuing operations before income tax expense (benefit)
46,917

 
11,824

 
35,340

 
61,743

 
(107,613
)
 
48,211

Income tax expense (benefit)
2

 
(469
)
 
1

 
1,762

 
—

 
1,296

Income from continuing
operations, net of tax
46,915

 
12,293

 
35,339

 
59,981

 
(107,613
)
 
46,915

(Loss) income from discontinued
operations, net of tax (a)
(964
)
 
7,912

 
(8,877
)
 
(17,752
)
 
18,717

 
(964
)
Net income
$
45,951

 
$
20,205

 
$
26,462

 
$
42,229

 
$
(88,896
)
 
$
45,951

 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income
$
45,951

 
$
11,426

 
$
26,462

 
$
43,049

 
$
(88,896
)
 
$
37,992

(a) Includes equity in earnings (loss) of subsidiaries related to discontinued operations.

Condensed Consolidating Statements of Comprehensive Income (Loss)
For the Three Months Ended June 30, 2018
(Thousands of Dollars)
 
NuStar
Energy
 
NuStar
Logistics
 
NuPOP
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenues
$
—

 
$
117,862

 
$
66,505

 
$
205,036

 
$
(147
)
 
$
389,256

Costs and expenses
538

 
86,588

 
42,324

 
183,566

 
(147
)
 
312,869

Operating (loss) income
(538
)
 
31,274

 
24,181

 
21,470

 
—

 
76,387

Equity in earnings of subsidiaries
27,410

 
1,692

 
20,655

 
43,183

 
(92,940
)
 
—

Interest income (expense), net
37

 
(50,357
)
 
(1,724
)
 
3,655

 
—

 
(48,389
)
Other income (expense), net
—

 
1,848

 
73

 
(314
)
 
—

 
1,607

Income (loss) from continuing operations before income tax expense
26,909

 
(15,543
)
 
43,185

 
67,994

 
(92,940
)
 
29,605

Income tax expense
—

 
61

 
—

 
2,635

 
—

 
2,696

Income (loss) from continuing
operations, net of tax
26,909

 
(15,604
)
 
43,185

 
65,359

 
(92,940
)
 
26,909

Income from discontinued
operations, net of tax (a)
2,490

 
—

 
2,490

 
4,980

 
(7,470
)
 
2,490

Net income (loss)
$
29,399

 
$
(15,604
)
 
$
45,675

 
$
70,339

 
$
(100,410
)
 
$
29,399

 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income (loss)
$
29,399

 
$
(9,336
)
 
$
45,675

 
$
61,450

 
$
(100,410
)
 
$
26,778

(a) Includes equity in earnings (loss) of subsidiaries related to discontinued operations.

 



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

Condensed Consolidating Statements of Comprehensive (Loss) Income
For the Six Months Ended June 30, 2019
(Thousands of Dollars)
 
NuStar
Energy
 
NuStar
Logistics
 
NuPOP
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenues
$
—

 
$
247,691

 
$
122,805

 
$
350,147

 
$
(372
)
 
$
720,271

Costs and expenses
1,375

 
160,440

 
77,285

 
314,655

 
(372
)
 
553,383

Operating (loss) income
(1,375
)
 
87,251

 
45,520

 
35,492

 
—

 
166,888

Equity in earnings of subsidiaries
76,990

 
12,329

 
26,523

 
68,624

 
(184,466
)
 
—

Interest income (expense), net
225

 
(92,472
)
 
(3,773
)
 
6,036

 
—

 
(89,984
)
Other income (expense), net
—

 
1,497

 
355

 
(440
)
 
—

 
1,412

Income from continuing operations before income tax expense (benefit)
75,840

 
8,605

 
68,625

 
109,712

 
(184,466
)
 
78,316

Income tax expense (benefit)
2

 
(352
)
 
1

 
2,827

 
—

 
2,478

Income from continuing
operations, net of tax
75,838

 
8,957

 
68,624

 
106,885

 
(184,466
)
 
75,838

(Loss) income from discontinued
operations, net of tax (a)
(307,750
)
 
7,912

 
(315,663
)
 
(631,324
)
 
939,075

 
(307,750
)
Net (loss) income
(231,912
)
 
16,869

 
(247,039
)
 
(524,439
)
 
754,609

 
(231,912
)
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive (loss) income
$
(231,912
)
 
$
2,360

 
$
(247,039
)
 
$
(522,715
)
 
$
754,609

 
$
(244,697
)
(a) Includes equity in earnings (loss) of subsidiaries related to discontinued operations.

Condensed Consolidating Statements of Comprehensive Income
For the Six Months Ended June 30, 2018
(Thousands of Dollars)
 
NuStar
Energy
 
NuStar
Logistics
 
NuPOP
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenues
$
—

 
$
237,556

 
$
122,779

 
$
405,997

 
$
(349
)
 
$
765,983

Costs and expenses
1,150

 
159,004

 
77,505

 
368,793

 
(349
)
 
606,103

Operating (loss) income
(1,150
)
 
78,552

 
45,274

 
37,204

 
—

 
159,880

Equity in earnings (loss) of
subsidiaries
61,223

 
(557
)
 
39,758

 
81,922

 
(182,346
)
 
—

Interest income (expense), net
69

 
(100,383
)
 
(3,295
)
 
7,832

 
—

 
(95,777
)
Other income, net
—

 
2,324

 
188

 
111

 
—

 
2,623

Income (loss) from continuing operations before income tax expense
60,142

 
(20,064
)
 
81,925

 
127,069

 
(182,346
)
 
66,726

Income tax expense
—

 
231

 
1

 
6,352

 
—

 
6,584

Income (loss) from continuing
operations, net of tax
60,142

 
(20,295
)
 
81,924

 
120,717

 
(182,346
)
 
60,142

Income from discontinued
operations, net of tax (a)
95,390

 
—

 
95,390

 
190,780

 
(286,170
)
 
95,390

Net income (loss)
$
155,532

 
$
(20,295
)
 
$
177,314

 
$
311,497

 
$
(468,516
)
 
$
155,532

 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income
$
155,532

 
$
4,784

 
$
177,314

 
$
304,721

 
$
(468,516
)
 
$
173,835

(a) Includes equity in earnings (loss) of subsidiaries related to discontinued operations.


27
Table of Contents
NUSTAR ENERGY L.P. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Condensed Consolidating Statements of Cash Flows
For the Six Months Ended June 30, 2019
(Thousands of Dollars)
 
NuStar
Energy
 
NuStar
Logistics
 
NuPOP
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net cash provided by operating
activities
$
187,265

 
$
77,144

 
$
60,539

 
$
200,762

 
$
(284,816
)
 
$
240,894

Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
 
 
Capital expenditures
—

 
(167,647
)
 
(9,131
)
 
(143,183
)
 
—

 
(319,961
)
Change in accounts payable related to capital expenditures
—

 
11,708

 
522

 
3,914

 
—

 
16,144

Proceeds from sale or disposition
of assets
—

 
71

 
26

 
46

 
—

 
143

Investment in subsidiaries
—

 
(11,999
)
 
—

 
—

 
11,999

 
—

Net cash used in investing activities
—

 
(167,867
)
 
(8,583
)
 
(139,223
)
 
11,999

 
(303,674
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
 
 
Debt borrowings
—

 
570,500

 
—

 
23,800

 
—

 
594,300

Debt repayments
—

 
(785,000
)
 
—

 
(22,800
)
 
—

 
(807,800
)
Note offering, net of
issuance costs
—

 
491,665

 
—

 
—

 
—

 
491,665

Distributions to preferred unitholders
(60,846
)
 
(30,424
)
 
(30,423
)
 
(30,425
)
 
91,272

 
(60,846
)
Distributions to common unitholders
(129,025
)
 
(64,512
)
 
(64,512
)
 
(64,520
)
 
193,544

 
(129,025
)
Contributions from affiliates
—

 
—

 
—

 
11,999

 
(11,999
)
 
—

Net intercompany activity
9,641

 
(75,900
)
 
43,009

 
23,250

 
—

 
—

Payment of tax withholding for unit-based compensation
(6,368
)
 
—

 
—

 
—

 
—

 
(6,368
)
Other, net
(1,436
)
 
(6,581
)
 
(30
)
 
(122
)
 
—

 
(8,169
)
Net cash (used in) provided by financing activities
(188,034
)
 
99,748

 
(51,956
)
 
(58,818
)
 
272,817

 
73,757

Effect of foreign exchange rate changes on cash
—

 
—

 
—

 
261

 
—

 
261

Net (decrease) increase in cash, cash equivalents and restricted cash
(769
)
 
9,025

 
—

 
2,982

 
—

 
11,238

Cash, cash equivalents, and restricted cash as of the beginning of the period
1,255

 
51

 
—

 
12,338

 
—

 
13,644

Cash, cash equivalents and restricted cash as of the end of the period
$
486

 
$
9,076

 
$
—

 
$
15,320

 
$
—

 
$
24,882


28
Table of Contents
NUSTAR ENERGY L.P. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Condensed Consolidating Statements of Cash Flows
For the Six Months Ended June 30, 2018
(Thousands of Dollars)
 
NuStar
Energy
 
NuStar
Logistics
 
NuPOP
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net cash provided by operating
activities
$
200,803

 
$
31,209

 
$
58,105

 
$
261,300

 
$
(307,567
)
 
$
243,850

Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
 
 
Capital expenditures
—

 
(17,136
)
 
(8,164
)
 
(223,221
)
 
—

 
(248,521
)
Change in accounts payable related to capital expenditures
—

 
495

 
(5,173
)
 
(14,642
)
 
—

 
(19,320
)
Proceeds from sale or disposition
of assets
—

 
1,385

 
16

 
696

 
—

 
2,097

Proceeds from insurance recoveries
—

 
—

 
—

 
78,419

 
—

 
78,419

Acquisitions
—

 
—

 
(37,502
)
 
—

 
—

 
(37,502
)
Net cash used in investing activities
—

 
(15,256
)
 
(50,823
)
 
(158,748
)
 
—

 
(224,827
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
 
 
Debt borrowings
—

 
1,122,272

 
—

 
11,000

 
—

 
1,133,272

Debt repayments
—

 
(1,316,621
)
 
—

 
(16,900
)
 
—

 
(1,333,521
)
Issuance of Series D preferred units
400,000

 
—

 
—

 
—

 
—

 
400,000

Payment of issuance costs for
Series D preferred units
(29,289
)
 
—

 
—

 
—

 
—

 
(29,289
)
Issuance of common units
10,000

 
—

 
—

 
—

 
—

 
10,000

Distributions to preferred unitholders
(32,713
)
 
(16,356
)
 
(16,357
)
 
(16,358
)
 
49,071

 
(32,713
)
Distributions to common unitholders and general partner
(172,324
)
 
(86,162
)
 
(86,162
)
 
(86,172
)
 
258,496

 
(172,324
)
Proceeds from termination of
interest rate swaps
—

 
8,048

 
—

 
—

 
—

 
8,048

Net intercompany activity
(374,973
)
 
279,080

 
95,237

 
656

 
—

 
—

Other, net
(1,493
)
 
(4,466
)
 
—

 
(64
)
 
—

 
(6,023
)
Net cash used in financing activities
(200,792
)
 
(14,205
)
 
(7,282
)
 
(107,838
)
 
307,567

 
(22,550
)
Effect of foreign exchange rate
changes on cash
—

 
—

 
—

 
(421
)
 
—

 
(421
)
Net increase (decrease) in cash and
cash equivalents
11

 
1,748

 
—

 
(5,707
)
 
—

 
(3,948
)
Cash and cash equivalents as of the
beginning of the period
885

 
29

 
—

 
23,378

 
—

 
24,292

Cash and cash equivalents as of the
end of the period
$
896

 
$
1,777

 
$
—

 
$
17,671

 
$
—

 
$
20,344





29

Table of Contents

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

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
In this Form 10-Q, we make certain forward-looking statements, including statements regarding our plans, strategies, objectives, expectations, estimates, predictions, projections, assumptions, intentions and resources. While these forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect our current judgment regarding the direction of our business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested in this report. These forward-looking statements can generally be identified by the words “anticipates,” “believes,” “expects,” “plans,” “intends,” “estimates,” “forecasts,” “budgets,” “projects,” “will,” “could,” “should,” “may” and similar expressions. These statements reflect our current views with regard to future events and are subject to various risks, uncertainties and assumptions, which may cause actual results to differ materially. Please read our Annual Report on Form 10-K for the year ended December 31, 2018, Part I, Item 1A “Risk Factors,” as well as our subsequent filings with the Securities and Exchange Commission, for a discussion of certain of those risks, uncertainties and assumptions.

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

OVERVIEW
NuStar Energy L.P. (NYSE: NS) is 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. As a result of the merger described below, NuStar GP Holdings, LLC (NuStar GP Holdings or NSH), which indirectly owns our general partner, became a wholly owned subsidiary of ours on July 20, 2018.

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations is presented in six sections:
•
Overview
•
Results of Operations
•
Trends and Outlook
•
Liquidity and Capital Resources
•
Critical Accounting Policies
•
New Accounting Pronouncements

Recent Developments
Issuance of Debt. On May 22, 2019, NuStar Logistics issued $500.0 million of 6.0% senior notes due June 1, 2026. We received net proceeds of approximately $491.7 million, which we initially used to repay outstanding borrowings under our revolving credit agreement. Please refer to Note 5 of the Condensed Notes to Consolidated Financial Statements in Item 1. “Financial Statements” for further information.

Sale of St. Eustatius Operations. On May 9, 2019, we entered into a Share Purchase and Sale Agreement to sell the equity interests in our wholly owned subsidiaries that own the St. Eustatius terminal and bunkering operations (the St. Eustatius Operations) for approximately $250.0 million, subject to adjustment (the St. Eustatius Disposition). The St. Eustatius Disposition included a 14.3 million barrel storage and terminalling facility and related assets on the island of St. Eustatius in the Caribbean Netherlands. We closed the sale on July 29, 2019 and received net proceeds of approximately $234.0 million. We previously reported the terminal operations in our storage segment and the bunkering operations in our fuels marketing segment.

The unaudited consolidated balance sheets reflect the assets and liabilities associated with the St. Eustatius Operations as held for sale for all periods presented, and the unaudited condensed consolidated statements of comprehensive income reflect the St. Eustatius Operations and the European Operations, which were sold on November 30, 2018 and defined below, as discontinued operations for all applicable periods presented. The consolidated statements of cash flows have not been adjusted to separately

30

Table of Contents

disclose cash flows related to discontinued operations. Please refer to Note 3 of the Condensed Notes to Consolidated Financial Statements in Item 1. “Financial Statements” for additional information on discontinued operations.

In the first quarter of 2019, we recorded long-lived asset and goodwill impairment charges of $297.3 million and $31.1 million, respectively, related to the St. Eustatius Operations. We recorded an additional impairment charge of $8.4 million in the second quarter of 2019 due to additional capital expenditures incurred. The impairment charges are recorded in discontinued operations. Please refer to Note 3 of the Condensed Notes to Consolidated Financial Statements in Item 1. “Financial Statements” for further discussion of the impairment charges.

Other Events
Sale of European Operations. On November 30, 2018, we sold our European operations, which consisted of six liquids storage terminals in the United Kingdom and one facility in Amsterdam and related assets (the European Operations), for approximately $270.0 million (the European Disposition). We previously reported the European Operations in our storage segment.

Merger. On July 20, 2018, we completed the merger of NuStar GP Holdings, LLC with a subsidiary of NS. Consequently, NSH, which indirectly owns our general partner, became a wholly owned subsidiary of ours. Under the terms of the merger agreement, NSH unitholders received 0.55 of a common unit representing a limited partner interest in NS in exchange for each NSH unit owned at the effective time of the merger, resulting in approximately 13.4 million incremental NS common units outstanding after the merger.

Council Bluffs Acquisition. On April 16, 2018, we acquired CHS Inc.’s Council Bluffs pipeline system, comprised of a 227-mile pipeline and 18 storage tanks, for approximately $37.5 million (the Council Bluffs Acquisition). The assets acquired and the results of operations are included in our pipeline segment, within the East Pipeline, from the date of acquisition. We accounted for this acquisition as an asset purchase.

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 the St. Eustatius terminal, which experienced the most damage and was temporarily shut down. In January 2018, we received $87.5 million of insurance proceeds in settlement of our property damage claim for the St. Eustatius terminal, of which $9.1 million related to business interruption, which is included in “Cash flows from operating activities” in the consolidated statements of cash flows. We recorded a $78.8 million gain 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. The insurance proceeds related to business interruption and the gain are included in “(Loss) income from discontinued operations, net of tax” in the consolidated statements of income.

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

Pipeline. We own 3,130 miles of refined product pipelines and 2,120 miles of crude oil pipelines, as well as 5.2 million barrels of storage capacity, which comprise our Central West System. In addition, we own 2,600 miles of refined product pipelines, consisting of the East and North Pipelines, and a 2,000-mile ammonia pipeline (the Ammonia Pipeline), which comprise our Central East System. The East and North Pipelines have storage capacity of 7.4 million barrels. We charge tariffs on a per barrel basis for transporting refined products, crude oil and other feedstocks in our refined product and crude oil pipelines and on a per ton basis for transporting anhydrous ammonia in the Ammonia Pipeline.

Storage. Our storage segment includes the operations of our terminal and storage facilities in the United States, Canada and Mexico, with 61.5 million barrels of storage capacity. Revenues for the storage segment include fees for tank storage agreements, whereby a customer agrees to pay for a certain amount of storage in a tank over a period of time (storage terminal revenues), and throughput agreements, whereby a customer pays a fee per barrel for volumes moving through our terminals (throughput terminal revenues).

Fuels Marketing. Within our fuels marketing operations, we purchase petroleum products for resale. The results of operations for the fuels marketing segment depend largely on the margin between our costs and the sales prices of the products we market. Therefore, the results of operations for this segment are more sensitive to changes in commodity prices compared to the operations of the pipeline and storage segments. Although we enter into derivative contracts to attempt to mitigate the effects of commodity price fluctuations, the derivative financial instruments associated with commodity price risk were not material for

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any periods presented. The operations in our fuels marketing segment include our bunkering operations in the Gulf Coast, as well as certain of our blending operations at our Central East System.

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

Increases or decreases in the price of crude oil affect sectors across the energy industry, including our customers in crude oil production, refining and trading, in different ways at different points in any given price cycle. For example, during periods of sustained low prices, producers tend to reduce their capital spending and drilling activity and narrow their focus to assets in the most cost-advantaged regions. Refiners, on the other hand, tend to benefit from lower crude oil prices, to the extent they are able to take advantage of lower feedstock prices, especially those positioned for healthy regional demand for their refined products; however, as refined product inventories increase, refiners typically reduce their production rate, which may reduce the degree to which they are able to benefit from low crude prices. Crude oil traders focus less on the current market commodity price than on whether that price is higher or lower than expected future market prices: if the future price for a product is believed to be higher than the current market price, or a “contango market,” traders are more likely to purchase and store products to sell in the future at the higher price. On the other hand, when the current price of crude oil nears or exceeds the expected future market price, or “backwardation,” as is currently the case for certain markets that we serve, traders are no longer incentivized to purchase and store product for future sale.



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RESULTS OF OPERATIONS
Three Months Ended June 30, 2019 Compared to Three Months Ended June 30, 2018
Financial Highlights
(Unaudited, Thousands of Dollars, Except Per Unit Data)
 
Three Months Ended June 30,
 
Change
 
2019
 
2018
 
Statement of Income Data:
 
 
 
 
 
Revenues:
 
 
 
 
 
Service revenues
$
282,472

 
$
259,599

 
$
22,873

Product sales
89,973

 
129,657

 
(39,684
)
Total revenues
372,445

 
389,256

 
(16,811
)
 
 
 
 
 
 
Costs and expenses:
 
 
 
 
 
Costs associated with service revenues
166,086

 
164,018

 
2,068

Cost of product sales
86,389

 
119,939

 
(33,550
)
General and administrative expenses
24,868

 
26,754

 
(1,886
)
Other depreciation and amortization expense
1,819

 
2,158

 
(339
)
Total costs and expenses
279,162

 
312,869

 
(33,707
)
 
 
 
 
 
 
Operating income
93,283

 
76,387

 
16,896

Interest expense, net
(45,693
)
 
(48,389
)
 
2,696

Other income, net
621

 
1,607

 
(986
)
Income from continuing operations before income tax expense
48,211

 
29,605

 
18,606

Income tax expense
1,296

 
2,696

 
(1,400
)
Income from continuing operations, net of tax
46,915

 
26,909

 
20,006

(Loss) income from discontinued operations, net of tax
(964
)
 
2,490

 
(3,454
)
Net income
$
45,951

 
$
29,399

 
$
16,552

Basic net income (loss) per common unit:
 
 
 
 
 
Continuing operations
$
0.11

 
$
0.12

 
$
(0.01
)
Discontinued operations
(0.01
)
 
0.03

 
(0.04
)
Total
$
0.10

 
$
0.15

 
$
(0.05
)

Overview
Net income increased $16.6 million for the three months ended June 30, 2019, compared to the three months ended June 30, 2018, mainly due to higher operating income from our pipeline segment.

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Segment Operating Highlights
(Thousands of Dollars, Except Barrels/Day Information)
 
Three Months Ended June 30,
 
Change
 
2019
 
2018
 
Pipeline:
 
 
 
 
 
Crude oil pipelines throughput (barrels/day)
1,089,848

 
839,574

 
250,274

Refined products and ammonia pipelines throughput (barrels/day)
569,820

 
565,740

 
4,080

Total throughput (barrels/day)
1,659,668

 
1,405,314

 
254,354

Throughput revenues
$
172,493

 
$
150,276

 
$
22,217

Operating expenses
52,930

 
48,706

 
4,224

Depreciation and amortization expense
40,851

 
38,591

 
2,260

Segment operating income
$
78,712

 
$
62,979

 
$
15,733

Storage:
 
 
 
 
 
Throughput (barrels/day)
395,512

 
331,917

 
63,595

Throughput terminal revenues
$
23,170

 
$
20,141

 
$
3,029

Storage terminal revenues
87,233

 
94,679

 
(7,446
)
Total revenues
110,403

 
114,820

 
(4,417
)
Operating expenses
48,165

 
52,853

 
(4,688
)
Depreciation and amortization expense
24,140

 
23,186

 
954

Segment operating income
$
38,098

 
$
38,781

 
$
(683
)
Fuels Marketing:
 
 
 
 
 
Product sales and other revenue
$
89,549

 
$
124,293

 
$
(34,744
)
Cost of goods
85,802

 
119,942

 
(34,140
)
Gross margin
3,747

 
4,351

 
(604
)
Operating expenses
587

 
815

 
(228
)
Segment operating income
$
3,160

 
$
3,536

 
$
(376
)
Consolidation and Intersegment Eliminations:
 
 
 
 
 
Revenues
$
—

 
$
(133
)
 
$
133

Cost of goods
—

 
(3
)
 
3

Operating expenses
—

 
(133
)
 
133

Total
$
—

 
$
3

 
$
(3
)
Consolidated Information:
 
 
 
 
 
Revenues
$
372,445

 
$
389,256

 
$
(16,811
)
Costs associated with service revenues:
 
 
 
 
 
Operating expenses
101,095

 
102,241

 
(1,146
)
Depreciation and amortization expense
64,991

 
61,777

 
3,214

Total costs associated with service revenues
166,086

 
164,018

 
2,068

Cost of product sales
86,389

 
119,939

 
(33,550
)
Segment operating income
119,970

 
105,299

 
14,671

General and administrative expenses
24,868

 
26,754

 
(1,886
)
Other depreciation and amortization expense
1,819

 
2,158

 
(339
)
Consolidated operating income
$
93,283

 
$
76,387

 
$
16,896



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Pipeline
Total revenues increased $22.2 million and throughputs increased 254,354 barrels per day for the three months ended June 30, 2019, compared to the three months ended June 30, 2018, primarily due to:
•
an increase in revenues of $14.1 million and an increase in throughputs of 115,286 barrels per day resulting from increased customer production supplying our Permian Crude System and the completion of new pipeline connections and expansion projects;
•
an increase in revenues of $3.2 million and an increase in throughputs of 2,384 barrels per day on our Ardmore System, mainly due to an increase in long-haul deliveries resulting in higher average tariffs and the completion of new pipeline connections that began delivering incremental Permian crude oil in the second quarter of 2019 from Wichita Falls to local refiners and a connected carrier;
•
an increase in revenues of $2.3 million on our Houston pipeline, as a customer began leasing a portion of the pipeline on January 1, 2019;
•
an increase in revenues of $1.5 million on our Ammonia Pipeline mainly due to a tariff rate increase in 2019;
•
an increase in revenues of $1.2 million and an increase in throughputs of 4,512 barrels per day on our North Pipeline, primarily due to favorable market conditions in locations served by the North Pipeline; and
•
an increase in revenues of $1.2 million on our McKee System pipelines, mainly due to an increase in long-haul deliveries resulting in higher average tariffs.

These increases were partially offset by:
•
a decrease in revenues of $2.8 million, despite a slight increase in throughputs on our East Pipeline, due to a decrease in other product sales and lower average tariffs; and
•
a decrease in revenues of $0.7 million on our Eagle Ford System, mainly due to lower rates, which more than offset an increase in throughputs of 136,538 barrels per day.

Operating expenses increased $4.2 million for the three months ended June 30, 2019, compared to the three months ended June 30, 2018, mainly due to:
•
an increase in power costs of $1.7 million, spread across various pipeline systems as a result of higher throughputs;
•
an increase of $0.8 million due to ad valorem tax rate increases across all pipeline systems; and
•
an increase in salaries and wages of $0.7 million.

Depreciation and amortization expense increased $2.3 million for the three months ended June 30, 2019, compared to the three months ended June 30, 2018, mainly due to completed projects associated with the Permian Crude System in 2019 and owning the assets associated with the Council Bluffs Acquisition for the entire second quarter of 2019.

Storage
Throughput terminal revenues increased $3.0 million while throughputs increased 63,595 barrels per day for the three months ended June 30, 2019, compared to the three months ended June 30, 2018, mainly due to an increase in throughput terminal revenues of $2.8 million and an increase in throughputs of 66,131 barrels per day at our Corpus Christi North Beach terminal, which receives our South Texas Crude System volumes.

Storage terminal revenues decreased $7.4 million for the three months ended June 30, 2019, compared to the three months ended June 30, 2018, primarily due to the following:
•
a decrease in revenues of $10.3 million at our North East Terminals, mainly due to the re-contracting of certain customer contracts in a backwardated market and an adjustment to revenues in 2018 resulting from a change in the term of a contract at our Linden terminal; and
•
a decrease in revenues of $1.1 million at our Point Tupper terminal, primarily due to a decrease in throughput and handling fees.

These decreases were partially offset by an increase of $3.3 million at our West Coast Terminals, mainly due to completed projects.

Operating expenses decreased $4.7 million for the three months ended June 30, 2019, compared to the three months ended June 30, 2018, primarily due to a decrease in maintenance and regulatory expenses of $4.2 million across various terminals.

Depreciation and amortization expense increased $1.0 million for the three months ended June 30, 2019, compared to the three months ended June 30, 2018, due to an increase in amortization expense of $1.7 million associated with a finance lease for a dock that was completed in September 2018.


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General
General and administrative expenses decreased $1.9 million for the three months ended June 30, 2019, compared to the three months ended June 30, 2018, mainly due to lower compensation costs.

Interest expense, net, decreased $2.7 million for the three months ended June 30, 2019, compared to the three months ended June 30, 2018, mainly due to lower borrowings under our $1.4 billion revolving credit agreement.

Income tax expense decreased $1.4 million for the three months ended June 30, 2019, compared to the three months ended June 30, 2018, primarily due to lower taxable income and Texas margin tax refunds received in the second quarter of 2019.

Discontinued Operations
Please refer to Note 3 of the Condensed Notes to Consolidated Financial Statements in Item 1. “Financial Statements” for information on discontinued operations.


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Six Months Ended June 30, 2019 Compared to Six Months Ended June 30, 2018
Financial Highlights
(Unaudited, Thousands of Dollars, Except Per Unit Data)
 
Six Months Ended June 30,
 
Change
 
2019
 
2018
 
Statement of Income Data:
 
 
 
 
 
Revenues:
 
 
 
 
 
Service revenues
$
541,499

 
$
507,668

 
$
33,831

Product sales
178,772

 
258,315

 
(79,543
)
Total revenues
720,271

 
765,983

 
(45,712
)
 
 
 
 
 
 
Costs and expenses:
 
 
 
 
 
Costs associated with service revenues
326,315

 
311,921

 
14,394

Cost of product sales
172,571

 
245,089

 
(72,518
)
General and administrative expenses
50,559

 
44,896

 
5,663

Other depreciation and amortization expense
3,938

 
4,197

 
(259
)
Total costs and expenses
553,383

 
606,103

 
(52,720
)
 
 
 
 
 
 
Operating income
166,888

 
159,880

 
7,008

Interest expense, net
(89,984
)
 
(95,777
)
 
5,793

Other income, net
1,412

 
2,623

 
(1,211
)
Income from continuing operations before income tax expense
78,316

 
66,726

 
11,590

Income tax expense
2,478

 
6,584

 
(4,106
)
Income from continuing operations, net of tax
75,838

 
60,142

 
15,696

(Loss) income from discontinued operations, net of tax
(307,750
)
 
95,390

 
(403,140
)
Net (loss) income
$
(231,912
)
 
$
155,532

 
$
(387,444
)
Basic net income (loss) per common unit:
 
 
 
 
 
Continuing operations
$
0.05

 
$
0.30

 
$
(0.25
)
Discontinued operations
(2.86
)
 
1.00

 
(3.86
)
Total
$
(2.81
)
 
$
1.30

 
$
(4.11
)

Overview
We incurred a net loss of $231.9 million for the six months ended June 30, 2019, compared to net income of $155.5 million for the six months ended June 30, 2018.

Income from continuing operations, net of tax, increased $15.7 million for the six months ended June 30, 2019, compared to the six months ended June 30, 2018, mainly due to higher operating income from the pipeline segment, partially offset by lower operating income from the storage and fuels marketing segments.

For the six months ended June 30, 2019, loss from discontinued operations, net of tax, includes impairment charges totaling $336.8 million related to the St. Eustatius Operations. For the six months ended June 30, 2018, income from discontinued operations, net of tax, includes a gain of $78.8 million resulting from insurance proceeds received for hurricane damages incurred at our St. Eustatius terminal.

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Segment Operating Highlights
(Thousands of Dollars, Except Barrels/Day Information)
 
Six Months Ended June 30,
 
Change
 
2019
 
2018
 
Pipeline:
 
 
 
 
 
Crude oil pipelines throughput (barrels/day)
1,054,425

 
815,568

 
238,857

Refined products and ammonia pipelines throughput (barrels/day)
536,836

 
548,910

 
(12,074
)
Total throughput (barrels/day)
1,591,261

 
1,364,478

 
226,783

Throughput revenues
$
328,744

 
$
287,066

 
$
41,678

Operating expenses
101,028

 
91,047

 
9,981

Depreciation and amortization expense
81,700

 
75,246

 
6,454

Segment operating income
$
146,016

 
$
120,773

 
$
25,243

Storage:
 
 
 
 
 
Throughput (barrels/day)
380,267

 
337,892

 
42,375

Throughput terminal revenues
$
44,856

 
$
40,157

 
$
4,699

Storage terminal revenues
169,047

 
186,083

 
(17,036
)
Total revenues
213,903

 
226,240

 
(12,337
)
Operating expenses
95,478

 
98,017

 
(2,539
)
Depreciation and amortization expense
48,109

 
46,355

 
1,754

Segment operating income
$
70,316

 
$
81,868

 
$
(11,552
)
Fuels Marketing:
 
 
 
 
 
Product sales and other revenue
$
177,628

 
$
252,951

 
$
(75,323
)
Cost of goods
171,303

 
245,107

 
(73,804
)
Gross margin
6,325

 
7,844

 
(1,519
)
Operating expenses
1,240

 
1,512

 
(272
)
Segment operating income
$
5,085

 
$
6,332

 
$
(1,247
)
Consolidation and Intersegment Eliminations:
 
 
 
 
 
Revenues
$
(4
)
 
$
(274
)
 
$
270

Cost of goods
28

 
(18
)
 
46

Operating expenses
—

 
(256
)
 
256

Total
$
(32
)
 
$
—

 
$
(32
)
Consolidated Information:
 
 
 
 
 
Revenues
$
720,271

 
$
765,983

 
$
(45,712
)
Costs associated with service revenues:
 
 
 
 
 
Operating expenses
196,506

 
190,320

 
6,186

Depreciation and amortization expense
129,809

 
121,601

 
8,208

Total costs associated with service revenues
326,315

 
311,921

 
14,394

Cost of product sales
172,571

 
245,089

 
(72,518
)
Segment operating income
221,385

 
208,973

 
12,412

General and administrative expenses
50,559

 
44,896

 
5,663

Other depreciation and amortization expense
3,938

 
4,197

 
(259
)
Consolidated operating income
$
166,888

 
$
159,880

 
$
7,008


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Pipeline
Total revenues increased $41.7 million and total throughputs increased 226,783 barrels per day for the six months ended June 30, 2019, compared to the six months ended June 30, 2018, primarily due to:
•
an increase in revenues of $30.2 million and an increase in throughputs of 131,973 barrels per day resulting from increased customer production supplying our Permian Crude System and the completion of new pipeline connections and expansion projects;
•
an increase in revenues of $7.0 million on our Ardmore System, despite throughputs that remained flat, mainly due to an increase in long-haul deliveries resulting in higher average tariffs and the completion of new pipeline connections that began delivering incremental Permian crude oil in the second quarter of 2019 from Wichita Falls to local refiners and a connected carrier;
•
an increase in revenues of $5.0 million on our Houston pipeline, as a customer began leasing a portion of the pipeline on January 1, 2019;
•
an increase in revenues of $2.2 million on our Ammonia Pipeline mainly due to a tariff rate increase in 2019;
•
an increase in revenues of $1.9 million and an increase in throughputs of 11,963 barrels per day on our Three Rivers System, mainly due to increased demand; and
•
an increase in revenues of $1.6 million and an increase in throughputs of 2,907 barrels per day on our North Pipeline, primarily due to favorable market conditions in locations served by the North Pipeline.

These increases were partially offset by:
•
a decrease in revenues of $5.1 million and a decrease in throughputs of 51,400 barrels per day due to operational issues at the refinery served by our McKee System pipelines in the first quarter of 2019; and
•
a decrease in revenues of $3.7 million on our Eagle Ford System, mainly due to lower rates, which more than offset an increase in throughputs of 125,356 barrels per day.

Operating expenses increased $10.0 million for the six months ended June 30, 2019, compared to the six months ended June 30, 2018, mainly due to:
•
an increase in operating expenses of $6.6 million on our Permian Crude System, mainly due to higher power costs resulting from higher throughputs, as well as higher bad debt expense; and
•
an increase in operating costs of $1.5 million due to owning the assets associated with the Council Bluffs Acquisition for the entire period in 2019.

Depreciation and amortization expense increased $6.5 million for the six months ended June 30, 2019, compared to the six months ended June 30, 2018, mainly due to completed projects associated with the Permian Crude System and owning the assets associated with the Council Bluffs Acquisition for the entire period in 2019.

Storage
Throughput terminal revenues increased $4.7 million, while throughputs increased 42,375 barrels per day for the six months ended June 30, 2019, compared to the six months ended June 30, 2018, mainly due to an increase in throughput terminal revenues of $4.5 million and an increase in throughputs of 46,501 barrels per day at our Corpus Christi North Beach terminal, which receives our South Texas Crude System volumes.

Storage terminal revenues decreased $17.0 million for the six months ended June 30, 2019, compared to the six months ended June 30, 2018, primarily due to a decrease of $20.7 million at our North East and Gulf Coast Terminals, mainly resulting from a decrease in customer base, the re-contracting of certain customer contracts in a backwardated market and an adjustment to revenues in 2018 resulting from a change in the term of a contract at our Linden terminal. These decreases were partially offset by an increase of $3.7 million at our West Coast Terminals, mainly due to completed projects.

Operating expenses decreased $2.5 million for the six months ended June 30, 2019, compared to the six months ended June 30, 2018, primarily due to a decrease in maintenance and regulatory expenses of $3.7 million, partially offset by an increase in insurance expense of $1.0 million due to an increase in premiums, both across various terminals.

Depreciation and amortization expense increased $1.8 million for the six months ended June 30, 2019, compared to the six months ended June 30, 2018, mainly due to amortization expense associated with a finance lease for a dock that was completed in September 2018.

Fuels Marketing
Segment operating income decreased $1.2 million for the six months ended June 30, 2019, compared to the six months ended June 30, 2018, mainly due to a decrease in operating income from our blending operations.


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General
General and administrative expenses increased $5.7 million for the six months ended June 30, 2019, compared to the six months ended June 30, 2018, mainly resulting from lower legal expenses in 2018.

Interest expense, net decreased $5.8 million for the six months ended June 30, 2019, compared to the six months ended June 30, 2018, mainly due to the maturity of the $350.0 million of 7.65% senior notes in the second quarter of 2018, which were paid off with lower interest revolver borrowings. These notes were replaced with $500.0 million of 6.0% senior notes in the second quarter of 2019.

Income tax expense decreased $4.1 million for the six months ended June 30, 2019, compared to the six months ended June 30, 2018, mainly due to lower taxable income and tax refunds received in the second quarter of 2019.

Discontinued Operations
For the six months ended June 30, 2019, we recognized a loss from discontinued operations, net of tax, of $307.8 million, primarily due to long-lived asset impairment charges of $305.7 million and a goodwill impairment charge of $31.1 million in 2019 associated with the St. Eustatius Operations. Please refer to Note 3 of the Condensed Notes to Consolidated Financial Statements in Item 1. “Financial Statements” for further information.

For the six months ended June 30, 2018, we recognized income from discontinued operations, net of tax, of $95.4 million, mainly due to a gain of $78.8 million from insurance proceeds received in the first quarter of 2018 relating to hurricane damage at our St. Eustatius terminal in the third quarter of 2017.

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Table of Contents

TRENDS AND OUTLOOK
In 2019, we continue to execute on the comprehensive plan that we began in 2018, which included simplifying our corporate structure and eliminating the incentive distribution rights, reducing our leverage metrics and improving our distribution coverage ratio. Those actions, combined with our sale of the St Eustatius Operations in July 2019 and the European Operations in the fourth quarter of 2018, positioned us to fund a larger proportion of our capital projects with the cash generated by our operations, thus reducing our need to access common equity markets to finance future growth opportunities.

We continue to see significant opportunities emanate from the growth in North American shale production, especially in the Permian Basin, as that growth drives demand for the midstream logistics assets and services necessary to transport and store crude from the wellhead to domestic and international destinations. Our Permian Crude System was built to directly benefit from horizontal well production in the Permian Basin, but we also have assets in Texas and elsewhere on the Gulf Coast that are either already benefiting, or that we expect to benefit in the future, from North American shale production growth. We expect our Permian Crude System to benefit from higher throughputs as production grows in that basin, and we expect our crude oil pipeline systems, including our Wichita Falls, Ardmore and South Texas crude systems, and our Gulf Coast storage and export dock facilities in Corpus Christi, Texas and St. James, Louisiana to benefit from increased utilization as shale play production grows and Gulf Coast exports increase.

Early in the third quarter of 2019, we completed the first phase of a project connecting our Corpus Christi terminal to a pipeline transporting Permian barrels for export, and we continue to expect to complete the second phase of that project in the third quarter. Once we begin transporting volumes, we expect to see improved results for our storage facility in Corpus Christi. Our St. James terminal is now benefiting from North American shale production growth through increased unit train activity at that facility to accommodate shale crude volumes from the Permian, the Bakken and Western Canada. Longer term, we expect our St. James terminal to benefit from its advantaged location and shale-driven shifts in domestic crude flows. While backwardated crude prices in 2019 could have a detrimental impact on some of our storage facilities, we believe we are insulated to some extent by long-term contracts at certain of our facilities where backwardation is a driving factor, and due to the fact that we have storage assets in markets where forward pricing has little impact on rates or renewals.

In addition to the Permian-related growth, we also expect 2019 results to benefit from pipeline expansion projects to facilitate the export of refined products to Northern Mexico and the completion of a number of bio-fuel projects at our West Coast terminals in 2018 and 2019.

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

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

Our partnership agreement requires that we distribute all “Available Cash” to our common limited partners each quarter. “Available Cash” is defined in the partnership agreement generally as cash on hand at the end of the quarter, plus certain permitted borrowings made subsequent to the end of the quarter, less cash reserves determined by our board of directors, subject to requirements for distributions for our preferred units.

Each year, our objective is to fund our reliability capital expenditures and distribution requirements with our net cash provided by operating activities during that year. If we do not generate sufficient cash from operations to meet that objective, we utilize cash on hand or other sources of cash flow, which in the past have primarily included borrowings under our revolving credit agreement, sales of non-strategic assets and, to the extent necessary, funds raised through equity or debt offerings. We have typically funded our strategic capital expenditures and acquisitions from external sources, primarily borrowings under our revolving credit agreement or funds raised through equity or debt offerings. However, our ability to raise funds by issuing debt or equity depends on many factors beyond our control. Our risk factors in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2018 describe the risks inherent to these sources of funding and the availability thereof.

During periods when our cash flow from operations is less than our distribution and reliability capital requirements, we may maintain our distribution level because we can use other sources of Available Cash, as provided in our partnership agreement, including borrowings under our revolving credit agreement and proceeds from the sales of assets. Our risk factors in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2018 describe the risks inherent in our ability to maintain or grow our distribution.

For 2019, we expect our total cash from operations to exceed our distribution and reliability capital requirements. Furthermore, proceeds from the St. Eustatius Disposition in July 2019 were initially used to repay outstanding borrowings under our revolving credit agreement, increasing the amount available for borrowing. The sale is part of our plan to improve our debt metrics and partially fund capital projects to grow our core business in North America.

Cash Flows for the Six Months Ended June 30, 2019 and 2018
The following table summarizes our cash flows from operating, investing and financing activities (please refer to our Consolidated Statements of Cash Flows in Item 1. “Financial Statements”):
 
Six Months Ended June 30,
 
2019
 
2018
 
(Thousands of Dollars)
Net cash provided by (used in):
 
 
 
Operating activities
$
240,894

 
$
243,850

Investing activities
(303,674
)
 
(224,827
)
Financing activities
73,757

 
(22,550
)
Effect of foreign exchange rate changes on cash
261

 
(421
)
Net increase (decrease) in cash, cash equivalents and restricted cash
$
11,238

 
$
(3,948
)

Net cash provided by operating activities for the six months ended June 30, 2019 was comparable to the six months ended June 30, 2018. For the six months ended June 30, 2019, the net cash provided by operating activities was used to fund our distributions to unitholders of $189.9 million and reliability capital expenditures of $27.2 million, and along with net proceeds from debt borrowings to fund our strategic capital expenditures of $292.8 million, as described in the Capital Requirements section below.

For the six months ended June 30, 2018, the net cash provided by operating activities was used to fund our distributions to unitholders and our general partner in the aggregate amount of $205.0 million. Net cash provided by operating activities as well as a portion of the insurance recoveries relating to hurricane damage at our St. Eustatius terminal were used to fund reliability capital expenditures of $41.8 million, and proceeds from debt borrowings were used to fund our strategic capital expenditures of $244.2 million. The proceeds from the issuance of units were used to repay outstanding borrowings under our revolving credit agreement.


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Debt Sources of Liquidity
Revolving Credit Agreement. Our $1.4 billion revolving credit agreement (the Revolving Credit Agreement) is subject to maximum consolidated debt coverage ratio and minimum consolidated interest coverage ratio requirements, which may limit the amount we can borrow to an amount less than the total amount available for borrowing. For the rolling period of four quarters ending June 30, 2019, the consolidated debt coverage ratio (as defined in the Revolving Credit Agreement) could not exceed 5.00-to-1.00 and the consolidated interest coverage ratio (as defined in the Revolving Credit Agreement) must not be less than 1.75-to-1.00. As of June 30, 2019, our consolidated debt coverage ratio was 3.9x and our consolidated interest coverage ratio was 2.5x. As of June 30, 2019, we had $853.5 million available for borrowing.

In the second quarter of 2019, our credit rating was downgraded by S&P Global Ratings from BB to BB-, and our outlook was changed from negative to stable by the three credit rating agencies identified in the table below. Per the terms of the Revolving Credit Agreement, these changes did not impact the interest rate on our Revolving Credit Agreement, which is the only debt arrangement with an interest rate that is subject to adjustment if our debt rating is downgraded (or upgraded) by certain credit rating agencies. The following table reflects the current outlook and ratings that have been assigned to our debt:
 
Fitch, Inc.
 
Moody’s Investor
Service Inc.
 
S&P
Global Ratings
Ratings
BB
 
Ba2
 
BB-
Outlook
Stable
 
Stable
 
Stable

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). On April 29, 2019, we amended the Receivables Financing Agreement to extend the scheduled termination date from September 20, 2020 to September 20, 2021 and to amend certain provisions with respect to receivables related to certain customers. The amount available for borrowing under the Receivables Financing Agreement is limited to $125.0 million and is based on the availability of eligible receivables and other customary factors and conditions.

Issuance of Debt. On May 22, 2019, NuStar Logistics issued $500.0 million of 6.0% senior notes due June 1, 2026. We received net proceeds of approximately $491.7 million, which we initially used to repay outstanding borrowings under our Revolving Credit Agreement.

Other Debt Sources of Liquidity. Other sources of liquidity as of June 30, 2019 consist of the following:
•
$365.4 million in revenue bonds pursuant to the Gulf Opportunity Zone Act of 2005 (the GoZone Bonds), with $43.1 million remaining in trust as of June 30, 2019, supported by $370.2 million in letters of credit; and
•
one short-term line of credit agreement with an uncommitted borrowing capacity of up to $35.0 million, with $6.0 million of borrowings outstanding as of June 30, 2019.

We are also a party to a $100.0 million uncommitted letter of credit agreement, which provides for standby letters of credit or guarantees with a term of up to one year (LOC Agreement). As of June 30, 2019, we had no letters of credit issued under the LOC Agreement.

Please refer to Note 5 of the Condensed Notes to Consolidated Financial Statements in Item 1. “Financial Statements” for a discussion of certain of our debt agreements.

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


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The following table summarizes our capital expenditures for the six months ended June 30, 2019 and 2018, and the amount we expect to spend in 2019:
 
Strategic Acquisitions and
Capital Expenditures
 
Reliability Capital
Expenditures
 
Total
 
(Thousands of Dollars)
For the six months ended June 30:
 
 
 
 
 
2019
$
292,785

 
$
27,176

 
$
319,961

2018
$
244,228

 
$
41,795

 
$
286,023

 
 
 
 
 
 
Expected for the year ended December 31, 2019
$ 500,000 - 550,000

 
$ 60,000 - 80,000

 



Strategic capital expenditures for the six months ended June 30, 2019 mainly consisted of pipeline expansions on our Permian Crude System, Northern Mexico refined products supply projects and an export project to connect our Corpus Christi North Beach terminal to long-haul pipelines transporting crude oil from the Permian Basin. Strategic capital expenditures for the six months ended June 30, 2018 consisted of pipeline expansions on our Permian Crude System and terminal expansions. Reliability capital expenditures primarily relate to maintenance upgrade projects at our terminals, including costs to repair the property damage at the St. Eustatius terminal.

For the year ended December 31, 2019, we expect a significant portion of our strategic capital spending to relate to our Permian Crude System and the Northern Mexico and export projects described above. A large portion of reliability capital spending for 2019 related to hurricane damage repairs at the St. Eustatius facility prior to the sale in July 2019, which was funded with insurance proceeds already received. We expect reliability capital spending for 2019 to also relate to the completion of our Ammonia Pipeline replacement project. We continue to evaluate our capital budget and make changes as economic conditions warrant, and our actual capital expenditures for 2019 may increase or decrease from the expected amounts noted above. We believe cash on hand, combined with the sources of liquidity previously described, will be sufficient to fund our capital expenditures in 2019, and our internal growth projects can be accelerated or scaled back depending on market conditions or customer demand.

Distributions
Common Units. Distribution payments are made to our common limited partners within 45 days after the end of each quarter as of a record date that is set after the end of each quarter. The following table summarizes information about quarterly cash distributions to our common limited partners:
Quarter Ended
 
Cash
Distributions
Per Unit
 
Total Cash
Distributions
 
Record Date
 
Payment Date
 
 
 
 
(Thousands of Dollars)
 
 
 
 
June 30, 2019
 
$
0.60

 
$
64,658

 
August 7, 2019
 
August 13, 2019
March 31, 2019
 
$
0.60

 
$
64,690

 
May 8, 2019
 
May 14, 2019

Preferred Units. Distributions on our preferred units are payable out of any legally available funds, accrue and are cumulative from the original issuance dates, and are payable on the 15th day (or next business day) of each of March, June, September and December of each year to holders of record on the first business day of each payment month.

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The following table provides the terms related to distributions for our Series A, Series B and Series C Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Units (collectively, the Series A, B and C Preferred Units):
Units
 
Fixed Distribution Rate Per Annum (as a Percentage of the $25.00 Liquidation Preference Per Unit)
 
Fixed Distribution Rate Per Unit Per Annum
 
Fixed Distribution Per Annum
 
Optional Redemption Date/Date at Which Distribution Rate Becomes Floating
 
Floating Annual Rate (as a Percentage of the
$25.00 Liquidation
Preference Per Unit)
 
 
 
 
 
 
(Thousands of Dollars)
 
 
 
 
Series A Preferred Units
 
8.50%
 
$
2.125

 
$
19,253

 
December 15, 2021
 
Three-month LIBOR plus 6.766%
Series B Preferred Units
 
7.625%
 
$
1.90625

 
$
29,357

 
June 15, 2022
 
Three-month LIBOR plus 5.643%
Series C Preferred Units
 
9.00%
 
$
2.25

 
$
15,525

 
December 15, 2022
 
Three-month LIBOR plus 6.88%

The distribution rate on our Series D Cumulative Convertible Preferred Units (the Series D Preferred Units) is: (i) 9.75% per annum (or $0.619 per unit per distribution period) for the first two years; (ii) 10.75% per annum (or $0.682 per unit per distribution period) for years three through five; and (iii) the greater of 13.75% per annum (or $0.872 per unit per distribution period) or the distribution per common unit thereafter. While the Series D Preferred Units are outstanding, the Partnership will be prohibited from paying distributions on any junior securities, including the common units, unless full cumulative distributions on the Series D Preferred Units (and any parity securities) have been, or contemporaneously are being, paid or set aside for payment through the most recent Series D Preferred Unit distribution payment date. Any Series D Preferred Unit distributions in excess of $0.635 may be paid, in the Partnership’s sole discretion, in additional Series D Preferred Units, with the remainder paid in cash.

In July 2019, our board of directors declared distributions with respect to the Series A, B and C Preferred Units and the Series D Preferred Units to be paid on September 16, 2019.

Debt Obligations
As of June 30, 2019, we were a party to the following debt agreements:
•
Revolving Credit Agreement due October 29, 2020, with $543.0 million of borrowings outstanding as of June 30, 2019;
•
4.80% senior notes due September 1, 2020 with a face value of $450.0 million; 6.75% senior notes due February 1, 2021 with a face value of $300.0 million; 4.75% senior notes due February 1, 2022 with a face value of $250.0 million; 6.0% senior notes due June 1, 2026 with a face value of $500.0 million; 5.625% senior notes due April 28, 2027 with a face value of $550.0 million; and subordinated notes due January 15, 2043 with a face value of $402.5 million and a floating interest rate, which was 9.3% as of June 30, 2019;
•
$365.4 million in GoZone Bonds due from 2038 to 2041;
•
Line of credit agreement with $6.0 million of borrowings outstanding as of June 30, 2019; and
•
Receivables Financing Agreement due September 20, 2021, with $62.8 million of borrowings outstanding as of June 30, 2019.

Management believes that, as of June 30, 2019, we are in compliance with the ratios and covenants contained in our debt instruments. A default under certain of our debt agreements would be considered an event of default under other of our debt instruments. Please refer to Note 5 of the Condensed Notes to Consolidated Financial Statements in Item 1. “Financial Statements” for a discussion of certain of our debt agreements.

Interest Rate Swaps
As of June 30, 2019 and December 31, 2018, we were a party to forward-starting interest rate swap agreements for the purpose of hedging interest rate risk. As of June 30, 2019 and December 31, 2018, the aggregate notional amount of these forward-starting interest rate swaps was $250.0 million. Please refer to Note 8 of the Condensed Notes to Consolidated Financial Statements in Item 1. “Financial Statements” for a more detailed discussion of our interest rate swaps.

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Table of Contents

Environmental, Health and Safety
Our operations are subject to extensive international, federal, state and local environmental laws and regulations, in the U.S. and in the other countries in which we operate, including those relating to the discharge of materials into the environment, waste management, remediation, the characteristics and composition of fuels, climate change and greenhouse gases. Our operations are also subject to extensive health, safety and security laws and regulations, including those relating to worker and pipeline safety, pipeline and storage tank integrity and operations security. Because more stringent environmental and safety laws and regulations are continuously being enacted or proposed, the level of expenditures required for environmental, health and safety matters is expected to increase in the future.

Contingencies
We are subject to certain loss contingencies, and we believe that the resolution of any particular claim or proceeding, or all matters in the aggregate, would not have a material adverse effect on our results of operations, financial position or liquidity, as further disclosed in Note 6 of the Condensed Notes to Consolidated Financial Statements in Item 1. “Financial Statements.”

CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Our critical accounting policies are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018.

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

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Table of Contents

Item 3.
Quantitative and Qualitative Disclosures About Market Risk

We manage our exposure to changing interest rates principally through the use of a combination of fixed-rate debt and variable-rate debt. In addition, we utilize forward-starting interest rate swap agreements to lock in the rate on the interest payments related to forecasted debt issuances. Borrowings under our variable-rate debt expose us to increases in interest rates. Since the operations of our fuels marketing segment expose us to commodity price risk, we also use derivative instruments to attempt to mitigate the effects of commodity price fluctuations. Derivative financial instruments associated with commodity price risk were not material for any periods presented.

Please refer to Note 8 of the Condensed Notes to Consolidated Financial Statements in Item 1. “Financial Statements” for a more detailed discussion of our interest rate swaps. The following tables present principal cash flows and related weighted-average interest rates by expected maturity dates for our long-term debt, excluding finance leases:
 
June 30, 2019
 
Expected Maturity Dates
 
 
 
 
 
2019
 
2020
 
2021
 
2022
 
2023
 
There-
after
 
Total
 
Fair
Value
 
(Thousands of Dollars, Except Interest Rates)
Long-term Debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-rate
$
—

 
$
450,000

 
$
300,000

 
$
250,000

 
$
—

 
$
1,050,000

 
$
2,050,000

 
$
2,098,945

Weighted-average rate
—

 
4.8
%
 
6.8
%
 
4.8
%
 
—

 
5.8
%
 
5.6
%
 
 
Variable-rate
$
—

 
$
543,000

 
$
62,800

 
$
—

 
$
—

 
$
767,940

 
$
1,373,740

 
$
1,374,861

Weighted-average rate
—

 
4.4
%
 
3.3
%
 
—

 
—

 
5.8
%
 
5.1
%
 
 

 
December 31, 2018
 
Expected Maturity Dates
 
 
 
 
 
2019
 
2020
 
2021
 
2022
 
2023
 
There-
after
 
Total
 
Fair
Value
 
(Thousands of Dollars, Except Interest Rates)
Long-term Debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-rate
$
—

 
$
450,000

 
$
300,000

 
$
250,000

 
$
—

 
$
550,000

 
$
1,550,000

 
$
1,499,920

Weighted-average rate
—

 
4.8
%
 
6.8
%
 
4.8
%
 
—

 
5.6
%
 
5.5
%
 
 
Variable-rate
$
—

 
$
806,800

 
$
—

 
$
—

 
$
—

 
$
767,940

 
$
1,574,740

 
$
1,556,784

Weighted-average rate
—

 
4.4
%
 
—

 
—

 
—

 
5.6
%
 
5.0
%
 
 

The following table presents information regarding our forward-starting interest rate swap agreements:
Notional Amount
 
 
 
Weighted-Average Fixed Rate
 
Fair Value
June 30, 2019
 
December 31, 2018
 
Period of Hedge
 
 
June 30, 2019
 
December 31, 2018
(Thousands of Dollars)
 
 
 
 
 
(Thousands of Dollars)
$
250,000

 
$
250,000

 
09/2020 - 09/2030
 
2.8
%
 
$
(16,716
)
 
$
(124
)
 

 


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Table of Contents

Item 4.
Controls and Procedures

(a)
Evaluation of disclosure controls and procedures.
Our management has evaluated, with the participation of the principal executive officer and principal financial officer of NuStar GP, LLC, the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report, and has concluded that our disclosure controls and procedures were effective as of June 30, 2019.
(b)
Changes in internal control over financial reporting.
There has been no change in our internal control over financial reporting that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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Table of Contents

PART II - OTHER INFORMATION


Item 6.
Exhibits
Exhibit
Number
 
Description
 
 
 
10.01

 
 
 
 
10.02

 
 
 
 
10.03

 
 
 
 
10.04

 
 
 
10.05

 
 
 
 
*10.06

 
 
 
 
*10.07

 
 
 
 
*31.01

 
 
 
*31.02

 
 
 
**32.01

 
 
 
**32.02

 
 
 
*101.INS

 
XBRL Instance Document - The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
 
 
 
*101.SCH

 
XBRL Taxonomy Extension Schema Document
 
 
 
*101.CAL

 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
*101.DEF

 
XBRL Taxonomy Extension Definition Linkbase Document
 
 
 
*101.LAB

 
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
*101.PRE

 
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
*104

 
Cover Page Interactive Data File - The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
*

Filed herewith.
**

Furnished herewith.

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

By: Riverwalk Logistics, L.P., its general partner
By: NuStar GP, LLC, its general partner
 
By:
 
/s/ Bradley C. Barron
 
 
Bradley C. Barron
 
 
President and Chief Executive Officer
 
 
August 9, 2019
 
 
 
By:
 
/s/ Thomas R. Shoaf
 
 
Thomas R. Shoaf
 
 
Executive Vice President and Chief Financial Officer
 
 
August 9, 2019
 
 
 
By:
 
/s/ Jorge A. del Alamo
 
 
Jorge A. del Alamo
 
 
Senior Vice President and Controller
 
 
August 9, 2019

50