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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 September 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
  _________________________________________
NUSTARJPEG.JPG
NuStar Energy L.P.
(Exact name of registrant as specified in its charter)
  _________________________________________
Delaware
 
74-2956831
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
19003 IH-10 West
San Antonio, Texas
(Address of principal executive offices)
78257
(Zip Code)
Registrant’s telephone number, including area code (210918-2000
 _______________________________________
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  þ    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 þ    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
 
þ
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  þ

The number of common units outstanding as of October 31, 2019 was 107,785,598.



Table of Contents

NUSTAR ENERGY L.P.
FORM 10-Q
TABLE OF CONTENTS
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
6
 
 
 
 
 
 
 
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)
 
September 30,
2019
 
December 31,
2018
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
15,354

 
$
11,529

Accounts receivable, net of allowance for doubtful accounts of $72 and $9,412 as of September 30, 2019 and December 31, 2018, respectively
130,549

 
110,417

Inventories
10,123

 
8,434

Prepaid and other current assets
31,925

 
17,374

Assets held for sale

 
599,347

Total current assets
187,951

 
747,101

Property, plant and equipment, at cost
6,090,131

 
5,627,805

Accumulated depreciation and amortization
(2,014,791
)
 
(1,853,003
)
Property, plant and equipment, net
4,075,340

 
3,774,802

Intangible assets, net
694,488

 
733,056

Goodwill
1,005,853

 
1,005,853

Other long-term assets, net
172,204

 
88,328

Total assets
$
6,135,836

 
$
6,349,140

Liabilities, Mezzanine Equity and Partners’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
102,209

 
$
103,122

Short-term debt and current portion of finance leases
15,664

 
18,500

Current portion of long-term debt
453,241

 

Accrued interest payable
40,902

 
36,293

Accrued liabilities
99,889

 
74,418

Taxes other than income tax
15,282

 
16,823

Income tax payable
3,050

 
4,445

Liabilities held for sale

 
69,834

Total current liabilities
730,237

 
323,435

Long-term debt, less current portion
2,898,477

 
3,111,996

Deferred income tax liability
12,097

 
12,428

Other long-term liabilities
148,108

 
79,558

Total liabilities
3,788,919

 
3,527,417

 
 
 
 
Commitments and contingencies (Note 6)

 

 
 
 
 
Series D preferred limited partners (23,246,650 preferred units outstanding as of
September 30, 2019 and December 31, 2018) (Note 9)
577,191

 
563,992

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

 
218,307

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

 
371,476

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

 
166,518

Common limited partners (107,766,142 and 107,225,156 common units outstanding
as of September 30, 2019 and December 31, 2018, respectively)
1,092,686

 
1,556,308

Accumulated other comprehensive loss
(79,261
)
 
(54,878
)
Total partners’ equity
1,769,726

 
2,257,731

Total liabilities, mezzanine equity and partners’ equity
$
6,135,836

 
$
6,349,140

See Condensed Notes to Consolidated Financial Statements.

3



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 September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Revenues:
 
 
 
 
 
 
 
Service revenues
$
289,258

 
$
270,269

 
$
830,757

 
$
777,937

Product sales
88,798

 
109,873

 
267,570

 
368,188

Total revenues
378,056

 
380,142

 
1,098,327

 
1,146,125

Costs and expenses:
 
 
 
 
 
 
 
Costs associated with service revenues:
 
 
 
 
 
 
 
Operating expenses (excluding depreciation and amortization expense)
100,852

 
94,673

 
297,358

 
283,481

Depreciation and amortization expense
66,332


62,111

 
196,141

 
183,712

Total costs associated with service revenues
167,184

 
156,784


493,499


467,193

Cost of product sales
80,880


105,746

 
253,451

 
352,347

General and administrative expenses (excluding depreciation and amortization expense)
27,804

 
26,255

 
78,363

 
71,151

Other depreciation and amortization expense
2,216

 
2,192

 
6,154

 
6,389

Total costs and expenses
278,084

 
290,977


831,467


897,080

Operating income
99,972

 
89,165

 
266,860

 
249,045

Interest expense, net
(46,902
)
 
(44,314
)
 
(136,886
)
 
(140,091
)
Other income, net
608

 
925

 
2,020

 
3,548

Income from continuing operations before income
tax expense
53,678

 
45,776

 
131,994

 
112,502

Income tax expense
1,090

 
2,113

 
3,568

 
8,697

Income from continuing operations
52,588

 
43,663

 
128,426

 
103,805

(Loss) income from discontinued operations, net of tax
(4,777
)
 
4,473

 
(312,527
)
 
99,863

Net income (loss)
$
47,811

 
$
48,136

 
$
(184,101
)
 
$
203,668

 
 
 
 
 
 
 
 
Basic and diluted net income (loss) per common unit (Note 11):
 
 
 
 
 
 
 
Continuing operations
$
0.15

 
$
(3.53
)
 
$
0.20

 
$
(3.51
)
Discontinued operations
(0.04
)
 
0.04

 
(2.90
)
 
1.01

Total net income (loss) per common unit
$
0.11

 
$
(3.49
)
 
$
(2.70
)
 
$
(2.50
)
 
 
 
 
 
 
 
 
Basic weighted-average common units outstanding
107,763,870

 
104,264,796

 
107,687,019

 
96,920,202

Diluted weighted-average common units outstanding
107,875,529

 
104,264,796

 
107,724,648

 
96,920,202

 
 
 
 
 
 
 
 
Comprehensive income (loss)
$
36,213

 
$
53,037

 
$
(208,484
)
 
$
226,872

See Condensed Notes to Consolidated Financial Statements.

4



NUSTAR ENERGY L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, Thousands of Dollars)
 
Nine Months Ended September 30,
 
2019
 
2018
Cash Flows from Operating Activities:
 
 
 
Net (loss) income
$
(184,101
)
 
$
203,668

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 
 
 
Depreciation and amortization expense
210,831

 
223,579

Unit-based compensation expense
10,060

 
8,689

Amortization of debt related items
3,991

 
5,926

Loss (gain) from sale or disposition of assets
2,569

 
(1,264
)
Asset and goodwill impairment losses
336,838

 

Gain from insurance recoveries

 
(78,756
)
Deferred income tax (benefit) expense
(605
)
 
1,340

Changes in current assets and current liabilities (Note 12)
(38,082
)
 
31,243

Decrease (increase) in other long-term assets
18,119

 
(2,324
)
Decrease in other long-term liabilities
(3,223
)
 
(28,171
)
Other, net
(1,736
)
 
(610
)
Net cash provided by operating activities
354,661

 
363,320

Cash Flows from Investing Activities:
 
 
 
Capital expenditures
(435,043
)
 
(338,440
)
Change in accounts payable related to capital expenditures
(12,641
)
 
(18,630
)
Proceeds from sale or disposition of assets
314

 
2,220

Proceeds from sale of the St. Eustatius Operations (Note 3)
227,709

 

Proceeds from insurance recoveries

 
78,419

Acquisitions

 
(37,502
)
Investment in other long-term assets

 
(3,280
)
Other, net
(1,100
)
 

Net cash used in investing activities
(220,761
)
 
(317,213
)
Cash Flows from Financing Activities:
 
 
 
Proceeds from long-term debt borrowings
565,400

 
985,453

Proceeds from short-term debt borrowings
253,500

 
538,500

Proceeds from note offering, net of issuance costs
491,588

 

Long-term debt repayments
(870,600
)
 
(1,215,498
)
Short-term debt repayments
(260,500
)
 
(563,000
)
Proceeds from issuance of Series D preferred units

 
590,000

Payment of issuance costs for Series D preferred units

 
(34,187
)
Proceeds from issuance of common units, including contributions from general partner

 
10,204

Distributions to preferred unitholders
(91,269
)
 
(60,247
)
Distributions to common unitholders and general partner
(193,683
)
 
(236,549
)
Cash consideration for Merger (Note 1)

 
(61,271
)
Proceeds from termination of interest rate swaps

 
8,048

Payment of tax withholding for unit-based compensation
(6,578
)
 
(557
)
Decrease in cash book overdrafts
(4,741
)
 
(27
)
Other, net
(7,218
)
 
(5,970
)
Net cash used in financing activities
(124,101
)
 
(45,101
)
Effect of foreign exchange rate changes on cash
681

 
(719
)
Net increase in cash, cash equivalents and restricted cash
10,480

 
287

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
$
24,124

 
$
24,579

See Condensed Notes to Consolidated Financial Statements.

5


NUSTAR ENERGY L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS’ EQUITY AND MEZZANINE EQUITY
Three Months Ended September 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 June 30, 2019
$
756,301

 
$
1,140,665

 
$

 
$
(67,663
)
 
$
1,829,303

 
$
572,597

 
$
2,401,900

Net income
16,034

 
17,388

 

 

 
33,422

 
14,389

 
47,811

Other comprehensive loss

 

 

 
(11,598
)
 
(11,598
)
 

 
(11,598
)
Distributions to partners:
 
 
 
 
 
 
 
 
 
 
 
 
 
Series A, B and C preferred
(16,034
)
 

 

 

 
(16,034
)
 

 
(16,034
)
Common ($0.60 per unit)

 
(64,658
)
 

 

 
(64,658
)
 

 
(64,658
)
Series D preferred

 

 

 

 

 
(14,389
)
 
(14,389
)
Unit-based compensation

 
3,532

 

 

 
3,532

 

 
3,532

Series D preferred unit accretion

 
(4,592
)
 

 

 
(4,592
)
 
4,592

 

Other

 
351

 

 

 
351

 
2

 
353

Balance as of September 30, 2019
$
756,301

 
$
1,092,686

 
$

 
$
(79,261
)
 
$
1,769,726

 
$
577,191

 
$
2,346,917

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of June 30, 2018
$
756,334

 
$
1,740,768

 
$
25,999

 
$
(66,624
)
 
$
2,456,477

 
$
370,711

 
$
2,827,188

Net income
16,033

 
18,255

 

 

 
34,288

 
13,848

 
48,136

Other comprehensive income

 

 

 
4,901

 
4,901

 

 
4,901

Distributions to partners:
 
 
 
 
 
 
 
 
 
 
 
 


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

 

 

 
(16,033
)
 

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

 
(64,225
)
 

 

 
(64,225
)
 

 
(64,225
)
Series D preferred

 

 

 

 

 
(13,848
)
 
(13,848
)
Issuance of Series D preferred units

 

 

 

 

 
185,102

 
185,102

Unit-based compensation

 
3,508

 

 

 
3,508

 

 
3,508

Adjustments related to the Merger
(Note 1)

 
(41,973
)
 
(25,999
)
 

 
(67,972
)
 

 
(67,972
)
Series D Preferred Unit accretion

 
(4,031
)
 

 

 
(4,031
)
 
4,031

 

Other
(31
)
 

 

 

 
(31
)
 

 
(31
)
Balance as of September 30, 2018
$
756,303

 
$
1,652,302

 
$

 
$
(61,723
)
 
$
2,346,882

 
$
559,844

 
$
2,906,726

See Condensed Notes to Consolidated Financial Statements.

6


NUSTAR ENERGY L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS’ EQUITY AND MEZZANINE EQUITY
Nine Months Ended September 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)
48,100

 
(275,370
)
 

 

 
(227,270
)
 
43,169

 
(184,101
)
Other comprehensive loss

 

 

 
(24,383
)
 
(24,383
)
 

 
(24,383
)
Distributions to partners:
 
 
 
 
 
 
 
 

 
 
 

Series A, B and C preferred
(48,100
)
 

 

 

 
(48,100
)
 

 
(48,100
)
Common ($1.80 per unit)

 
(193,683
)
 

 

 
(193,683
)
 

 
(193,683
)
Series D preferred

 

 

 

 

 
(43,169
)
 
(43,169
)
Unit-based compensation

 
19,218

 

 

 
19,218

 

 
19,218

Series D preferred unit accretion

 
(13,340
)
 

 

 
(13,340
)
 
13,340

 

Other

 
(447
)
 

 

 
(447
)
 
(141
)
 
(588
)
Balance as of September 30, 2019
$
756,301

 
$
1,092,686

 
$

 
$
(79,261
)
 
$
1,769,726

 
$
577,191

 
$
2,346,917

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of January 1, 2018
$
756,603

 
$
1,770,587

 
$
37,826

 
$
(84,927
)
 
$
2,480,089

 
$

 
$
2,480,089

Net income
48,056

 
139,086

 
2,466

 

 
189,608

 
14,060

 
203,668

Other comprehensive income

 

 

 
23,204

 
23,204

 

 
23,204

Distributions to partners:
 
 
 
 
 
 
 
 

 
 
 


Series A, B and C preferred
(48,056
)
 

 

 

 
(48,056
)
 

 
(48,056
)
Common ($2.295 per unit)
and general partner

 
(222,170
)
 
(14,379
)
 

 
(236,549
)
 

 
(236,549
)
Series D preferred

 

 

 

 

 
(14,060
)
 
(14,060
)
Issuance of common units, including contribution from general partner

 
10,000

 
204

 

 
10,204

 

 
10,204

Issuance of Series D preferred units

 

 

 

 

 
555,813

 
555,813

Unit-based compensation

 
6,559

 

 

 
6,559

 

 
6,559

Adjustments related to the Merger
(Note 1)

 
(41,973
)
 
(25,999
)
 

 
(67,972
)
 

 
(67,972
)
Series D Preferred Unit accretion

 
(4,031
)
 

 

 
(4,031
)
 
4,031

 

Other
(300
)
 
(5,756
)
 
(118
)
 

 
(6,174
)
 

 
(6,174
)
Balance as of September 30, 2018
$
756,303

 
$
1,652,302

 
$

 
$
(61,723
)
 
$
2,346,882

 
$
559,844

 
$
2,906,726

See Condensed Notes to Consolidated Financial Statements.

7


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 (the Merger). 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 accounted for the Merger as an equity transaction similar to a redemption or induced conversion of preferred stock, which resulted in a loss of $377.1 million that was subtracted from net income attributable to common unitholders in the calculation of net income (loss) per common unit for the three and nine months ended September 30, 2018. Please refer to Note 11 for the calculation of net income (loss) per common unit.

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 sold our 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 nine months ended September 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.

New Accounting Policy
As of September 30, 2019, we have restricted cash representing legally restricted funds that are unavailable for general use totaling $8.8 million, which is included in “Prepaid and other current assets” on the consolidated balance sheet.


8

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

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.

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 is permitted. We currently expect to adopt the guidance on January 1, 2020 on a prospective basis. 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. Under the amended guidance, goodwill impairment is 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 expect to adopt the amended guidance on January 1, 2020. Currently, we do not expect the amended guidance to have a material impact on our financial position, results of operations or disclosures.

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.


9

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

3. DISCONTINUED OPERATIONS AND IMPAIRMENTS

On July 29, 2019, we sold our 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 previously reported the terminal operations in our storage segment and the bunkering operations in our fuels marketing segment. We received net proceeds of $227.7 million as of September 30, 2019. We recognized a non-cash loss of $3.9 million in “(Loss) income from discontinued operations, net of tax” on the condensed consolidated statements of comprehensive income (loss) in the third quarter of 2019.

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).

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 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 were 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 sheet reflects the assets and liabilities associated with the St. Eustatius Operations as held for sale as of December 31, 2018, and the condensed consolidated statements of comprehensive income (loss) 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 September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
(Thousands of Dollars)
Revenues
$
17,501

 
$
110,221

 
$
248,981

 
$
306,323

Costs and expenses:
 
 
 
 
 
 
 
Cost of revenues
17,715

 
102,463

 
220,595

 
277,096

Impairment losses

 

 
336,838

 

General and administrative expenses (excluding depreciation and amortization expense)
621

 
1,562

 
1,231

 
4,421

Other depreciation and amortization expense

 
84

 

 
256

Total costs and expenses
18,336

 
104,109

 
558,664

 
281,773

Operating (loss) income
(835
)

6,112


(309,683
)

24,550

Interest (expense) income, net

 
(511
)
 
32

 
(1,442
)
Other (expense) income, net
(3,942
)
 
(5
)
 
(2,775
)
 
78,536

(Loss) income from discontinued operations before income
tax expense
(4,777
)

5,596


(312,426
)

101,644

Income tax expense

 
1,123

 
101

 
1,781

(Loss) income from discontinued operations, net of tax
$
(4,777
)
 
$
4,473

 
$
(312,527
)
 
$
99,863




10

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

The consolidated statements of cash flows have not been adjusted to separately disclose cash flows related to discontinued operations. The following table presents selected cash flow information associated with our discontinued operations:
 
Nine Months Ended September 30,
 
2019
 
2018
 
(Thousands of Dollars)
Capital expenditures
$
(27,954
)
 
$
(99,327
)
 
 
 
 
Significant noncash operating activities:
 
 
 
Depreciation and amortization expense
$
8,536

 
$
33,478

Asset impairment losses
$
305,715

 
$

Goodwill impairment loss
$
31,123

 
$

Loss from sale of the St. Eustatius Operations
$
3,942

 
$

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 the 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.

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 consisted of our bunkering operations at the 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 for the Statia Bunkering reporting unit.

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


11

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

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 sheet:
 
December 31, 2018
 
(Thousands of Dollars)
Total current assets
$
54,404

Property, plant and equipment, net
513,820

Goodwill
31,123

Assets held for sale
$
599,347

 
 
Current liabilities
$
69,834



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
3,091

 
(41,211
)
 
1,086

 
(64,492
)
Transfer to accounts receivable
(3,956
)
 

 
(2,576
)
 

Transfer to revenues, including amounts
reported in discontinued operations

 
67,171

 

 
42,417

Total
(865
)
 
25,960

 
(1,490
)
 
(22,075
)
 
 
 
 
 
 
 
 
Balances as of September 30:
 
 
 
 
 
 
 
Current portion
343

 
(21,245
)
 
227

 
(10,886
)
Noncurrent portion
1,397

 
(38,676
)
 
410

 
(37,083
)
Held for sale

 

 

 
(34,570
)
Total
$
1,740

 
$
(59,921
)
 
$
637

 
$
(82,539
)


As previously discussed in Note 3, the inclusion of PDVSA on the SDN List prevented us from providing services to PDVSA unless these sanctions were 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.


12

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

Remaining Performance Obligations
The following table presents our estimated revenue from contracts with customers for remaining performance obligations that has not yet been recognized, representing our contractually committed revenue as of September 30, 2019 (in thousands of dollars):
2019 (remaining)
 
$
135,006

2020
 
476,405

2021
 
331,169

2022
 
278,062

2023
 
206,542

Thereafter
 
376,382

Total
 
$
1,803,566



Our contractually committed revenue, for purposes of the tabular presentation above, is generally limited to customer service contracts that have fixed pricing and fixed volume terms and conditions, generally including contracts with payment obligations for take-or-pay minimum volume commitments.

Disaggregation of Revenues
The following table disaggregates our revenues:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
(Thousands of Dollars)
Pipeline segment:
 
 
 
 
 
 
 
Crude oil pipelines
$
81,287

 
$
67,543

 
$
227,058

 
$
181,487

Refined products and ammonia pipelines
95,219

 
95,300

 
272,859

 
268,368

Total pipeline segment revenues from contracts with customers
176,506

 
162,843


499,917


449,855

Lessor revenues
2,667

 

 
8,000

 
54

Total pipeline segment revenues
179,173

 
162,843


507,917


449,909

 
 
 
 
 
 
 
 
Storage segment:
 
 
 
 
 
 
 
Throughput terminals
26,333

 
21,143

 
71,189

 
61,300

Storage terminals
77,209

 
79,127

 
225,869

 
245,030

Total storage segment revenues from contracts with customers
103,542

 
100,270


297,058


306,330

Lessor revenues
10,193

 
9,963

 
30,580

 
29,887

Total storage segment revenues
113,735

 
110,233


327,638


336,217

 
 
 
 
 
 
 
 
Fuels marketing segment:
 
 
 
 
 
 
 
Revenues from contracts with customers
85,148

 
107,072

 
262,776

 
360,023

 
 
 
 
 
 
 
 
Consolidation and intersegment eliminations

 
(6
)
 
(4
)
 
(24
)
 
 
 
 
 
 
 
 
Total revenues
$
378,056

 
$
380,142


$
1,098,327


$
1,146,125




13

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

5. DEBT

Revolving Credit Agreement
On September 12, 2019, NuStar Logistics amended its revolving credit agreement (the Revolving Credit Agreement) primarily to extend the maturity date to October 29, 2021 and reduce the total amount available for borrowing from $1.4 billion to $1.2 billion.

As of September 30, 2019, we had $445.0 million outstanding under 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 September 30, 2019, our weighted-average interest rate related to borrowings under the Revolving Credit Agreement was 4.2%.

For the rolling period of four quarters ending September 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 September 30, 2019, we had $751.5 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 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 September 30, 2019 was 2.9%. As of September 30, 2019, $109.8 million of our accounts receivable are included in the Securitization Program. The amount of borrowings outstanding under the Receivables Financing Agreement totaled $56.6 million as of September 30, 2019, which is included in “Long-term debt, less current portion” 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 $491.6 million, which we 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.




14

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

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 $3.7 million for contingent losses as of September 30, 2019 and $2.8 million as of 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;
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 land and dock leases at various terminal facilities. Land and dock leases have remaining terms generally ranging from 3 years to 17 years and include options to extend up to 15 years, which we are reasonably certain to exercise.

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

15

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

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 September 30, 2019, right-of-use assets and lease liabilities included in our consolidated balance sheet were as follows:
 
 
Balance Sheet Location
 
September 30, 2019
 
 
 
 
(Thousands of Dollars)
Right-of-Use Assets:
 
 
 
 
Operating
 
Other long-term assets, net
 
$
84,143

Finance
 
Property, plant and equipment, net of accumulated
amortization of $2,703
 
$
74,161

 
 
 
 
 
Lease Liabilities:
 
 
 
 
Operating:
 
 
 
 
Current
 
Accrued liabilities
 
$
11,354

Noncurrent
 
Other long-term liabilities
 
71,664

Total operating lease liabilities
 
 
 
$
83,018

Finance:
 
 
 
 
Current
 
Short-term debt and current portion of finance leases
 
$
4,164

Noncurrent
 
Long-term debt, less current portion
 
55,105

Total finance lease liabilities
 
 
 
$
59,269



As of September 30, 2019, maturities of our operating and finance lease liabilities were as follows:
 
 
Operating Leases
 
Finance Leases
 
 
(Thousands of Dollars)
2019 (remaining)
 
$
3,256

 
$
1,576

2020
 
12,642

 
6,306

2021
 
9,419

 
4,855

2022
 
8,717

 
4,186

2023
 
7,605

 
4,109

Thereafter
 
67,093

 
63,418

Total lease payments
 
$
108,732

 
$
84,450

Less: Interest
 
25,714

 
25,181

Present value of lease liabilities
 
$
83,018

 
$
59,269



Costs incurred for leases, including costs associated with discontinued operations, were as follows:
 
 
Three Months Ended September 30, 2019
 
Nine Months Ended September 30, 2019
 
 
(Thousands of Dollars)
Operating lease cost
 
$
5,978

 
$
24,920

Finance lease cost:
 
 
 
 
Amortization of right-of-use assets
 
962

 
2,703

Interest expense on lease liability
 
554

 
1,653

Short-term lease cost
 
5,051

 
14,974

Variable lease cost
 
1,256

 
3,044

Total lease cost
 
$
13,801

 
$
47,294



16

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

The table below presents additional information regarding our leases:
 
 
Operating Leases
 
Finance Leases
 
 
(Thousands of Dollars, Except Term and Rate Data)
For the nine months ended September 30, 2019:
 
 
 
 
Cash outflows from operating activities
 
$
24,314

 
$
1,469

Cash outflows from financing activities
 
$

 
$
2,586

Right-of-use assets obtained in exchange for lease liabilities
 
$
2,153

 
$
2,593

As of September 30, 2019:
 
 
 
 
Weighted-average remaining lease term (in years)
 
15

 
21

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 $30.6 million for the nine months ended September 30, 2019, which are included in “Service revenues” in the consolidated statements of income. As of September 30, 2019, we expect to receive minimum lease payments totaling $283.4 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 September 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 $234.8 million and $119.4 million, respectively.

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 that terminate in September 2020 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 September 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
 
September 30,
2019
 
December 31,
2018
 
September 30,
2019
 
December 31,
2018
 
 
(Thousands of Dollars)
Other long-term assets, net
 
$

 
$
627

 
$

 
$

Accrued liabilities
 
$

 
$

 
$
(27,582
)
 
$

Other long-term liabilities
 
$

 
$

 
$

 
$
(751
)


17

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

Our forward-starting interest rate swaps had the following impact on earnings:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
(Thousands of Dollars)
 
 
 
 
(Loss) gain recognized in other comprehensive income (loss) on derivative
$
(10,866
)
 
$
3,540

 
$
(27,458
)
 
$
26,067

Loss reclassified from AOCI into interest expense, net
$
(906
)
 
$
(1,719
)
 
$
(2,989
)
 
$
(4,271
)


As of September 30, 2019, we expect to reclassify a loss of $2.6 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 Level 2 non-recurring fair value measurement associated with the impairment of long-lived assets related to the St. Eustatius terminal.

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, including the current portion and excluding finance leases, were as follows:
 
September 30, 2019
 
December 31, 2018
 
(Thousands of Dollars)
Fair value
$
3,435,992

 
$
3,056,704

Carrying amount
$
3,296,613

 
$
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, 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 (beginning with the September 17, 2018 distribution); (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

18

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

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

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) equal to the amount of 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 October 2019, our board of directors declared distributions with respect to the Series A, B and C Preferred Units to be paid on December 16, 2019.

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)
 
 
 
 
September 30, 2019
 
$
0.60

 
$
64,660

 
November 8, 2019
 
November 14, 2019
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



19

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

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
1,802

 
(27,458
)
 

 
(25,656
)
Net gain on pension costs reclassified into other income, net

 

 
(1,736
)
 
(1,736
)
Net loss on cash flow hedges reclassified into interest
expense, net

 
2,989

 

 
2,989

Other

 

 
20

 
20

Other comprehensive income (loss)
1,802

 
(24,469
)
 
(1,716
)
 
(24,383
)
Balance as of September 30, 2019
$
(45,497
)
 
$
(25,362
)
 
$
(8,402
)
 
$
(79,261
)


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 income (loss) 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.


20

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 September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
(Thousands of Dollars, Except Unit and Per Unit Data)
Net income (loss)
$
47,811

 
$
48,136

 
$
(184,101
)
 
$
203,668