UNIT-BASED COMPENSATION

Please refer to Note 28 for a discussion of the merger of a subsidiary of ours with and into NuStar GP Holdings, pursuant to which we will become the sole member of NuStar GP Holdings.

Overview

On January 28, 2016, our unitholders approved the Fifth Amended and Restated 2000 Long-Term Incentive Plan (the 2000 LTIP) which, among other items, provides that we may use newly issued common units from NuStar Energy to satisfy unit awards and extends the term of the 2000 LTIP to January 28, 2026. Prior to the Employee Transfer, NuStar GP, LLC sponsored the 2000 LTIP, and we reimbursed NuStar GP, LLC for awards under this plan. Following the approval of the 2000 LTIP and the Employee Transfer in 2016, most of our currently outstanding awards are now classified as equity awards as we intend to settle these awards through the issuance of our common units.

Effective March 1, 2016, we assumed sponsorship of the 2000 LTIP, which provides the Compensation Committee of the Board of Directors of NuStar GP, LLC (the Compensation Committee) with the right to issue and award up to 3,250,000 of our common units to employees and non-employee directors (NEDs). Awards available under the 2000 LTIP include restricted units, performance units, unit options, unit awards and distribution equivalent rights (DERs). The Compensation Committee may also include a tandem grant of a DER that will entitle the participant to receive cash equal to cash distributions made on any award prior to its vesting. As of December 31, 2017, common units that remained available to be awarded under the 2000 LTIP totaled 679,045.

On March 1, 2016, we assumed all outstanding awards under the 2000 LTIP. The transfer of the outstanding awards qualifies as a plan modification. Therefore, we measured the fair value of the outstanding awards based on the common unit price on the transfer date.

The following table summarizes information pertaining to our long-term incentive plan compensation expense:



	Units Outstanding December 31,		Transferred Units	Compensation Expense Year Ended December 31,
	2017	2016	March 1, 2016	2017		2016
				(Thousands of Dollars)
Restricted Units:
Domestic employees	736,746	647,340	586,524	$	7,881	$	5,980
Non-employee directors (NEDs)	27,097	18,134	17,629	251		388
International employees	58,107	50,609	49,121	595		715
Performance Units	80,961	77,014	77,014	—		1,211
Total	902,911	793,097	730,288	$	8,727	$	8,294

Prior to the Employee Transfer, we reimbursed NuStar GP, LLC for our long-term incentive plan compensation expense which totaled $6.4 million for the year ended December 31, 2015.

Restricted Units

Our restricted unit awards are considered phantom units as they represent the right to receive our common units upon vesting.

We account for restricted units as either equity-classified awards or liability-classified awards depending on expected method of settlement. Awards we settle with the issuance of common units upon vesting are equity-classified. Awards we settle in cash upon vesting are liability-classified. We record compensation expense ratably over the vesting period based on the fair value of the common units at the grant date (for domestic employees) or the fair value of the common units measured at each reporting period (for NEDs and international employees). DERs paid with respect to outstanding equity-classified unvested restricted units reduce equity, similar to cash distributions to unitholders, whereas DERs paid with respect to outstanding liability-classified unvested restricted units are expensed. In connection with the DERs, we paid or expect to pay $3.0 million and $2.7 million, respectively, in cash, for the years ended December 31, 2017 and 2016. A summary of our restricted unit activity is as follows:



	Domestic Employees
	Number of Restricted Units		Weighted- Average Grant-Date Fair Value Per Unit		Number of Restricted Units to NEDs		Number of Restricted Units to International Employees
Nonvested units as of January 1, 2016	—		$	—	—		—
Transferred	586,524		35.03		17,629		49,121
Granted	246,070		47.70		8,730		20,107
Vested	(180,724	)	35.50		(8,225	)	(14,812	)
Forfeited	(4,530	)	35.03		—		(3,807	)
Nonvested units as of December 31, 2016	647,340		39.72		18,134		50,609
Granted	307,009		29.56		17,110		24,533
Vested	(201,466	)	38.74		(8,147	)	(16,440	)
Forfeited	(16,137	)	40.00		—		(595	)
Nonvested units as of December 31, 2017	736,746		$	35.95	27,097		58,107

The total fair value of our equity-classified awards vested for the years ended December 31, 2017 and 2016 was $6.5 million and $9.0 million, respectively. We issued 152,017 common units in connection with these award vestings, net of employee tax withholding requirements, for the year ended December 31, 2017. Unrecognized compensation cost related to our equity-classified employee awards totaled $25.5 million as of December 31, 2017, which we expect to recognize over a weighted-average period of 3.7 years.

Domestic Employees. The outstanding restricted units granted to domestic employees are equity-classified awards and generally vest over five years, beginning one year after the grant date. The fair value of these awards is measured at the transfer date (or grant date for issuances subsequent to the Employee Transfer).

Non-Employee Directors. The outstanding restricted units granted to NEDs are equity-classified awards that vest over three years. The fair value of these awards is equal to the market price of our common units at each reporting period.

International Employees. The outstanding restricted units granted to international employees are cash-settled and accounted for as liability-classified awards. These awards vest over three to five years and the fair value is equal to the market price of our common units at each reporting period.

Performance Units

Performance units are issued to certain of our key employees and represent rights to receive our common units upon achieving an objective performance measure for the performance period. The objective performance measure is determined each year by the NuStar GP, LLC Compensation Committee for the following year. Achievement of the performance measure determines the rate at which the performance units convert into our common units, which can range from zero to 200%.

Performance units vest in three annual increments (tranches), based upon our achievement of the performance measure set by the Compensation Committee during the one-year performance periods that end on December 31 of each year following the date of grant. Therefore, the performance units are not considered granted for accounting purposes until the Compensation Committee has set the performance measure for each tranche of awards. Performance units are equity-classified awards measured at the grant date fair value. In addition, since the performance units granted do not receive DERs, the grant date fair value of these awards is reduced by the per unit distributions expected to be paid to common unitholders during the vesting period. We record compensation expense ratably for each vesting tranche over its requisite service period (one year) if it is probable that the specified performance measure will be achieved. Additionally, changes in the actual or estimated outcomes that affect the quantity of performance units expected to be converted are recognized as a cumulative adjustment.

For the period from the Employee Transfer date to December 31, 2016, no performance units were granted or forfeited. For the year ended December 31, 2017, we issued 33,438 common units in connection with the performance award vestings related to 2016 performance, net of employee tax withholding requirements. For 2017, we did not achieve the performance measure.

A summary of our performance units is shown below:



			Granted for Accounting Purposes
	Total Performance Units Awarded		Performance Units		Weighted-Average Grant Date Fair Value per Unit
Outstanding as of January 1, 2017	77,014		35,373		$	31.75
Granted	39,320		38,865		50.04
Vested	(35,373	)	(35,373	)	31.75
Outstanding as of December 31, 2017	80,961		38,865		$	50.04

Performance units vested during the year ended December 31, 2017 with respect to 2016 performance were as follows:



	Vested Units	Actual Conversion Rate		Gross Number of Units Issued
2014 awards	9,613	150	%	14,420
2015 awards	9,878	150	%	14,818
2016 awards	15,882	150	%	23,825
Total	35,373			53,063