10-K 1 nsh201710-k.htm 10-K Document


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
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 1-32940
nustargpholdingsllclogo16a03.jpg
NUSTAR GP HOLDINGS, LLC
(Exact name of registrant as specified in its charter)
Delaware
 
85-0470977
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
19003 IH-10 West
 
78257
San Antonio, Texas
 
(Zip Code)
(Address of principal executive offices)
 
 
Registrant’s telephone number, including area code (210) 918-2000
Securities registered pursuant to Section 12(b) of the Act: Units representing limited liability company membership interests listed on the New York Stock Exchange.
Securities registered pursuant to 12(g) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [X] No [    ]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [    ] No [X]
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 [    ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [     ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 (Check one):
Large accelerated filer [X]
Accelerated filer [    ]
Non-accelerated filer [    ]  (Do not check if a smaller reporting company)
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. [    ]   
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 aggregate market value of units held by non-affiliates was approximately $826 million based on the last sales price quoted as of June 30, 2017, the last business day of the registrant’s most recently completed second quarter.
The number of common units outstanding as of January 31, 2018 was 42,953,132.




TABLE OF CONTENTS
 
Items 1., 1A. and 2.
 
 
 
 
 
 
 
 
 
 
Item 1B.
 
 
 
Item 3.
 
 
 
Item 4.
 
Item 5.
 
 
 
Item 6.
 
 
 
Item 7.
 
 
 
Item 7A.
 
 
 
Item 8.
 
 
 
Item 9.
 
 
 
Item 9A.
 
 
 
Item 9B.
 
Item 10.
 
 
 
Item 11.
 
 
 
Item 12.
 
 
 
Item 13.
 
 
 
Item 14.
 
 
 
Item 15.
 
 
 
Item 16.
 
 
 
 


2


PART I
Unless otherwise indicated, the terms “NuStar GP Holdings,” “we,” “our” and “us” are used in this report to refer to NuStar GP Holdings, LLC, to one or more of our consolidated subsidiaries or to all of them taken as a whole.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
In this Form 10-K, 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, that may cause actual results to differ materially, including the possibility that the proposed merger described under “Recent Developments” below will not be completed prior to the August 8, 2018 outside termination date, the possibility that we will not obtain the required approvals by our unitholders, the possibility that the anticipated benefits from the proposed merger cannot be fully realized, the possibility that costs or difficulties related to the proposed merger will be greater than expected and other risk factors. Please read Item 1A. “Risk Factors” 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-K. 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.

ITEMS 1., 1A. and 2. BUSINESS, RISK FACTORS AND PROPERTIES

OVERVIEW

NuStar GP Holdings, LLC (NuStar GP Holdings), a Delaware limited liability company, was formed in June 2000. Our units are traded on the New York Stock Exchange (NYSE) under the symbol “NSH.” Our principal executive offices are located at 19003 IH-10 West, San Antonio, Texas 78257 and our telephone number is (210) 918-2000.

Our only cash generating assets are our ownership interests in NuStar Energy L.P. (NuStar Energy), a publicly traded Delaware limited partnership (NYSE: NS). NuStar Energy is engaged in the transportation of petroleum products and anhydrous ammonia and the terminalling, storage and marketing of petroleum products. NuStar Energy has pipelines in the United States, as well as terminal and storage facilities in the United States, Canada, Mexico, the Netherlands, including St. Eustatius in the Caribbean, and the United Kingdom. As of December 31, 2017, we have an approximate 13% ownership interest in NuStar Energy, consisting of the following:
the general partner interest;
100% of the incentive distribution rights issued by NuStar Energy, which entitle us to receive increasing percentages of the cash distributed by NuStar Energy, currently at the maximum percentage of 23%; and
10,214,626 common units of NuStar Energy.

We strive to increase unitholder value by actively supporting NuStar Energy in executing its business strategy, which includes continued growth through expansion projects and strategic acquisitions. We may facilitate NuStar Energy’s growth through the use of our capital resources, which could involve capital contributions, loans or other forms of financial support.

NuStar Energy’s partnership agreement requires that it distribute all available cash to its common limited partners and general partner each quarter, defined in its 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 NuStar Energy’s board of directors. Similarly, we are required by our limited liability company agreement to distribute all of our available cash at the end of each quarter, less reserves established by our board of directors. However, unlike NuStar Energy, we do not have a general partner or incentive distribution rights. Therefore, all of our distributions are made on our units, which are our only class of securities outstanding.

3



Our internet website address is http://www.nustargpholdings.com. Information contained on our website is not part of this report. Our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K filed with (or furnished to) the Securities and Exchange Commission (SEC) are available on our website, free of charge, as soon as reasonably practicable after we file or furnish such material (select the “Investors” link, then the “SEC Filings” link). We also post our corporate governance guidelines, code of business conduct and ethics, code of ethics for senior financial officers and the charters of our board’s committees on our website free of charge (select “Investors” link, then the “Corporate Governance” link).

Our governance documents are available in print to any unitholder that makes a written request to Corporate Secretary, NuStar GP Holdings, LLC, 19003 IH-10 West, San Antonio, Texas 78257 or corporatesecretary@nustarenergy.com.

RECENT DEVELOPMENTS

Merger. On February 7, 2018, NuStar GP Holdings, NuStar Energy, Riverwalk Logistics, L.P., NuStar GP, LLC, Marshall Merger Sub LLC, a wholly owned subsidiary of NuStar Energy (Merger Sub), and Riverwalk Holdings, LLC entered into an Agreement and Plan of Merger (the Merger Agreement) pursuant to which Merger Sub will merge with and into NuStar GP Holdings with NuStar GP Holdings being the surviving entity (the Merger), such that NuStar Energy will be our sole member following the merger. Pursuant to the Merger Agreement and at the effective time of the Merger, NuStar Energy’s partnership agreement will be amended and restated to, among other things, (i) cancel the incentive distribution rights, (ii) convert the 2% general partner interest in NuStar Energy into a non-economic management interest and (iii) provide the holders of NuStar Energy’s common units with voting rights in the election of the members of the board of directors of NuStar GP, LLC at an annual meeting, beginning in 2019. The Merger is subject to the satisfaction or waiver of certain conditions, including approval of the Merger Agreement by our unitholders. Additionally, on February 8, 2018, NuStar Energy announced that NuStar Energy’s management anticipates recommending to the board of directors of NuStar GP, LLC, and expects such board of directors to adopt, a reset of NuStar Energy’s quarterly distribution per common unit to $0.60 ($2.40 on an annualized basis), starting with the first-quarter distribution payable in May 2018. We expect to adjust the quarterly distribution to our members accordingly. See Item 1A. “Risk Factors-Risks Related to the Potential Merger.” Please refer to Note 15 of the Notes to Consolidated Financial Statements in Item 8. “Financial Statements and Supplementary Data” for further discussion of the Merger.
NuStar Energy’s Navigator Acquisition and Financing Transactions. On May 4, 2017, NuStar Energy completed the acquisition of Navigator Energy Services, LLC for approximately $1.5 billion (the Navigator Acquisition). In order to fund the purchase price: (i) NuStar Energy issued 14,375,000 common units for net proceeds of $657.5 million, (ii) NuStar Logistics, L.P., a wholly owned subsidiary of NuStar Energy, issued $550.0 million of 5.625% senior notes for net proceeds of $543.3 million and (iii) NuStar Energy issued 15,400,000 of its 7.625% Series B Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Units (Series B Preferred Units) for net proceeds of $371.8 million. In conjunction with the Navigator Acquisition, NuStar Energy’s partnership agreement was amended and restated to, among other things, provide a waiver of certain quarterly distributions with respect to our incentive distribution rights. In April 2017, we borrowed approximately $14.0 million under our revolving credit facility to fund a contribution to NuStar Energy in order to maintain our 2% general partner interest in connection with NuStar Energy’s issuance of common units. Please refer to Note 4 of the Notes to Consolidated Financial Statements in Item 8. “Financial Statements and Supplementary Data” for a discussion of these transactions.


4


ORGANIZATIONAL STRUCTURE

The following chart depicts a summary of our organizational structure and relationship with NuStar Energy as of December 31, 2017:

nshorgchart2017a01.jpg

5


EMPLOYEES

NuStar Energy’s wholly owned subsidiary, NuStar Services Company LLC (Nustar Services Co), provides employee services to NuStar Energy and to us pursuant to the Amended GP Services Agreement (defined in Note 5 of the Notes to Consolidated Financial Statements in Item 8. “Financial Statements and Supplementary Data”). Our officers, who are also officers of NuStar GP, LLC, are dual employees of NuStar GP, LLC and NuStar Services Co.

ENVIRONMENTAL AND SAFETY REGULATION

Our only cash generating assets are our indirect ownership interests in NuStar Energy. We have no independent operations.

PROPERTIES

Our only cash generating assets are our indirect ownership interests in NuStar Energy. We have no independent operations.

RISK FACTORS
RISKS RELATED TO THE POTENTIAL MERGER

The market value of the stated consideration to our unitholders will be determined by the price of NuStar Energy’s common units, the value of which will decrease if the market value of NuStar Energy’s common units decreases, and our unitholders cannot be sure of the market value of NuStar Energy common units that will be issued.
Pursuant to the Merger Agreement, our unitholders will receive approximately 23.6 million NuStar Energy common units as a result of the Merger. The aggregate market value of NuStar Energy’s common units that our unitholders will receive in the Merger will fluctuate with any changes in the trading price of NuStar Energy’s common units. This means there is no “price protection” mechanism contained in the Merger Agreement that would adjust the number of NuStar Energy common units that our unitholders will receive based on any decreases in the trading price of NuStar Energy common units. If NuStar Energy’s common unit price decreases, the market value of the stated consideration received by our unitholders will also decrease. Consider the following example:

Example: Pursuant to the Merger Agreement, our unitholders will receive 0.55 of a NuStar Energy common unit for each NuStar GP Holdings common unit, subject to receipt of cash in lieu of any fractional NuStar Energy common units. Based on the closing sales price of NuStar Energy common units on February 7, 2018 of $31.25 per unit, the market value of all NuStar Energy common units to be received by our unitholders would be approximately $737.50 million. If the trading price for NuStar Energy common units decreased 10% from $31.25 to $28.13 per unit, then the market value of all NuStar Energy common units to be received by our unitholders would be approximately $663.87 million. Accordingly, there is a risk that the premium that existed on February 7, 2018, the last trading day before the public announcement of the Merger, will not be realized by our unitholders at the time the Merger is completed. NuStar Energy common unit price changes may result from a variety of factors, including general market and economic conditions, changes in its business, operations and prospects, and regulatory considerations. Many of these factors are beyond NuStar Energy’s control.

The right of our unitholders to distributions will be changed following the Merger.
Under NuStar Energy’s existing partnership agreement, we are entitled, as the indirect owner of NuStar Energy’s general partner, to receive approximately 2% of all distributions made by NuStar Energy and increasing percentages, up to a maximum of 23%, of the amount of incremental cash distributed by NuStar Energy in respect of the NuStar Energy common units as certain target distribution levels are reached in excess of $0.60 per NuStar Energy common unit in any quarter. After the Merger, assuming the number of units outstanding as of January 31, 2018, the former unitholders of NuStar GP Holdings common units as a group would be entitled to receive approximately 22% of all distributions made by NuStar Energy. As a result of this change, the distributions received by the former unitholders of NuStar GP Holdings could be significantly different.

While the Merger Agreement is in effect, our opportunities to enter into different business combination transactions with other parties on more favorable terms may be limited, and we may be limited in our ability to pursue other attractive business opportunities.
While the Merger Agreement is in effect, we are prohibited from knowingly initiating, soliciting or encouraging the submission of any acquisition proposal or from participating in any discussions or negotiations regarding any acquisition proposal, subject to certain exceptions. As a result of these provisions in the Merger Agreement, our opportunities to enter into more favorable transactions may be limited. Likewise, if we were to sell directly to a third party, we might have received more value with

6


respect to the general partner interest in us and the incentive distribution rights in NuStar Energy based on the value of NuStar Energy’s business at such time.

Moreover, the Merger Agreement provides for the payment by NuStar GP Holdings of up to $13.7 million in termination fees under specified circumstances, which may discourage other parties from proposing alternative transactions that could be more favorable to our unitholders.

We have also agreed to refrain from taking certain actions with respect to our business and financial affairs pending the consummation of the Merger or termination of the Merger Agreement. These restrictions could be in effect for an extended period of time if the consummation of the Merger is delayed. These limitations do not preclude us from conducting our business in the ordinary or usual course or from acquiring assets or businesses so long as such activity does not have a “material adverse effect,” as such term is defined in the Merger Agreement, or exceed certain thresholds specifically provided in the Merger Agreement.

In addition to the economic costs associated with pursuing the Merger, we will continue to devote substantial time and other human resources to the proposed Merger, which could limit our ability to pursue other attractive business opportunities, including potential joint ventures, stand-alone projects and other transactions. If we are unable to pursue such other attractive business opportunities, then our growth prospects and long-term strategic position following the Merger could be adversely affected.

The Merger is subject to conditions and may not be consummated even if the required NuStar GP Holdings unitholder approvals are obtained.
The Merger is subject to the satisfaction or waiver of certain conditions, some of which are out of the control of NuStar GP Holdings and NuStar Energy, including approval of the Merger Agreement by NuStar GP Holdings unitholders. The Merger Agreement contains other conditions that, if not satisfied or waived, would result in the Merger not occurring, regardless of whether or not the NuStar GP Holdings unitholders have voted in favor of the Merger-related proposals presented to them. Satisfaction of some of these other conditions to the Merger is not entirely in the control of either NuStar GP Holdings or NuStar Energy. In addition, NuStar GP Holdings and NuStar Energy can agree not to consummate the Merger even if all unitholder approvals have been received. The closing conditions to the Merger may not be satisfied, and NuStar GP Holdings and NuStar Energy may choose not to, or may be unable to, waive an unsatisfied condition, which may cause the Merger not to occur.

The Merger Agreement contains provisions granting both NuStar Energy and NuStar GP Holdings the right to terminate the Merger Agreement for certain reasons, including, among others (1) by mutual consent of NuStar Energy and NuStar GP Holdings; (2) by either party if the Merger has not been consummated on or before August 8, 2018; (3) if certain changes in rules or regulations prohibit the consummation of the Merger; (4) if NuStar GP Holdings fails to obtain NuStar GP Holdings unitholder approval; or (5) if a breach of, or an inaccuracy in, the representations or warranties is not cured within thirty days. Furthermore, NuStar Energy may terminate the Merger Agreement in the event that, prior to NuStar GP Holdings unitholder approval, NuStar GP Holdings has intentionally and materially breached the non-solicitation covenants in the Merger Agreement or the NuStar GP Holdings board issues a change of recommendation pursuant to the terms of the Merger Agreement, and NuStar GP Holdings may terminate the Merger Agreement in order to accept a Superior Proposal (as defined in the Merger Agreement) so long as NuStar GP Holdings (1) has not intentionally and materially breached certain provisions of the Merger Agreement and (2) has paid NuStar Energy a termination fee.

Failure to complete the Merger or delays in completing the Merger could negatively impact our common unit price.
If the Merger is not completed for any reason, we may be subject to a number of material risks, including the following:
the price of our common units may decline to the extent that the current market price of these securities reflects a market assumption that the Merger will be completed; and
some costs relating to the Merger, such as certain investment banking fees and legal and accounting fees, must be paid even if the Merger is not completed.

Additionally, on February 8, 2018, NuStar Energy announced that its management anticipates recommending to the board of directors of NuStar GP, LLC, and expects such board to adopt, a reset of NuStar Energy’s quarterly distribution per NuStar Energy common unit to $0.60 ($2.40 on an annualized basis), starting with the first-quarter distribution payable in May 2018. If the Merger is not completed, NuStar Energy’s reset of its quarterly distributions would result in a significant reduction in the amount of cash distributed by NuStar Energy per common unit, including, at a $0.60 quarterly distribution or below, the elimination of any distributions with respect to the incentive distribution rights to us, which could negatively impact our common unit price.

7


The costs of the Merger could adversely affect NuStar Energy’s operations and cash flows available for distribution to its unitholders.
The total costs of the Merger, which could be substantial, primarily consist of investment banking, legal counsel and accounting fees, financial printing and other related costs. These costs could adversely affect NuStar Energy’s operations and cash flows available for distributions to NuStar Energy’s unitholders.

If the Merger Agreement were terminated, we may be obligated to pay NuStar Energy for costs incurred related to the Merger. These costs could require us to seek loans or use our available cash that would have otherwise been available for distributions.
Upon termination of the Merger Agreement, and depending upon the circumstances leading to that termination, we could be responsible for reimbursing NuStar Energy for Merger-related expenses that NuStar Energy has paid.

If the Merger Agreement is terminated, the expense reimbursements required by us under the Merger Agreement may require us to seek loans or use cash received from our distributions from NuStar Energy to reimburse these expenses. In either case, reimbursement of these costs could reduce the cash we have available to make quarterly distributions.


RISKS INHERENT IN AN INVESTMENT IN US

Our only cash generating assets are our ownership interests in NuStar Energy. Our cash flows and ability to make distributions at current levels are, therefore, completely dependent upon the ability of NuStar Energy to make cash distributions at current levels to its partners, including us. If NuStar Energy does not make cash distributions at its current levels or reduces the level of cash distributions to its partners, we may not have sufficient cash to pay distributions at our current levels.
Our operating cash flows currently are completely dependent upon NuStar Energy making cash distributions at current levels to its partners, including us. The amount of cash that NuStar Energy can distribute to its partners each quarter principally depends upon the amount of cash it generates from its operations, which fluctuates from quarter to quarter based on, among other things:
throughput volumes transported in its pipelines;
storage contract renewals or throughput volumes in its terminals and storage facilities;
tariff rates and fees it charges and the revenue it realizes for its services;
demand for and supply of crude oil, refined products and anhydrous ammonia;
the effect of worldwide energy conservation measures;
its operating costs;
its costs to comply with environmental, health, safety and security laws and regulations;
weather conditions;
domestic and foreign governmental laws, regulations, sanctions, embargoes and taxes;
prevailing economic conditions; and
the results of its marketing, trading and hedging activities, which fluctuate depending upon the relationship between refined product prices and prices of crude oil and other feedstocks.

In addition, the amount of cash that NuStar Energy will have available for distribution depends on other factors, including:
its debt service requirements and restrictions on distributions contained in its current or future debt agreements;
the sources of cash used to fund its acquisitions;
its capital expenditures;
fluctuations in its working capital needs;
its issuances of debt and equity securities and ability to access the capital markets; and
adjustments in cash reserves made by the board of directors of NuStar GP, LLC, in its discretion.

As discussed above, on February 8, 2018, NuStar Energy announced that its management anticipates recommending to the board of directors of NuStar GP, LLC, and expects such board to adopt, a reset of NuStar Energy’s quarterly distribution per NuStar Energy common unit to $0.60 ($2.40 on an annualized basis), starting with the first-quarter distribution payable in May 2018. In addition, it is possible that one or more of the factors listed above may serve to reduce NuStar Energy’s available cash to such an extent that it could be rendered unable to pay distributions at the current level or at all in a given quarter. Furthermore, cash distributions to NuStar Energy unitholders depend primarily upon cash flows, and not solely on profitability, which is affected by non-cash items, and NuStar Energy may make cash distributions during periods in which it records net losses and may not make cash distributions during periods in which it records net income.


8


In the future, we may not have sufficient cash to pay distributions at our current quarterly distribution level or to increase distributions.
Because our only source of operating cash flows consists of cash distributions from NuStar Energy, the amount of distributions we are able to make to our unitholders may fluctuate based on the level of distributions NuStar Energy makes to its unitholders, including us. We cannot assure you that NuStar Energy will continue to make quarterly distributions at its current level of $1.095 per common unit, or any other amount, or increase its quarterly distributions in the future. In addition, while we would expect to increase or decrease distributions to our unitholders if NuStar Energy increases or decreases distributions to us, the timing and amount of such changes in distributions, if any, will not necessarily be comparable to the timing and amount of any changes in distributions made by NuStar Energy to us. Our ability to distribute cash received from NuStar Energy to our unitholders is limited by a number of factors, including:
interest expense and principal payments on any indebtedness we may incur;
restrictions on distributions contained in any future debt agreements;
our general and administrative expenses, including expenses we incur as a public company;
expenses of our subsidiaries, including tax liabilities of our corporate subsidiaries;
reserves necessary for us to make the necessary capital contributions to maintain our general partner interest in NuStar Energy, as required by the partnership agreement of NuStar Energy upon the issuance of certain additional partnership securities by NuStar Energy; and
reserves our board of directors believes prudent for us to maintain for the proper conduct of our business or to provide for future distributions.

We cannot guarantee that in the future we will be able to pay distributions or that any distributions NuStar Energy pays to us will allow us to pay distributions at or above our current quarterly distribution of $0.545 per unit. The actual amount of cash that is available for distribution to our unitholders will depend on numerous factors, many of which are beyond our control or the control of NuStar Energy. Therefore, a reduction in the amount of cash distributed by NuStar Energy per common unit or on the incentive distribution rights, or an increase in our expenses, may result in our not being able to pay our current quarterly distribution of $0.545 per unit. For instance, in connection with NuStar Energy’s acquisition of Navigator Energy Services, LLC in May 2017, NuStar Energy, with our consent, amended and restated its partnership agreement to waive up to an aggregate $22.0 million of the quarterly incentive distributions payable to us for any NuStar Energy common units issued from April 11, 2017 (other than those attributable to NuStar Energy common units issued under any equity compensation plan) for ten consecutive quarters, starting with the distributions for the second quarter of 2017 and, as described above, NuStar Energy has announced an anticipated reset of its quarterly distribution per NuStar Energy common unit to $0.60 per unit.

If the Merger is not consummated, NuStar Energy’s common unitholders, excluding the owner of NuStar Energy’s general partner, have the right to remove NuStar Energy’s general partner by a simple majority vote, which would cause us to divest our general partner interest and incentive distribution rights in NuStar Energy in exchange for cash or common units of NuStar Energy and cause us to lose our ability to manage NuStar Energy.
We currently manage NuStar Energy through Riverwalk Logistics, L.P., NuStar Energy’s general partner and our indirect, wholly owned subsidiary. NuStar Energy’s partnership agreement, however, gives common unitholders of NuStar Energy the right to remove the general partner of NuStar Energy upon the affirmative vote of holders of a majority of outstanding NuStar Energy common units, excluding the common units owned by us. As of December 31, 2017, we owned 10,214,626 common units representing limited partner interests in NuStar Energy, and the public unitholders owned the remaining 82,962,057 outstanding common units representing limited partner interests. If the Merger is not consummated, and if Riverwalk Logistics, L.P. were removed as the general partner of NuStar Energy, it would receive cash or common units in exchange for its general partner interest and its incentive distribution rights and would lose its ability to manage NuStar Energy. While the common units or cash that Riverwalk Logistics, L.P. would receive are intended under the terms of NuStar Energy’s partnership agreement to fully compensate it in the event it is removed as general partner, these common units or the investments made with the cash over time may not provide us with as much distributable cash, or be as valuable, as the general partner interest and incentive distribution rights had we retained them.

NuStar Energy’s general partner, with our consent, may limit or modify the incentive distributions we are entitled to receive in order to facilitate the growth strategy of NuStar Energy. Our board of directors can give this consent without a vote of our unitholders.
We indirectly own NuStar Energy’s general partner, which owns the incentive distribution rights in NuStar Energy that entitle us to receive increasing percentages, up to a maximum of 23%, of any cash distributed by NuStar Energy to common unitholders as it exceeds a distribution of $0.60 per NuStar Energy common unit in any quarter. A substantial portion of the cash flows we receive from NuStar Energy are provided by these incentive distributions. Our limited liability company agreement provides that our board of directors may consent to the elimination, reduction or modification of the incentive distribution rights without our unitholders’ approval if our board determines that the elimination, reduction or modification will not adversely affect our unitholders in any material respect. For example, in connection with NuStar Energy’s acquisition of

9


Navigator Energy Services, LLC in May 2017, NuStar Energy, with our consent, amended and restated its partnership agreement to waive up to an aggregate $22.0 million of the quarterly incentive distributions payable to us for any NuStar Energy common units issued from April 11, 2017 (other than those attributable to NuStar Energy common units issued under any equity compensation plan) for ten consecutive quarters, starting with the distributions for the second quarter of 2017.

Restrictions in our credit facility limit our ability to make distributions to our unitholders. Our credit facility matures in June 2018.
Our credit facility contains covenants limiting our ability to incur indebtedness, grant liens, engage in transactions with affiliates and make distributions to our unitholders. The credit facility also contains covenants requiring NuStar Energy to maintain certain financial ratios. Our and NuStar Energy’s ability to comply with any restrictions and covenants may be affected by events beyond our control, including prevailing economic, financial and industry conditions. If we or NuStar Energy are unable to comply with these restrictions and covenants, any indebtedness under our credit facility may become immediately due and payable, and our lenders’ commitment to make loans to us under our credit facility may terminate. We might not have, or be able to obtain, sufficient funds to make these accelerated payments.

Our payment of principal and interest on any future indebtedness will reduce our cash available for distribution on our units. Our credit facility limits our ability to pay distributions to our unitholders during an event of default or if an event of default would result from the distribution.

In addition, this and any future levels of indebtedness may:
adversely affect our ability to obtain additional financing for future operations or capital needs;
limit our ability to pursue acquisitions and other business opportunities; or
make our results of operations more susceptible to adverse economic or operating conditions.

Our revolving credit facility matures in June 2018. It is possible that our lenders may not agree to renew our credit facility or may only agree to renew it on substantially less favorable terms. If our credit facility is renewed on substantially less favorable terms, or if our credit facility is not renewed and we must enter into alternative financing arrangements, various limitations in these financing agreements may reduce our ability to incur additional indebtedness, to engage in some transactions or to capitalize on business opportunities. In the event we are unable to obtain adequate financing and NuStar Energy issues additional units, we may not be able to make contributions to NuStar Energy necessary to maintain our general partner interest.

Our ability to sell our ownership interests in NuStar Energy may be limited by securities laws restrictions and liquidity constraints.
All of the units of NuStar Energy that we own are unregistered, restricted securities within the meaning of Rule 144 under the Securities Act of 1933. Unless we exercise our registration rights with respect to these units, we are limited to selling into the market in any three-month period an amount of NuStar Energy common units that does not exceed the greater of 1% of the total number of common units outstanding or the average weekly reported trading volume of the common units for the four calendar weeks prior to the sale. We face contractual limitations on our ability to sell our general partner interest and incentive distribution rights, and the market for such interests is illiquid.

The market price of our units may be volatile, which could cause you to lose all or part of your investment.
The market price of our units could be subject to significant fluctuations due to a variety of factors outside of our control, and the equity markets in general are subject to volatility that may be unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our units. In addition, potential investors may be deterred from investing in our units for various reasons, including the very limited number of publicly traded entities whose assets consist almost exclusively of partnership interests in a publicly traded partnership. The lack of liquidity may also contribute to significant fluctuations in the market price of our units and limit the number of investors who are able to buy our units.

The market price of our units could be adversely affected by sales of substantial amounts of our units into public markets, including sales by our existing unitholders.
Sales by us or any of our existing unitholders, including William E. Greehey, Chairman of the Boards of Directors of NuStar GP Holdings and NuStar GP, LLC, of a substantial number of our units in the public markets, or the perception that such sales might occur, could have a material adverse effect on the price of our units or could impair our ability to obtain capital through an offering of equity securities. As of December 31, 2017, Mr. Greehey beneficially owned approximately 21% of our outstanding units.


10


Distributions on our incentive distribution rights in NuStar Energy are more uncertain than distributions on the common units we hold.
Our indirect ownership of the incentive distribution rights in NuStar Energy entitles us to receive our pro rata share of specified percentages of cash distributions on common units made by NuStar Energy with respect to any particular quarter only in the event that NuStar Energy distributes more than $0.60 per common unit for such quarter. As a result, the holders of NuStar Energy’s common units have a priority over the holders of NuStar Energy’s incentive distribution rights to the extent of cash distributions by NuStar Energy up to and including $0.60 per common unit for any quarter.

Our incentive distribution rights entitle us to receive increasing percentages, up to 23%, of all cash distributed by NuStar Energy on its common units. However, in connection with NuStar Energy’s acquisition of Navigator Energy Services, LLC in May 2017, NuStar Energy, with our consent, amended and restated its partnership agreement to waive up to an aggregate $22.0 million of the quarterly incentive distributions payable to us for any NuStar Energy common units issued from April 11, 2017 (other than those attributable to NuStar Energy common units issued under any equity compensation plan) for ten consecutive quarters, starting with the distributions for the second quarter of 2017. Because the incentive distribution rights with respect to all common units not temporarily subject to the aforementioned waiver currently participate at the maximum 23% target cash distribution level in all distributions made by NuStar Energy at or above the current distribution level with respect to its common units, future growth in distributions we receive from NuStar Energy will not result from an increase in the target cash distribution level associated with the incentive distribution rights.

Furthermore, a decrease in the amount of distributions by NuStar Energy to less than $0.66 per common unit per quarter would reduce our percentage of the incremental cash distributions above $0.60 per common unit per quarter from 23% to 8%. As a result, any such reduction in quarterly cash distributions from NuStar Energy on its common units would have the effect of disproportionately reducing the amount of all distributions that we receive from NuStar Energy based on our ownership interest in the incentive distribution rights in NuStar Energy as compared to cash distributions we receive from NuStar Energy on our general partner interest in NuStar Energy and our NuStar Energy common units.

If NuStar Energy’s general partner is not fully reimbursed or indemnified for obligations and liabilities it incurs in managing the business and affairs of NuStar Energy, it may not be able to satisfy its obligations and its cash flows will be reduced.
The general partner of NuStar Energy and its affiliates may make expenditures on behalf of NuStar Energy for which they will seek reimbursement from NuStar Energy. In addition, under Delaware law, the general partner, in its capacity as the general partner of NuStar Energy, has unlimited liability for the obligations of NuStar Energy, such as its debts and environmental liabilities, except for those contractual obligations of NuStar Energy that are expressly made without recourse to the general partner. To the extent Riverwalk Logistics, L.P. incurs obligations on behalf of NuStar Energy, it is entitled to be reimbursed or indemnified by NuStar Energy. If NuStar Energy does not reimburse or indemnify its general partner, Riverwalk Logistics, L.P. may be unable to satisfy these liabilities or obligations, which would reduce its cash flows. In turn, Riverwalk Logistics, L.P. would have less cash to distribute to us.

If distributions on our units are not paid with respect to any fiscal quarter, our unitholders will not be entitled to receive such payments in the future.
Our distributions to our unitholders are not cumulative. Consequently, if distributions on our units are not paid with respect to any fiscal quarter at the current distribution rate, our unitholders will not be entitled to receive such payments in the future.

Our cash distribution policy limits our growth because we do not retain earnings to reinvest in any acquisitions or growth capital expenditures, and NuStar Energy’s distribution policy may limit NuStar Energy’s growth.
Because we distribute all of our available cash, our growth may not be as fast as businesses that reinvest their available cash to expand ongoing operations. In fact, our growth currently is completely dependent upon NuStar Energy’s ability to increase its quarterly distributions because our only cash-generating assets are indirect ownership interests in NuStar Energy. If we issue additional units or incur debt to fund acquisitions and growth capital expenditures, the payment of distributions on those additional units or interest on that debt could increase the risk that we will be unable to maintain or increase our current per unit distribution level.

Consistent with the terms of its partnership agreement, NuStar Energy distributes to its common unitholders and its general partner its available cash each quarter. In determining the amount of cash available for distribution, NuStar Energy sets aside cash reserves, which it uses to fund its growth capital expenditures. Additionally, it historically has relied upon external financing sources, including commercial borrowings and other debt and equity issuances, to fund its acquisition capital expenditures. Accordingly, to the extent NuStar Energy does not have sufficient cash reserves or is unable to finance growth externally, its cash distribution policy will significantly impair its ability to grow. In addition, to the extent NuStar Energy issues additional units in connection with any acquisitions or growth capital expenditures, the payment of distributions on those

11


additional units may increase the risk that NuStar Energy will be unable to maintain or increase its per unit distribution level, which in turn may impact the available cash that we have to distribute to our unitholders. The incurrence of additional debt to finance its growth strategy would result in increased interest expense to NuStar Energy, which in turn may impact the available cash that we have to distribute to our unitholders.

If in the future we cease to manage NuStar Energy, we may be deemed to be an investment company under the Investment Company Act of 1940, which would cause us either to have to register as an investment company, obtain exemptive relief from the SEC or modify our organizational structure or our contract rights.
If we cease to manage NuStar Energy as a consequence of Riverwalk Logistics, L.P.’s removal or withdrawal as NuStar Energy’s general partner or otherwise, and are deemed to be an investment company under the Investment Company Act of 1940 because of our ownership of NuStar Energy partnership interests, we would either have to register as an investment company under the Investment Company Act, obtain exemptive relief from the SEC or modify our organizational structure or our contract rights to fall outside the definition of an investment company. Registering as an investment company could, among other things, materially limit our ability to engage in transactions with affiliates, including the sale and purchase of certain securities or other property to or from our affiliates and restrict our ability to borrow funds or engage in other transactions involving leverage.

An increase in interest rates may cause the market price of our units to decline.
As interest rates rise, the ability of investors to obtain higher risk-adjusted rates of return by purchasing government-backed debt securities may cause a corresponding decline in demand for riskier investments generally, including yield-based equity investments, such as limited liability company membership interests. Reduced demand for our units resulting from investors seeking other more favorable investment opportunities may cause the market price of our units to decline.

We may issue an unlimited number of additional securities without the consent of our unitholders, which will dilute each unitholder’s ownership interest in us and may increase the risk that we will be unable to maintain or increase our per unit distribution level.
At any time we may issue an unlimited number of additional securities without the approval of our unitholders on terms and conditions determined by our board of directors. The issuance by us of additional units or other equity securities of equal or senior rank will have the following effects:
our unitholders’ proportionate ownership interest in us will decrease;
the amount of cash available for distribution on each unit may decrease;
the relative voting strength of each previously outstanding unit may be diminished;
the ratio of taxable income to distributions may increase; and
the market price of the units may decline.

NuStar Energy may issue additional NuStar Energy units, which may increase the risk that NuStar Energy will not have sufficient available cash to maintain or increase its per unit cash distribution level and that we will have to make a capital contribution to NuStar Energy.
NuStar Energy may issue additional NuStar Energy units, including units that rank senior to the NuStar Energy common units, preferred units and incentive distribution rights as to quarterly cash distributions, on the terms and conditions established by its general partner. Additionally, we are required to make additional capital contributions to NuStar Energy upon certain issuances by NuStar Energy of additional units in order to maintain our general partner interest in NuStar Energy. Furthermore, to the extent NuStar Energy issues units that are senior to the NuStar Energy common units and the incentive distribution rights, such as the preferred units, their issuance will render more uncertain the payment of distributions on the common units and the incentive distribution rights. Neither the common units nor the incentive distribution rights are entitled to any arrearages from prior quarters; however, the NuStar Energy preferred units are cumulative and must be paid in full before distributions on the NuStar Energy common units and incentive distribution rights can be paid. The payment of distributions on any additional NuStar Energy units may increase the risk that NuStar Energy will be unable to maintain or increase its per unit cash distribution level and the requirement that we make capital contributions to NuStar Energy to maintain our general partner interest may impact the available cash that we have to distribute to our unitholders.

Anti-takeover provisions in our limited liability company agreement may make an acquisition of us complicated and the removal and replacement of our directors and executive officers difficult.
Our limited liability company agreement contains the following provisions that may delay or prevent a change in control. These provisions may also make it difficult for unitholders to remove and replace our board of directors and executive officers.

Section 203. Our limited liability company agreement effectively adopts Section 203 of the Delaware General Corporation Law (DGCL). Section 203 of the DGCL, as it applies to us, prevents an interested unitholder, defined as a person who owns 15% or more of our outstanding units, from engaging in business combinations with us for three years following the time such person

12


becomes an interested unitholder. Section 203 broadly defines “business combination” to encompass a wide variety of transactions with or caused by an interested unitholder, including mergers, asset sales and other transactions in which the interested unitholder receives a benefit on other than a pro rata basis with other unitholders. This provision of our limited liability company agreement could have an anti-takeover effect with respect to transactions not approved in advance by our board of directors, including discouraging takeover attempts that might result in a premium over the market price for our units.

Limited Voting Rights. Our limited liability company agreement provides that if any person or group other than our affiliates acquires beneficial ownership of 20% or more of any class of units, that person or group loses voting rights on all of its units. This loss of voting rights does not apply to any person or group that acquires all of its units from our affiliates or any transferees of that person or group approved by our board of directors or to any person or group who acquires the units with the prior approval of our board of directors.

Staggered Board. Pursuant to our limited liability company agreement, our board is divided into three classes serving staggered three-year terms. This, when coupled with the provision of our limited liability company agreement authorizing only the board of directors to fill vacant or newly created directorships or increase the size of the board of directors and the provision providing that directors may only be removed at a meeting of unitholders and cannot be removed by written consent, may deter a unitholder from gaining control of our board of directors by removing incumbent directors or increasing the number of directorships and simultaneously filling the vacancies or newly created directorships with its own nominees.

These provisions may delay or prevent a third party from acquiring us and any such delay or prevention could cause the market price of our units to decline.

Unitholders may have liability to repay distributions.
Under certain circumstances, our unitholders may have to repay amounts wrongfully returned or distributed to them. Under Section 18-607 of the Delaware Limited Liability Company Act (the Delaware Act), we may not make a distribution to our unitholders if the distribution would cause our liabilities to exceed the fair value of our assets. Liabilities to members on account of their membership interests and liabilities that are nonrecourse to the limited liability company are not counted for purposes of determining whether a distribution is permitted.

Delaware law provides that, for a period of three years from the date of an impermissible distribution, members who received the distribution and who knew at the time of the distribution that it violated Delaware law will be liable to us for the repayment of the distribution amount. Likewise, upon the winding up of our limited liability company, in the event that (a) we do not distribute assets in the following order: (1) to creditors in satisfaction of their liabilities; (2) to members and former members in satisfaction of liabilities for distributions owed under our limited liability company agreement; (3) to members for the return of their contributions; and finally (4) to the members in the proportions in which the members share in distributions and (b) a member knows at the time that the distribution violated the Delaware Act, then such member will be liable to repay the distribution for a period of three years (subject to certain exceptions) from the impermissible distribution under Section 18-804 of the Delaware Act.

A purchaser of common units will be liable for the obligations of the transferor to make contributions to us that are known to such purchaser at the time it became a member and for unknown obligations, if the liabilities could be determined from our limited liability company agreement.

NuStar Energy’s unitholders may not have limited liability if a court finds that limited partner actions constitute control of NuStar Energy’s business and may, therefore, become liable for certain of NuStar Energy’s obligations, which may have an impact on the cash we have available to make distributions.
Under Delaware law, unitholders could be held liable for NuStar Energy’s obligations to the same extent as a general partner if a court determined that actions of a unitholder constituted participation in the “control” of NuStar Energy’s business.

Under Delaware law, the general partner generally has unlimited liability for the obligations of the partnership, such as its debts and environmental liabilities, except for those contractual obligations of the partnership that are expressly made without recourse to the general partner. In addition, Section 17-607 of the Delaware Revised Uniform Limited Partnership Act provides that, under some circumstances, a limited partner may be liable to NuStar Energy for the amount of a distribution for a period of three years from the date of the distribution.




13


If we fail to maintain an effective system of internal controls, we may not be able to report our financial results accurately or prevent fraud, which could have a material and adverse impact on our financial condition, results of operations, and cash flows and our ability to make distributions to our unitholders.
We are required to disclose material changes made in our internal controls over financial reporting on a quarterly basis and we are required to assess the effectiveness of our controls annually. Effective internal controls are necessary for us to provide reliable and timely financial reports. We may be unable to maintain effective controls over our financial processes and reporting in the future or to comply with our obligations under Section 404 of the Sarbanes-Oxley Act of 2002. For example, Section 404 requires us, among other things, annually to review and report on the effectiveness of our internal control over financial reporting. Any failure to maintain effective internal controls or to improve our internal controls could harm our operating results or cause us to fail to meet our reporting obligations.

Given the difficulties inherent in the design and operation of internal controls over financial reporting, we can provide no assurance as to our, or our independent registered public accounting firm’s, future conclusions about the effectiveness of our internal controls, and we may incur significant costs in our efforts to comply with Section 404. Any failure to maintain effective internal controls over financial reporting will subject us to regulatory scrutiny and a loss of confidence in our reported financial information, which could have a material adverse effect on our financial condition, results of operations and cash flows and our ability to make distributions to our unitholders.

RISKS RELATED TO CONFLICTS OF INTEREST

Although we manage NuStar Energy through our indirect ownership of its general partner, NuStar Energy’s general partner owes fiduciary duties to NuStar Energy and NuStar Energy’s unitholders, which may conflict with our interests.
Conflicts of interest exist and may arise in the future as a result of the relationships between us and our affiliates, including NuStar Energy’s general partner, on the one hand, and NuStar Energy and its limited partners, on the other hand. The directors and officers of NuStar GP, LLC have fiduciary duties to manage NuStar Energy’s business in a manner beneficial to us, its owner. At the same time, NuStar GP, LLC has a fiduciary duty to manage NuStar Energy in a manner beneficial to NuStar Energy and its unitholders. The board of directors of NuStar GP, LLC or its conflicts committee will resolve any such conflict and have broad latitude to consider the interests of all parties to the conflict. Our independent directors are not the same as the independent directors who serve on the conflicts committee of NuStar GP, LLC. The resolution of these conflicts may not always be in our best interest or that of our unitholders. For example, conflicts of interest may arise in the following situations:
the allocation of shared overhead expenses to NuStar Energy and us;
the determination and timing of the amount of cash to be distributed to NuStar Energy’s partners and the amount of cash to be reserved for the future conduct of NuStar Energy’s business;
any proposal by NuStar GP, LLC to eliminate, reduce or modify the incentive distribution rights;
the decision whether NuStar Energy should make acquisitions, and on what terms;
the determination of whether NuStar Energy should use cash on hand, borrow or issue equity to raise cash to finance acquisitions or expansion capital projects, repay indebtedness, meet working capital needs, pay distributions to NuStar Energy’s partners or otherwise; and
any decision we make in the future to engage in business activities independent of, or in competition with, NuStar Energy.

Our limited liability company agreement limits and modifies our directors’ fiduciary duties and the fiduciary duties of our officers and directors may conflict with those of the general partner of NuStar Energy’s general partner’s officers and directors.
Our limited liability company agreement contains provisions that modify and limit our directors’ fiduciary duties to our unitholders. For example, our limited liability company agreement provides that:
our directors will not have any liability to us or our unitholders for decisions made in good faith, meaning they believed the decision was in our best interests; and
our board of directors will not be liable for monetary damages to us or our unitholders for any acts or omissions unless there has been a final and non-appealable judgment entered by a court of competent jurisdiction determining that the board of directors acted in bad faith or engaged in fraud or willful misconduct or, in the case of a criminal matter, acted with knowledge that such conduct was unlawful.

Our directors and officers have fiduciary duties to manage our business in a manner beneficial to us and our unitholders. Simultaneously, two of our directors and all of our officers are also directors and officers of NuStar GP, LLC, the general partner of NuStar Energy’s general partner, and have fiduciary duties to manage the business of NuStar Energy in a manner beneficial to NuStar Energy and its unitholders. For instance, William E. Greehey is our Chairman of the Board as well as the Chairman of the Board of NuStar GP, LLC. Consequently, these directors and officers may encounter situations in which their fiduciary obligations to NuStar Energy, on the one hand, and us, on the other hand, are in conflict. The resolution of these

14


conflicts may not always be in our best interest or that of our unitholders. Our executive officers, who are also the executive officers of NuStar GP, LLC, will allocate, in their reasonable and sole discretion, their time spent on our behalf and on behalf of NuStar Energy. These allocations may not be the result of arms-length negotiations between NuStar GP, LLC and us and, therefore, the allocations may not exactly match the actual time and overhead spent.

RISKS RELATED TO NUSTAR ENERGY’S BUSINESS

NuStar Energys future financial and operating flexibility may be adversely affected by its significant leverage, any future downgrades of its credit ratings, restrictions in its debt agreements and conditions in the financial markets.
As of December 31, 2017, NuStar Energy’s consolidated debt was $3.6 billion, and it has the ability to incur more debt. NuStar Energy also may be required to post cash collateral under certain of its hedging arrangements, which it expects to fund with borrowings under its revolving credit agreement. In addition to any potential direct financial impact of NuStar Energy’s debt, it is possible that any material increase to NuStar Energy’s debt or other negative financial factors may be viewed negatively by credit rating agencies, which could result in ratings downgrades and increased costs for NuStar Energy to access the capital markets. In November 2017, S&P Global Ratings downgraded NuStar Energy’s credit rating from BB+ Stable to BB Negative outlook, which raised the interest rate on its 7.65% Senior Notes Due 2018 (the 2018 Senior Notes). In February 2018, Moody’s Investors Service, Inc. downgraded NuStar Energy’s credit rating from Ba1 to Ba2, which increased the interest rate on both the 2018 Senior Notes and amounts borrowed under its credit facilities. Any additional downgrades in NuStar Energy’s credit ratings in the future could result in further increases to the interest rate on its 2018 Senior Notes, significantly increase its capital costs, reduce its liquidity and adversely affect its ability to raise capital in the future.

NuStar Energy’s revolving credit agreement contains restrictive covenants, such as limitations on indebtedness, liens, mergers, asset transfers and certain investing activities. In addition, the revolving credit agreement generally requires NuStar Energy to maintain, as of the end of each rolling period (consisting of any period of four consecutive fiscal quarters) a consolidated debt coverage ratio (consolidated debt to consolidated EBITDA, each as defined in the revolving credit agreement) not to exceed 5.00-to-1.00, except in specific circumstances, including acquisitions by NuStar Energy for aggregate net consideration of at least $50 million, when NuStar Energy is permitted to maintain a consolidated debt coverage ratio of up to 5.50-to-1.00 for two rolling periods, as provided in its revolving credit agreement. NuStar Energy’s maximum permitted ratio was raised to 5.50-to-1.00 through March 31, 2018 due to its acquisition of Navigator Energy Services, LLC. NuStar Energy also amended its revolving credit agreement in November 2017 to exclude NuStar Logistics, L.P.’s 7.625% Fixed-to-Floating Rate Subordinated Notes Due 2043 (the Junior Sub Notes) from its calculation of consolidated debt through December 31, 2018. Failure by NuStar Energy to comply with any of the revolving credit agreement restrictive covenants or its required coverage ratio will result in a default and could result in acceleration of its obligations under the revolving credit agreement and possibly other indebtedness. Future financing agreements NuStar Energy may enter into may contain similar or more restrictive covenants than those it has negotiated for its current financing agreements.

NuStar Energy’s accounts receivable securitization program contains various customary affirmative and negative covenants and default, indemnification and termination provisions. In addition, the related receivables financing agreement pursuant to which NuStar Energy is initial servicer and performance guarantor provides for acceleration of amounts owed upon the occurrence of certain specified events.

NuStar Energy’s debt service obligations, restrictive covenants and maturities resulting from its leverage may adversely affect NuStar Energy’s ability to finance future operations, pursue acquisitions, fund its capital needs and pay cash distributions to its unitholders, including us. In addition, this leverage may make NuStar Energy’s results of operations more susceptible to adverse economic or operating conditions, limit its flexibility in planning for, or reacting to, changes in its business and industry and place it at a competitive disadvantage compared to competitors with proportionately less indebtedness. For example, during an event of default under certain of NuStar Energy’s debt agreements, NuStar Energy would be prohibited from making cash distributions to its unitholders, including us. Also, if any of NuStar Energy’s lenders files for bankruptcy or experiences severe financial hardship, they may not honor their pro rata share of NuStar Energy’s borrowing requests under the revolving credit agreement, which may significantly reduce its available borrowing capacity and, as a result, materially adversely affect NuStar Energy’s financial condition and ability to pay distributions to its unitholders, including us.

NuStar Energy’s ability to service its debt will depend on, among other things, its future financial and operating performance, which will be affected by prevailing economic conditions and financial, business, regulatory and other factors, some of which are beyond its control. If NuStar Energy’s operating results are not sufficient to service its indebtedness, it may be required to reduce its distributions, reduce or delay its business activities, investments or capital expenditures, sell assets or issue equity, which could materially and adversely affect its financial condition, results of operations, cash flows and ability to make distributions to its unitholders, as well as the trading price of its units.


15


Depending on conditions in the credit and capital markets at a given time, NuStar Energy may not be able to obtain funding on acceptable terms or at all, which may hinder or prevent it from meeting its future capital needs.
From time to time, the domestic and global financial markets and economic conditions are volatile and disrupted by a variety of factors, including low consumer confidence, high unemployment, geoeconomic and geopolitical issues, weak economic conditions and uncertainty in the market. In addition, there are fewer investors and lenders for debt and equity capital market issuances by master limited partnerships, such as NuStar Energy, than there are for corporate issuances. As a result, NuStar Energy’s cost of raising capital in the debt and equity capital markets could increase substantially, possibly at a time when the availability of funds from these markets has diminished. The cost of obtaining funds from the credit markets may increase as interest rates increase and tighter lending standards are enacted, and lenders may refuse to refinance existing debt on similar terms or at all and reduce, or in some cases cease to provide, funding to borrowers.

In addition, lending counterparties under NuStar Energy’s existing revolving credit facility and other debt instruments may be unwilling or unable to meet their funding obligations. Due to these factors, NuStar Energy cannot be certain that new financing or funding will be available on acceptable terms. If funding is not available when needed, or is available only on unfavorable terms, NuStar Energy may be unable to execute its growth strategy, complete future acquisitions or construction projects or take advantage of other business opportunities, any of which could have a material adverse effect on its revenues and results of operations.

A significant portion of NuStar Energy’s debt matures over the next five years and will need to be repaid or refinanced, and changes to the debt and equity markets could limit its refinancing options.
A significant portion of NuStar Energy’s debt is set to mature within the next five years, including its revolving credit facility. NuStar Energy may not be able to refinance its maturing debt on commercially reasonable terms, or at all, depending on numerous factors, including its financial condition and prospects at the time and the then-current state of the banking and capital markets in the United States.

Increases in interest rates could adversely affect NuStar Energy’s business and the trading price of NuStar Energy’s units.
NuStar Energy has significant exposure to increases in interest rates through variable rate provisions in certain of its debt instruments. As of December 31, 2017, NuStar Energy had approximately $3.6 billion of consolidated debt, of which $2.3 billion was at fixed interest rates and $1.3 billion was at variable interest rates. Also, in January 2018 the interest rates on NuStar Energy’s Junior Sub Notes shifted from a fixed rate to a floating annual rate equal to the sum of the three-month LIBOR rate for the related quarterly interest period, plus 6.734%. Additionally, at December 31, 2017, NuStar Energy had $600.0 million aggregate notional amount of interest rate swap arrangements, which may expose it to risk of financial loss. Prior ratings downgrades on NuStar Energy’s existing indebtedness caused interest rates under its revolving credit agreement and its 2018 Senior Notes to increase, and any future downgrades may further increase the interest rate on its 2018 Senior Notes. NuStar Energy’s results of operations, cash flows and financial position could be materially adversely affected by significant changes in interest rates. In addition, NuStar Energy historically has funded its strategic capital expenditures and acquisitions from external sources, primarily borrowings under its revolving credit agreement or funds raised through debt or equity offerings. An increase in interest rates may also have a negative impact on NuStar Energy’s ability to access the capital markets at economically attractive rates.

Furthermore, the market price of master limited partnership units such as NuStar Energy’s, like other yield-oriented securities, may be affected by, among other factors, implied distribution yield. The distribution yield is often used by investors to compare and rank yield-oriented securities for investment decision-making purposes. Therefore, increases or decreases in interest rates may affect whether or not certain investors decide to invest in master limited partnership units, including NuStar Energy’s, and a rising interest rate environment could have an adverse impact on its unit price and impair its ability to issue additional equity or incur debt to fund growth or for other purposes, including distributions.
 
Continued low crude oil prices could have an adverse impact on NuStar Energy’s results of operations, cash flows and ability to make distributions to its unitholders, including us.
Since late 2014, the price of crude oil has been depressed, which has caused most crude oil producers to reduce their capital spending and drilling activity and narrow their focus to assets in the most cost-advantaged regions. On the other hand, refiners have benefited from lower crude prices, to the extent that lower feedstock price has been coupled with higher demand for certain refined products in some regional markets. While only a portion of NuStar Energy’s total business is directly affected by the price of crude, continued low crude oil prices and related overall economic downturn could have a negative impact on its cash flows and results of operations.


16


An extended period of reduced demand for or supply of crude oil and refined products could affect NuStar Energy’s results of operations and ability to make distributions to its unitholders, including us.
Although NuStar Energy enters into throughput and deficiency agreements to protect against near-term fluctuations whenever possible, its business is ultimately dependent upon the long-term demand for and supply of the crude oil and refined products it transports in its pipelines and stores in its terminals. Any sustained decrease in demand for refined products in the markets NuStar Energy’s pipelines and terminals serve that extends beyond the expiration of its existing throughput and deficiency agreements could result in a significant reduction in throughputs in its pipelines and storage in its terminals, which would reduce its cash flows and impair its ability to make distributions to its unitholders, including us. Factors that tend to decrease market demand include:
a recession or other adverse economic condition that results in lower spending by consumers on gasoline, diesel and travel;
higher fuel taxes or other governmental or regulatory actions that increase, directly or indirectly, the cost of gasoline;
an increase in automotive engine fuel economy, whether as a result of a shift by consumers to more fuel-efficient vehicles or technological advances by manufacturers;
new regulations or court decisions requiring the phase out or reduced use of gasoline-fueled vehicles;
the increased use of alternative fuel sources;
an increase in the market price of crude oil that leads to higher refined product prices, which may reduce demand for refined products and drive demand for alternative products. Market prices for crude oil and refined products, including fuel oil, are subject to wide fluctuation in response to changes in global and regional supply that are beyond NuStar Energy’s control, and increases in the price of crude oil may result in a lower demand for refined products that NuStar Energy transports, stores and markets, including fuel oil; and
a decrease in corn acres planted for ethanol, which may reduce demand for anhydrous ammonia.

Similarly, any sustained decrease in the supply of crude oil and refined products in markets NuStar Energy serves could result in a significant reduction in throughputs in its pipelines and storage in its terminals, which would reduce its cash flows and undermine its ability to make distributions to its unitholders, including us. Factors that tend to decrease supply and, by extension, utilization of NuStar Energy’s pipelines and terminals include:
prolonged periods of low prices for crude oil and refined products, which could lead to a decrease in exploration and development activity and reduced production in markets served by NuStar Energy’s pipelines and storage terminals;
a lack of drilling services or equipment available to accommodate production needs;
changes in laws, regulations, sanctions or taxation that directly or indirectly delay supply or production or increase the cost of production of refined products; and
macroeconomic forces affecting, or actions taken by, foreign oil and gas producing nations that impact supply of and prices for crude oil and refined products.

NuStar Energy’s inability to develop and execute growth projects and acquire new assets could limit its ability to maintain and grow quarterly distributions to its unitholders, including us.
NuStar Energy’s ability to maintain and grow its distributions to unitholders, including us, depends on the growth of NuStar Energy’s existing businesses and strategic acquisitions. Decisions regarding new growth projects rely on numerous estimates, including, among other factors, predictions of future demand for NuStar Energy’s services, future supply shifts, crude oil production estimates, commodity price environments, economic conditions, both domestic and foreign, and potential changes in the financial condition of NuStar Energy’s customers. NuStar Energy’s predictions of such factors could cause it to forego certain investments and to lose opportunities to competitors who make investments based on different predictions. If NuStar Energy is unable to acquire new assets, due either to high prices or a lack of attractive synergistic targets, its future growth will be limited. In addition, NuStar Energy’s future growth will be limited if it is unable to develop additional expansion projects, implement business development opportunities and finance such activities on economically acceptable terms, which could adversely impact its results of operations and cash flows and, accordingly, result in reduced distributions to unitholders, including us, over time.

Failure to complete capital projects as planned could adversely affect NuStar Energy’s financial condition, results of operations and cash flows.
Delays or cost increases related to capital spending programs involving construction of new facilities (or improvements and repairs to NuStar Energy’s existing facilities) could adversely affect NuStar Energy’s ability to achieve forecasted operating results. Although NuStar Energy evaluates and monitors each capital spending project and tries to anticipate difficulties that may arise, such delays or cost increases may arise as a result of factors that are beyond its control, including:
non-performance or delay by, or disputes with, counterparties, vendors, suppliers, contractors or subcontractors involved with a project;

17


denial or delay in issuing requisite regulatory approvals and/or permits;
protests and other activist interference with planned or in-process projects;
unplanned increases in the cost of construction materials or labor;
disruptions in transportation of modular components and/or construction materials;
severe adverse weather conditions, natural disasters or other events (such as equipment malfunctions, explosions, fires or spills) affecting NuStar Energy’s facilities, or those of vendors and suppliers;
shortages of sufficiently skilled labor, or labor disagreements resulting in unplanned work stoppages; or
market-related increases in a project’s debt or equity financing costs.

NuStar Energy will incur financing costs during the planning and construction phases of its projects; however, the operating cash flows it expects these projects to generate will not materialize until sometime after the projects are completed, if at all. Additionally, NuStar Energy’s forecasted operating results from capital spending projects are based upon its projections of future market fundamentals that are not within its control, including changes in general economic conditions, the supply and demand of crude oil and refined products, availability to its customers of attractively priced alternative solutions for storage, transportation or supplies of crude oil and refined products and overall customer demand.

If NuStar Energy is unable to retain or replace current customers and existing contracts to maintain utilization of its pipeline and storage assets at current or more favorable rates, NuStar Energy’s revenue and cash flows could be reduced to levels that could adversely affect its ability to make quarterly distributions to its unitholders, including us.
NuStar Energy’s revenue and cash flows are generated primarily from its customers’ payments of fees under throughput contracts and storage agreements. Failure by NuStar Energy to renew or enter into new contracts or its storage customers’ material reduction of their utilization under existing contracts could result from many factors, including:
continued low crude oil prices;
a material decrease in the supply or price of crude oil;
a material decrease in demand for refined products in the markets served by NuStar Energy’s pipelines and terminals;
political, social or economic instability in another country impacting a customer based there;
competition for customers from companies with comparable assets and capabilities;
scheduled turnarounds or unscheduled maintenance at refineries NuStar Energy serves;
operational problems or catastrophic events affecting NuStar Energy’s assets or a refinery it serves;
environmental proceedings or other litigation that compel the cessation of all or a portion of the operations at NuStar Energy’s assets or a refinery it serves;
increasingly stringent environmental, health, safety and security regulations;
a decision by NuStar Energy’s current customers to redirect refined products transported in NuStar Energy’s pipelines to markets not served by NuStar Energy’s pipelines or to transport crude oil or refined products by means other than NuStar Energy’s pipelines; or
a decision by NuStar Energy’s current customers to sell one or more of the refineries NuStar Energy serves to a purchaser that elects not to use NuStar Energy’s pipelines and terminals.

Competing midstream service providers, including certain major energy and chemical companies, possess, or have greater financial resources to acquire, assets better suited to meet customer demand, which could undermine NuStar Energy’s ability to obtain and retain customers or reduce utilization of its assets, which could reduce NuStar Energy’s revenues and cash flows, thereby reducing its ability to make its quarterly distributions to unitholders, including us.
NuStar Energy’s competitors include major energy and chemical companies, some of which have greater financial resources, more pipelines or storage terminals, greater capacity pipelines or storage terminals and greater access to supply than NuStar Energy does. Certain of its competitors also may have advantages in competing for acquisitions or other new business opportunities because of their financial resources and synergies in operations. As a consequence of increased competition in the industry, some of NuStar Energy’s customers may be reluctant to renew or enter into long-term contracts or contracts that provide for minimum throughput amounts in the future. NuStar Energy’s inability to renew or replace current contracts as they expire, to enter into contracts for newly acquired, constructed or expanded assets and to respond appropriately to changing market conditions could have a negative effect on NuStar Energy’s revenue, cash flows and ability to make quarterly distributions to its unitholders, including us.

NuStar Energy’s operations are subject to operational hazards and interruptions, and NuStar Energy cannot insure against and/or predict all potential losses and liabilities that might result therefrom.
NuStar Energy’s operations and those of its customers and suppliers are subject to operational hazards and unforeseen interruptions such as natural disasters, adverse weather conditions (such as hurricanes, tornadoes, storms and floods), accidents, fires, explosions, hazardous materials releases, mechanical failures and other events beyond its control. In addition, many scientists hypothesize that global climatic changes are occurring that are likely to cause an increase in hurricanes and other

18


severe weather conditions. These events might result in a loss of life or equipment, injury or extensive property damage, as well as an interruption in NuStar Energy’s operations or those of its customers or suppliers. In the event any of NuStar Energy’s facilities, or those of its customers or suppliers, suffer significant damage or are forced to shut down for a significant period of time, it may have a material adverse effect on NuStar Energy’s earnings, its other results of operations and its financial condition as a whole.

As a result of market conditions, premiums and deductibles for certain of NuStar Energy’s insurance policies have increased substantially and could escalate further; therefore, NuStar Energy may not be able to maintain or obtain insurance of the type and amount it desires at reasonable rates. Certain insurance coverage could become subject to broad exclusions, become unavailable altogether or become available only for reduced amounts of coverage and at higher rates. For example, NuStar Energy’s insurance carriers require broad exclusions for losses due to terrorist acts. If NuStar Energy were to incur a significant liability for which it is not fully insured, such a liability could have a material adverse effect on NuStar Energy’s financial position and its ability to make distributions to its unitholders, including us, and to meet its debt service requirements.

NuStar Energy could be subject to damages or lose customers due to failure to maintain certain quality specifications or other claims related to the operation of its assets and the services it provides to its customers.
Certain of the products NuStar Energy stores and transports are produced to precise customer specifications. If NuStar Energy fails to maintain the quality and purity of the products it receives and/or a product fails to perform in a manner consistent with the quality specifications required by the customer, the customer could seek replacement of the product or damages for costs incurred as a result of the product failing to perform as guaranteed. NuStar Energy also could face other claims by its customers if its assets do not operate as expected by its customers or its services otherwise do not meet its customers’ expectations. A successful claim or series of claims against NuStar Energy could result in unforeseen expenditures and a loss of one or more customers.

NuStar Energy is exposed to counterparty credit risk. Nonpayment and nonperformance by NuStar Energy’s customers, vendors or derivative counterparties could reduce its revenues, increase its expenses and otherwise have a negative impact on its ability to conduct its business, operating results, cash flows and ability to make distributions to its unitholders, including us.
Weak economic conditions and widespread financial stress could reduce the liquidity of NuStar Energy’s customers, vendors or counterparties, making it more difficult for them to meet their obligations to NuStar Energy. NuStar Energy is therefore subject to risks of loss resulting from nonpayment or nonperformance by its customers to whom it extends credit. Severe financial problems encountered by NuStar Energy’s customers could limit its ability to collect amounts owed to it, or to enforce the performance of obligations owed to it under contractual arrangements. For example, a substantial portion of NuStar Energy’s St. Eustatius facility revenue derives from its storage of petroleum products exported from Venezuela on behalf of Petróleos de Venezuela, S.A. (PDVSA), a state-owned Venezuelan oil company. Significant political, social and economic instability in Venezuela, including constraints on foreign currency transactions by the Venezuelan government, has caused PDVSA to utilize NuStar Energy’s assets significantly less than it forecasted and late-pay invoices from time to time. NuStar Energy’s involvement with products exported from Venezuela also exposes it to the risk of trade restrictions and economic embargoes imposed by the United States and other countries.

In addition, nonperformance by vendors who have committed to provide NuStar Energy with critical products or services could raise its costs or interfere with its ability to successfully conduct its business. Furthermore, nonpayment by the counterparties to any of NuStar Energy’s outstanding derivatives could expose it to additional interest rate or commodity price risk. While NuStar Energy attempts to mitigate its risk through warehouseman’s liens and other security protections, any substantial increase in the nonpayment and nonperformance by its customers, vendors or counterparties could have a material adverse effect on its results of operations, cash flows and ability to make distributions to unitholders, including us.

Cybersecurity breaches and other disruptions could compromise NuStar Energy’s information and operations, and expose it to liability, which would cause its business and reputation to suffer.
NuStar Energy relies on its information technology infrastructure to process, transmit and store electronic information, including information it uses to safely operate its assets. In recent years, there has been a rise in the number of cyberattacks on other companies’ network and information systems by both state-sponsored and criminal organizations, and as a result, the risks associated with such an event continue to increase. A significant failure, compromise, breach or interruption in NuStar Energy’s systems could result in a disruption of its operations, customer dissatisfaction, damage to its reputation, a loss of customers or revenues and potential regulatory fines. If any such failure, interruption or similar event results in improper disclosure of information maintained in NuStar Energy’s information systems and networks or those of its vendors, including personnel, customer and vendor information, it could also be subject to liability under relevant contractual obligations and laws and regulations protecting personal data and privacy. NuStar Energy’s financial results could also be adversely affected if

19


operational systems are breached or an employee causes its operational systems to fail, either as a result of inadvertent error or by deliberately tampering with or manipulating its operational systems.

Although NuStar Energy believes that it has robust information security procedures and other safeguards in place, as cyberthreats continue to evolve, it may be required to expend additional resources to continue to enhance its information security measures and/or to investigate and remediate information security vulnerabilities.

Acquisitions and expansions, if any, may increase substantially the level of NuStar Energy’s indebtedness and contingent liabilities or otherwise change its capital structure, and NuStar Energy may be unable to integrate acquisitions and expansions effectively into its existing operations.
From time to time, NuStar Energy evaluates and acquires assets and businesses that it believes complement or diversify its existing assets and operations. Acquisitions may require NuStar Energy to raise a substantial amount of equity or incur a substantial amount of indebtedness. If NuStar Energy consummates any future material acquisitions, its capitalization and results of operations may change significantly, and unitholders will not have the opportunity to evaluate the economic, financial and other relevant information that NuStar Energy will consider in connection with any future acquisitions.

Part of NuStar Energy’s overall business strategy includes acquiring additional assets that complement NuStar Energy’s existing asset base and distribution capabilities or provide entry into new markets. NuStar Energy may not be able to identify suitable acquisitions, or it may not be able to purchase or finance any acquisitions on terms that it finds acceptable. Additionally, NuStar Energy competes against other companies for acquisitions, and NuStar Energy may not be successful in the acquisition of any assets or businesses appropriate for its growth strategy.

Even if NuStar Energy does consummate acquisitions that it believes will increase distributable cash flow, these acquisitions may nevertheless result in a decrease in distributable cash flow. Any acquisition involves potential risks, including, among other things:
NuStar Energy may not be able to obtain the cost savings and financial improvements it anticipates or acquired assets may not perform as NuStar Energy expects;
NuStar Energy may not be able to successfully integrate the assets, management teams or employees of the businesses it acquires with its assets and management team, or such integration may be significantly delayed;
NuStar Energy may fail or be unable to discover some of the liabilities of businesses that it acquires, including liabilities resulting from a prior owner’s noncompliance with applicable federal, state or local laws;
NuStar Energy may have assumed prior known or unknown liabilities for which it may not be indemnified or have adequate insurance;
acquisitions may divert the attention of NuStar Energy’s senior management from focusing on its core business;
NuStar Energy may experience a decrease in its liquidity by using a significant portion of its available cash or borrowing capacity to finance acquisitions; and
NuStar Energy may face the risk that its existing financial controls, information systems, management resources and human resources will need to grow to support future growth.

NuStar Energy operates a global business that exposes it to additional risk.
NuStar Energy operates a global business. A significant portion of its revenues come from its business outside of the United States, and its operations are subject to various risks unique to each country that could have a material adverse effect on its business, results of operations and financial condition. With respect to any particular country, these risks may include political and economic instability, including: civil unrest, war and other armed conflict; inflation; and currency fluctuations, devaluation and conversion restrictions. NuStar Energy is also exposed to the risk of governmental actions that may: limit or disrupt markets for its operations, restrict payments to it or limit the movement of funds; impose sanctions on its ability to conduct business with certain customers or persons; or result in the deprivation of contract rights. Its operations outside the United States may also be affected by changes in trade protection laws, policies and measures, and other regulatory requirements affecting trade and investment, including the Foreign Corrupt Practices Act, the United Kingdom Bribery Act and other foreign laws prohibiting corrupt payments, as well as import and export regulations. Additionally, negotiations are ongoing regarding the United Kingdom’s exit from the European Union, and any future effects from this are currently unknown.

NuStar Energy also has assets in, or does business with customers based in, certain emerging markets, and the developing nature of these markets presents a number of risks. In addition, due to the unsettled political conditions in many oil-producing countries, NuStar Energy’s operations may be subject to the adverse consequences of war, civil unrest, strikes, currency controls and governmental actions. Deterioration of social, political, labor or economic conditions, including the increasing threat of terrorist organizations and drug cartels, in a country or region in which NuStar Energy does business, or affecting a customer with whom NuStar Energy does business, as well as difficulties in staffing and managing foreign operations, may adversely affect its operations or financial results. For example, PDVSA, a state-owned oil company in Venezuela, is a

20


significant customer at NuStar Energy’s terminal facility in St. Eustatius, and recent political, social and economic instability in Venezuela seems to have had a negative impact on both PDVSA’s utilization of NuStar Energy’s facility and its ability to timely pay amounts invoiced.

NuStar Energy is subject to laws and sanctions implemented by the United States and foreign jurisdictions where it does business that may restrict the type of business it is permitted to conduct with certain entities, including PDVSA, restrict its activities in certain countries, or even restrict the services it may provide with respect to crude oil or other products produced in certain countries.   In 2017, the United States and the European Union imposed sanctions relating to Venezuela and PDVSA.  While these sanctions do not prohibit NuStar Energy from continuing to perform under its existing contracts with PDVSA, the sanctions may increase the likelihood that PDVSA will be unable to perform its obligations to NuStar Energy.  In addition, in the event additional sanctions are imposed in the future relating to Venezuela or PDVSA, such future sanctions may result in further deterioration of PDVSA’s ability to perform its obligations to NuStar Energy and could prevent it from continuing to serve PDVSA in St. Eustatius.

NuStar Energy does not own all of the land on which its pipelines and facilities have been constructed, and NuStar Energy is therefore subject to the possibility of increased costs or the inability to retain necessary land use.
NuStar Energy obtains the rights to construct and operate its pipelines, storage terminals and other facilities on land owned by third parties and governmental agencies. Many of these rights-of-way or other property rights are perpetual in duration, but others are for a specific period of time. In addition, some of NuStar Energy’s facilities are located on leased premises. Its loss of property rights, through its inability to renew right-of-way contracts or leases or otherwise, could adversely affect its operations and cash flows available for distribution to unitholders, including us.

In addition, the construction of additions to NuStar Energy’s existing assets may require it to obtain new rights-of-way or property rights prior to construction. NuStar Energy may be unable to obtain such rights-of-way or other property rights to connect new supplies to its existing pipelines, storage terminals or other facilities or to capitalize on other attractive expansion opportunities. Additionally, it may become more expensive for NuStar Energy to obtain new rights-of-way or other property rights or to renew existing rights-of-way or property rights. If the cost of obtaining new or renewing existing rights-of-way or other property rights increases, it may adversely affect NuStar Energy’s operations and cash flows available for distribution to unitholders, including us.

NuStar Energy may be unable to obtain or renew permits necessary for its operations, which could inhibit its ability to do business.
NuStar Energy’s facilities operate under a number of federal, state and local permits, licenses and approvals with terms and conditions containing a significant number of prescriptive limits and performance standards in order to operate. These limits and standards require a significant amount of monitoring, recordkeeping and reporting in order to demonstrate compliance with the underlying permit, license or approval. Noncompliance or incomplete documentation of NuStar Energy’s compliance status may result in the imposition of fines, penalties and injunctive relief. In addition, public protest and responsive government intervention have recently made it more difficult for some energy companies to acquire the permits required to complete planned infrastructure projects. A decision by a government agency to deny or delay issuing a new or renewed permit, license or approval, or to revoke or substantially modify an existing permit, license or approval, could have a material adverse effect on NuStar Energy’s ability to continue operations and on its financial condition, results of operations, cash flows and ability to make distributions to its unitholders, including us.

NuStar Energy may have liabilities from its assets that preexist NuStar Energy’s acquisition of those assets, but that may not be covered by indemnification rights NuStar Energy may have against the sellers of the assets.
In some cases, NuStar Energy may have indemnified the previous owners and operators of acquired assets. Some of NuStar Energy’s assets have been used for many years to transport and store crude oil and refined products, and releases may have occurred in the past that could require costly future remediation. If a significant release or event occurred in the past, the liability for which was not retained by the seller, or for which indemnification from the seller is not available, it could adversely affect NuStar Energy’s financial position and results of operations. Conversely, if future releases or other liabilities arise from assets NuStar Energy has sold, NuStar Energy could incur costs related to those liabilities if the buyer possesses valid indemnification rights against it with respect to those assets.

Climate change legislation and other regulatory initiatives may decrease demand for the products NuStar Energy stores, transports and sells and increase NuStar Energy’s operating costs.
In response to scientific studies asserting that emissions of certain “greenhouse gases” such as carbon dioxide and methane may be contributing to warming of the Earth’s atmosphere, the U.S. Congress, European Union and other political bodies have considered legislation or regulation to reduce emissions of greenhouse gases. Passage of climate change or fuels legislation or other regulatory initiatives in fuel efficiency, fuel additives, renewable fuels and other areas in which NuStar Energy conducts

21


business, could result in changes to the demand for the products NuStar Energy stores, transports and sells, and could increase the costs of NuStar Energy’s operations, including costs to operate and maintain its facilities, install new emission controls on its facilities, acquire allowances to authorize its greenhouse gas or other emissions, pay any taxes related to its greenhouse gas or other emissions or administer and manage emissions programs. In addition, certain of NuStar Energy’s blending operations can result in requirements to purchase renewable energy credits. Even though NuStar Energy attempts to mitigate such lost revenues or increased costs through the contracts it signs with its customers, NuStar Energy may be unable to recover those revenues or mitigate the increased costs, and any such recovery may depend on events beyond its control, including the outcome of future rate proceedings before the Federal Energy Regulatory Commission (the FERC), the Surface Transportation Board (STB) or other regulators and the provisions of any final legislation or regulations. Reductions in NuStar Energy’s revenues or increases in its expenses as a result of climate change legislation or other regulatory initiatives could have adverse effects on NuStar Energy’s business, financial position, results of operations and prospects.

NuStar Energy’s operations are subject to federal, state and local laws and regulations, in the U.S. and in the other countries in which it operates, relating to environmental, health, safety and security that could require NuStar Energy to make substantial expenditures.
NuStar Energy’s operations are subject to increasingly stringent federal, state and local environmental, health, safety and security laws and regulations. Transporting, storing and distributing hazardous materials, including petroleum products, entails the risk that these products may be released into the environment, potentially causing substantial expenditures for a response action, significant government penalties, liability to government agencies including for damages to natural resources, personal injury or property damages to private parties and significant business interruption. Further, certain of NuStar Energy’s pipeline facilities may be subject to the pipeline integrity and safety regulations of various federal and state regulatory agencies. In recent years, increased regulatory focus on pipeline integrity and safety has resulted in various proposed or adopted regulations. The implementation of these regulations, and the adoption of future regulations, could require NuStar Energy to make additional capital expenditures, including to install new or modified safety measures, or to conduct new or more extensive maintenance programs.

Current and future legislative action and regulatory initiatives could also result in changes to operating permits, material changes in operations, increased capital expenditures and operating costs, increased costs of the goods NuStar Energy transports and decreased demand for products it handles that cannot be assessed with certainty at this time. NuStar Energy may be required to make expenditures to modify operations or install pollution control equipment or release prevention and containment systems that could materially and adversely affect its business, financial condition, results of operations and liquidity if these expenditures, as with all costs, are not ultimately reflected in the tariffs and other fees it receives for its services.

NuStar Energy owns or leases a number of properties that were used to transport, store or distribute products for many years before NuStar Energy acquired them; therefore, such properties were operated by third parties whose handling, disposal or release of products and wastes was not under NuStar Energy’s control. Environmental laws and regulations could impose obligations to conduct assessment or remediation efforts at NuStar Energy’s facilities, third-party sites where it takes wastes for disposal, or where wastes have migrated. Environmental laws and regulations also may impose joint and several liabilities on NuStar Energy for the conduct of third parties or for actions that complied with applicable requirements when taken, regardless of negligence or fault.

If NuStar Energy were to incur a significant liability pursuant to environmental, health, safety or security laws or regulations, such a liability could have a material adverse effect on its financial position and its ability to make distributions to its unitholders, including us, and its ability to meet its debt service requirements.

NuStar Energy’s interstate common carrier pipelines are subject to regulation by the FERC.
The FERC regulates the tariff rates and terms and conditions of service for interstate oil movements on NuStar Energy’s common carrier pipelines. FERC regulations require that these rates must be just and reasonable and that the pipeline not engage in undue discrimination or undue preference with respect to any shipper. Under the Interstate Commerce Act, the FERC or shippers may challenge NuStar Energy’s pipeline tariff filings, including rates and terms and conditions of service. Further, other than for rates set under market-based rate authority, if a new rate is challenged by protest and investigated by the FERC, the FERC may suspend collection of such new rate for up to seven months. If such new rate is found to be unjust and unreasonable, the FERC may order refunds of amounts collected in excess of amounts generated by the just and reasonable rate determined by the FERC. A successful rate challenge could result in a common carrier paying refunds together with interest for the period that the rate was in effect. In addition, shippers may challenge by complaint tariff rates and terms and conditions of service even after the rates and terms and conditions of service are in effect. If the FERC, in response to such a complaint or on its own initiative, initiates an investigation of rates that are already in effect, the FERC may order a carrier to change its rates prospectively. If existing rates are challenged and are determined by the FERC to be in excess of a just and reasonable level,

22


any complaining shipper may obtain reparations for damages sustained during the two years prior to the date the shipper filed a complaint.

NuStar Energy is able to use various FERC-authorized rate change methodologies for its interstate pipelines, including indexed rates, cost-of-service rates, market-based rates and settlement rates. Typically, NuStar Energy adjusts its rates annually in accordance with FERC indexing methodology, which currently allows a pipeline to change its rates within prescribed ceiling levels that are tied to an inflation index. For the five-year period beginning July 1, 2011, the index was measured by the year-over-year change in the Bureau of Labor’s producer price index for finished goods, plus 2.65%. For the five-year period beginning July 1, 2016, the current index is measured by the year-over-year change in the Bureau of Labor’s producer price index for finished goods, plus 1.23%. Further, some of NuStar Energy’s newer projects that involved an open season include negotiated indexation rate caps.

In October 2016, the FERC initiated an Advance Notice of Proposed Rulemaking (ANOPR) to determine whether to require oil pipeline companies to file cost and revenue data for each of the company’s pipeline systems, with the definition of such systems also part of the ANOPR. Among other things, the ANOPR also proposed that index rate adjustments be capped or prohibited under certain circumstances and that ceiling rates be capped under certain circumstances. These methodologies, if adopted, could result in changes in NuStar Energy’s revenue that do not fully reflect changes in costs it incurs to operate and maintain its pipelines. For example, NuStar Energy’s costs could increase more quickly or by a greater amount than the negotiated or, if adopted, FERC-mandated indexation rate cap.

The reporting of system-based cost and revenue data, if adopted as a result of the ANOPR, could lead to an increase in rate litigation at the FERC. Currently, shippers may protest rate increases made within the ceiling levels, but such protests must show that the portion of the rate increase resulting from application of the index is substantially in excess of the pipeline’s change in costs from the previous year. However, if the index results in a negative adjustment, NuStar Energy is required to reduce any rates that exceed the new maximum allowable rate. In addition, changes in the index might not be large enough to fully reflect actual increases in NuStar Energy’s costs. If the FERC’s rate-making methodologies change, any such change or new methodologies could result in rates that generate lower revenues and cash flow and could adversely affect NuStar Energy’s ability to make distributions to its unitholders, including us, and to meet its debt service requirements. Additionally, because competition constrains NuStar Energy’s rates in various markets, NuStar Energy may from time to time be forced to reduce some of its rates to remain competitive.

Changes to FERC rate-making principles or pronouncements could have an adverse impact on NuStar Energy’s ability to recover the full cost of operating its pipeline facilities and its ability to make distributions to its unitholders, including us.
In May 2005, the FERC issued a statement of general policy stating it will permit pipelines to include in their costs of service a tax allowance to reflect actual or potential tax liability on their public utility income attributable to all partnership or limited liability company interests, if the ultimate owner of the interest has an actual or potential income tax liability on such income. Whether a pipeline’s owners have such actual or potential income tax liability will be reviewed by the FERC on a case-by-case basis. Although this policy is generally favorable for pipelines that are organized as pass-through entities, it still entails rate risk due to the case-by-case review requirement. This tax allowance policy and the FERC’s application of that policy were appealed to the D.C. Circuit, and, on May 29, 2007, the D.C. Circuit issued an opinion upholding the FERC’s tax allowance policy.

In two proceedings involving SFPP, L.P., a refined products pipeline system, shippers again challenged the FERC’s income tax allowance policy, alleging that it is unlawful for a pipeline organized as a tax-pass-through entity to be afforded an income tax allowance and that the income tax allowance is unnecessary because an allowance for income taxes for such pipelines is recovered indirectly through the rate of return on equity. The FERC rejected these shipper arguments in multiple orders. Petitions for review of the FERC’s rulings on the income tax allowance were filed with the D.C. Circuit.

On July 1, 2016, the D.C. Circuit issued an opinion granting the shippers’ petition for review of the FERC’s rulings on the income tax allowance, finding that the FERC had failed to demonstrate that there is no double recovery of taxes for partnerships that receive an income tax allowance in addition to the return they receive through the rate of return on equity. On this basis, the D.C. Circuit remanded the issue to the FERC, which established a pending industrywide Notice of Inquiry regarding this issue. Certain participants in the Notice of Inquiry made filings claiming that pipeline rates should be reduced based on anticipated income tax reductions related to the Tax Cuts and Jobs Act. Because the extent to which an interstate oil pipeline organized as a partnership is entitled to an income tax allowance is subject to a case-by-case review at the FERC and is a matter that remains under litigation and FERC review, the level of income tax allowance to which NuStar Energy would ultimately be entitled is not certain. The manner in which the FERC’s income tax allowance policy is applied to pipelines owned by publicly traded partnerships could limit NuStar Energy’s ability to include a full income tax allowance in its cost of service.


23


The rates that NuStar Energy may charge on its interstate ammonia pipeline are subject to regulation by the STB.
NuStar Energy’s ammonia pipeline is subject to regulation under the Interstate Commerce Act by the STB, which is part of the DOT. Under that regulation NuStar Energy’s ammonia pipeline’s rates, rules and practices related to the interstate transportation of anhydrous ammonia must be reasonable and, in providing interstate transportation, NuStar Energy’s ammonia pipeline may not subject a shipper to unreasonable discrimination.

Increases in natural gas and power prices could adversely affect NuStar Energy’s operating expenses and its ability to make distributions to its unitholders, including us.
Power costs constitute a significant portion of NuStar Energy’s operating expenses. For the year ended December 31, 2017, NuStar Energy’s power costs equaled approximately $46.0 million, or 10.2% of NuStar Energy’s operating expenses for the year. NuStar Energy uses mainly electric power at its pipeline pump stations and terminals, and such electric power is furnished by various utility companies that primarily use natural gas to generate electricity. Accordingly, NuStar Energy’s power costs typically fluctuate with natural gas prices, and increases in natural gas prices may cause NuStar Energy’s power costs to increase further. If natural gas prices increase, NuStar Energy’s cash flows may be adversely affected, which could adversely affect NuStar Energy’s ability to make distributions to its unitholders, including us.

Terrorist attacks and the threat of future attacks worldwide, as well as continued hostilities in the Middle East or other sustained military campaigns, may adversely impact NuStar Energy’s results of operations.
The United States Department of Homeland Security has identified pipelines and other energy infrastructure assets as ones that might be specific targets of terrorist organizations. These potential targets might include NuStar Energy’s pipeline systems, storage facilities or operating systems and may affect its ability to operate or control its pipeline and storage assets. Increased security measures taken by NuStar Energy as a precaution against possible terrorist attacks have resulted in increased costs to its business. Uncertainty surrounding continued hostilities in the Middle East or other sustained military campaigns may affect NuStar Energy’s operations in unpredictable ways, including disruptions of crude oil supplies and markets for refined products, instability in the financial markets that could restrict NuStar Energy’s ability to raise capital and the possibility that infrastructure facilities could be direct targets of, or indirect casualties of, an attack.

Hedging transactions may limit NuStar Energy’s potential gains or result in significant financial losses.
While intended to reduce the effects of volatile commodity prices, hedging transactions, depending on the hedging instrument used, may limit NuStar Energy’s potential gains if petroleum product prices were to rise substantially over the price established by the hedge. In addition, such transactions may expose NuStar Energy to the risk of financial loss in certain circumstances, including instances in which there is a change in the expected differential between the underlying price in the hedging agreement and the actual prices received.

The accounting standards regarding hedge accounting are complex and, even when NuStar Energy engages in hedging transactions that are effective economically, these transactions may not be considered effective for accounting purposes. Accordingly, NuStar Energy’s financial statements will reflect increased volatility due to these hedges, even when there is no underlying economic impact at that point. It is not possible for NuStar Energy to engage in a hedging transaction that completely mitigates its exposure to commodity prices, and NuStar Energy’s financial statements may reflect a gain or loss arising from an exposure to commodity prices for which NuStar Energy is unable to enter into an effective hedge.

NuStar Energy’s purchase and sale of crude oil and petroleum products may expose NuStar Energy to trading losses and hedging losses, and non-compliance with NuStar Energy’s related risk management policies could result in significant financial losses.
Although NuStar Energy’s marketing and trading of crude oil and petroleum products represents a small percentage of its overall business, these activities expose NuStar Energy to some commodity price volatility risk for the purchase and sale of crude oil and petroleum products, including distillates and fuel oil. NuStar Energy attempts to mitigate this volatility risk through hedging, but it is still exposed to basis risk and may be required to post cash collateral under its hedging arrangements. NuStar Energy also may be exposed to inventory and financial liquidity risk due to the inability to trade certain products or rising costs of carrying some inventories. Further, NuStar Energy’s marketing and trading activities, including any hedging activities, may cause volatility in NuStar Energy’s earnings. In addition, NuStar Energy will be exposed to credit risk in the event of non-performance by counterparties.

NuStar Energy’s risk management policies may not eliminate all price risk since open trading positions will expose it to price volatility, and there is a risk that NuStar Energy’s risk management policies will not be complied with. Although NuStar Energy has designed procedures to anticipate and detect non-compliance, there are no assurances these steps will detect and prevent all violations of NuStar Energy’s trading policies and procedures, particularly if deception and other intentional misconduct are involved.


24


As a result of the risks described above, the activities associated with NuStar Energy’s marketing and trading business may expose NuStar Energy to volatility in earnings and financial losses, which may adversely affect its financial condition and ability to make its quarterly distributions to its unitholders, including us.

TAX RISKS TO OUR UNITHOLDERS

If we or NuStar Energy were treated as a corporation for federal or state income tax purposes or we or NuStar Energy were otherwise subject to a material amount of entity-level taxation, then our cash available for distribution to our unitholders would be substantially reduced.
The anticipated after-tax benefit of an investment in our units depends largely on our being treated as a partnership for federal income tax purposes. We have not requested, and do not plan to request, a ruling from the Internal Revenue Service (the IRS) on this matter.
The value of our investment in NuStar Energy depends largely on NuStar Energy being treated as a partnership for federal income tax purposes.

Despite the fact that we are a limited liability company and NuStar Energy is a limited partnership under Delaware law, we would each be treated as a corporation for federal income tax purposes unless each of us satisfies a “qualifying income” requirement. Based upon our current operations, we believe we and NuStar Energy each satisfy the qualifying income requirement. Failing to meet the qualifying income requirement or a change in current law could cause us or NuStar Energy to be treated as a corporation for federal income tax purposes or otherwise subject us or NuStar Energy to taxation as an entity.

If we were treated as a corporation for federal income tax purposes, we would pay federal income tax on our taxable income at the corporate tax rate and would likely pay state and local income tax at varying rates. Distributions to unitholders who are treated as holders of corporate stock would generally be taxed again as corporate dividends (to the extent of our current and accumulated earnings and profits), and no income, gains, losses, deductions or credits would flow through to unitholders. If NuStar Energy were treated as a corporation for federal income tax purposes, it would pay federal income tax on its taxable income at the corporate tax rate. Distributions to us would generally be taxed again as corporate distributions, and no income, gains, losses, deductions or credits would flow through to us. Because a tax would be imposed upon us or NuStar Energy as a corporation, our distributable cash flow would be substantially reduced.

Moreover, changes in current state law may subject us or NuStar Energy to entity-level taxation by individual states. Because of widespread state budget deficits and other reasons, several states are evaluating ways to subject entities treated as partnerships to entity-level taxation through the imposition of state income, franchise and other forms of taxation. Imposition of any such taxes or an increase in the existing tax rates would substantially reduce the cash available for distribution to unitholders. Therefore, if we or NuStar Energy were treated as a corporation for federal income tax purposes or otherwise subjected to a material amount of entity-level taxation, there would be a material reduction in the anticipated cash flow and after-tax return to our unitholders, likely causing a substantial reduction in the value of our common units.

The tax treatment of publicly traded entities treated as partnerships for federal income tax purposes, or an investment in our or NuStar Energy units, could be subject to potential legislative, judicial or administrative changes or differing interpretations, possibly applied on a retroactive basis.
The present U.S. federal income tax treatment of publicly traded entities treated as partnerships for federal income tax purposes, including us or NuStar Energy, or an investment in our or NuStar Energy’s units may be modified by administrative, legislative or judicial changes or differing interpretations at any time. From time to time, members of Congress propose and consider such substantive changes to the existing federal income tax laws that affect such entities. Further, final Treasury regulations under Section 7704(d)(1)(E) of the Code published in the Federal Register interpret the scope of qualifying income requirements for publicly traded partnerships by providing industry-specific guidance. We do not believe the final Treasury regulations affect our or NuStar Energy’s ability to be treated as partnerships for U.S. federal income tax purposes.

In addition, the Tax Cuts and Jobs Act enacted December 22, 2017 makes significant changes to the U.S. federal income tax rules applicable to both individuals and entities, including changes to the tax rate on a unitholder’s allocable share of income from a publicly traded entity. The Tax Cuts and Jobs Act is complex and lacks administrative guidance. Thus, the impact of certain aspects of its provisions on us or an investment in our units is currently unclear. Unitholders should consult their tax advisor regarding the Tax Cuts and Jobs Act and its effect on us or an investment in our units.

Any changes to the federal income tax laws and interpretations thereof (including administrative guidance relating to the Tax Cuts and Jobs Act) may be applied retroactively and could make it more difficult or impossible for us or NuStar Energy to meet the exception for certain publicly traded entities to be treated as partnerships for federal income tax purposes or otherwise adversely affect our business, financial condition or results of operations. We are unable to predict whether any additional

25


changes or other proposals will ultimately be enacted. Any such changes could negatively impact the value of an investment in our units.

A successful IRS contest of the federal income tax positions we or NuStar Energy take may adversely impact the market for our or NuStar Energy’s units, and the costs of any contest will reduce cash available for distribution to our unitholders.
The IRS may adopt positions that differ from the positions we or NuStar Energy take, even positions taken with the advice of counsel. It may be necessary to resort to administrative or court proceedings to sustain some or all of the positions we or NuStar Energy take. A court may not agree with all of the positions we or NuStar Energy take. Any contest with the IRS may affect adversely the taxable income reported to our unitholders and the income taxes they are required to pay. As a result, any such contest with the IRS may materially and adversely impact the market for our or NuStar Energy’s units and the prices at which they trade. In addition, the costs of any contest between NuStar Energy and the IRS will result in a reduction in cash available for distribution to NuStar Energy unitholders and thus will be borne indirectly by us, as a unitholder and as the owner of the general partner of NuStar Energy, and by other unitholders of NuStar Energy.

If the IRS makes audit adjustments to our or NuStar Energy’s income tax returns for tax years beginning after December 31, 2017, it (and some states) may assess and collect any taxes (including any applicable penalties and interest) resulting from such audit adjustment directly from us or NuStar Energy, in which case we or NuStar Energy, as applicable, may elect to either pay the taxes directly to the IRS or to have its unitholders and former unitholders take such audit adjustment into account and pay any resulting taxes. If we or NuStar Energy bears such payment, our cash available for distribution to our unitholders might be substantially reduced.
Pursuant to the Bipartisan Budget Act of 2015, for tax years beginning after December 31, 2017, if the IRS makes audit adjustments to our or NuStar Energy’s income tax returns, it (and some states) may assess and collect any taxes (including any applicable penalties and interest) resulting from such audit adjustment directly from us or NuStar Energy, as applicable. To the extent possible under the new rules, we may elect to either pay the taxes (including any applicable penalties and interest) directly to the IRS or, if we are eligible, issue a revised Schedule K-1 to each unitholder with respect to an audited and adjusted return. Although we or NuStar Energy’s general partner, as applicable, may elect to have our unitholders and former unitholders take such audit adjustment into account and pay any resulting taxes (including applicable penalties or interest) in accordance with their interests in us during the tax year under audit, there can be no assurance that such election will be practical, permissible or effective in all circumstances. As a result, our current unitholders may bear some or all of the tax liability resulting from such audit adjustment, even if such unitholders did not own common units in us during the tax year under audit. If, as a result of any such audit adjustment, we or NuStar Energy make payments of taxes, penalties and interest, our cash available for distribution to our unitholders might be substantially reduced.

Even if unitholders do not receive any cash distributions from us, they will be required to pay taxes on their respective share of our taxable income.
Unitholders will be required to pay federal income taxes and, in some cases, state and local income taxes on their respective share of our taxable income, whether or not the unitholders receive cash distributions from us. Unitholders may not receive cash distributions from us equal to their respective share of our taxable income or even equal to the actual tax liability that results from their respective share of our taxable income.

Tax gain or loss on the disposition of our units could be different than expected.
If a unitholder sells units, the selling unitholder will recognize a gain or loss equal to the difference between the amount realized and the unitholder’s tax basis in those units. Prior distributions to the selling unitholder in excess of the total net taxable income the unitholder was allocated for a unit, which decreased the unitholder’s tax basis in that unit, will, in effect, become taxable income to the selling unitholder if the unit is sold at a price greater than the unitholder’s tax basis in that unit, even if the price the unitholder receives is less than the units’ original cost. A substantial portion of the amount realized, whether or not representing gain, may be ordinary income to the selling unitholder.

Unitholders may be subject to limitations on their ability to deduct interest expense incurred by us.
In general, we are entitled to a deduction for interest paid or accrued on indebtedness properly allocable to our trade or business during our taxable year, and NuStar Energy is entitled to a deduction for interest paid or accrued on indebtedness properly allocable to its trade or business during its taxable year. However, under the Tax Cuts and Jobs Act, for taxable years beginning after December 31, 2017, a deduction for “business interest” is limited to the sum of a taxpayer’s business interest income plus 30% of its “adjusted taxable income.” This limitation is applied at the entity level for entities treated as partnerships for federal income tax purposes, including us and NuStar Energy. For the purposes of this limitation, adjusted taxable income is computed without regard to any business interest expense or business interest income, and in the case of taxable years beginning before January 1, 2022, any deduction allowable for depreciation, amortization, or depletion. Any interest disallowed at the entity level may be carried forward and deducted in future years by the partner from his share of the entity’s “excess taxable income,”

26


which is generally equal to the excess of 30% of its adjusted taxable income over the amount of its deduction for business interest for such future taxable year, subject to certain restrictions.

Tax-exempt entities face unique tax issues from owning our units that may result in adverse tax consequences to them.
Investment in our units by tax-exempt entities, such as employee benefit plans and individual retirement accounts (known as IRAs) raises issues unique to them. For example, virtually all of our income allocated to organizations that are exempt from U.S. federal income tax, including IRAs and other retirement plans, will be unrelated business taxable income and will be taxable to them. Further, with respect to taxable years beginning after December 31, 2017, a tax-exempt entity with more than one unrelated trade or business (including by attribution from investment in us or NuStar Energy that is engaged in one or more unrelated trades or businesses) is required to compute the unrelated business taxable income of such tax-exempt entity separately with respect to each such trade or business (including for purposes of determining any net operating loss deduction). As a result, for years beginning after December 31, 2017, it may not be possible for tax-exempt entities to utilize losses from an investment in us to offset unrelated business taxable income from another unrelated trade or business and vice versa. Tax-exempt entities should consult a tax advisor before investing in our units.

Non-U.S. unitholders will be subject to U.S. taxes and withholding with respect to their income and gain from owning our units.
Non-U.S. unitholders are subject to U.S. federal income tax on income effectively connected with a U.S. trade or business (“effectively connected income”). A unitholder’s share of our income, gain, loss and deduction, and any gain from the sale or disposition of our units will generally be considered to be “effectively connected” with a U.S. trade or business and subject to U.S. federal income tax. Additionally, distributions to a non-U.S. unitholder will be subject to withholding at the highest applicable effective tax rate.

The Tax Cuts and Jobs Act imposes a withholding obligation of 10% of the amount realized upon a non-U.S. unitholder’s sale or disposition of units. The IRS has temporarily suspended the application of the withholding requirements on sales of publicly traded interests, including our units, pending promulgation of regulations or other guidance. It is not clear if or when such regulations or other guidance will be issued. Non-U.S. unitholders should consult a tax advisor before investing in our units.

We will treat each purchaser of our units as having the same tax benefits without regard to the units purchased. The IRS may challenge this treatment, which could adversely affect the value of our units.
Because we cannot match transferors and transferees of units, we will adopt depreciation and amortization positions that may not conform with all aspects of existing Treasury regulations. A successful IRS challenge to those positions could adversely affect the amount of tax benefits available to unitholders. It also could affect the timing of these tax benefits or the amount of gain from a unitholder’s sale of units and could have a negative impact on the value of our units or result in audit adjustments to the unitholder’s tax returns.

Unitholders will likely be subject to state and local taxes and return filing requirements as a result of investing in our units.
In addition to federal income taxes, unitholders will likely be subject to other taxes, such as state and local income taxes, unincorporated business taxes and estate, inheritance or intangible taxes that are imposed by the various jurisdictions in which we or NuStar Energy do business or own property. Unitholders will likely be required to file state and local income tax returns and pay state and local income taxes in some or all of these various jurisdictions. Further, unitholders may be subject to penalties for failure to comply with those requirements. We or NuStar Energy may own property or conduct business in other states or foreign countries in the future. It is each unitholder’s responsibility to file all federal, state and local tax returns.

We prorate our items of income, gain, loss and deduction between transferors and transferees of our units each month based upon the ownership of our units on the first day of each month, instead of on the basis of the date a particular unit is transferred. The IRS may challenge this treatment, which could change the allocation of items of income, gain, loss and deduction among our unitholders.
We prorate our items of income, gain, loss and deduction between transferors and transferees of our units each month based upon the ownership of our units on the first day of each month, instead of on the basis of the date a particular unit is transferred. The U.S. Treasury Department and the IRS recently issued final regulations pursuant to which a publicly traded entity treated as a partnership for federal income tax purposes may use a similar monthly simplifying convention to allocate tax items among transferor and transferee unitholders although such tax items must be prorated on a daily basis and the regulations do not specifically authorize all aspects of the proration method we have currently adopted. If the IRS were to challenge our proration method, we may be required to change the allocation of items of income, gain, loss and deduction among our unitholders.


27


We and NuStar Energy have adopted certain valuation methodologies in determining a unitholder’s allocations of income, gain, loss and deduction. The IRS may challenge these methods or the resulting allocations and such a challenge could adversely affect the value of our investment in NuStar Energy.
In determining the items of income, gain, loss and deduction allocable to our and NuStar Energy’s common unitholders, we and NuStar Energy must routinely determine the fair market value of our respective assets. Although we or NuStar Energy may from time to time consult with professional appraisers regarding valuation matters, we and NuStar Energy make valuation estimates using a methodology based on the fair market value of our respective common units as a means to measure the fair market value of our respective assets. The IRS may challenge these valuation methods and the resulting allocations of income, gain, loss and deduction.

A successful IRS challenge to these methods or allocations could adversely affect the amount of taxable income or loss being allocated to our unitholders or the NuStar Energy common unitholders. It also could affect the amount of gain on the sale of common units by NuStar Energy’s common unitholders and our unitholders and could have a negative impact on our investment in NuStar Energy or result in audit adjustments to the tax returns of our or NuStar Energy’s common unitholders without the benefit of additional deductions.

We expect that our ratio of taxable income to cash distributions will be higher than the ratio applicable to holders of common units in NuStar Energy.
We expect that our ratio of taxable income to cash distributions will be higher than the ratio applicable to holders of common units in NuStar Energy. Other holders of common units in NuStar Energy will receive remedial allocations of deductions from NuStar Energy. Any remedial allocations of deductions to us from NuStar Energy will be very limited. In addition, our ownership of NuStar Energy incentive distribution rights will cause more taxable income to be allocated to us from NuStar Energy. If NuStar Energy is successful in increasing its distributions over time, our income allocations from our NuStar Energy incentive distribution rights will increase, and, therefore, our ratio of taxable income to cash distributions will increase.

Items of our income, gain, loss and deduction will be allocated among our unitholders to account for the difference between the fair market value and tax basis of our assets at the time of an offering.
Specified items of income, gain, loss and deduction will be allocated to us from NuStar Energy and among our unitholders to account for the difference between the fair market value and tax basis of NuStar Energy’s assets and our assets at the time the assets were contributed to NuStar Energy (or its predecessors) or at any other offering. The effect of these allocations will be to allocate to us from NuStar Energy and to our unitholders, gains attributable to our share of the difference between the fair market value and the tax basis of NuStar Energy’s assets at these times (including gain attributable to our ownership of the incentive distribution rights). The effect of these allocations to a unitholder purchasing units will be essentially the same as if the tax basis of our and NuStar Energy’s assets were equal to their fair market values at the time of the purchase, with the result that a unitholder purchasing units will not bear the federal income tax burden associated with any existing difference between the fair market value and tax basis of our or NuStar Energy’s assets. The federal income tax burden associated with the difference between the fair market value and the tax basis of our assets immediately prior to purchasing units will be borne by our existing unitholders as of that time.

A unitholder whose units are the subject of a securities loan (e.g., a loan to a “short seller” to cover a short sale of units) may be considered as having disposed of those units. If so, the unitholder would no longer be treated for tax purposes as a partner with respect to those units during the period of the loan and may recognize gain or loss from the disposition.
Because there are no specific rules governing the federal income tax consequences of loaning an interest in an entity treated as a partnership for federal income tax purposes, a unitholder whose units are the subject of a securities loan may be considered as having disposed of the loaned units. In that case, the unitholder may no longer be treated for tax purposes as a partner with respect to those units during the period of the loan to the short seller and the unitholder may recognize gain or loss from such disposition. Moreover, during the period of the loan, any of our income, gain, loss or deduction with respect to those units may not be reportable by the unitholder and any cash distributions received by the unitholder as to those units could be fully taxable as ordinary income. Unitholders desiring to assure their status as partners for tax purposes and avoid the risk of gain recognition from a loan to a short seller are urged to consult a tax advisor to discuss whether it is advisable to modify any applicable brokerage account agreements to prohibit their brokers from borrowing their units.


28


ITEM 1B. UNRESOLVED STAFF COMMENTS
None.

ITEM 3. LEGAL PROCEEDINGS

We are not currently a party to any material legal proceedings. We are insured against various business risks to the extent we believe is prudent; however, we cannot assure you that the nature and amount of such insurance will be adequate, in every case, to indemnify us against liabilities arising from future legal proceedings as a result of our ordinary business activity.

NuStar Energy is named as a defendant in litigation and is a party to other claims and legal proceedings relating to NuStar Energy’s normal business operations, including regulatory and environmental matters. Due to the inherent uncertainty of litigation, there can be no assurance that the resolution of any particular claim or proceeding would not have a material adverse effect on NuStar Energy’s results of operations, financial position or liquidity. NuStar Energy is insured against various business risks to the extent its management believes is prudent; however, NuStar Energy cannot be assured that the nature and amount of such insurance will be adequate, in every case, to protect it against liabilities arising from future legal proceedings as a result of its ordinary business activity.

ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.


29


PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON UNITS, RELATED UNITHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common units are listed and traded on the New York Stock Exchange under the symbol “NSH.” At the close of business on February 8, 2018, we had 12 holders of record of our units. The following table presents the high and low sales prices for our units during the periods presented (composite transactions as reported by the New York Stock Exchange) and the amount, record date and payment date of the quarterly cash distributions on our units with respect to such periods:
 
 
Price Range per Unit
 
Cash Distributions
 
High
 
Low
 
Amount per Common Unit
 
Record Date
 
Payment Date
Year 2017
 
 
 
 
 
 
 
 
 
4th Quarter
$
21.90

 
$
13.50

 
$
0.545

 
February 8, 2018
 
February 15, 2018
3rd Quarter
$
25.25

 
$
20.04

 
$
0.545

 
November 9, 2017
 
November 16, 2017
2nd Quarter
$
28.60

 
$
22.20

 
$
0.545

 
August 7, 2017
 
August 15, 2017
1st Quarter
$
31.50

 
$
26.65

 
$
0.545

 
May 8, 2017
 
May 16, 2017
Year 2016
 
 
 
 
 
 
 
 
 
4th Quarter
$
29.30

 
$
22.30

 
$
0.545

 
February 8, 2017
 
February 15, 2017
3rd Quarter
$
26.45

 
$
22.40

 
$
0.545

 
November 8, 2016
 
November 16, 2016
2nd Quarter
$
27.07

 
$
19.82

 
$
0.545

 
August 9, 2016
 
August 16, 2016
1st Quarter
$
23.18

 
$
12.86

 
$
0.545

 
May 9, 2016
 
May 17, 2016

We are required by our limited liability company agreement to distribute all of our available cash at the end of each quarter, less reserves established by our board of directors. All of our distributions are made on our common units, which is our only class of security outstanding. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further information regarding our distributions.
 

30


The following Performance Graph is not “soliciting material,” is not deemed filed with the SEC and is not to be incorporated by reference into any of NuStar GP Holdings, LLC’s filings under the Securities Act of 1933 or the Securities Exchange Act of 1934, as amended, respectively. The stock or unit price performance included in this graph is not necessarily indicative of future stock or unit price performance.

The following graph compares the cumulative 5-year total return provided to holders of NuStar GP Holdings, LLC’s units relative to the cumulative total returns of the NYSE Composite index and the Alerian MLP index. An investment of $100 (with reinvestment of all dividends) is assumed to have been made in our common units and in each of the indexes on December 31, 2012, and its relative performance is tracked through December 31, 2017.

culmtotalreturn22017.jpg
        
 
12/12
 
12/13
 
12/14
 
12/15
 
12/16
 
12/17
NuStar GP Holdings, LLC
100.00
 
109.88
 
143.08
 
93.94
 
142.02
 
84.92
NYSE Composite
100.00
 
126.28
 
134.81
 
129.29
 
144.73
 
171.83
Alerian MLP
100.00
 
137.01
 
156.49
 
113.29
 
136.63
 
131.07

31


ITEM 6. SELECTED FINANCIAL DATA

The following table contains selected financial data derived from our audited financial statements.
 
Year Ended December 31,
 
2017
 
2016
 
2015
 
2014
 
2013
 
(Thousands of Dollars, Except Per Unit Data)
Statement of Comprehensive Income (Loss) Data:
 
 
 
 
 
 
 
 
 
Equity in earnings (loss) of NuStar Energy L.P.
$
51,556

 
$
56,096

 
$
79,673

 
$
65,380

 
$
(6,741
)
Net income (loss)
86,775

 
55,068

 
72,208

 
61,427

 
(11,034
)
Basic and diluted net income (loss) per unit
2.01

 
1.28

 
1.68

 
1.44

 
(0.26
)
Cash distributions per unit
2.18

 
2.18

 
2.18

 
2.18

 
2.18

Other Financial Data:
 
 
 
 
 
 
 
 
 
Distributions received from NuStar Energy L.P.
$
99,310

 
$
95,905

 
$
96,030

 
$
96,012

 
$
96,134

 
 
 
 
 
 
 
 
 
 
 
December 31,
 
2017
 
2016
 
2015
 
2014
 
2013
 
(Thousands of Dollars)
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
Total assets
$
283,842

 
$
274,630

 
$
360,490

 
$
385,150

 
$
412,382

Total short-term debt
42,500

 
30,000

 
26,000

 
26,000

 
26,000

Members’ equity
240,536

 
243,788

 
287,070

 
310,836

 
349,986

 

32


ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following review of our results of operations and financial condition should be read in conjunction with “Cautionary Statement Regarding Forward-Looking Information,” Items 1., 1A. and 2. “Business, Risk Factors and Properties,” and Item 8. “Financial Statements and Supplementary Data,” included in this report.

OVERVIEW

NuStar GP Holdings, LLC (NuStar GP Holdings) (NYSE: NSH) is a publicly traded Delaware limited liability company. Unless otherwise indicated, the terms “NuStar GP Holdings,” “NSH,” “we,” “our” and “us” are used in this report to refer to NuStar GP Holdings, LLC, to one or more of our consolidated subsidiaries or to all of them taken as a whole. Our Management’s Discussion and Analysis of Financial Condition and Results of Operations is presented in seven sections:
Overview
Results of Operations
Trends and Outlook
Liquidity and Capital Resources
Related Party Transactions
Critical Accounting Policies
New Accounting Pronouncements

Our only cash generating assets are our ownership interests in NuStar Energy L.P. (NuStar Energy), a publicly traded Delaware limited partnership (NYSE: NS). As of December 31, 2017, we have an approximate 13% ownership interest in NuStar Energy, consisting of the following:
the general partner interest;
100% of the incentive distribution rights issued by NuStar Energy, which entitle us to receive increasing percentages of the cash distributed by NuStar Energy, currently at the maximum percentage of 23%; and
10,214,626 common units of NuStar Energy.

We account for our investment in NuStar Energy using the equity method. Therefore, our financial results reflect a portion of NuStar Energy’s net income based on our ownership interest. We have no separate operating activities apart from those conducted by NuStar Energy and therefore generate no revenues from operations.

NuStar Energy is engaged in the transportation of petroleum products and anhydrous ammonia and the terminalling, storage and marketing of petroleum products. NuStar Energy has pipelines in the United States, as well as terminal and storage facilities in the United States, Canada, Mexico, the Netherlands, including St. Eustatius in the Caribbean, and the United Kingdom. NuStar Energy conducts its operations through its subsidiaries, primarily NuStar Logistics, L.P. (NuStar Logistics) and NuStar Pipeline Operating Partnership L.P. Unless otherwise indicated, the terms “NuStar GP Holdings,” “NSH,” “we,” “our” and “us” are used in this report to refer to NuStar GP Holdings, LLC, to one or more of our consolidated subsidiaries or to all of them taken as a whole.

NuStar Energy’s partnership agreement requires that it distribute all available cash to its common limited partners and general partner each quarter. Available cash is generally defined as cash receipts less cash disbursements (including distributions to holders of NuStar Energy’s preferred units) and cash reserves established by NuStar Energy’s board of directors, in its sole discretion. Similarly, we are required by our limited liability company agreement to distribute all of our available cash at the end of each quarter, generally defined in our limited liability company agreement as cash on hand at the end of the quarter, less reserves established by our board of directors.

Merger. On February 7, 2018, NuStar GP Holdings, NuStar Energy, Riverwalk Logistics, L.P., NuStar GP, LLC, Marshall Merger Sub LLC, a wholly owned subsidiary of NuStar Energy (Merger Sub), and Riverwalk Holdings, LLC entered into an Agreement and Plan of Merger (the Merger Agreement) pursuant to which Merger Sub will merge with and into NuStar GP Holdings with NuStar GP Holdings being the surviving entity (the Merger), such that NuStar Energy will be our sole member following the Merger. Pursuant to the Merger Agreement and at the effective time of the Merger, NuStar Energy’s partnership agreement will be amended and restated to, among other things, (i) cancel the incentive distribution rights, (ii) convert the 2% general partner interest in NuStar Energy into a non-economic management interest and (iii) provide the holders of NuStar Energy’s common units with voting rights in the election of the members of the board of directors of NuStar GP, LLC at an annual meeting, beginning in 2019. The Merger is subject to the satisfaction or waiver of certain conditions, including approval

33


of the Merger Agreement by our unitholders. Please refer to Note 15 of the Notes to Consolidated Financial Statements in Item 8. “Financial Statements and Supplementary Data” for further discussion of the Merger.

Employee Transfer from NuStar GP, LLC
On March 1, 2016, NuStar GP, LLC, our wholly owned subsidiary, transferred and assigned to NuStar Services Company LLC (NuStar Services Co), a wholly owned subsidiary of NuStar Energy, all of NuStar GP, LLC’s employees and related benefit plans, programs, contracts and policies (the Employee Transfer). Our officers, who are also officers of NuStar GP, LLC, are now dual employees of NuStar GP, LLC and NuStar Services Co. The Employee Transfer did not materially change our results of operations since NuStar Energy previously reimbursed us for nearly all of NuStar GP, LLC’s employee costs. However, as a result of the Employee Transfer, NuStar Services Co pays employee costs directly and sponsors the 2000 Long-Term Incentive Plan and other employee benefit plans. Please refer to Note 5 of the Notes to Consolidated Financial Statements in Item 8. “Financial Statements and Supplementary Data” for further discussion on the Employee Transfer.

NuStar Energy’s Acquisitions
Navigator Acquisition and Financing Transactions. On May 4, 2017, NuStar Energy completed the acquisition of Navigator Energy Services, LLC for approximately $1.5 billion (the Navigator Acquisition). In order to fund the purchase price, NuStar Energy issued 14,375,000 common units for net proceeds of $657.5 million, NuStar Logistics issued $550.0 million of 5.625% senior notes for net proceeds of $543.3 million and NuStar Energy issued 15,400,000 of its 7.625% Series B Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Units for net proceeds of $371.8 million. In conjunction with the Navigator Acquisition, NuStar Energy’s partnership agreement was amended and restated to, among other things, provide a waiver of certain quarterly distributions with respect to our incentive distribution rights. In April 2017, we borrowed approximately $14.0 million under our revolving credit facility to fund a contribution to NuStar Energy in order to maintain our 2% general partner interest in connection with NuStar Energy’s issuance of common units. Please refer to Note 4 of the Notes to Consolidated Financial Statements in Item 8. “Financial Statements and Supplementary Data” for a discussion of these transactions.

Martin Terminal Acquisition. On December 21, 2016, NuStar Energy acquired crude oil and refined product storage assets in Corpus Christi, TX for $95.7 million, including $2.1 million of capital expenditure reimbursements, from Martin Operating Partnership L.P. The assets acquired include 900,000 barrels of crude oil storage capacity, 250,000 barrels of refined product storage capacity and exclusive use of the Port of Corpus Christi’s new crude oil dock.

Linden Acquisition. On January 2, 2015, NuStar Energy acquired full ownership of ST Linden Terminal, LLC, which owns a refined products terminal in Linden, NJ, for $142.5 million (the Linden Acquisition). Prior to the Linden acquisition, the terminal operated as a joint venture between NuStar Energy and Linden Holding Corp., with each party owning 50%.





34


RESULTS OF OPERATIONS

As discussed above, we account for our investment in NuStar Energy using the equity method. As a result, our equity in earnings of NuStar Energy, our only source of income, directly fluctuates with the amount of NuStar Energy’s distributions and results of operations. NuStar Energy’s distributions to its common limited partners determine the amount of our incentive distribution earnings, while NuStar Energy’s results of operations determine the amounts of earnings attributable to our general partner and common limited partner interests.
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
Financial Highlights
(Thousands of Dollars, Except Per Unit Data)
 
 
Year Ended December 31,
 
 
 
2017
 
2016
 
Change
Equity in earnings of NuStar Energy
$
51,556

 
$
56,096

 
$
(4,540
)
 
 
 
 
 
 
General and administrative expenses
(3,298
)
 
(3,046
)
 
(252
)
Other income, net
41,942

 
3,021

 
38,921

Interest expense, net
(1,587
)
 
(1,069
)
 
(518
)
Income before income tax (expense) benefit
88,613

 
55,002

 
33,611

Income tax (expense) benefit
(1,838
)
 
66

 
(1,904
)
Net income
$
86,775

 
$
55,068

 
$
31,707

Basic and diluted net income per unit
$
2.01

 
$
1.28

 
$
0.73


The following table summarizes NuStar Energy’s statement of income data:
 
Year Ended December 31,
 
 
 
2017
 
2016
 
Change
 
(Thousands of Dollars, Except Per Unit Data)
Revenues
$
1,814,019

 
$
1,756,682

 
$
57,337

Cost of product sales
651,599

 
633,653

 
17,946

Operating expenses
449,670

 
448,367

 
1,303

Depreciation and amortization expense
255,534

 
208,217

 
47,317

Segment operating income
457,216

 
466,445

 
(9,229
)
General and administrative expenses
112,240

 
98,817

 
13,423

Other depreciation and amortization expense
8,698

 
8,519

 
179

Operating income
$
336,278

 
$
359,109

 
$
(22,831
)
Net income
$
147,964

 
$
150,003

 
$
(2,039
)
Net income per unit applicable to common limited partners
$
0.64

 
$
1.27

 
$
(0.63
)
Cash distributions per unit applicable to common limited partners
$
4.38

 
$
4.38

 
$


NuStar Energy’s net income slightly decreased for the year ended December 31, 2017, compared to the year ended December 31, 2016. The decrease in other expense, net, mainly resulting from a $58.7 million impairment charge in 2016 on NuStar Energy’s term loan to Axeon Specialty Products, was offset by increased interest expense, increased general and administrative expenses and decreased segment operating income.

35


Equity in Earnings of NuStar Energy
The following table summarizes our equity in earnings of NuStar Energy: 
 
Year Ended December 31,
 
 
 
2017
 
2016
 
Change
 
(Thousands of Dollars)
NuStar GP Holdings’ Equity in Earnings of NuStar Energy:
 
 
 
 
 
General partner interest
$
1,237

 
$
2,091

 
$
(854
)
General partner incentive distribution rights (IDRs)
45,669

 
43,407

 
2,262

General partner’s interest in earnings and incentive
distributions of NuStar Energy
46,906

 
45,498

 
1,408

Common limited partner interest in earnings of NuStar Energy
7,534

 
13,482

 
(5,948
)
Amortization of step-up in basis related to
NuStar Energy’s assets and liabilities
(2,884
)
 
(2,884
)
 

Equity in earnings of NuStar Energy
$
51,556

 
$
56,096

 
$
(4,540
)

Our equity in earnings in NuStar Energy decreased $4.5 million for the year ended December 31, 2017, compared to the year ended December 31, 2016, primarily due to a decrease in our equity in earnings related to our general and common limited partner interests. NuStar Energy issued preferred units in the fourth quarter of 2016 and in the second and fourth quarters of 2017, and NuStar Energy’s earnings are first allocated to its preferred units in an amount equal to its earned distributions. Accordingly, earnings allocated to our general and common limited partner interests for year ended December 31, 2017 were reduced by the amount of NuStar Energy’s earnings allocated to the preferred limited partner interests, as well as to higher IDRs.

Our equity in earnings of NuStar Energy related to our IDRs increased as a result of NuStar Energy’s issuances of common units in 2016 and in April of 2017. Our IDRs in NuStar Energy entitle us to an increasing amount of NuStar Energy’s cash distributions. In connection with the Navigator Acquisition, we amended NuStar Energy’s partnership agreement to waive our IDRs related to NuStar Energy’s common units issued in April of 2017 for ten consecutive quarters beginning with the distribution earned for the second quarter of 2017 up to a maximum of $22.0 million. Please refer to Notes 4 and 6 of the Consolidated Financial Statements in Item 8. “Financial Statements and Supplementary Data” for a more detailed discussion of the incentive distribution waiver and of how NuStar Energy’s distributions are allocated.

General
For the years ended December 31, 2017 and 2016, we recognized other income, net of $41.9 million and $3.0 million, respectively, mainly due to gains resulting from NuStar Energy’s issuances of common units, calculated as if we had sold a proportionate share of our investment in NuStar Energy.
Income tax (expense) benefit changed by $1.9 million for the year ended December 31, 2017, compared to the year ended December 31, 2016, primarily due to the U.S. corporate tax rate reduction from 35% to 21% due to the Tax Cuts and Jobs Act (“the Act”) enacted on December 22, 2017. Please refer to Note 13 of the Notes to Consolidated Financial Statements in Item 8. “Financial Statements and Supplementary Data” for a discussion on income taxes.


36


Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Financial Highlights
(Thousands of Dollars, Except Per Unit Data)
 
 
Year Ended December 31,
 
 
 
2016
 
2015
 
Change
Equity in earnings of NuStar Energy
$
56,096

 
$
79,673

 
$
(23,577
)
 
 
 
 
 
 
General and administrative expenses
(3,046
)
 
(3,338
)
 
292

Other income (expense), net
3,021

 
(2,333
)
 
5,354

Interest expense, net
(1,069
)
 
(893
)
 
(176
)
Income before income tax benefit (expense)
55,002

 
73,109

 
(18,107
)
Income tax benefit (expense)
66

 
(901
)
 
967

Net income
$
55,068

 
$
72,208

 
$
(17,140
)
Basic and diluted net income per unit
$
1.28

 
$
1.68

 
$
(0.40
)


The following table summarizes NuStar Energy’s statement of income data:
 
Year Ended December 31,
 
 
 
2016
 
2015
 
Change
 
(Thousands of Dollars, Except Per Unit Data)
Revenues
$
1,756,682

 
$
2,084,040

 
$
(327,358
)
Cost of product sales
633,653

 
907,574

 
(273,921
)
Operating expenses
448,367

 
473,031

 
(24,664
)
Depreciation and amortization expense
208,217

 
201,719

 
6,498

Segment operating income
466,445

 
501,716

 
(35,271
)
General and administrative expenses
98,817

 
102,521

 
(3,704
)
Other depreciation and amortization expense
8,519

 
8,491

 
28

Operating income
$
359,109

 
$
390,704

 
$
(31,595
)
 
 
 
 
 
 
Income from continuing operations
$
150,003

 
$
305,946

 
$
(155,943
)
Income from discontinued operations, net of tax

 
774

 
(774
)
Net income
$
150,003

 
$
306,720

 
$
(156,717
)
 
 
 
 
 
 
Net income per unit applicable to common limited partners
$
1.27

 
$
3.30

 
$
(2.03
)
 
 
 
 
 
 
Cash distributions per unit applicable to common limited partners
$
4.38

 
$
4.38

 
$


NuStar Energy’s net income decreased $156.7 million for the year ended December 31, 2016, compared to the year ended December 31, 2015, primarily due to a $58.7 million impairment charge in 2016 on NuStar Energy’s term loan to Axeon Specialty Products and a $56.3 million gain associated with NuStar Energy’s Linden Acquisition in 2015. In addition, NuStar Energy’s segment operating income decreased $35.3 million, resulting mainly from reductions in operating income for its pipeline and fuels marketing segments.


37


Equity in Earnings of NuStar Energy
The following table summarizes our equity in earnings of NuStar Energy:
 
 
Year Ended December 31,
 
 
 
2016
 
2015
 
Change
 
(Thousands of Dollars)
NuStar GP Holdings’ Equity in Earnings of NuStar Energy:
 
 
 
 
 
General partner interest
$
2,091

 
$
5,270

 
$
(3,179
)
General partner IDRs
43,407

 
43,220

 
187

General partner’s interest in earnings and incentive
distributions of NuStar Energy
45,498

 
48,490

 
(2,992
)
Common limited partner interest in earnings of NuStar Energy
13,482

 
34,067

 
(20,585
)
Amortization of step-up in basis related to
NuStar Energy’s assets and liabilities
(2,884
)
 
(2,884
)
 

Equity in earnings of NuStar Energy
$
56,096

 
$
79,673

 
$
(23,577
)

Our equity in earnings related to our general and common limited partner interests in NuStar Energy decreased $23.6 million for the year ended December 31, 2016, compared to the year ended December 31, 2015, due to a decrease in NuStar Energy’s net income. However, our equity in earnings of NuStar Energy related to our IDRs increased slightly as a result of NuStar Energy’s issuances of common units in 2016. Our IDRs in NuStar Energy entitle us to an increasing amount of NuStar Energy’s cash distributions. Please refer to Note 6 of the Consolidated Financial Statements in Item 8. “Financial Statements and Supplementary Data” for a more detailed discussion of how NuStar Energy’s distributions are allocated.

Other Income (Expense), Net
For the year ended December 31, 2016, we recognized other income of $3.0 million, mainly due to gains of $2.4 million as a result of NuStar Energy’s issuances of common units in 2016. The gains represent the increase in the value of our proportionate share of NuStar Energy’s capital. For the year ended December 31, 2015, we recognized other expense of $2.3 million, due to losses of $2.3 million on the sale of NuStar Energy L.P. common limited partner units in connection with unit-based compensation plans we sponsored prior to the Employee Transfer.



38


TRENDS AND OUTLOOK

As discussed in more detail in Note 15 of the Notes to Consolidated Financial Statements in Item 8. “Financial Statements and Supplementary Data,” we and NuStar Energy entered into the Merger Agreement to simplify our corporate structure. At the closing of the Merger, which is subject to, among other things, approval of our unitholders: (i) NuStar Energy will issue 0.55 of an NS common unit for each outstanding NSH unit; (ii) our economic rights in the 2% general partner interest, the incentive distribution rights (the IDRs) in NS and the NS common units held by us will be cancelled; and (iii) NS will pay off and cancel our obligations under our revolving credit agreement.

NuStar Energy believes simplifying the corporate structure and eliminating the IDRs will lower NuStar Energy’s cost of capital and create a more efficient and transparent structure. In addition, NuStar Energy’s management anticipates recommending, and the NuStar Energy board of directors indicated it intends to approve, resetting NuStar Energy’s quarterly distribution from $1.095 per common unit to $0.60 per common unit, effective with the first quarter 2018 distribution. NuStar Energy expects that resetting its distribution will improve its ability to fund cash requirements immediately, and, in the longer-term, will also serve to improve its leverage metrics and reduce its future need to access the capital markets.

Historically, master limited partnerships (MLPs), like NuStar Energy, have typically funded strategic capital expenditures and acquisitions from external sources, primarily through borrowings under revolving credit agreements and issuance of equity and debt securities. In the past few years, the total number of, and aggregate amount raised by, MLP common equity issuances has dropped dramatically, and MLPs with low coverage and high leverage have found it increasingly difficult to issue common equity. Through the combination of the simplification and distribution reset discussed above, NuStar Energy expects to be able to fund a larger proportion of its capital projects with the cash generated by its operations, which should, over time, reduce its need to access capital markets to finance future growth opportunities.

During 2017, NuStar Energy’s legacy pipeline systems and storage assets, other than its Permian Crude System, faced several unanticipated challenges, on top of the continuing burden of the third year of sustained low crude prices. In September, hurricanes caused damage in the Gulf of Mexico and significant destruction in the Caribbean. Hurricane Harvey’s heavy rainfall caused only minimal damage to NuStar Energy’s six affected Gulf Coast facilities, but Hurricane Irma passed almost directly over its facility at St. Eustatius, causing a temporary shutdown and inflicting substantial damage. NuStar Energy received hurricane insurance proceeds of $12.5 million in the fourth quarter of 2017 and $87.5 million in January 2018. NuStar Energy expects to recognize a gain in its first quarter 2018 results equal to the amount by which the insurance proceeds received exceed its actual expense incurred during the period, or approximately $85 million. At this time, NuStar Energy expects that costs incurred, over and above its deductible amount, will be covered by the insurance proceeds it has already received. NuStar Energy expects these repairs to continue through next year and into 2020.

Due to that fact that some of NuStar Energy’s current committed shippers’ contracts on its South Texas Crude System expire in the second half of 2018, as well as NuStar Energy’s assessment of the current market conditions in the Eagle Ford, its 2018 forecast reflects its expectation that some of those customers will decline to renew their commitments and demand rates lower than previously contracted rates. As a result, NuStar Energy is projecting lower throughput and rates for the South Texas Crude System in the second half of 2018, which it expects to result in lower revenues for that system during 2018 as compared to 2017.

Since NuStar Energy agrees with the many energy experts who currently predict that backwardation, which tends to decrease demand for storage capacity, will continue through 2018, NuStar Energy’s 2018 forecast reflects lower storage rates and contract renewals at certain of its facilities, which it expects to result in lower revenues for those facilities during 2018 as compared to 2017.

In January 2018, as a result of the widely reported economic strife in Venezuela and the mounting financial and operational challenges facing NuStar Energy’s St. Eustatius anchor tenant, Petróleos de Venezuela, S.A. (PDVSA), NuStar Energy reduced its expectations for PDVSA’s utilization of the terminal during 2018 to reflect a more conservative outlook. In 2017 and this year so far, news outlets around the world have reported the dramatic deterioration of economic conditions in Venezuela, and during 2017, NuStar Energy saw PDVSA’s activity at the terminal decrease to levels well below their historical levels. In addition, in August 2017, the United States imposed sanctions against Venezuela intended to limit PDVSA’s access to credit, and the Trump Administration has announced it may also ban imports of Venezuelan crude into the U.S. and export of U.S. refined products to Venezuela. If implemented, these additional sanctions, together with the current sanctions, could have a significant negative impact on Venezuela and on PDVSA.

Largely due to the impact NuStar Energy believes those negative factors may have on PDVSA and PDVSA’s utilization of its facility, NuStar Energy’s 2018 forecast reflects that its 2018 results of operations of its storage segment will be lower than 2017

39


and that the current forecast properly reflects its conservative assessment of significant uncertainty and risk surrounding PDVSA’s ability to perform this year. That being said, since early January PDVSA’s activity at the terminal has increased, and, if they are able to continue this trend through all or a portion of the year, all other factors remaining constant, NuStar Energy could see improvement in its revenue generated for St. Eustatius, in comparison with its current forecast for 2018, as the year progresses. While NuStar Energy is hopeful that PDVSA will maintain its current activity and continues to work to retain them as an important customer, NuStar Energy also continues to closely monitor PDVSA’s activity and financial well-being and are working to diversify its St. Eustatius facility customer base.

While NuStar Energy’s outlook for 2018 reflects all the challenges it has described, NuStar Energy believes that the consummation of the Merger and its board of director’s approval of its recommended reset to its distribution will immediately increase NuStar Energy’s cash available to pay for capital expenditures, and, over time, will improve its leverage metrics. NuStar Energy expects these steps to strengthen its balance sheet in 2018 and beyond. NuStar Energy also projects that the Permian Crude System will continue to grow, and expects its positive contributions to its pipeline segment’s overall results to grow accordingly.

NuStar Energy’s earnings and the distributions we receive from NuStar Energy directly affect our results. NuStar Energy’s outlook, both overall and for any of its segments, may change, as NuStar Energy bases its expectations on its continuing evaluation of a number of factors, many of which are outside its control. These factors include, but are not limited to, the state of the economy and the capital markets, changes to its 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 its transportation and storage services and changes in laws or regulations affecting its assets.





































40


LIQUIDITY AND CAPITAL RESOURCES

General
Our cash flows consist of distributions from NuStar Energy on our partnership interests, including the incentive distribution rights that we own. Due to our ownership of NuStar Energy’s incentive distribution rights, our portion of NuStar Energy’s total distributions may exceed our ownership interest in NuStar Energy. Our primary cash requirements are for distributions to members, capital contributions to maintain our 2% general partner interest in NuStar Energy (as defined in NuStar Energy’s partnership agreement) in the event that NuStar Energy issues additional common units, debt service requirements, if any, and general and administrative expenses. In addition, because NuStar GP, LLC, a wholly owned subsidiary of NuStar GP Holdings, elected to be treated as a taxable entity in August 2006, we may be required to pay income taxes, which may exceed the amount of tax expense recorded in the consolidated financial statements. We expect to fund our cash requirements primarily with the quarterly cash distributions we receive from NuStar Energy and, if necessary, borrowings under our revolving credit facility.

Pursuant to the Merger Agreement and at the effective time of the Merger, NuStar Energy’s partnership agreement will be amended and restated to, among other things, cancel the incentive distribution rights and convert the 2% general partner interest in NuStar Energy into a non-economic management interest. Furthermore, the 10,214,626 NuStar Energy common units currently owned by us will be cancelled and will cease to exist. As a result, after the Merger, we will no longer receive incentive distributions or quarterly cash distributions related to our ownership interest, from NuStar Energy. At the effective time of the Merger, each of our outstanding common units will be converted into the right to receive 0.55 of a NuStar Energy common unit. All of our common units, when converted, will cease to be outstanding and will automatically be cancelled and no longer exist. NuStar Energy will pay off and cancel our obligations under our revolving credit agreement. Additionally, on February 8, 2018, NuStar Energy announced that NuStar Energy’s management anticipates recommending to the board of directors of NuStar GP, LLC, and expects such board of directors to adopt, a reset of NuStar Energy’s quarterly distribution per common unit to $0.60 ($2.40 on an annualized basis), starting with the first-quarter distribution payable in May 2018. We expect to adjust the quarterly distribution to our members accordingly. Please refer to Note 15 of the Notes to Consolidated Financial Statements in Item 8. “Financial Statements and Supplementary Data” for further discussion of the Merger.

Cash Distributions from NuStar Energy
NuStar Energy distributes all of its available cash to its common limited partners and general partner within 45 days following the end of each quarter based on the partnership interests outstanding as of a record date that is set after the end of each quarter. Available cash is generally defined as cash receipts less cash disbursements (including distributions to holders of NuStar Energy’s preferred units, as further discussed under the Investment in NuStar Energy section below) and cash reserves established by NuStar Energy’s board of directors, in its sole discretion. The following table reflects the cash distributions earned for the periods shown with respect to our ownership interests in NuStar Energy and our incentive distribution rights (IDRs):
 
Year Ended December 31,
 
2017
 
2016
 
2015
 
(Thousands of Dollars, Except Per Unit and Percentage Data)
Cash distributions per unit applicable to common limited partners
$
4.38

 
$
4.38

 
$
4.38

Total cash distributions by NuStar Energy to its general partner and common limited partners
$
462,602

 
$
393,882

 
$
392,204

Cash distributions we received from NuStar Energy:
 
 
 
 
 
General partner interest
$
9,252

 
$
7,877

 
$
7,844

General partner IDRs
45,669

 
43,407

 
43,220

Limited partner interest – common units
44,740

 
44,699

 
45,073

Total cash distributions to us
$
99,661

 
$
95,983

 
$
96,137

Distributions to us as a percentage of total cash distributions to NuStar Energy’s general partner and common limited partners
21.5
%
 
24.4
%
 
24.5
%

Beginning with the distribution earned for the second quarter of 2017 and for a period of up to ten consecutive quarters, we will not receive incentive distributions with respect to certain NS common units, including those recently issued by NuStar Energy in connection with the Navigator Acquisition. Please refer to Note 4 of the Notes to Consolidated Financial Statements in Item 8. “Financial Statements and Supplementary Data” for further discussion.



41


Cash Flows for the Years Ended December 31, 2017, 2016 and 2015
For the years ended December 31, 2017, 2016 and 2015, cash distributions received from NuStar Energy were used primarily to fund distributions to our unitholders.

Credit Facility
We amended our revolving credit facility on June 27, 2017 to, among other things, extend its maturity to June 27, 2018 and increase its borrowing capacity from $50.0 million to $60.0 million. The revolving credit agreement allows for the use of up to $10.0 million of its borrowing capacity for letters of credit. Borrowings under our revolving credit facility are used to fund capital contributions to NuStar Energy to maintain our 2% general partner interest when NuStar Energy issues additional common units and to meet other liquidity and capital resource requirements. Our obligations under our revolving credit facility are guaranteed by Riverwalk Holdings, LLC (Riverwalk), our wholly owned subsidiary. Riverwalk has pledged 2,926,833 NuStar Energy common units that it owns to secure its guarantee.

As of December 31, 2017, we had outstanding borrowings of $42.5 million and availability of $17.5 million for borrowings under our revolving credit facility. Interest on our revolving credit facility is based upon, at our option, either an alternative base rate or a LIBOR-based rate. Our management believes that we are in compliance with the covenants of the revolving credit facility as of December 31, 2017. Please refer to Note 9 of the Notes to Consolidated Financial Statements in Item 8. “Financial Statements and Supplementary Data” for a detailed discussion on our revolving credit facility.

Investment in NuStar Energy
Issuances of Common Units. On April 18, 2017, NuStar Energy issued 14,375,000 common units representing limited partner interests at a price of $46.35 per unit. NuStar Energy used the net proceeds from this offering of $657.5 million, including our contribution of $13.6 million to maintain our 2% general partner interest, to fund a portion of the purchase price for the Navigator Acquisition. Beginning with the distribution earned for the second quarter of 2017, we will not receive incentive distributions with respect to these common units. We borrowed approximately $14.0 million under our revolving credit facility to fund our general partner contribution to NuStar Energy. Our common limited partner ownership interest in NuStar Energy was approximately 11% subsequent to this issuance. This issuance resulted in a gain of $41.6 million, which is included in “Other income (expense), net” on our consolidated statements of comprehensive income for the year ended December 31, 2017, calculated as if we had sold a proportionate share of our investment in NuStar Energy.

In 2016, NuStar Energy issued 595,050 common units representing limited partner interests at an average price of $47.39 per unit. NuStar Energy received net proceeds of $28.3 million, which includes our contribution of $0.6 million in order to maintain our 2% general partner interest. This issuance resulted in a gain of $2.1 million for the year ended December 31, 2016, which is included in “Other income (expense), net” on our consolidated statements of comprehensive income, and represents a gain as if we had sold a proportionate share of our investment in NuStar Energy.

Issuances of Preferred Units. In 2017 and 2016, NuStar Energy issued fixed-to-floating rate cumulative redeemable perpetual preferred units representing limited partner interests. The preferred units rank senior to all of NuStar Energy’s other classes of equity securities, including our general partner and common limited partner interests, with respect to distribution rights and rights upon liquidation. Distributions on the 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. The following is a summary of NuStar Energy’s preferred units outstanding as of December 31, 2017:
Units
 
Original Issuance Date
 
Number of Units Issued and Outstanding
 
Fixed Distribution Rate per Annum (as a Percentage of the $25.00 Liquidation Preference per Unit)
 
Fixed Distribution Rate per Unit per Annum
 
Date at Which Distribution Rate Becomes Floating
 
Floating Annual Rate (as a Percentage of the $25.00 Liquidation Preference per Unit)
Series A
Preferred Units
 
November 25, 2016
 
9,060,000
 
8.50%
 
$
2.125

 
December 15, 2021
 
Three-month LIBOR plus 6.766%
Series B
Preferred Units
 
April 28, 2017
 
15,400,000
 
7.625%
 
$
1.90625

 
June 15, 2022
 
Three-month LIBOR plus 5.643%
Series C
Preferred Units
 
November 30, 2017
 
6,900,000
 
9.00%
 
$
2.25

 
December 15, 2022
 
Three-month LIBOR plus 6.88%

Please refer to Note 4 of the Notes to Consolidated Financial Statements in Item 8. “Financial Statements and Supplementary Data” for a detailed discussion of NuStar Energy’s issuances of units.



42


Cash Distributions to Unitholders
Our limited liability company agreement requires that, within 50 days after the end of each quarter, we distribute all of our available cash to the holders of record of our units on the applicable record date. Available cash is defined generally as all cash on hand at the end of any calendar quarter, less the amount of cash reserves necessary or appropriate, as determined in good faith by our board of directors, to service debt we may incur, if any, and to fund general and administrative expenses, future distributions and other miscellaneous cash requirements. The following table reflects our cash distributions applicable to the period in which the distributions were earned:
 
Year Ended December 31,
 
2017
 
2016
 
2015
 
(Thousands of Dollars, Except Per Unit Data)
Cash distributions per unit
$
2.18

 
$
2.18

 
$
2.18

Total cash distributions
$
93,649

 
$
93,601

 
$
93,561


Contingencies
We are not currently a party to any material legal proceedings and have not recorded any accruals for loss contingencies. NuStar Energy is a party to claims and legal proceedings arising in the ordinary course of its business, which it believes are not material to its financial position or results of operations. However, due to the inherent uncertainty of litigation, there can be no assurance that the resolution of any particular claim or proceeding would not have a material adverse effect on NuStar Energy’s results of operations and ability to pay distributions, which would impact our results of operations and ability to pay distributions.

RELATED PARTY TRANSACTIONS

Agreements with NuStar Energy
Prior to the Employee Transfer, pursuant to a services agreement between NuStar GP, LLC and NuStar Energy, NuStar Energy reimbursed NuStar GP, LLC for furnishing administrative and certain operating services necessary to conduct the business of NuStar Energy. In conjunction with the Employee Transfer, NuStar GP, LLC entered into an Amended and Restated Services Agreement with NuStar Services Co, a wholly owned subsidiary of NuStar Energy, effective March 1, 2016 (the Amended GP Services Agreement). The Amended GP Services Agreement provides that NuStar Services Co will furnish administrative services necessary to conduct our business, for an annual fee of $1.0 million, subject to certain adjustments for merit increases and changes in level of service. The Amended GP Services Agreement will terminate on March 1, 2020 and will automatically renew for successive two-year terms, unless terminated by either party. Please refer to Note 5 of the Notes to Consolidated Financial Statements in Item 8. “Financial Statements and Supplementary Data” for a more detailed discussion of agreements with NuStar Energy.

Following the Merger, we will be a wholly owned subsidiary of NuStar Energy. Please refer to Note 15 of the Notes to Consolidated Financial Statements in Item 8. “Financial Statements and Supplementary Data” for a more detailed discussion of the Merger.

Employee Benefit Plans and Unit-Based Compensation
Prior to the Employee Transfer, we sponsored the following employee benefit and long-term incentive plans, among others:

The NuStar Thrift Plan;
The NuStar Excess Thrift Plan;
The NuStar Pension Plan;
The NuStar Excess Pension Plan;
The NuStar GP, LLC Retiree Welfare Benefits Plan; and
The 2000 Long-Term Incentive Plan.

Prior to the Employee Transfer, NuStar Energy reimbursed NuStar GP, LLC for expenses incurred related to employee benefit plans at cost, and for long-term incentive plan compensation expenses resulting from NS and NSH awards to employees and directors of NuStar GP, LLC.

We continue to sponsor the 2006 Long-Term Incentive Plan, under which NuStar GP Holdings may award up to 2,000,000 (NSH) units, and retain the compensation expense related to these awards.


43


CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires management to select accounting policies and to make estimates and assumptions related thereto that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. The accounting policies below are considered critical due to judgments made by management and the sensitivity of these estimates to deviations of actual results from management’s assumptions. The critical accounting policies should be read in conjunction with Note 2 of the Notes to Consolidated Financial Statements in Item 8. “Financial Statements and Supplementary Data,” which summarizes our significant accounting policies.

Investment in NuStar Energy
We evaluate our investment in NuStar Energy for impairment if and when there is evidence that we may not be able to recover the carrying amount of our investment or that NuStar Energy is unable to sustain an earnings capacity that justifies the carrying amount. If a decline in the value of our investment is determined to be other than temporary, then we would record an impairment loss in the current period based on the difference between the estimated current fair value of the investment and our carrying amount. In order to determine fair value, our management must make certain estimates and assumptions regarding NuStar Energy’s operations, including, among other things, an assessment of market conditions, projected cash flows, interest rates and growth rates that could significantly impact the fair value of our investment. Due to the significant subjectivity of the assumptions used to determine fair value, changes in market conditions and/or changes in assumptions could result in significant impairment charges in the future, thus affecting our earnings. We believe that the carrying amount of our investment in NuStar Energy as of December 31, 2017 is recoverable.

Unit-Based Compensation
Prior to the Employee Transfer, we accounted for awards of NS performance units and restricted units to employees and directors of NuStar GP, LLC and its affiliates at fair value, whereby a liability for the award was initially recorded and subsequent changes in the fair value were included in the determination of net income. The fair value of NS restricted units and performance units equaled the market price of NS common units at each reporting date. However, NS performance units were earned only upon NuStar Energy’s achievement of an objective performance measure. We recorded compensation expense each reporting period such that the cumulative compensation expense equaled the portion of the award’s current fair value that had vested. We recorded compensation expense for NS restricted units and performance units until the date of vesting.

We account for awards of NSH restricted units granted to employees of NuStar GP, LLC and our directors based on the fair value of the awards at the grant date. The fair value of NSH restricted units equals the market price of NSH common units at the grant date. Compensation expense for NSH restricted units is recognized ratably over the vesting period based on the initial fair value determination.

NEW ACCOUNTING PRONOUNCEMENTS

Please refer to Note 3 of the Notes to Consolidated Financial Statements in Item 8. “Financial Statements and Supplementary Data” for a detailed discussion of new accounting pronouncements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our only cash generating assets are our ownership interests in NuStar Energy, which we account for using the equity method. We have no material market risk other than those market risks affecting NuStar Energy, which could therefore affect the value of our investment. NuStar Energy is exposed to various market risks, including interest rate risk and commodity price risk. For a description of NuStar Energy’s market risks and how it manages its exposure to those risks, please see Item 7A. “Quantitative and Qualitative Disclosures About Market Risk” contained in NuStar Energy’s Form 10-K for the year ended December 31, 2017.


44


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining effective internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. Our management assessed the effectiveness of NuStar GP Holdings, LLC’s internal control over financial reporting as of December 31, 2017. In its evaluation, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework (2013). Based on this assessment, management believes that, as of December 31, 2017, our internal control over financial reporting was effective based on those criteria.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

The effectiveness of internal control over financial reporting as of December 31, 2017 has been audited by KPMG LLP, the independent registered public accounting firm who audited our consolidated financial statements included in this Form 10-K. KPMG LLP’s attestation on the effectiveness of our internal control over financial reporting appears on page 47.


45


Report of Independent Registered Public Accounting Firm
The Board of Directors and Members
of NuStar GP Holdings, LLC:

Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of NuStar GP Holdings, LLC and subsidiaries (the “Company”) as of December 31, 2017 and 2016, the related consolidated statements of comprehensive income, members’ equity, and cash flows for each of the years in the three‑year period ended December 31, 2017, and the related notes (collectively, the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 28, 2018 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

We have served as the Company’s auditor since 2005.

/s/    KPMG LLP
San Antonio, Texas
February 28, 2018


46


Report of Independent Registered Public Accounting Firm
The Board of Directors and Members
of NuStar GP Holdings, LLC:

Opinion on Internal Control Over Financial Reporting
We have audited NuStar GP Holdings, LLC (a Delaware limited partnership) and subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company as of December 31, 2017 and 2016, the related consolidated statements of comprehensive income, members’ equity, and cash flows for each of the years in the three-year period ended December 31, 2017, and the related notes (collectively, the “consolidated financial statements”), and our report dated February 28, 2018 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 
/s/    KPMG LLP
San Antonio, Texas
February 28, 2018




47


NUSTAR GP HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars, Except Unit Data)
 
 
December 31,
 
2017
 
2016
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
422

 
$
207

Income tax receivable
105

 
303

Other receivables
26

 

Prepaid expenses and other current assets
319

 
292

Total current assets
872

 
802

Investment in NuStar Energy L.P.
279,721

 
268,742

Deferred income tax assets, net
3,249

 
5,086

Total assets
$
283,842

 
$
274,630

Liabilities and Members’ Equity
 
 
 
Current liabilities:
 
 
 
Short-term debt
$
42,500

 
$
30,000

Payable to related party
205

 
317

Accounts payable
3

 
1

Accrued liabilities
500

 
460

Taxes other than income tax
98

 
64

Total current liabilities
43,306

 
30,842

Commitments and contingencies (Note 10)

 

Members’ equity (42,977,132 and 42,951,749 common units outstanding as of December 31, 2017 and 2016, respectively)
251,358

 
257,662

Accumulated other comprehensive loss
(10,822
)
 
(13,874
)
Total members’ equity
240,536

 
243,788

Total liabilities and members’ equity
$
283,842

 
$
274,630

See Notes to Consolidated Financial Statements.


48


NUSTAR GP HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Thousands of Dollars, Except Unit and Per Unit Data)
 
 
Year Ended December 31,
 
2017
 
2016
 
2015
Equity in earnings of NuStar Energy L.P.
$
51,556

 
$
56,096

 
$
79,673

 
 
 
 
 
 
General and administrative expenses:
 
 
 
 
 
Third parties
(2,427
)
 
(2,258
)
 
(3,338
)
Related party
(871
)
 
(788
)
 

Total general and administrative expenses
(3,298
)

(3,046
)
 
(3,338
)
Other income (expense), net
41,942

 
3,021

 
(2,333
)
Interest expense, net
(1,587
)
 
(1,069
)
 
(893
)
Income before income tax (expense) benefit
88,613

 
55,002

 
73,109

Income tax (expense) benefit
(1,838
)
 
66

 
(901
)
Net income
86,775

 
55,068

 
72,208

Other comprehensive income (loss):
 
 
 
 
 
Share of NuStar Energy L.P.’s other comprehensive income (loss)
3,052

 
(685
)
 
(3,107
)
Pension and other postretirement benefit plan adjustments

 
(4,525
)
 
218

Total other comprehensive income (loss)
3,052

 
(5,210
)
 
(2,889
)
Comprehensive income
$
89,827

 
$
49,858

 
$
69,319

Net income per unit
$
2.01

 
$
1.28

 
$
1.68

Weighted-average number of basic common units outstanding
42,954,230

 
42,932,320

 
42,914,297

See Notes to Consolidated Financial Statements.


49


NUSTAR GP HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
 
 
Year Ended December 31,
 
2017
 
2016
 
2015
Cash Flows from Operating Activities:
 
 
 
 
 
Net income
$
86,775

 
$
55,068

 
$
72,208

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
Equity in earnings of NuStar Energy L.P.
(51,556
)
 
(56,096
)
 
(79,673
)
Distributions of equity in earnings from NuStar Energy L.P.
51,556

 
56,096

 
79,673

Gain related to NuStar Energy L.P.’s issuance of common limited partner units
(41,942
)
 
(2,408
)
 

(Gain) loss on sale of NuStar Energy L.P. common limited partner units in connection with unit-based compensation

 
(613
)
 
2,333

Unit-based compensation expense
849

 
661

 
239

Amortization of deferred debt costs
182

 
169

 
155

Expense (benefit) for deferred income tax
1,837

 
(75
)
 
952

Changes in current assets and liabilities (Note 8)
92

 
(3,336
)
 
296

(Increase) decrease in long-term receivable from related party

 
(898
)
 
363

Increase (decrease) in long-term liabilities

 
1,183

 
(647
)
Net cash provided by operating activities
47,793

 
49,751

 
75,899

Cash Flows from Investing Activities:
 
 
 
 
 
Distributions in excess of equity in earnings from NuStar Energy L.P.
47,754

 
39,809

 
16,357

Investment in NuStar Energy L.P.
(13,738
)
 
(842
)
 
(7,444
)
Proceeds from sale of NuStar Energy L.P. common units in connection with unit-based compensation

 
1,319

 
5,935

Net cash provided by investing activities
34,016

 
40,286

 
14,848

Cash Flows from Financing Activities:
 
 
 
 
 
Proceeds from short-term debt borrowings
15,500

 
4,000

 

Repayment of short-term debt
(3,000
)
 

 

Distributions to unitholders
(93,634
)
 
(93,590
)
 
(93,567
)
Other, net
(460
)
 
(274
)
 
14

Net cash used in financing activities
(81,594
)
 
(89,864
)
 
(93,553
)
Net increase (decrease) in cash and cash equivalents
215

 
173

 
(2,806
)
Cash and cash equivalents as of the beginning of the period
207

 
34

 
2,840

Cash and cash equivalents as of the end of the period
$
422

 
$
207

 
$
34

See Notes to Consolidated Financial Statements.

50


NUSTAR GP HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF MEMBERS’ EQUITY
(Thousands of Dollars, Except Unit Data)
 
 
Units
 
Members’
Equity
 
Accumulated
Other
Comprehensive
(Loss) Income
 
Total
Balance as of January 1, 2015
42,913,277

 
$
316,611

 
$
(5,775
)
 
$
310,836

Net income

 
72,208

 

 
72,208

Other comprehensive loss

 

 
(2,889
)
 
(2,889
)
Distributions to unitholders

 
(93,567
)
 

 
(93,567
)
Unit-based compensation
17,272

 
468

 

 
468

Other

 
14

 

 
14

Balance as of December 31, 2015
42,930,549

 
295,734

 
(8,664
)
 
287,070

Net income

 
55,068

 

 
55,068

Other comprehensive loss

 

 
(5,210
)
 
(5,210
)
Distributions to unitholders

 
(93,590
)
 

 
(93,590
)
Unit-based compensation
21,200

 
450

 

 
450

Balance as of December 31, 2016
42,951,749

 
257,662

 
(13,874
)
 
243,788

Net income

 
86,775

 

 
86,775

Other comprehensive income

 

 
3,052

 
3,052

Distributions to unitholders

 
(93,634
)
 

 
(93,634
)
Unit-based compensation
25,383

 
555

 

 
555

Balance as of December 31, 2017
42,977,132

 
$
251,358

 
$
(10,822
)
 
$
240,536

See Notes to Consolidated Financial Statements.


51


NUSTAR GP HOLDINGS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2017, 2016 and 2015

1. ORGANIZATION

NuStar GP Holdings, LLC (NuStar GP Holdings) (NYSE: NSH) is a publicly held Delaware limited liability company. Unless otherwise indicated, the terms “NuStar GP Holdings,” “NSH,” “we,” “our” and “us” are used in this report to refer to NuStar GP Holdings, LLC, to one or more of our consolidated subsidiaries or to all of them taken as a whole.

Our unitholders have no liability under our limited liability company agreement, or for any of our debts, obligations or liabilities, in their capacity as unitholders.

We have no operations or sources of income or cash flows other than our investment in NuStar Energy L.P. (NuStar Energy or NS) (NYSE: NS). As of December 31, 2017, we have an approximate 13% ownership interest in NuStar Energy, consisting of the following:
the general partner interest;
100% of the incentive distribution rights issued by NuStar Energy, which entitle us to receive increasing percentages of the cash distributed by NuStar Energy, currently at the maximum percentage of 23%; and
10,214,626 common units of NuStar Energy.

NuStar Energy 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. NuStar Energy has pipelines in the United States, as well as terminal and storage facilities in the United States, Canada, Mexico, the Netherlands, including St. Eustatius in the Caribbean, and the United Kingdom. NuStar Energy conducts its operations through its subsidiaries, primarily NuStar Logistics, L.P. (NuStar Logistics) and NuStar Pipeline Operating Partnership L.P.

Recent Developments
Merger. On February 7, 2018, NuStar GP Holdings, NuStar Energy, Riverwalk Logistics, L.P., NuStar GP, LLC, Marshall Merger Sub LLC, a wholly owned subsidiary of NuStar Energy (Merger Sub), and Riverwalk Holdings, LLC entered into an Agreement and Plan of Merger (the Merger Agreement) pursuant to which Merger Sub will merge with and into NuStar GP Holdings with NuStar GP Holdings being the surviving entity (the Merger), such that NuStar Energy will be our sole member following the Merger. Pursuant to the Merger Agreement and at the effective time of the Merger, NuStar Energy’s partnership agreement will be amended and restated to, among other things, (i) cancel the incentive distribution rights, (ii) convert the 2% general partner interest in NuStar Energy into a non-economic management interest and (iii) provide the holders of NuStar Energy’s common units with voting rights in the election of the members of the board of directors of NuStar GP, LLC at an annual meeting, beginning in 2019. The Merger is subject to the satisfaction or waiver of certain conditions, including approval of the Merger Agreement by our unitholders. Please refer to Note 15 for further discussion of the Merger.

NuStar Energy’s Navigator Acquisition and Financing Transactions. On May 4, 2017, NuStar Energy completed the acquisition of Navigator Energy Services, LLC for approximately $1.5 billion (the Navigator Acquisition). In order to fund the purchase price, NuStar Energy issued 14,375,000 common units for net proceeds of $657.5 million, NuStar Logistics issued $550.0 million of 5.625% senior notes for net proceeds of $543.3 million and NuStar Energy issued 15,400,000 of its 7.625% Series B Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Units (Series B Preferred Units) for net proceeds of $371.8 million. In conjunction with the Navigator Acquisition, NuStar Energy’s partnership agreement was amended and restated to, among other things, provide a waiver of certain quarterly distributions with respect to our incentive distribution rights. In April 2017, we borrowed approximately $14.0 million under our revolving credit facility to fund a contribution to NuStar Energy in order to maintain our 2% general partner interest in connection with NuStar Energy’s issuance of common units. Please refer to Note 4 for a discussion of these transactions.

Employee Transfer from NuStar GP, LLC. On March 1, 2016, NuStar GP, LLC, our wholly owned subsidiary, transferred and assigned to NuStar Services Company LLC (NuStar Services Co), a wholly owned subsidiary of NuStar Energy, all of NuStar GP, LLC’s employees and related benefit plans, programs, contracts and policies (the Employee Transfer). Our officers, who are also officers of NuStar GP, LLC, are now dual employees of NuStar GP, LLC and NuStar Services Co. As a result of the Employee Transfer, NuStar Energy pays employee costs directly and sponsors the long-term incentive plan and other employee benefit plans. Please refer to Note 5 for a discussion of the Employee Transfer and our related party agreements.

52

NUSTAR GP HOLDINGS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Consolidation
The accompanying consolidated financial statements include the accounts of NuStar GP Holdings and subsidiaries in which it has a controlling interest. Intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (GAAP) 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. On an ongoing basis, management reviews its estimates based on currently available information. Management may revise estimates due to changes in facts and circumstances.

Cash and Cash Equivalents
Cash equivalents are all highly liquid investments with an original maturity of three months or less when acquired.
 
Investment in NuStar Energy
We account for our investment in NuStar Energy using the equity method. As the general partner, we exercise significant influence over NuStar Energy. We evaluate our investment in NuStar Energy for impairment when there is evidence that we may not be able to recover the carrying amount of our investment or that the investee is unable to sustain an earnings capacity that justifies the carrying amount. If a decline in the value of our investment is determined to be other than temporary, then we would record an impairment loss in the current period based on the difference between the estimated current fair value of the investment and our carrying amount. We believe that the carrying amount of our investment in NuStar Energy as of December 31, 2017 is recoverable.

Accounting for Issuances of Units by NuStar Energy
We account for issuances of common units by NuStar Energy as if we had sold a proportionate share of our investment, such that we record any gain or loss in earnings.

Income Taxes
We are a limited liability company taxed as a partnership and generally are not subject to federal or state income taxes. Accordingly, our taxable income or loss, which may vary substantially from income or loss reported for financial reporting purposes, is generally included in the federal and state income tax returns of our unitholders. For transfers of publicly held units subsequent to our initial public offering, we have made an election permitted by Section 754 of the Internal Revenue Code (the Code) to adjust the common unit purchaser’s tax basis in our underlying assets to reflect the purchase price of the units. This results in an allocation of taxable income and expenses to the purchaser of the common units, including depreciation deductions and gains and losses on sales of assets, based upon the new unitholder’s purchase price for the common units.

On August 14, 2006, NuStar GP, LLC, our wholly owned subsidiary, elected to be treated as a corporation for federal income tax purposes under Treasury Regulation §301.7701-3(a). We account for income taxes under the asset and liability method. Under this method, we recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. We measure deferred taxes using enacted tax rates expected to apply to taxable income in the year those temporary differences are expected to be recovered or settled.

Income tax expense includes federal and state income and withholding taxes currently payable and deferred federal and state income taxes resulting from temporary differences between financial statement and tax bases of assets and liabilities when such differences exist. We, or certain of our subsidiaries, file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. For U.S. federal and state purposes, tax years subject to examination are 2013 through 2016, according to standard statutes of limitations.

We recognize a tax position if it is more likely than not that the tax position will be sustained, based on the technical merits of the position, upon examination. We record uncertain tax positions in the financial statements at the largest amount of benefit that is more likely than not to be realized. We had no unrecognized tax benefits as of December 31, 2017 and 2016.

53

NUSTAR GP HOLDINGS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Net Income Per Common Unit
Net income per common unit is determined pursuant to the two-class method. Under this method, all earnings are allocated to our common units 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 plan. Net income attributable to distribution equivalent rights for outstanding restricted units totaled $0.2 million for the years ending December 31, 2017 and 2016. We compute net income per common unit by dividing net income attributable to our common units by the weighted-average number of common units outstanding during the period. Basic and diluted net income per common unit are the same as we have no potentially dilutive securities outstanding.

Unit-Based Compensation
We account for awards of NSH restricted units granted to employees of NuStar GP, LLC and our directors based on the fair value of the awards at the grant date. Compensation expense for NSH restricted units is recognized ratably over the vesting period based on the initial fair value determination, and is included in “General and administrative expenses” on our consolidated statements of comprehensive income.

Prior to the Employee Transfer, we accounted for awards of NS performance units and restricted units to employees and directors of NuStar GP, LLC and its affiliates at fair value, whereby a liability for the award was initially recorded and subsequent changes in the fair value were included in the determination of net income. The fair value of NS restricted units and performance units equaled the market price of NS common units at each reporting date. However, NS performance units were earned only upon NuStar Energy’s achievement of an objective performance measure. We recorded compensation expense each reporting period such that the cumulative compensation expense equaled the portion of the award’s current fair value that had vested. We recorded compensation expense related to NS restricted units and performance units until the date of vesting. Prior to the Employee Transfer, we recorded a liability on our consolidated balance sheet for awards of NS performance units and restricted units and NuStar Energy reimbursed us for the expenses resulting from NS awards and NSH awards to employees providing services to NuStar Energy. Following the Employee Transfer, NuStar Energy retains the expenses resulting from NS awards and we retain the expenses resulting from NSH awards.

Distribution Equivalent Rights (DERs) paid with respect to outstanding, unvested NS units were expensed, whereas DERs with respect to outstanding, unvested NSH restricted units reduce equity, similar to cash distributions to unitholders. Forfeitures of our unit-based awards are recognized as an adjustment to compensation expense when they occur.

3. NEW ACCOUNTING PRONOUNCEMENTS

Unit-Based Payments
In May 2017, the Financial Accounting Standards Board (FASB) issued amended guidance that clarifies when a change to the terms and conditions of a unit-based payment award is accounted for as a modification. Under the amended guidance, an entity will apply modification accounting if the value, vesting or classification of the unit-based payment award changes. The guidance is effective for annual and interim periods beginning after December 15, 2017, and amendments should be applied prospectively. We adopted these provisions January 1, 2018, and they did not have a material impact on our financial position, results of operations or disclosures.

Statement of Cash Flows
In August 2016, the FASB issued amended guidance that clarifies how entities should present certain cash receipts and cash payments on the statement of cash flows, including but not limited to debt prepayment or debt extinguishment costs; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims and distributions received from equity method investees. The changes are effective for annual and interim periods beginning after December 15, 2017, and amendments should be applied retrospectively. We adopted these provisions January 1, 2018, and they did not have an impact on our statements of cash flows or disclosures.

Financial Instruments
In January 2016, the FASB issued new guidance that addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The changes are effective for annual and interim periods beginning after December 15, 2017, and amendments should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. We adopted these provisions January 1, 2018, and they did not have a material impact on our financial position, results of operations or disclosures.


54

NUSTAR GP HOLDINGS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Deferred Taxes
In November 2015, the FASB issued amended guidance that requires deferred tax assets and liabilities to be classified as noncurrent on the balance sheet. The changes are effective for annual and interim periods beginning after December 15, 2016, using either a prospective or retrospective transition method, and early adoption is permitted. We adopted these provisions on a prospective basis on January 1, 2017, and they did not have an impact on our financial position, results of operations or disclosures.

4. INVESTMENT IN NUSTAR ENERGY

NuStar Energy’s Acquisitions
Navigator Acquisition. On April 11, 2017, NuStar Logistics and NuStar Energy entered into a Membership Interest Purchase and Sale Agreement (the Acquisition Agreement) with FR Navigator Holdings LLC to acquire all of the issued and outstanding limited liability company interests in Navigator Energy Services, LLC (Navigator) for approximately $1.5 billion. NuStar Energy closed the Navigator Acquisition on May 4, 2017 and funded the purchase price with the net proceeds of the equity and debt issuances described below. NuStar Energy acquired crude oil transportation, pipeline gathering and storage assets located in the Midland Basin of West Texas consisting of: (i) more than 500 miles of crude oil gathering and transportation pipelines with approximately 92,000 barrels per day ship-or-pay volume commitments and deliverability of approximately 412,000 barrels per day; (ii) a pipeline gathering system with more than 200 connected producer tank batteries capable of more than 400,000 barrels per day of pumping capacity covering over 500,000 dedicated acres with fixed fee contracts; and (iii) approximately 1.0 million barrels of crude oil storage capacity with 440,000 barrels contracted to third parties.

The Navigator Acquisition broadens NuStar Energy’s geographic footprint by marking its entry into the Permian Basin and complements its existing asset base. NuStar Energy believes this acquisition provides a strong growth platform that, when coupled with its assets in the Eagle Ford region, solidifies its presence in two of the most prolific basins in the United States.

We amended and restated NuStar Energy’s partnership agreement in connection with NuStar Energy’s issuance of the Series B Preferred Units described below and the Navigator Acquisition to waive up to an aggregate $22.0 million of the quarterly incentive distributions payable to us for any NS common units issued from the date of the Acquisition Agreement (other than those attributable to NS common units issued under any equity compensation plan) for ten consecutive quarters, starting with the second quarter of 2017.

Martin Terminal Acquisition. On December 21, 2016, NuStar Energy acquired crude oil and refined product storage assets in Corpus Christi, TX for $95.7 million, including $2.1 million of capital expenditure reimbursements, from Martin Operating Partnership L.P. (the Martin Terminal Acquisition). The assets acquired include 900,000 barrels of crude oil storage capacity, 250,000 barrels of refined product storage capacity and exclusive use of the Port of Corpus Christi’s new crude oil dock.

Linden Acquisition. On January 2, 2015, NuStar Energy acquired full ownership of a refined products terminal in Linden, NJ for $142.5 million (the Linden Acquisition). Prior to the Linden Acquisition, the terminal operated as a joint venture between NuStar Energy and Linden Holding Corp, with each party owning 50%.

NuStar Energy’s Equity Issuances
Issuances of Common Units. On April 18, 2017, NuStar Energy issued 14,375,000 common units representing limited partner interests at a price of $46.35 per unit. NuStar Energy used the net proceeds from this offering of $657.5 million, including our contribution of $13.6 million to maintain our 2% general partner interest, to fund a portion of the purchase price for the Navigator Acquisition. Beginning with the distribution earned for the second quarter of 2017, we will not receive incentive distributions with respect to these common units. We borrowed approximately $14.0 million under our revolving credit facility to fund our general partner contribution to NuStar Energy, and our common limited partner ownership interest in NuStar Energy was approximately 11% subsequent to this issuance. This issuance resulted in a gain of $41.6 million, which is included in “Other income (expense), net” on our consolidated statements of comprehensive income for the year ended December 31, 2017, calculated as if we had sold a proportionate share of our investment in NuStar Energy.

In 2016, NuStar Energy issued 595,050 common units representing limited partner interests at an average price of $47.39 per unit. NuStar Energy received net proceeds of $28.3 million, which includes our contribution of $0.6 million in order to maintain our 2% general partner interest. This issuance resulted in a gain of $2.1 million for the year ended December 31, 2016, which is included in “Other income (expense), net” on our consolidated statements of comprehensive income, calculated as if we had sold a proportionate share of our investment in NuStar Energy.

55

NUSTAR GP HOLDINGS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


Issuances of Preferred Units. In 2017 and 2016, NuStar Energy issued fixed-to-floating rate cumulative redeemable perpetual preferred units representing limited partner interests. The preferred units rank senior to all of NuStar Energy’s other classes of equity securities, including our general partner and common limited partner interests, with respect to distribution rights and rights upon liquidation. Distributions on the 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.

The following is a summary of NuStar Energy’s preferred units outstanding as of December 31, 2017:
Units
 
Original Issuance Date
 
Number of Units Issued and Outstanding
 
Fixed Distribution Rate per Annum (as a Percentage of the $25.00 Liquidation Preference per Unit)
 
Fixed Distribution Rate per Unit per Annum
 
Date at Which Distribution Rate Becomes Floating
 
Floating Annual Rate (as a Percentage of the $25.00 Liquidation Preference per Unit)
Series A
Preferred Units
 
November 25, 2016
 
9,060,000
 
8.50
%
 
$
2.125

 
December 15, 2021
 
Three-month LIBOR plus 6.766%
Series B
Preferred Units
 
April 28, 2017
 
15,400,000
 
7.625
%
 
$
1.90625

 
June 15, 2022
 
Three-month LIBOR plus 5.643%
Series C
Preferred Units
 
November 30, 2017
 
6,900,000
 
9.00
%
 
$
2.25

 
December 15, 2022
 
Three-month LIBOR plus 6.88%

Summary Financial Information
Condensed consolidated financial information reported by NuStar Energy is presented below:
 
December 31,
 
2017
 
2016
 
(Thousands of Dollars)
Balance Sheet Information:
 
 
 
Current assets
$
250,432

 
$
377,183

Property, plant and equipment, net
4,300,933

 
3,722,283

Goodwill
1,097,475

 
696,637

Other non-current assets
886,393

 
234,442

Total assets
$
6,535,233

 
$
5,030,545

Current liabilities
$
651,506

 
$
289,396

Long-term debt
3,263,069

 
3,014,364

Other non-current liabilities
140,569

 
115,168

Total liabilities
4,055,144

 
3,418,928

NuStar Energy partners’ equity
2,480,089

 
1,611,617

Total liabilities and partners’ equity
$
6,535,233

 
$
5,030,545

 
 
Year Ended December 31,
 
2017
 
2016
 
2015
 
(Thousands of Dollars)
Statement of Income Information:
 
 
 
 
 
Revenues
$
1,814,019

 
$
1,756,682

 
$
2,084,040

Operating income
$
336,278

 
$
359,109

 
$
390,704

 
 
 
 
 
 
Income from continuing operations
$
147,964

 
$
150,003

 
$
305,946

 Income from discontinued operations, net of tax

 

 
774

Net income
$
147,964

 
$
150,003

 
$
306,720



56

NUSTAR GP HOLDINGS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Other
Our investment in NuStar Energy reconciles to NuStar Energy’s total partners’ equity as follows:
 
December 31,
 
2017
 
2016
 
(Thousands of Dollars, Except Percentage Data)
NuStar Energy’s partners’ equity
$
2,480,089

 
$
1,611,617

Less NuStar Energy’s preferred limited partners’ equity
756,603

 
218,400

NuStar Energy’s partners’ equity, excluding preferred limited partners’ equity
1,723,486

 
1,393,217

NuStar GP Holdings’ ownership interest in NuStar Energy
12.8
%
 
14.7
%
NuStar GP Holdings’ share of NuStar Energy’s partners’ equity
220,606

 
204,803

Step-up in basis related to NuStar Energy’s assets and liabilities,
including equity method goodwill, and other
59,115

 
63,939

Investment in NuStar Energy
$
279,721

 
$
268,742

 
We do not own any NuStar Energy preferred limited partner units. Accordingly, we subtract NuStar Energy’s preferred limited partners’ equity from its total equity and apply our ownership percentage of NuStar Energy’s remaining equity when reconciling to our investment in NuStar Energy above.

Valero Energy Corporation (Valero Energy) acquired us in connection with its December 31, 2001 acquisition of Ultramar Diamond Shamrock Corporation (2001 Acquisition). The step-up in basis related to NuStar Energy’s assets and liabilities, including equity method goodwill, reflected in the table above relates to purchase accounting adjustments resulting from the 2001 Acquisition. The amount represents the unamortized excess of the fair value over carrying amount applicable to Valero Energy’s proportionate 73.6% interest in NuStar Energy’s identifiable assets and liabilities as of December 31, 2001, of which $81.8 million is being amortized as a reduction to equity in earnings of NuStar Energy over approximately 28 years. This amount also includes the portion of goodwill resulting from the 2001 Acquisition that was attributed to our investment in NuStar Energy. Since 26.4% of the equity interest in NuStar Energy was owned by public unitholders as of the date of the 2001 Acquisition, a significant portion of the total ownership interest in NuStar Energy was deemed to be held by the public according to GAAP, thereby preventing the adjustment of the reported financial statements of NuStar Energy.

The following table summarizes our equity in earnings of NuStar Energy:
 
Year Ended December 31,
 
2017
 
2016
 
2015
 
(Thousands of Dollars)
NuStar GP Holdings’ Equity in Earnings of NuStar Energy:
 
 
 
 
 
General partner interest
$
1,237

 
$
2,091

 
$
5,270

General partner incentive distribution rights
45,669

 
43,407

 
43,220

General partner’s interest in earnings and
incentive distributions of NuStar Energy
46,906

 
45,498

 
48,490

Common limited partner interest in earnings of NuStar Energy
7,534

 
13,482

 
34,067

Amortization of step-up in basis related to
NuStar Energy’s assets and liabilities
(2,884
)
 
(2,884
)
 
(2,884
)
Equity in earnings of NuStar Energy
$
51,556

 
$
56,096

 
$
79,673



57

NUSTAR GP HOLDINGS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

5. RELATED PARTY TRANSACTIONS

NuStar Energy
We manage NuStar Energy through our ownership of NuStar GP, LLC and Riverwalk Holdings, LLC, which own Riverwalk Logistics L.P., the general partner of NuStar Energy. Our officers are also officers of NuStar GP, LLC and are considered dual employees of ours and of NuStar Energy. The chairman of our board of directors, William E. Greehey, is also the chairman of the board of directors of NuStar GP, LLC. The board of directors of NuStar GP, LLC is responsible for overseeing NuStar GP, LLC’s role as the general partner of the general partner of NuStar Energy, and we, as the sole owner of NuStar GP, LLC, must also approve matters that have or would reasonably be expected to have a material effect on our interests as the sole owner of NuStar GP, LLC.

GP Services Agreement. Prior to the Employee Transfer, NuStar GP, LLC performed services for NuStar Energy’s U.S. operations. Employees of NuStar GP, LLC provided services to both NuStar Energy and NuStar GP Holdings; therefore, NuStar Energy reimbursed NuStar GP, LLC for all employee costs incurred prior to the Employee Transfer, other than the expenses allocated specifically to NuStar GP Holdings (the Holdco Administrative Services Expense). For the years ended December 31, 2016 and 2015, the Holdco Administrative Services Expense totaled $0.2 million and $1.5 million, respectively. The following table summarizes information pertaining to related party transactions reimbursed by NuStar Energy:
 
Year Ended December 31,
 
2016
 
2015
 
(Thousands of Dollars)
Expenses for payroll, employee benefit plans and unit-based compensation
$
32,053

 
$