INVESTMENT IN NUSTAR ENERGY

NuStar Energy’s Equity Offerings

On September 10, 2012, NuStar Energy issued 7,130,000 common units representing limited partner interests at a price of $48.94 per unit. NuStar Energy received proceeds of $336.8 million, net of issuance costs. In conjunction with NuStar Energy’s issuance of common units, we contributed $7.1 million to NuStar Energy in order to maintain our 2% general partner interest and our ownership in NuStar Energy was reduced from 16.3% at December 31, 2011 to 15.0% at December 31, 2012. This issuance resulted in a gain of $10.7 million, or $0.25 per unit for the year ended December 31, 2012, which is included in “Other income, net” on our consolidated statements of comprehensive income (loss), and represents the increase in the value of our proportionate share of NuStar Energy’s capital.

On December 9, 2011, NuStar Energy issued 6,037,500 common units representing limited partner interests at a price of $53.45 per unit. NuStar Energy received proceeds of $311.4 million, net of issuance cost. In September and October 2011, NuStar Energy issued 108,029 common units for proceeds of $5.9 million, net of issuance cost. In conjunction with NuStar Energy’s issuances of common units in 2011, we contributed $6.7 million to NuStar Energy in order to maintain our 2% general partner interest. Additionally, these issuances resulted in a gain of $8.1 million or $0.19 per unit for the year ended December 31, 2011, which is included in “Other income, net” on our consolidated statements of comprehensive income, and represents the increase in the value of our proportionate share of NuStar Energy’s capital. Following these issuances, our ownership in NuStar Energy was reduced from 17.6% at December 31, 2010 to 16.3% at December 31, 2011.

On May 19, 2010, NuStar Energy issued 4,400,000 common units representing limited partner interests at a price of $56.55 per unit. NuStar Energy received proceeds of $240.1 million, net of issuance cost. In conjunction with NuStar Energy’s issuance of common units, we contributed $5.1 million to NuStar Energy in order to maintain our 2% general partner interest and our ownership in NuStar Energy was reduced from 18.7% at December 31, 2009 to 17.6% at December 31, 2010. This issuance resulted in a gain of $7.8 million or $0.18 per unit for the year ended December 31, 2010, which is included in “Other income, net” on our consolidated statements of comprehensive income, and represents the increase in the value of our proportionate share of NuStar Energy’s capital.

NuStar Energy’s Acquisitions and Dispositions

On January 1, 2013, NuStar Energy sold the San Antonio Refinery and related assets, which included inventory, a terminal in Elmendorf, Texas and a pipeline connecting the terminal and refinery for approximately $115.0 million. NuStar Energy presented the results of operations for the San Antonio Refinery and related assets, previously reported in its asphalt and fuels marketing segment, as discontinued operations for the years ended December 31, 2012 and 2011.

On December 13, 2012, NuStar Energy completed its acquisition of the TexStar Crude Oil Assets (as defined below), including 100% of the partnership interest in TexStar Crude Oil Pipeline, LP, from TexStar Midstream Services, LP and certain of its affiliates (collectively, TexStar) for $325.4 million (the TexStar Asset Acquisition). The TexStar Crude Oil Assets consist of approximately 140 miles of crude oil pipelines and gathering lines, as well as five terminals and storage facilities providing 0.6 million barrels of storage capacity.

On September 28, 2012, NuStar Energy sold a 50% ownership interest (the Asphalt Sale) in NuStar Asphalt LLC (Asphalt JV), previously a wholly-owned subsidiary of NuStar Energy, to an affiliate of Lindsay Goldberg LLC (Lindsay Goldberg), a private investment firm. Asphalt JV owns and operates the asphalt refining assets that were previously wholly owned by NuStar Energy, including the asphalt refineries located in Paulsboro, New Jersey and Savannah, Georgia (collectively, the Asphalt Operations). Lindsay Goldberg paid $175.0 million for the Class A equity interests of Asphalt JV, while NuStar Energy retained the Class B equity interests with a fair value of $52.0 million. At closing, NuStar Energy received $263.8 million from Asphalt JV for inventory related to the Asphalt Operations. Upon closing, NuStar Energy deconsolidated Asphalt JV and started reporting its remaining investment in Asphalt JV using the equity method of accounting.

In anticipation of the Asphalt Sale, NuStar Energy evaluated the goodwill and other long-lived assets associated with the Asphalt Operations for potential impairment. NuStar Energy determined the fair value of the Asphalt Operations reporting unit was less than its carrying value, which resulted in the recognition of a goodwill impairment loss of $22.1 million in the second quarter of 2012. In addition, NuStar Energy recorded an impairment loss of $244.3 million in the second quarter of 2012 to write-down the carrying value of long-lived assets related to the Asphalt Operations, including fixed assets, intangible assets and other long-term assets to their estimated fair value.

Summary Financial Information

Condensed financial information reported by NuStar Energy is summarized below:



	December 31,
	2012		2011
	(Thousands of Dollars)
Balance Sheet Information:
Current assets	$	939,443	$	1,200,923
Property, plant and equipment, net	3,238,460		3,430,468
Goodwill	951,024		846,717
Other long-term assets, net	484,162		403,082
Total assets	$	5,613,089	$	5,881,190
Current liabilities	$	845,971	$	943,800
Long-term debt, less current portion	2,124,582		1,928,071
Other long-term liabilities	57,541		144,984
Total liabilities	3,028,094		3,016,855
NuStar Energy partners’ equity	2,572,384		2,852,201
Noncontrolling interest	12,611		12,134
Total liabilities and partners’ equity	$	5,613,089	$	5,881,190



	Year Ended December 31,
	2012			2011		2010
	(Thousands of Dollars)
Statement of Income Information:
Revenues	$	5,955,676		$	6,271,815	$	4,403,061
Operating (loss) income	$	(30,079	)	$	301,812	$	302,557

(Loss) income from continuing operations	$	(178,132	)	$	211,487	$	238,970
(Loss) income from discontinued operations, net of tax	(49,105		)	10,114		—
Net (loss) income	$	(227,237	)	$	221,601	$	238,970

Other

Our investment in NuStar Energy reconciles to NuStar Energy’s total partners’ equity as follows:



	December 31,
	2012			2011
	(Thousands of Dollars)
NuStar Energy’s total partners’ equity	$	2,572,384		$	2,852,201
NuStar GP Holdings’ ownership interest in NuStar Energy	15.0		%	16.3		%
NuStar GP Holdings’ share of NuStar Energy’s partners’ equity	385,858			464,909
Step-up in basis related to NuStar Energy’s assets and liabilities, including equity method goodwill, and other	79,123			82,321
Investment in NuStar Energy	$	464,981		$	547,230

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 (loss) earnings of NuStar Energy:



	Year Ended December 31,
	2012			2011			2010
	(Thousands of Dollars)
NuStar GP Holdings’ Equity in (Loss) Earnings of NuStar Energy:
General partner interest	$	(5,356	)	$	3,703		$	4,113
General partner incentive distribution (a)	41,242			36,319			33,304
General partner’s interest in earnings and incentive distributions of NuStar Energy	35,886			40,022			37,417
Limited partner interest in (loss) earnings of NuStar Energy	(37,580		)	28,645			32,326
Amortization of step-up in basis related to NuStar Energy’s assets and liabilities	(2,884		)	(2,884		)	(2,884		)
Equity in (loss) earnings of NuStar Energy	$	(4,578	)	$	65,783		$	66,859


(a)	Our equity in (loss) earnings of NuStar Energy allocated to the general partner incentive distribution is less than the actual distribution made with respect to 2011, due to NuStar Energy’s issuance of common units after the end of the third quarter, but before the record date.