INVESTMENT IN NUSTAR ENERGY

NuStar Energy’s Equity Issuances

Preferred Unit Offering. In the fourth quarter of 2016, NuStar Energy issued 9,060,000 of its 8.50% Series A Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Units (the Preferred Units) representing limited partner interests at a price of $25.00 per unit. NuStar Energy used the net proceeds of $218.4 million from this issuance for general partnership purposes, including the funding of capital expenditures and to repay outstanding borrowings under its revolving credit agreement.

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 date of original issuance of the Preferred Units and are payable quarterly. The holders of the Preferred Units are entitled to receive quarterly distributions at an initial distribution rate of 8.50% per annum of the $25.00 liquidation preference per unit (equal to $2.125 per unit per annum). On and after December 15, 2021, distributions on the Preferred Units accumulate at a percentage of the $25.00 liquidation preference equal to an annual floating rate of the three-month LIBOR plus a spread of 6.766%.

Common Unit Offering. 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 2.0% general partner interest (as defined in NuStar Energy’s partnership agreement). 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 the increase in the value of our proportionate share of NuStar Energy’s capital.

Other Issuances of Common Units. In 2016, we recorded a gain of $0.3 million as a result of NuStar Energy’s issuance of common units in association with its unit-based compensation awards. The gain is included in “Other income (expense), 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

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%.

2014 Asphalt Sale. On February 26, 2014, NuStar Energy sold its remaining 50% ownership interest in NuStar Asphalt LLC (the 2014 Asphalt Sale) to Lindsay Goldberg LLC, a private investment firm. Effective February 27, 2014, NuStar Asphalt LLC changed its name to Axeon Specialty Products LLC (Axeon).

Summary Financial Information

Condensed consolidated financial information reported by NuStar Energy is presented below:



	December 31,
	2016		2015
	(Thousands of Dollars)
Balance Sheet Information:
Current assets	$	377,183	$	333,851
Property, plant and equipment, net	3,722,283		3,683,571
Goodwill	696,637		696,637
Other non-current assets	234,442		411,466
Total assets	$	5,030,545	$	5,125,525
Current liabilities	$	289,396	$	332,213
Long-term debt	3,014,364		3,055,612
Other non-current liabilities	115,168		127,856
Total liabilities	3,418,928		3,515,681
NuStar Energy partners’ equity	1,611,617		1,609,844
Total liabilities and partners’ equity	$	5,030,545	$	5,125,525



	Year Ended December 31,
	2016		2015		2014
	(Thousands of Dollars)
Statement of Income Information:
Revenues	$	1,756,682	$	2,084,040	$	3,075,118
Operating income	$	359,109	$	390,704	$	346,901

Income from continuing operations	$	150,003	$	305,946	$	214,169
Income (loss) from discontinued operations, net of tax	—		774		(3,791		)
Net income	$	150,003	$	306,720	$	210,378

Other

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



	December 31,
	2016			2015
	(Thousands of Dollars, Except Percentage Data)
NuStar Energy’s partners’ equity	$	1,611,617		$	1,609,844
Less NuStar Energy’s preferred limited partners’ equity	218,400			—
NuStar Energy’s partners’ equity, excluding preferred limited partners’ equity	1,393,217			1,609,844
NuStar GP Holdings’ ownership interest in NuStar Energy	14.7		%	14.9		%
NuStar GP Holdings’ share of NuStar Energy’s partners’ equity	204,803			239,867
Step-up in basis related to NuStar Energy’s assets and liabilities, including equity method goodwill, and other	63,939			66,827
Investment in NuStar Energy	$	268,742		$	306,694

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,
	2016			2015			2014
	(Thousands of Dollars)
NuStar GP Holdings’ Equity in Earnings of NuStar Energy:
General partner interest	$	2,091		$	5,270		$	3,352
General partner incentive distribution rights	43,407			43,220			43,220
General partner’s interest in earnings and incentive distributions of NuStar Energy	45,498			48,490			46,572
Common limited partner interest in earnings of NuStar Energy	13,482			34,067			21,692
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	$	56,096		$	79,673		$	65,380