INVESTMENT IN NUSTAR ENERGY

Navigator Acquisition

On April 11, 2017, 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, subject to customary adjustments at and following closing. NuStar Energy closed on the Navigator Acquisition on May 4, 2017 and funded the purchase price with the net proceeds of the equity and debt issuances described below. The assets acquired consisted of 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.

In connection with NuStar Energy’s issuance of the Series B Preferred Units described below and the Navigator Acquisition, NuStar Energy’s partnership agreement was amended and restated 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 distributions for the second quarter of 2017.

Issuance 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. 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 for the three and six months ended June 30, 2017, which is included in “Other income, net” on our condensed consolidated statements of comprehensive income, and represents the increase in the value of our proportionate share of NuStar Energy’s capital.

Issuance of Series B Preferred Units

On April 28, 2017, NuStar Energy issued 15,400,000 of its Series B Preferred Units representing limited partner interests at a price of $25.00 per unit. NuStar Energy used the net proceeds of $371.8 million from the issuance of the Series B Preferred Units to fund a portion of the purchase price for the Navigator Acquisition and to pay related fees and expenses.

The Series B Preferred Units rank senior to our general partner and common limited partner interests with respect to distribution rights and rights upon liquidation. Distributions on the Series B Preferred Units are payable out of any legally available funds, accrue and are cumulative from the date of original issuance of the Series B Preferred Units and are payable quarterly. The holders of the Preferred Units are entitled to receive quarterly distributions at an initial distribution rate of 7.625% per annum of the $25.00 liquidation preference per unit (equal to $1.90625 per unit per annum). On and after June 15, 2022, distributions on the Series B 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 5.643%.

Summary Financial Information

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



	June 30, 2017		December 31, 2016
	(Thousands of Dollars)
Balance Sheet Information:
Current assets	$	230,862	$	377,183
Property, plant and equipment, net	4,147,333		3,722,283
Goodwill	1,023,359		696,637
Intangible assets, net	857,616		127,083
Other non-current assets	100,154		107,359
Total assets	$	6,359,324	$	5,030,545
Current liabilities	$	654,517	$	289,396
Long-term debt	3,073,864		3,014,364
Other non-current liabilities	129,894		115,168
Total liabilities	3,858,275		3,418,928
NuStar Energy partners’ equity	2,501,049		1,611,617
Total liabilities and partners’ equity	$	6,359,324	$	5,030,545



	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
	(Thousands of Dollars)
Statement of Comprehensive Income Information:
Revenues	$	435,488	$	437,804	$	922,918	$	843,507
Operating income	$	73,404	$	91,217	$	170,543	$	185,782
Net income	$	26,250	$	52,517	$	84,190	$	109,918

Other

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



	June 30, 2017			December 31, 2016
	(Thousands of Dollars)
NuStar Energy’s partners’ equity	$	2,501,049		$	1,611,617
Less NuStar Energy’s preferred limited partners’ equity	589,953			218,400
NuStar Energy’s partners’ equity, excluding preferred limited partners’ equity	1,911,096			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	244,620			204,803
Step-up in basis related to NuStar Energy’s assets and liabilities, including equity method goodwill, and other	60,369			63,939
Investment in NuStar Energy	$	304,989		$	268,742