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.

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

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