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| NSH > SEC Filings for NSH > Form 10-Q on 7-May-2009 | All Recent SEC Filings |
7-May-2009
Quarterly Report
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains certain estimates, predictions, projections, assumptions and other forward-looking statements that involve various risks and uncertainties. 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. Please read our annual report on Form 10-K for the year ended December 31, 2008, Part I "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-Q. We do not intend to update these statements unless it is 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.
Overview
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," "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 only cash generating assets are our ownership interests in NuStar Energy L.P. (NuStar Energy), a publicly held Delaware limited partnership (NYSE: NS). As of March 31, 2009, our aggregate ownership interests in NuStar Energy consisted of the following:
• the 2% general partner interest;
• 100% of the incentive distribution rights (IDR) 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
• 10,241,566 common units of NuStar Energy representing an 18.4% limited partner interest.
We account for our ownership interest 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 terminalling and storage of petroleum products, the transportation of petroleum products and anhydrous ammonia and asphalt and fuels marketing. NuStar Energy has terminal facilities in the United States, the Netherlands Antilles, Canada, Mexico, the Netherlands and the United Kingdom.
NuStar Energy is required by its partnership agreement to distribute all of its available cash at the end of each quarter, less reserves established by its general partner, in its sole discretion, to provide for the proper conduct of NuStar Energy's business or to provide funds for future distributions. 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.
Results of Operations
Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008
Financial Highlights
(Unaudited, Thousands of Dollars, Except Unit and Per Unit Data)
Three Months Ended March 31,
2009 2008 Change
Equity in earnings of NuStar Energy $ 12,833 $ 15,754 $ (2,921 )
General and administrative expenses (757 ) (742 ) (15 )
Other expense, net (24 ) - (24 )
Interest expense, net (27 ) (29 ) 2
Income before income tax (expense) benefit 12,025 14,983 (2,958 )
Income tax (expense) benefit (17 ) 20 (37 )
Net income $ 12,008 $ 15,003 $ (2,995 )
Basic and diluted net income per unit $ 0.28 $ 0.35 $ (0.07 )
Weighted average number of basic and diluted
units outstanding 42,503,784 42,500,990 2,794
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The following table summarizes NuStar Energy's results of operations:
Three Months Ended March 31,
2009 2008 Change
(Unaudited, Thousands of Dollars, Except
Per Unit Data)
NuStar Energy Statement of Income Data:
Revenues $ 634,004 $ 592,774 $ 41,230
Cost of product sales 416,795 393,009 23,786
Operating expenses 103,322 88,450 14,872
Depreciation and amortization 34,863 29,244 5,619
Segment operating income 79,024 82,071 (3,047 )
General and administrative expenses 22,464 16,083 6,381
Other depreciation and amortization expense 1,126 802 324
Operating income $ 55,434 $ 65,186 $ (9,752 )
Net income $ 39,355 $ 55,869 $ (16,514 )
Net income per unit applicable to limited
partners $ 0.58 $ 1.01 $ (0.43 )
Cash distributions per unit applicable to
limited partners $ 1.0575 $ 0.9850 $ 0.0725
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NuStar Energy's net income for the three months ended March 31, 2009 decreased $16.5 million compared to the three months ended March 31, 2008, primarily due to increases in general and administrative expenses and interest expense and a decrease in segment operating income. NuStar Energy's segment operating income decreased $3.0 million for the three months ended March 31, 2009 compared to the three months ended March 31, 2008, mainly due to a $14.1 million decrease in operating income for the asphalt and fuels marketing segment.
Our equity in earnings of NuStar Energy, our only source of income, directly fluctuates with the amount of NuStar Energy's distributions, which determines the amount of our incentive distribution earnings, and NuStar Energy's results of operations, which determine the amounts of earnings attributable to our general partner and limited partner interests.
The following table summarizes our equity in earnings of NuStar Energy:
Three Months Ended March 31,
2009 2008 Change
(Thousands of Dollars)
NuStar GP Holdings' Equity in Earnings of
NuStar Energy:
General partner interest $ 649 $ 1,014 $ (365 )
General partner incentive distribution (a) 6,929 5,188 1,741
General partner's interest in earnings and
incentive distributions of NuStar Energy 7,578 6,202 1,376
NuStar GP Holdings' limited partner interest
in earnings of NuStar Energy 5,976 10,273 (4,297 )
Amortization of step-up in basis related to
NuStar Energy's assets and liabilities (721 ) (721 ) -
NuStar GP Holdings' equity in earnings of
NuStar Energy $ 12,833 $ 15,754 $ (2,921 )
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(a) For the first quarter of 2008, NuStar Energy's net income allocation to general and limited partners reflected total cash distributions based on the partnership interests outstanding as of March 31, 2008. NuStar Energy issued approximately 5.1 million common units in April 2008. Actual distribution payments are made within 45 days after the end of each quarter as of a record date that is set after the end of each quarter. As such, our portion of the actual distributions made with respect to the first quarter 2008, including the IDR, exceeded the net income allocation to us.
Our equity in earnings of NuStar Energy related to our general and limited partner interests decreased for the three months ended March 31, 2009 compared to the three months ended March 31, 2008, due to a decrease in NuStar Energy's net income. Equity in earnings related to our limited partner interest was also affected by the issuance of NuStar Energy units in the second quarter of 2008, which diluted its earnings per unit.
NuStar Energy's per unit distributions for the three months ended March 31, 2009, increased compared to the three months ended March 31, 2008, to $1.0575 from $0.9850. That increase, coupled with a higher number of NuStar Energy units outstanding following the issuance of units in the second quarter of 2008, resulted in NuStar Energy increasing its total cash distributions. Because our IDR in NuStar Energy entitle us to an increasing amount of NuStar Energy's cash distributions, our equity in earnings of NuStar Energy related to our IDR increased for that period.
Outlook
NuStar Energy expects its operating results in all of its segments to improve in 2009 compared to 2008.
NuStar Energy's Transportation Segment
Barring any significant unplanned maintenance activity for the remainder of 2009 at the refineries NuStar Energy serves, NuStar Energy expects throughputs for 2009 to decline slightly from 2008 due to the impact of refinery maintenance in the first quarter and the effect of reduced refinery utilization rates caused by lower demand. However, effective July 1, 2009, NuStar Energy expects to increase the tariff on its pipelines by approximately 7.5%, which should positively affect its revenues and offset the impact of the decline in throughputs. In addition to the expected tariff increase, the completion of a pipeline expansion project should also offset the expected decline in NuStar Energy's throughputs.
NuStar Energy's Storage Segment
NuStar Energy expects the same factors affecting throughputs in its transportation segment and the conversion of certain throughput-based contracts to lease-based contracts, to cause its storage segment throughputs for 2009 to decline from 2008. However, NuStar Energy does not expect these lower throughputs to significantly impact its revenues or results of operations for the full year of 2009 because most of its revenues relate to long-term storage lease contracts, which are not throughput dependent. Most of NuStar Energy's multi-year storage contracts include annual index increases to storage fee rates, which should increase its storage lease revenue. Additionally, NuStar Energy's revenues and results of operations should benefit from key terminal expansion projects.
NuStar Energy's Asphalt and Fuels Marketing Segment
NuStar Energy expects many of the same factors present in 2008 that contributed
positively to its results of operations to continue in 2009, which should
increase the earnings from its asphalt and fuels marketing segment.
Specifically, NuStar Energy expects asphalt supply levels to remain below recent
averages due to lower U.S. refinery utilization rates, which reduce asphalt
production, and the continued lack of asphalt imports. Demand for asphalt should
increase slightly over 2008 levels due to the impact of the American Recovery
and Revitalization Act, which provides approximately $29 billion for
transportation infrastructure projects. As a result of those factors, NuStar
Energy expects its margin per barrel to improve over 2008 and sales volumes to
increase slightly, resulting in improved results of operations for this segment.
We expect our equity in earnings of NuStar Energy to increase or decrease consistent with NuStar Energy's operating results.
LIQUIDITY AND CAPITAL RESOURCES
General
Our cash flows consist of distributions from NuStar Energy on our partnership interests, including all of the IDR that we own. Due to our ownership of NuStar Energy's IDR, our portion of NuStar Energy's total distributions may exceed our percentage ownership interest of 20.4%. Our primary cash requirements are for distributions to members, capital contributions to maintain our 2% general partner interest in NuStar Energy in the event NuStar Energy issues additional units, debt service requirements, if any, benefit plan funding and general and administrative expenses. In addition, because NuStar GP, LLC elected to be treated as a taxable entity, we may be required to pay income taxes, depending upon the taxable income of NuStar GP, LLC. These tax payments 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 borrowings on our revolving credit facility, if necessary. Additionally, NuStar Energy reimburses us for the costs incurred on their behalf, primarily employee related costs.
Cash Distributions from NuStar Energy
NuStar Energy pays quarterly distributions 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. The table set forth below shows the
cash distributions earned for the periods shown with respect to our ownership
interests in NuStar Energy and IDR:
Three Months Ended March 31,
2009 2008
(Thousands of Dollars,
Except Per Unit Data)
Cash distributions per unit $ 1.0575 $ 0.985
Total cash distributions by NuStar Energy to all
partners $ 65,838 $ 60,573
Cash distributions we received from NuStar Energy:
Distributions on our general partner interest $ 1,318 $ 1,211
Distributions on our IDR 6,929 5,718
Distributions on our limited partnership interests 10,830 10,067
Total cash distributions to us $ 19,077 $ 16,996
Distributions to us as a percentage of total cash
distributions 29.0 % 28.1 %
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Cash Flows for the Three Months Ended March 31, 2009 and 2008
Cash distributions received from NuStar Energy for the three months ended March 31, 2009 were $19.1 million compared to $16.4 million for the three months ended March 31, 2008. The cash distributions we received were used principally to fund distributions to our unitholders, which totaled $18.3 million for the three months ended March 31, 2009, compared to $15.3 million for the three months ended March 31, 2008.
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. The table set forth below
shows our cash distributions to be paid related to the periods shown:
Three Months Ended March 31,
2009 2008
(Thousands of Dollars,
Except Per Unit Data)
Cash distributions per unit $ 0.43 $ 0.36
Total cash distributions $ 18,277 $ 15,300
Long-Term Contractual Obligations
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Credit Facility
Our three-year revolving credit facility matures on July 19, 2009 and has a borrowing capacity of up to $20 million (Credit Facility). We fund capital contributions to NuStar Energy to maintain our 2% general partner interest as NuStar Energy issues additional units and meet other liquidity and capital resource requirements through borrowings under the Credit Facility.
Under the terms of the Credit Facility, NuStar Energy must maintain a total debt-to-EBITDA ratio of less than 5.0-to-1.0 for any four consecutive quarters, subject to adjustment following certain acquisitions. We are also required to receive cash distributions of at least $25.0 million in respect to our ownership interests in NuStar Energy for the preceding four fiscal quarters ending on the last day of each fiscal quarter. Our management believes that we are in compliance with the covenants as of March 31, 2009.
As of March 31, 2009, we had outstanding borrowings of $6.5 million and availability of $13.5 million under the Credit Facility. Borrowings under the Credit Facility bear interest, at our option, at either an alternative base rate or a LIBOR based rate, which was 1.1% as of March 31, 2009.
We are in discussions with certain lenders to renew or replace our Credit Facility.
Related Party Transactions
Employee Benefit Plans and Unit Based Compensation
NuStar Energy reimburses us for its share of costs incurred by us related to employee benefit plans and long-term incentive plans. Expenses resulting from NuStar GP Holdings awards to our non-employee directors are included in "General and administrative expenses" on our consolidated statements of income. Our liabilities for employee benefits are included in "Employee benefit plan liabilities" and our liability related to the long-term incentive plans is included in "Accrued compensation expense" on our consolidated balance sheets.
The following table summarizes information pertaining to employee benefit plan and long-term incentive plan compensation expenses:
Three Months Ended March 31,
2009 2008
(Thousands of Dollars)
Expenses for payroll and related benefit plans
charged to NuStar Energy $ 42,511 $ 33,933
Long-term incentive plan compensation expense charged
to NuStar Energy 3,281 271
Expenses resulting from NuStar GP Holdings awards to
non-employee directors - 192
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GP Services Agreement
NuStar Energy and NuStar GP, LLC entered into a services agreement, effective as of January 1, 2008 (the GP Services Agreement). The GP Services Agreement provides that NuStar GP, LLC will furnish all administrative services necessary to conduct the business of NuStar Energy. All employees providing services to both NuStar GP Holdings and NuStar Energy are employed by NuStar GP, LLC; therefore, NuStar Energy will reimburse NuStar GP, LLC for all employee costs, other than the expenses allocated to NuStar GP Holdings (the Holdco Administrative Services Expense).
The Holdco Administrative Services Expense equals $1.1 million and $0.8 million for the fiscal years 2009 and 2008, respectively, plus 1.0% of NuStar GP, LLC's domestic bonus and unit compensation expense subject to certain other adjustments. The GP Services Agreement will terminate on December 31, 2012, with automatic two-year renewals unless terminated by either party upon six months' prior written notice. The aggregate amounts we incurred related to the GP Services Agreement were $0.3 million and $0.1 million for the three months ended March 31, 2009 and 2008, respectively.
Contingencies
As previously discussed, our only cash-generating assets are our indirect ownership interests in NuStar Energy. NuStar Energy is subject to certain loss contingencies, the outcome of which could have a material effect on NuStar Energy's results of operations and cash flows. Please refer to Note 9 of Condensed Notes to Consolidated Financial Statements for a more detailed discussion of contingencies.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in accordance with United States generally accepted accounting principles 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. Our critical accounting policies are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2008.
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