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| NSH > SEC Filings for NSH > Form 10-Q on 7-Aug-2009 | All Recent SEC Filings |
7-Aug-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," as well as our subsequent quarterly reports on Form 10-Q, 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 June 30, 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
• 10,238,371 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 June 30, 2009 Compared to Three Months Ended June 30, 2008
Financial Highlights
(Unaudited, Thousands of Dollars, Except Unit and Per Unit Data)
Three Months Ended June 30,
2009 2008 Change
Equity in earnings of NuStar Energy $ 21,896 $ 6,704 $ 15,192
General and administrative expenses (720 ) (824 ) 104
Other income (expense), net 21 (82 ) 103
Interest expense, net (22 ) (67 ) 45
Income before income tax benefit 21,175 5,731 15,444
Income tax benefit 200 49 151
Net income $ 21,375 $ 5,780 $ 15,595
Basic and diluted net income per unit $ 0.50 $ 0.14 $ 0.36
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 June 30,
2009 2008 Change
(Unaudited, Thousands of Dollars, Except Per Unit Data)
NuStar Energy Statement of Income
Data:
Revenues $ 987,842 $ 1,377,580 $ (389,738 )
Cost of product sales 731,861 1,175,916 (444,055 )
Operating expenses 110,505 106,928 3,577
Depreciation and amortization 34,466 34,014 452
Segment operating income 111,010 60,722 50,288
General and administrative expenses 25,852 19,544 6,308
Other depreciation and amortization
expense 1,082 816 266
Operating income $ 84,076 $ 40,362 $ 43,714
Net income $ 83,735 $ 14,090 $ 69,645
Net income per unit applicable to
limited partners $ 1.38 $ 0.15 $ 1.23
Cash distributions per unit applicable
to limited partners $ 1.0575 $ 0.9850 $ 0.0725
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NuStar Energy's net income increased $69.6 million for the three months ended June 30, 2009, compared to the three months ended June 30, 2008, primarily due to increases in segment operating income and other income. NuStar Energy's segment operating income increased $50.3 million during the three months ended June 30, 2009, compared to the three months ended June 30, 2008, primarily due to a $48.5 million increase in operating income for the asphalt and fuels marketing segment, mainly resulting from a hedging loss in the second quarter of 2008 of approximately $61.0 million related to certain inventory purchased with the acquisition of the East Coast Asphalt Operations. NuStar Energy's other income increased $18.6 million during the three months ended June 30, 2009, compared to the three months ended June 30, 2008, primarily due to the June 2009 sale of the Ardmore-Wynnewood and Trans-Texas pipelines.
The following table summarizes our equity in earnings of NuStar Energy:
Three Months Ended June 30,
2009 2008 Change
(Thousands of Dollars)
NuStar GP Holdings' Equity in Earnings of NuStar
Energy:
General partner interest $ 1,536 $ 167 $ 1,369
General partner incentive distribution 6,929 5,718 1,211
General partner's interest in earnings and
incentive distributions of NuStar Energy 8,465 5,885 2,580
NuStar GP Holdings' limited partner interest in
earnings of NuStar Energy 14,152 1,540 12,612
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 $ 21,896 $ 6,704 $ 15,192
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Our equity in earnings related to our general and limited partner interests in NuStar Energy increased for the three months ended June 30, 2009, compared to the three months ended June 30, 2008, due to an increase in NuStar Energy's net income.
NuStar Energy's per unit distributions for the three months ended June 30, 2009, increased compared to the three months ended June 30, 2008, to $1.0575 from $0.9850. That increase resulted in NuStar Energy increasing its total cash distributions. Since 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.
Six Months Ended June 30, 2009 Compared to Six Months Ended June 30, 2008
Financial Highlights
(Unaudited, Thousands of Dollars, Except Unit and Per Unit Data)
Six Months Ended June 30,
2009 2008 Change
Equity in earnings of NuStar Energy $ 34,729 $ 22,458 $ 12,271
General and administrative expenses (1,477 ) (1,566 ) 89
Other expense, net (3 ) (82 ) 79
Interest expense, net (49 ) (96 ) 47
Income before income tax benefit 33,200 20,714 12,486
Income tax benefit 183 69 114
Net income $ 33,383 $ 20,783 $ 12,600
Basic and diluted net income per unit $ 0.78 $ 0.49 $ 0.29
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:
Six Months Ended June 30,
2009 2008 Change
(Unaudited, Thousands of Dollars, Except Per Unit Data)
NuStar Energy Statement of Income
Data:
Revenues $ 1,621,846 $ 1,970,354 $ (348,508 )
Cost of product sales 1,148,656 1,568,925 (420,269 )
Operating expenses 213,827 195,378 18,449
Depreciation and amortization 69,329 63,258 6,071
Segment operating income 190,034 142,793 47,241
General and administrative expenses 48,316 35,627 12,689
Other depreciation and amortization
expense 2,208 1,618 590
Operating income $ 139,510 $ 105,548 $ 33,962
Net income $ 123,090 $ 69,959 $ 53,131
Net income per unit applicable to
limited partners $ 1.96 $ 1.11 $ 0.85
Cash distributions per unit applicable
to limited partners $ 2.115 $ 1.970 $ 0.1450
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NuStar Energy's net income increased $53.1 million for the six months ended June 30, 2009, compared to the six months ended June 30, 2008, primarily due to increases in segment operating income and other income, partially offset by an increase in general and administrative expenses. NuStar Energy's segment operating income increased $47.2 million during the six months ended June 30, 2009, compared to the six months ended June 30, 2008, primarily due to a $34.4 million increase in operating income for the asphalt and fuels marketing segment due to the $61.0 hedging loss in the second quarter of 2008. In addition, NuStar Energy's operating income for the storage segment increased $14.0 million mainly due to completed tank expansion projects. NuStar Energy's other income increased $17.3 million during the six months ended June 30, 2009, compared to the six months ended June 30, 2008, primarily due to the June 2009 sale of the Ardmore-Wynnewood and Trans-Texas pipelines.
The following table summarizes our equity in earnings of NuStar Energy:
Six Months Ended June 30,
2009 2008 Change
(Thousands of Dollars)
NuStar GP Holdings' Equity in Earnings of NuStar
Energy:
General partner interest $ 2,185 $ 1,181 $ 1,004
General partner incentive distribution (a) 13,858 10,906 2,952
General partner's interest in earnings and
incentive distributions of NuStar Energy 16,043 12,087 3,956
NuStar GP Holdings' limited partner interest in
earnings of NuStar Energy 20,128 11,813 8,315
Amortization of step-up in basis related to NuStar
Energy's assets and liabilities (1,442 ) (1,442 ) -
NuStar GP Holdings' equity in earnings of NuStar
Energy $ 34,729 $ 22,458 $ 12,271
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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 six months ended June 30, 2008, including the IDR, exceeded the net income allocation to us.
Our equity in earnings related to our general and limited partner interests in NuStar Energy increased for the six months ended June 30, 2009, compared to the six months ended June 30, 2008, due to an increase in NuStar Energy's net income.
NuStar Energy's per unit distributions for the six months ended June 30, 2009, increased compared to the six months ended June 30, 2008, to $2.115 from $1.970. That increase resulted in NuStar Energy increasing its total cash distributions. Since 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's Transportation Segment
NuStar Energy expects throughputs for 2009 to decline from 2008 due to the impact of refinery maintenance occurring throughout 2009 and reduced refinery utilization rates caused by lower refining margins. However, effective July 1, 2009, NuStar Energy's tariffs increased on most of its pipelines by 7.6%, which will positively affect its revenues. In addition, NuStar Energy completed a pipeline expansion project at the end of the second quarter and expects to see a contribution to earnings beginning in the third quarter of 2009. The tariff increases, the completion of the pipeline expansion project and lower operating expenses should offset the expected revenue decline associated with the lower throughputs.
NuStar Energy's Storage Segment
Earnings for NuStar Energy's storage segment should improve in 2009 compared to 2008, despite lower throughputs, as this segment should benefit primarily from key terminal expansion projects mainly completed in the second half of 2008 and rate increases on its storage contracts. Most of NuStar Energy's revenues relate to long-term storage lease contracts, which are not throughput dependent. In addition, NuStar Energy's multi-year customer storage contracts include annual index increases to storage fee rates, which should also increase its storage lease revenue.
NuStar Energy's Asphalt and Fuels Marketing Segment
For the second half of 2009, NuStar Energy expects its asphalt and fuels marketing segment to perform well compared to the first half of the year, primarily due to its asphalt operations. Specifically, NuStar Energy expects its asphalt operations to benefit from solid margins and higher sales volumes due to continued low supply levels and higher demand. A number of factors have contributed to the lower levels of asphalt supply, including reduced asphalt production from complex refiners that have reduced overall production due to weak refining margins. Smaller heavy crude oil discounts have reduced the benefit to complex refiners of processing heavy crudes, which results in less asphalt production from the complex refiners. Additionally, imports continue to remain significantly below last year and historic levels. Absent a change in these factors, NuStar Energy expects asphalt supplies for the remainder of the year to remain relatively low. NuStar Energy expects its asphalt sales volumes to increase in the third quarter, as the second quarter suffered from reduced demand due to wet weather that effectively delayed asphalt paving projects until the third quarter. NuStar Energy's asphalt sales volumes should also increase somewhat in the second half of 2009 due to the impact of the American Recovery and Revitalization Act and other federal highway and public transportation programs, which provide for transportation infrastructure projects, although the majority of the benefit from those programs will occur in 2010 and beyond. Compared to the second half of last year, NuStar Energy expects earnings from its asphalt operations to be more evenly distributed between the third and fourth quarters of 2009 reflective of a less volatile crude oil market.
We expect our equity in earnings of NuStar Energy to increase or decrease consistent with NuStar Energy's earnings.
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 20.4% ownership interest in NuStar Energy. 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 in August 2006, 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 under our revolving credit facility, if necessary. Additionally, NuStar Energy reimburses us for all 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 June 30, Six Months Ended June 30,
2009 2008 2009 2008
(Thousands of Dollars, Except Per Unit Data)
Cash distributions per unit $ 1.0575 $ 0.985 $ 2.115 $ 1.970
Total cash distributions by NuStar
Energy to all partners $ 65,838 $ 60,573 $ 131,676 $ 121,146
Cash distributions we received from
NuStar Energy:
Distributions on our general partner
interest $ 1,318 $ 1,211 $ 2,636 $ 2,422
Distributions on our IDR 6,929 5,718 13,858 11,436
Distributions on our limited
partnership interests 10,827 10,064 21,657 20,131
Total cash distributions to us $ 19,074 $ 16,993 $ 38,151 $ 33,989
Distributions to us as a percentage of
total cash distributions 29.0 % 28.1 % 29.0 % 28.1 %
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Cash Flows for the Six Months Ended June 30, 2009 and 2008
Cash distributions received from NuStar Energy for the six months ended June 30, 2009 were $38.2 million, which we used principally to fund distributions to our unitholders totaling $36.6 million. Employee benefit plan liabilities and accrued compensation expense increased $4.7 million and $7.2 million, respectively, for the six months ended June 30, 2009, due to timing of payments for these liabilities versus reimbursement of employee-related expenses from NuStar Energy. We paid off $6.5 million of long-term debt during the six months ended June 30, 2009 from available cash on hand, due to the impending maturity of our three-year revolving credit facility.
Cash distributions received from NuStar Energy for the six months ended June 30, 2008 were $33.4 million, which we used principally to fund distributions to our unitholders totaling $30.6 million. We borrowed $5.0 million for the six months ended June 30, 2008, which we used to fund our $5.0 million contribution to NuStar Energy to maintain our 2% general partner interest following NuStar Energy's issuance of common units in April 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 June 30, Six Months Ended June 30,
2009 2008 2009 2008
(Thousands of Dollars, Except Per Unit Data)
Cash distributions per unit $ 0.43 $ 0.36 $ 0.86 $ 0.72
Total cash distributions $ 18,277 $ 15,300 $ 36,554 $ 30,600
Contractual Obligations
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Credit Facility
As of June 30, 2009, we had no borrowings outstanding under our three-year revolving credit facility (2006 Credit Facility), which matured on July 19, 2009. On July 17, 2009, we entered into an amended and restated revolving credit facility (2009 Credit Facility) that matures on July 16, 2010 with a borrowing capacity of up to $19.5 million, of which, up to $10 million may be available for letters of credit. Interest on the 2009 Credit Facility is based upon, at our option, either an alternative base rate plus 3.5% or a LIBOR based rate plus 4.5%. These interest rates are 3.5% to 4.0% higher than the rates that were in effect under the 2006 Credit Facility.
The terms of the 2009 Credit Facility, which are substantially equivalent to those under the 2006 Credit Facility, require NuStar Energy to 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 June 30, 2009.
We will use our 2009 Credit Facility to fund capital contributions to NuStar Energy to maintain our 2% general partner interest in the event NuStar Energy issues additional units and to meet other liquidity and capital resource requirements.
Related Party Transactions
NuStar Energy reimburses us for its share of costs incurred by us related to employee-related benefit plans and unit-based compensation. Please refer to Note 4 of Condensed Notes to Consolidated Financial Statements for total related party transactions charged to NuStar Energy, and amounts due from NuStar Energy related to these and other transactions.
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