NuStar GP Holdings, LLC Earnings Remain Steady During the Downturn

Despite a period of continued commodity price volatility, NuStar GP Holdings' (NSH) earnings have remained pretty steady. That trend continued during the fourth quarter, with the company releasing those results before the market opened on Friday. In fact, in a lot of ways, they were a near-mirror image of the fourth quarter of 2014, except for a difference in taxes. That stability is due to the fact that the entirety of its income is derived from income earned by managing and owning a stake in MLP NuStar Energy (NS 1.93%), which primarily owns fee-based assets. Those assets have continued to earn recurring fees regardless of what commodity prices are doing.

NuStar results: The raw numbers

Data source: NuStar GP Holdings.

What happened with NuStar this quarter? 
NuStar results were very stable:

• NuStar GP's entire income is derived from cash distribution from NuStar Energy, including $1.9 million from its general partner interest, $10.8 million from its incentive distribution rights, and $11.2 million for its limited partner interest. The first two are a mirror image from the prior period, while limited partner interest cash flow was up ever so slightly.
• Outside of that, the other change from the prior period was NuStar's tax situation. Last year, the company recorded a $901,000 tax benefit, while this quarter it had a $688,000 tax expense, which results in the difference in distributable cash flow.
• Because of this the company's distribution coverage ratio showed a slight shortfall from the $0.545 per unit in distributions it paid during the quarter. Furthermore, for the full year, it paid $2.18 per unit in distributions, but only produced $2.12 per unit in distributable cash flow, meaning it paid out more than it brought in. That's a caution flag because it's not sustainable over the long term, though the company should be able to maintain the payout given that its MLP is expected to produce stronger results in 2016.

What management had to say 
CEO Brad Barron, commenting on the company's results, said:

NuStar GP Holdings, LLC's full-year 2015 results were supported by NuStar Energy L.P.'s solid performance and stable distribution during the year.

Because NuStar GP results are fully supported by its MLP NuStar Energy, investors need to also take a look at those results each quarter, especially noting the sustainability of its own distribution. For the fourth quarter, NuStar Energy reported distributable cash flow of $86.6 million, or $1.15 per unit, which was a slight decline from the $95.4 million, or $1.23 per unit it earned in the year-ago period. However, that was still more than enough to cover the company's distribution with it delivering a 1.05 times coverage ratio during the fourth quarter and a 1.11 times coverage ratio for the full year.

NuStar Energy benefited from higher refined product pipeline throughput and higher storage revenue during the quarter. However, despite this strength, distributable cash flow slipped due to higher reliability capital expenses, higher income tax expenses, and reduced mark-to-market impact on its hedging transactions.

Looking forward 
NuStar Energy expects to deliver relatively stable results again in 2016 with the company providing an update to its previous guidance ranges:

• Storage segment EBITDA between $310 to $330 million, up $15 million from its previous guidance due to increased storage rates.
• Pipeline segment EBITDA between $335 to $355 million, which is slightly lower than its previous guidance range due to lower volume projections in the Eagle Ford.
• Fuels marketing segment EBITDA between $15 to $35 million, which is unchanged from its prior guidance.

At the low end, those results would be flat with 2015, while the higher end would represent nearly 9% growth in EBITDA. Given this outlook, NuStar Energy expects to again be able to fully cover its current distribution, which means that NuStar GP's current distribution looks likely to be sustainable.