Fitch Affirms NuStar's Ratings at 'BB'; Outlook Stable
NEW YORK -- January 10, 2014
Fitch Ratings affirms the 'BB' Issuer Default Rating (IDR) and senior
unsecured rating for NuStar Logistics, L.P.'s (Logistics). The junior
subordinated notes are affirmed at 'B+'. At the same time, the 'BB' IDR is
withdrawn for NuStar Pipe Line Operating Partnership, L.P. (NPOP) since there
is no longer debt issued at NPOP.
Debt issued by Logistics is guaranteed by NuStar Energy L.P. (NuStar) and
NPOP. Both Logistics and NPOP are the operating limited partnerships of
NuStar, which is a publicly traded master limited partnership.
The Outlook is Stable based on expectations that EBITDA growth resumes
following significant deterioration in 2012 and that cash flow should be more
stable than in the recent past.
KEY RATING DRIVERS
The 'BB' rating is supported by NuStar's strong base of primarily fee-based
and regulated pipeline, and terminalling and storage assets. These assets
accounted for 80% of segment EBITDA in 2011 and Fitch estimates the assets
could account for approximately 95% of EBITDA in 2013 and 2014. The company
sold 50% of its asphalt operations in September 2012 and closed on the sale of
its San Antonio refinery in January 2013. Both of these assets generated
volatile cash flows.
NuStar has been in discussions with its asphalt operations JV partner to
divest the remaining 50% stake it owns. NuStar currently provides the JV with
a $250 million senior unsecured revolver and up to $150 million in guarantees.
Should NuStar successfully divest its 50% stake and financial obligations to
the JV, it would benefit NuStar's credit profile but would not likely trigger
a rating action.
Other factors which support the rating include expectations a return to EBITDA
growth in 2013 and beyond after significant deterioration in 2012. In 2013,
EBITDA growth from the transportation segment is expected to more than offset
weakness in the storage segment which has been hurt by lower demand for
storage due to backwardation of the forward curve for crude.
Ratings concerns include the company's leverage (Fitch defined as debt
adjusted for 50% equity credit for the junior subordinated notes to adjusted
EBITDA) of 4.9x as of Sept. 30, 2013. Other concerns include continued high
levels of spending for capex in 2013 and expectations for significant spending
in 2014. Following NuStar's acquisition of crude oil assets in December 2012
for approximately $325 million, the company plans to invest in the assets for
LIQUIDITY AND LEVERAGE
Fitch estimates overall liquidity to be approximately $485 million as of Sept.
30, 2013. The company had $25 million of cash and equivalents on the balance
sheet. In addition, it has a $1.5 billion revolver due 2017 and availability
to draw on the revolver is restricted by the leverage covenant as defined by
the bank agreement. Fitch estimates that NuStar had availability to draw
approximately $460 million since leverage as defined by the bank agreement was
4.3x as of Sept. 30, 2013. Revolver borrowings were $286 million.
Leverage as defined by the bank agreement is to be no greater than 5.0x for
covenant compliance. However, if NuStar makes acquisitions which exceed $50
million, the bank-defined leverage ratio increases to 5.5x from 5.0x for two
The bank agreement definition of debt excludes debt proceeds held in escrow
for the future funding of construction which was $88 million as of Sept. 30,
2013 and $403 million of junior subordinated debt from the definition of debt.
The bank-defined leverage calculation also gives pro forma credit for EBITDA
for material projects.
Fitch still expects yearend 2013 leverage (Fitch defined as debt adjusted for
50% equity credit for the junior subordinated notes to adjusted EBITDA) to be
in the range of 4.8 - 5.0x. Leverage is forecast to remain in that range in
2014 and 2015.
After the revolver matures in 2017, the next debt maturity is $350 million due
Capital expenditures remain significant. In 2011, total capex was $336 million
and it rose to $411 million in 2012. Management estimates it to be in the
range of $335 million to $370 million in 2013. Fitch believes spending in 2014
could be above 2013 given NuStar's need to increase EBITDA and distributable
Positive: Future developments that may, individually or collectively, lead to
positive rating action include:
--Significant leverage reduction. Should leverage fall below 4.5x over a
sustained period of time, Fitch may take positive rating action.
Negative: Future developments that may, individually or collectively, lead to
a negative rating action include:
--Deterioration of EBITDA;
--Inability to meet growth expectations associated with the crude oil
acquisition in late 2012 given the substantial investment;
--Significant increases in capital spending beyond Fitch's expectations or
further acquisition activity which have negative consequences for the credit
--Increased adjusted leverage beyond 5.5x for a sustained period of time.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Relevant Research:
--'2014 Outlook: Crude Oil and Refined Products Pipelines', Dec. 10, 2013;
--'Credit Considerations for the GP/LP Relationship', Nov. 6, 2013;
--'Investor FAQs: Recent Questions on the Pipeline, Midstream, and MLP
Sectors' (Aug. 5, 2013);
--'Tax Event Risk and MLPs: Assessing a Change in Tax Status for MLPs' (April
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Parent and Subsidiary Rating Linkage' (Aug. 8, 2012);
--'Treatment and Notching of Hybrids in Nonfinancial Corporates and REIT
Credit Analysis' (Dec. 23, 2013).
Applicable Criteria and Related Research:
2014 Outlook: Crude Oil and Refined Products Pipelines
Credit Considerations for the GP/LP Relationship
Investor FAQs: Recent Questions on the Pipeline, Midstream, and MLP Sectors
Tax Event Risk and MLPs: Assessing a Change in Tax Status for MLPs
Corporate Rating Methodology - Effective from 8 August 2012 - 5 August 2013
Parent and Subsidiary Rating Linkage
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit
Analysis ￢ﾀﾓ Effective Dec. 15, 2011 to Dec. 13, 2012
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Kathleen Connelly, +1-212-908-0290
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
Peter Molica, +1-212-908-0288
Ralph Pellecchia, +1-212-908-0586
Media Relations, New York
Brian Bertsch, +1-212-908-0549
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