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+'.
The Outlook is Stable based on expectations that EBITDA growth will continue, and that distribution coverage and leverage metrics will continue to gradually improve, as the partnership has invested in crude oil pipeline projects which should generate stable earnings. Fitch expects cash flows to be more stable than in the past when the partnership owned asphalt operations and a refinery.
Debt issued by Logistics is guaranteed by NuStar Energy L.P. (NuStar) and NuStar Pipe Line Operating Partnership, L.P. (NPOP). Both Logistics and NPOP are the operating limited partnerships of NuStar, which is a publicly traded master limited partnership (MLP).
KEY RATING DRIVERS
The 'BB' rating is supported by NuStar's strong base of fee-based and regulated pipeline, terminalling and storage assets, which accounted for 80% of segment EBITDA in 2011 and should account for approximately 95% of EBITDA in 2014. NuStar sold 50% of its asphalt operations in September 2012, closed on the sale of its refinery in January 2013 and divested its remaining 50% stake in the asphalt operations in February 2014. These divested assets generated volatile cash flows and had significant working capital requirements.
The partnership's improved distribution coverage also supports the rating. For the LTM ending Sept. 30, 2014, NuStar's distribution coverage ratio was 1x after being below that for a couple of years. NuStar's distributions to unitholders have remained flat since the middle of 2011. Fitch expects the coverage ratio to be approximately 1x for the near term.
Other factors which support the rating include expectations of continued EBITDA growth. In 2014 and 2015, Fitch expects EBITDA growth from the transportation segment, which has been the focus of the partnership's spending. The storage segment is expected to have somewhat flat results. This segment was previously impacted by crude prices in backwardation resulting in a lack of EBITDA growth. While oil prices are now in contango, Fitch does not expect material changes in the near term.
Ratings concerns include the partnership's leverage and continued elevated levels of spending in 2015. NuStar seeks to reduce leverage through EBITDA growth and spending is expected to remain significant for the partnership.
Recent ratings concerns for issuers in the crude oil and refined products pipeline sector now include the impact of low crude prices. It is expected that the impact on NuStar should be minimal and that ratings should not be affected in the near term. The pipeline segment accounted for approximately 50% of LTM EBITDA and management estimates that approximately 90% of pipeline volumes are from take-or-pay contracts or else structurally exclusive. Management estimates that approximately 90% of storage is contracted, and this segment accounted for 46% of LTM EBITDA. As of mid-October 2014, 25% of storage had contracts expiring within one year, 47% of contracts mature in one to three years, 24% mature in three to five years, and 4% expire after five years.
LIQUIDITY AND LEVERAGE
NuStar has a sufficient liquidity position which Fitch estimates to be approximately $645 million as of Sept. 30, 2014. The company had $26 million of cash and equivalents on the balance sheet. In addition, it has a $1.5 billion revolver due 2019 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 $560 million based on this restriction (versus $460 million one year ago). Revolver borrowings were $582 million. In 2014, NuStar established two short-term lines of credit with uncommitted borrowing capacity of $80 million. As of Sept. 30, 2014 there were $21 million of borrowings on these credit lines leaving $59 million available for borrowing. There are no near-term debt maturities. The $1.5 billion revolver expires in 2019, and $350 million of notes due in 2018.
Leverage as defined by the bank agreement is to be no greater than 5x for covenant compliance. However, if NuStar makes acquisitions which exceed $50 million, the bank-defined leverage ratio increases to 5.5x from 5x for two consecutive quarters.
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. The bank-defined leverage calculation also gives pro forma credit for EBITDA for material projects.
Leverage (defined by Fitch as adjusted debt-to-adjusted EBITDA) was 4.6x as of Sept. 30, 2014. This is an improvement from 5.1x at the end of 2013 and 5.7x at the end of 2012. Fitch projects leverage will be approximately 5x at the end of 2014 and in the range of 4.75x-5x at the end of 2015. NuStar seeks to reduce leverage through EBITDA growth and spending is expected to remain significant for the partnership.
CAPITAL EXPENDITURES
Capital expenditures remain significant. In 2013, total capex was $343 million and management estimates it to be $375 million in 2014. For 2015, the partnership's guidance is $435 million to $465 million. Management plans to direct approximately two-thirds of spending to the pipeline segment and the remaining third will be for storage. Within the pipeline segment, two-thirds of the budget is to be focused on the Eagle Ford.
RATINGS SENSITIVITIES
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:
--Reduced liquidity;
--Deterioration of EBITDA and inability to meet growth expectations associated with capex spending and past acquisitions;
--Significant increases in capital spending beyond Fitch's expectations which have negative consequences for the credit profile;
--Increased leverage beyond 5.5x for a sustained period of time.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Relevant Research:
--'2015 Outlook: Crude Oil and Refined Products Pipelines' (December 2014);
--'Pipelines, Midstream and MLP Stats Quarterly - Third Quarter 2014' (December 2014);
--'MLP End Game (Common Goals - Divergent Strategies) (November 2014);
--'Bakken Shale Report (Prolific Production Prompts New Pipelines) (October 2014);
--'What Investors Want to Know: Pipelines, Midstream and MLPs' (October 2014);
--'Midstream Spending Significantly Rising for MLPs and C-Corps' (August 2014);
--'Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage' (May 2014)'
--'Rating Pipelines, Midstream and MLPs - Sector Credit Factors' (January 2014).
Applicable Criteria and Related Research:
Rating Pipelines, Midstream and MLPs - Sector Credit Factors
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=722082
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Midstream Spending Significantly Rising for MLPs and C-Corps
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=759467
Bakken Shale Report (Prolific Oil Production Prompts New Pipelines)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=783488
2015 Outlook: Crude Oil and Refined Products Pipelines (Positioned to Withstand Lower Commodity Prices)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=839808
MLP End Game (Common Goals - Divergent Strategies)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=802308
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=965817
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