NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BB' Long-Term Issuer Default Rating (IDR) and the 'BB'/RR4 senior unsecured rating for NuStar Logistics, L.P. (Logistics). The junior subordinated notes have been affirmed at 'B+'/RR6. The Rating Outlook is Stable.
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.
KEY RATING DRIVERS
The 'BB' rating is supported by NuStar's strong fee-based and regulated pipeline, terminalling and storage assets, which accounted for 98% of segment EBITDA for the nine months ending Sept. 30, 2015. The rating is also supported by NuStar's leverage which remains in line with Fitch's target for the 'BB' rating. For the last twelve months ending Sept. 30, 2015, leverage (as defined by Fitch as adjusted debt to adjusted EBITDA) was 4.9x, up slightly from 4.7x at the end of 2014 but significantly lower than 5.1x at the end of 2013. Distribution coverage was adequate at 1.1x for the latest twelve months ending Sept. 30, 2015.
Ratings concerns include NuStar's liquidity given the challenging capital market environment and the partnership's plan for significant spending in 2016. Fitch estimates that NuStar had cash and committed liquidity of approximately $483 million as of Sept. 30, 2015. Growth spending in 2015 is expected to be in the range of $435 to $445 million which includes acquisition spending of $143 million. In 2016, NuStar expects to spend $360 to $380 million for growth. Fitch expects balanced funding of capital spending between debt and equity, however, capital market access remains a large and growing concern.
Like other MLPs, NuStar's access to the capital markets is more restricted than in the past when commodity prices were stronger. Despite the environment, NuStar continues to evaluate its access to the equity markets which are now more costly given the equity yield. Importantly, NuStar's incentive distributions paid to its general partner are capped at 25% versus many MLPs which cap incentive distributions at 50%. This helps NuStar's overall equity cost of capital versus other MLPs with higher payouts to the general partner. Additionally, NuStar has stated it may consider issuing preferred securities. Fitch currently believes NuStar's liquidity, though constrained, should be enough to support its spending plans. Should liquidity and capital market access further deteriorate, NuStar would need to take steps to maintain adequate liquidity at or near current levels, through capital spending or distribution cuts to maintain the rating and Stable Outlook. Failure to do so would likely result in Fitch taking a negative ratings action.
EBITDA Weaker in 2016: The storage segment is expected to have lower EBITDA. Overall, EBITDA is expected to decline $15 to $35 million due to three factors: 1) reduced Eagle Ford production which will lower volumes at its Corpus Christi terminal, 2) lower revenues for some foreign terminals and 3) the absence of 2015 insurance proceeds ($7.5 million from Hurricane Sandy for the Linden Terminal). NuStar anticipates EBITDA for the pipeline segment to be approximately flat. It has significant refined products pipelines that should have higher volumes and this is expected to offset lower volumes on crude pipelines.
Leverage: For the last twelve months ending Sept. 30, 2015, leverage (as defined by Fitch as adjusted debt to adjusted EBITDA) was 4.9x, up slightly from 4.7x at the end of 2014 and down from 5.1x at the end of 2013. Leverage was as high as 5.8x at the end of 2012. With expectations for lower EBITDA and significant spending in 2016, Fitch expects yearend adjusted leverage to be in the range of 5.0x-5.3x.
Distribution Coverage: NuStar's distribution coverage ratio was 1.1x for the latest twelve months ending Sept. 30, 2015. This is an improvement from historical coverage and is a result of NuStar holding distributions flat since 2011 while focusing on growth. Even in the challenging environment expected in the current year with no growth to the distribution assumed, Fitch expects distribution coverage at or slightly above for 1.0x in 2016.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for NuStar include:
--A modest reduction of EBITDA in 2016 as a result of lower profits for the storage segment with growth resuming in 2017;
--Leverage increases in 2016 as NuStar continues to spend during a time with reduced EBITDA;
--Capex spending for growth assumed to be $370 million, at the midpoint of management's guidance for 2016 with slightly elevated spending in the two years which follow;
--Maintenance capex is also at the midpoint of public guidance at $40 million in 2016 with slightly elevated spending in the following two years;
--No distribution growth paid for common unit holders;
--No assumptions are made for acquisitions.
RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
--While not expected in the near term, Fitch may take positive rating action if leverage falls below 4.5x for a sustained period of time.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
--Lack of access to capital markets;
--Failure to reduce growth capex if availability to fund growth is restricted or too heavily dependent on debt;
--Reduced liquidity;
--Deterioration of EBITDA and inability to meet growth expectations associated with capex spending;
--Significant increases in capital spending beyond Fitch's expectations which have negative consequences for the credit profile;
--Increased leverage beyond 6.0x for a sustained period of time.
LIQUIDITY
Fitch estimates NuStar's committed liquidity was approximately $483 million as of Sept. 30, 2015. The partnership had $116 million of cash and equivalents on the balance sheet. NuStar had $908 million drawn on its $1.5 billion revolver due 2019. Availability to draw on the revolver is restricted by the leverage covenant as defined by the bank agreement which does not allow leverage to be 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 consecutive quarters. As of Sept. 30, 2015, bank defined leverage was 4.4x.
The bank agreement definition of debt excludes debt proceeds held in escrow for the future funding of construction which was $59 million as of Sept. 30, 2015 and $403 million of junior subordinated debt. The bank-defined leverage calculation also gives pro forma credit for EBITDA for material projects.
Fitch estimates that NuStar had availability to draw approximately $367 million based on the leverage covenant (versus $560 million one year ago which was higher than typical availability). In 2014, NuStar established two short-term lines of credit with uncommitted borrowing capacity of $80 million. As of Sept. 30, 2015 there were $42 million of borrowings on these credit lines leaving $38 million available for borrowing.
In June 2015, the partnership also entered into a $100 million uncommitted letter of credit agreement for a term of up to one year. This increases the availability to borrow on the revolvers since any letters of credit issued under this agreement do not reduce availability to draw on the revolver. As of Sept.30, 2015, there were $47 million of letters of credit issued under this facility.
NuStar has no near term debt maturities. There are $350 million of notes due in 2018. NuStar also has $402.5 million of junior subordinated notes callable in 2018 however they are not due until 2043.
In June 2015, NuStar established a $125 million receivable financing agreement which is which can be upsized to $200 million. This agreement has an initial termination date of June 15, 2018 with the option to renew for an additional 364-day period thereafter. As of Sept. 30, 2015, it had $99 million of accounts receivables in the securitization program for NuStar Finance LLC. Account receivables held by NuStar Finance LLC are not available for claims of credits of NuStar Energy LP. Borrowings on this facility as of Sept. 30, 2015 were $57 million.
Fitch has affirmed NuStar Logistics, L.P. as follows:
NuStar Logistics, L.P.
--Long-Term IDR at 'BB';
--Senior Unsecured at 'BB'/RR4;
--Junior Subordinated Notes at 'B+'/RR6.
The Rating Outlook is Stable.
Additional information is available on www.fitchratings.com.
Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers (pub. 07 Dec 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=873504
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=997596
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