Fitch Assigns NuStar First-Time 'BB' Rating; Perpetual Preferreds 'B+/RR6 (EXP)'; Logistics Affirmed

NEW YORK--()--Fitch Ratings has assigned first-time ratings to NuStar Energy, L.P. (NuStar). NuStar's Issuer Default Rating (IDR) is 'BB'/ Stable Outlook. Additionally, Fitch has assigned an expected rating of 'B+/RR6(EXP)' to NuStar's issuance of perpetual preferreds. The new securities will rank junior to all existing senior unsecured and subordinated debt and senior to common equity. Proceeds from the offering are to be used for general partnership purposes.

The perpetual preferreds are assigned 50% equity credit under Fitch's hybrid criteria. The Recovery Rating of 'RR6' for the securities reflects Fitch's expectations for poor recovery prospects in the event of a default.

NuStar is the parent of the operating subsidiaries NuStar Logistics, L.P. (Logistics) and NuStar Pipe Line Operating Partnership, L.P. (NPOP). Senior unsecured debt at NuStar is issued by Logistics and guaranteed by NuStar. There is no debt outstanding at NPOP.

Fitch rates Logistics as follows:

Logistics

--Long-Term IDR at 'BB';

--Senior unsecured debt at 'BB/RR4';

--Junior subordinated notes at 'B+/RR6'.

The Outlook for Logistics is Stable. Approximately $3.2 billion of debt at the combined partnerships is affected by today's rating actions (excluding the new perpetual preferreds).

KEY RATING DRIVERS

The 'BB' rating is supported by NuStar's strong fee-based and regulated pipeline, and terminalling and storage assets, which accounted for 100% of segment EBITDA for the nine months ending Sept. 30, 2016. The rating is also supported by NuStar's leverage which remains in line with Fitch's target for the 'BB' rating. For the last 12 months (LTM) ending Sept. 30, 2016, leverage (as defined by Fitch as adjusted debt/adjusted EBITDA) was 5.1x, up slightly from 4.9x at the end of 2015. Distribution coverage was adequate at 1.1x for the LTM ending Sept. 30, 2016.

Ratings concerns include NuStar's liquidity given the partnership's plan for significant spending in 2017. Growth spending in 2016 is expected to be in the range of $253 million to $273 million which includes acquisition spending of $93 million. In 2017, growth spending will ramp up and be in the range of $530 million to $550 million.

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 rating action.

Eagle Ford Impact: Lower crude oil production in the Eagle Ford has been hurting crude oil pipeline throughput volumes, impacting the partnership's profitability. In 2016, management forecasts the pipeline segment's EBITDA (before SG&A expenses) to be in the range of $325 million to $345 million, against $355 million earned in 2015. NuStar expects its storage segment to generate EBITDA (before SG&A expenses) in the range of $330 million to $350 million versus $335 million generated in 2015. Fuels marketing is expected to generate $5 million to $10 million versus $14 million in the prior year.

Leverage: For the LTM ending Sept. 30, 2016, leverage (as defined by Fitch as adjusted debt/adjusted EBITDA) was 5.1x, up slightly from 4.9x at the end of 2015. Leverage has been in line with Fitch's forecast. With expectations for lower EBITDA and significant spending in 2016, Fitch expects year-end adjusted leverage to be in the range of 5.0x-5.3x.

Distribution Coverage: NuStar's distribution coverage ratio was 1.1x for the LTM ending Sept. 30, 2016. Distributions have been held flat since 2011. Even in the challenging environment in the current year and with no growth to the distribution assumed, Fitch expects distribution coverage at or slightly above for 1x in 2016.

Notching: Fitch has equalized the rating of the preferreds and the junior subordinated notes based on the RRs which are both 'RR6', indicating poor recovery in the event of default. Should the recovery improve for the junior subordinated notes, it is expected that they would move up one notch to 'BB-' while the preferreds would remain two notches below the IDR at 'B+'. On the other hand, if credit quality deteriorates at NuStar, the notching between the IDR and the preferreds could expand to three notches.

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 Eagle Ford volumes, and growth of EBITDA resuming in 2017;

--Leverage increases modestly in 2016 as NuStar continues to spend during a time with reduced EBITDA;

--Capex spending for growth assumed to be $263 million in 2016 and $540 million, at the midpoint of management's guidance for 2017 reduced spending in the two years that follow;

--Maintenance capex is forecasted to be $40 million in 2016 and $45 million in 2017 with slightly elevated spending in the following two years;

--No distribution growth paid for common unit-holders.

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 6x for a sustained period of time.

LIQUIDITY

As of Sept. 30, 2016, Fitch estimates that NuStar has approximately $322 million of total liquidity. The partnership had $33 million of cash and equivalents on the balance sheet. NuStar had $992 million drawn on its $1.5 billion revolver due 2019. There was also $16 million of letters of credit outstanding. 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 5x 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 4.6x. Fitch estimates NuStar could draw an additional $235 million before violating its financial covenant.

The bank agreement definition of debt excludes debt proceeds held in escrow for the future funding of construction, which was $43 million as of Sept. 30, 2016, and $403 million of junior subordinated debt. The bank-defined leverage calculation also gives pro forma credit for EBITDA for material projects and acquisitions.

NuStar also has access to a short-term line of credit with uncommitted borrowing capacity of $40 million. As of Sept. 30, 2016, there was $7 million of borrowings on these credit lines leaving $32 million available for borrowing.

In June 2015, NuStar established a $125 million receivable financing agreement 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, 2016, it had $103 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.

NuStar has no near-term debt maturities. There is $350 million in notes due in 2018. NuStar also has $402.5 million of junior subordinated notes callable in 2018; however, they are not due until 2043.

FULL LIST OF RATING ACTIONS

Fitch has assigned the following ratings:

NuStar Energy, L.P.

--Long-Term IDR at 'BB';

--Perpetual Preferred Equity at 'B+/RR6(EXP)'.

Fitch has affirmed the following ratings:

NuStar Logistics, L.P.

--Long-Term IDR at 'BB';

--Senior unsecured notes at 'BB'/RR4;

--Junior subordinated notes at 'B+'/RR6.

The Rating Outlook for both entities is Stable.

Summary of Financial Statement Adjustments - Fitch typically adjusts EBITDA for Master Limited Partnerships (MLP) like NuStar to exclude equity in earnings of unconsolidated affiliates but include cash distributions from unconsolidated affiliates. In addition, NuStar's definition of debt gives 50% equity credit to the $402.5 million of junior subordinated notes and the pending issuance of perpetual preferreds. Fitch excludes cash raised from Gulf Opportunity bonds held in escrow for the use future use of capex from the definition of debt.

Additional information is available on www.fitchratings.com.

Applicable Criteria

Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)

https://www.fitchratings.com/site/re/885629

Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers (pub. 05 Apr 2016)

https://www.fitchratings.com/site/re/879564

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1014946

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1014946

Endorsement Policy

https://www.fitchratings.com/regulatory

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Contacts

Fitch Ratings
Primary Analyst
Kathleen Connelly
Director
+1-212-908-0290
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Peter Molica
Senior Director
+1-212-908-0288
or
Committee Chairperson
Thomas Brownsword
Senior Director
+1-646-582-4881
or
Media Relations:
Alyssa Castelli, +1-212-908-0540
alyssa.castelli@fitchratings.com