-- U.S. midstream energy company NuStar Energy L.P.'s credit profile
has weakened due to continued poor results in the asphalt-refining business and
a trading loss in the fuels-marketing segment. As a result, financial leverage
will be significantly higher than our previous estimates, requiring NuStar to
obtain an amendment to its debt to EBITDA covenant for the second and third
quarters of 2012.
-- NuStar also announced that it has entered into an agreement with an
affiliate of Lindsay Goldberg LLC to sell a 50% interest in its
asphalt-refining assets for $175 million in cash plus working capital.
-- We are lowering the ratings on NuStar and its operating subsidiaries
to 'BB+' from 'BBB-'. The outlook is stable.
-- The stable outlook reflects our view that the partnership will likely
reduce leverage, have sufficient liquidity, and focus on expanding its core
transportation and storage segments during the next 12 to 18 months.
On July 6, 2012, Standard & Poor's Ratings Services lowered its ratings on San
Antonio-based midstream energy company NuStar Energy Partners L.P., including
the corporate credit rating, to 'BB+' from 'BBB-' and revised the outlook to
Our issue-level rating on NuStar's senior unsecured notes is 'BB+' (the same
as the corporate credit rating). We are assigning a recovery rating of '3',
which indicates our expectation for average (50% to 70%) recovery if a payment
The downgrade reflects that NuStar's financial risk profile will be
considerably weaker than we previously expected due to losses in its
asphalt-refining and fuels-marketing segments, which requires covenant relief
in the second and third quarters of 2012.
NuStar's financial performance for the quarter ended June 30, 2012 will be
very weak, hurt by poor results in the asphalt refining business and a trading
loss. The partnership's asphalt operations will generate negative EBITDA and
the fuels-marketing segment will generate a loss because the partnership did
not hedge its heavy fuel oil and bunker fuel inventories for about two months
even as commodity prices sharply declined. Consequently, NuStar was going to
breach its debt to EBITDA covenant of 5.5x as of June 30, 2012 and 5x as of
Sept. 30, 2012 were it not for an amendment to its credit facility by its
NuStar's decision not to hedge its inventory when it historically used hedges
in the past raises concerns about NuStar's financial policies, and, together
with the potential breach of financial covenants, is inconsistent with an
investment-grade credit profile, in our opinion. NuStar indicates that its
entire fuel oil inventory is fully hedged as of May 25, 2012 and the
partnership intends to remain fully hedged in the future.
We view NuStar's announcement that it plans to form a joint venture with an
affiliate of private equity firm Lindsay Goldberg (not rated) to own and
operate NuStar's asphalt refining assets as a positive step in improving
NuStar's overall credit profile, because it should reduce future cash flow
volatility and the need for large working capital investment. We believe that
the partnership can also use expected cash proceeds of $400 million to $500
million to reduce debt or help fund capital spending. However, this view is
tempered by the fact that NuStar will still have significant ties and
obligations to the joint venture. NuStar will provide an unsecured,
seven-year, $250 million credit facility to fund working capital as well as
offer initial guarantees and credit support of up to $150 million. We also
expect NuStar to continue to be the counterparty to the supply contract with
Petroleos de Venezuela S.A. (PDVSA), which supplies the bulk of crude oil to
NuStar's asphalt refineries.
We are revising NuStar's financial risk profile to "aggressive" from
"significant" due to our expectations for higher leverage in 2012 and 2013
compared with our previous expectations. Under our base-case forecast, we
assume that NuStar receives no EBITDA from the asphalt segment in 2012 and
minimal distributions in 2013 while providing working capital support to the
new joint venture of $100 million to $150 million (depending on commodity
prices). We have also reduced our 2012 EBITDA assumption in the
fuels-marketing segment to about $35 million from our previous forecast of
between $50 million and $60 million, and continue to view the San Antonio
refinery as break-even in 2012. Our EBITDA projection for the transportation
and storage segments will be about $40 million to $50 million higher in 2012
due to the completion of organic projects such as NuStar's St. James terminal
expansion and various crude transportation projects in the Eagle Ford crude
and gas-gathering area. We assume total 2012 EBITDA will be about $460 million
and total debt to EBITDA will be about 5.5x compared with our previous
estimates of 5x. For 2013, we forecast total debt to EBITDA to be in the high
4x area, above our previous forecast of about 4.5x.
Due to NuStar's weak operating performance, we expect distribution coverage to
be below 1x in 2012. In our view, coverage could remain weak through 2013,
given the cash flow lag related to many of the growth projects in the
partnership's transportation and storage segments.
The partnership's core transportation and storage segments continue to
generate the bulk of overall cash flow (about 80%). These largely fee-based
businesses generate stable cash flow and support our business risk assessment
of "satisfactory" under our criteria. At the same time, the large growth
projects in these segments will keep the balance sheet somewhat stretched
through 2013, in our view.
We consider NuStar's liquidity "adequate" under our liquidity criteria. We
project that sources divided by uses will be about 1.2x during the next 12
months. Our assumptions for the partnership's sources of cash include about
$350 million of funds from operations, $450 million of net proceeds pro forma
for the asphalt joint venture, and about $700 million of unused capacity
available under its $1.5 billion bank facility that matures in May 2017. Key
uses include about $475 million of capital expenditures (related to
maintenance and growth), $134 million of long-term debt maturities, and
distributions of about $360 million. A key assumption in our liquidity
analysis is that we would expect NuStar to scale down its capital spending if
sources of liquidity became constrained.
On June 29, 2012, NuStar obtained a covenant waiver from its bank group and
revised its maximum debt to EBITDA covenant to 6.5x and 6x for the second and
third quarters of 2012, respectively (5.5x and 5x previously). Based on these
revised covenant levels, we believe the leverage covenant will continue to
limit the amount NuStar can currently borrow under its $1.5 billion revolving
credit facility. As of March 31, 2012, the partnership's credit facility had a
maximum debt to EBITDA covenant of 5x, compared with NuStar's ratio of 4.6x.
See our recovery report on Nustar Energy L.P. to be published following this
report on RatingsDirect.
The outlook on NuStar is stable, and reflects our view that the partnership
will reduce debt to EBITDA to about 4.75x by 2013 from more than 5x in 2012
and have sufficient liquidity to fund its growth initiatives during the next
12 to 18 months. We could lower the rating if NuStar exhibits a more
aggressive financial strategy in managing its businesses, such that there is a
renewed focus on segments with a higher degree of business risk and more
volatile cash flows, or if NuStar cannot reduce leverage below 5x. A higher
rating, currently not under consideration, is possible over time if we see
management embrace more conservative financial policies and demonstrate that
it can consistently maintain leverage in the low-4x area.
Related Criteria And Research
-- Key Credit Factors: Criteria For Rating The Global Midstream Energy
Industry, April 18, 2012
-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
NuStar Energy L.P.
Corporate Credit Rating BB+/Stable/-- BBB-/Negative/--
Senior Unsecured BB+ BBB-
Recovery Rating 3