Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDRs) for NuStar Energy, L.P. (NuStar) and NuStar Logistics, L.P.'s (Logistics) at 'BB-'.
The Rating Outlook for both entities is Stable. In addition, Logistics' senior unsecured ratings have been affirmed at 'BB-'/'RR4' and junior subordinated notes at 'B'/'RR6', and NuStar's preferred equity rating has been affirmed at 'B'/'RR6'.
The ratings reflect the company's diversified asset base, contract structure with a mix of minimum volume commitment (MVC) contracts and acreage dedications, as well as some structurally exclusive assets, and strong relative leverage. Concerns include meaningful volume exposure, beyond MVC contracted levels, and a small amount of direct commodity price spread exposure. The Stable Outlook is based on Fitch's view of supportive fundamentals underlying NuStar's businesses including expectations for continued crude oil production growth in the Permian Basin, further increased demand for renewable fuels along the West Coast and resilient demand for refined products across North America.
Key Rating Drivers
A Stable Base: Roughly one third of NuStar's EBITDA is expected to come from contracts where the company will receive payment regardless of whether a product is moved or not. These contracts are with high credit quality counterparties including roughly 63% of 2022 revenue coming from investment grade rated entities and approximately 13% coming from large private or international (not rated) customers. This provides good visibility into a portion of future expected cash flows. Additionally, roughly another third of forecast EBITDA is expected to come from fixed-fee volume exposed arrangements where NuStar has structural exclusivity.
The company operates the only pipelines that carry crude oil into, and refined products out of, a number of Valero refineries. The advantaged location and high capacity utilization of these refineries offer more certainty to expected NuStar volumes, compared to other fixed-fee fully volume exposed arrangements (i.e. acreage dedications).
Some Volume and Price Exposure: NuStar generates roughly one third of its EBITDA from fixed-fee volume exposed contracts and less than 5% from direct commodity price spread exposed activities. This exposure provides less visibility into future cash flow. Outside of the Fuels Marketing businesses (i.e. direct commodity price spread exposure), expected volumes and throughput for NuStar are supported by the relative attractiveness of its Permian crude oil pipeline system. The Permian Basin continues to be the preeminent oil producing region in the U.S., with breakeven costs that support continued near-term development expansion.
The company's exposure to the Permian somewhat reduces near-term volumetric risk, compared to issuers with exposure to relatively less attractive basins. For Fuels Marketing, NuStar seeks to reduce volatility through the use of hedging; however, this business remains a source of variable cash flow for the company.
Renewables Momentum: NuStar benefits from an early mover advantage in renewable fuels on the West Coast, increasing both the diversity of its asset base and supporting near-to-medium-term growth expectations. Additionally, the company has a unique franchise in its large-scale ammonia pipeline system, to participate in the growth of 'blue' or 'green' ammonia. Both businesses offer NuStar growth opportunities outside of its traditional liquid petroleum operations and an ability to participate directly in the sector's move towards energy transition.
Strong Leverage and Liquidity Position: NuStar has posted strong leverage for its current rating. Fitch forecasts leverage to remain around 5.5x over the forecast period. This forecast is based on improving EBITDA, driven by growth spending on the company's Permian pipeline system and within its West Coast renewables fuel businesses, among others. Increasing EBITDA is partially offset by a rising debt balance.
NuStar has begun redeeming its outstanding Series D preferred units. This series of preferred units represent the highest cost instruments in NuStar's capital structure and, as such, redeeming them with internally generated cash flow and revolver borrowings have a positive impact on expected cash flow. However, the Series D preferred units received 50% equity credit under Fitch's Corporate Hybrids Treatment and Notching Criteria. Accordingly, the portion of Series D preferred units redeemed with another form of debt is, by its nature, a leveraging transaction. Additionally, Fitch no longer ascribes equity credit to the remaining Series D preferred units as Fitch no longer considers them a part of the long-term capital structure of the company.
NuStar completed meaningful asset sales in 2021 and 2022, the proceeds from which were used to reduce debt outstanding. In addition, in early 2022 the company extended the maturity date on its $1 billion unsecured revolving credit facility and $100 million receivables financing facility from 2H23 to 1H25. These amendments also included the replacement of LIBOR as a base interest rate with SOFR.
NuStar has no debt maturities before 2025. As of Dec. 31, 2022, NuStar had available liquidity of $789 million including $14 million of cash on hand and roughly $775 million available of its revolving credit facility. Fitch considers NuStar's liquidity as meaningfully improved over the past two years and expects liquidity to remain adequate over the forecast period.
Rating Linkage: There is a parent subsidiary relationship between NuStar and Logistics. Fitch determines NuStar's standalone credit profile (SCP) based on consolidated metrics and considers Logistics' SCP stronger than NuStar's. As such, Fitch has followed the stronger subsidiary path. Legal ring fencing is open given the cross guarantees between NuStar and Logistics and the minimal limitations on flows between the entities. Access and control is also open given NuStar's 100% ownership interest in Logistics. Due to the aforementioned rating linkages, Fitch rates both entities on a consolidated credit profile with the same IDRs.
Derivation Summary
NuStar's closest rated peers are Buckeye Partners, L.P. (BB/Stable) and Plains All American L.P. (PAA: BBB-/Positive). All three feature operations that focus predominantly on the liquid petroleum midstream value chain providing pipeline, terminalling and storage services, among other activities. NuStar has smaller scale and less geographic and operational diversity, compared to both Buckeye and PAA.
Leverage at NuStar is expected to remain around 5.5x over the forecast period. This compares to falling below 6.0x by 2024 at Buckeye and below 3.5x by 2024 at PAA.
Buckeye's diverse asset base and larger relative size and scale more than offset the expected leverage difference and accounts for the one-notch difference between the IDRs of NuStar and Buckeye. The combination of much larger size and scale and meaningfully lower leverage account for the three-notch difference between the IDRs of NuStar and PAA.
Key Assumptions
Crude and refined product production consistent with the Fitch price deck;
Pipeline segment results show continued upward momentum over the forecast period, driven in large part by volume growth on the company's Permian pipeline system, as well as incremental growth projects on the ammonia pipeline system;
Storage segment results in 2023 to benefit from inflation-indexed rate increases as well as growth capital spent in the West Coast US franchise, largely offset by weakness at the St. James Terminal;
2023 Fuels Marketing segment results in-line with current underlying commodity spread margins impacting, among other, the company's butane blending business;
Growth capex and maintenance capex for 2023 in line with management guidance;
Distributions to common unitholders grow annually at a low-single digit rate;
No meaningful asset sales or equity issuances;
Series D preferred units are fully redeemed by the end of 2024;
Base interest rates applicable to the company's outstanding variable rate debt obligations reflects the Fitch Global Economic Outlook.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
If EBITDA leverage were expected to be sustained below 5.5x;
A meaningful increase in geographic or business line diversity and/or a meaningful increase in the percentage of EBITDA coming from long-term take or pay-type contracts, organically or through an acquisition or acquisitions funded in a debt-friendly manner.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
EBITDA leverage above 6.5x on a sustained basis;
Significant increases in capital spending beyond Fitch's expectations with negative consequences for the credit profile;
An acquisition or acquisitions that meaningfully raise the business risk of NuStar.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
Adequate Liquidity: As of Dec. 31, 2022, NuStar had total liquidity of $789 million, which included $775 million undrawn on its $1.0 billion revolver, after accounting for $4.7 million in letters of credit. Cash on the balance sheet was $14 million.
NuStar's ability to draw on the revolver is restricted by a leverage covenant as defined in the bank agreement, which does not allow leverage to be greater than 5.0x for covenant compliance. Bank defined leverage was 3.79x, as of September 30, 2022, lower than the 3.99x at YE 2021. The maturity on the revolver is April 2025.
Fitch expects NuStar to remain in compliance with its covenants over the forecast period. Fitch notes that the covenant calculation allows for the exclusion of junior subordinated notes ($402.5 million) and preferred equity Series A, B, C and D, totaling nearly $1.2 billion. The covenant calculation allows for inclusion of pro forma EBITDA for material projects and acquisitions, providing some cushion in calculations.
NuStar also has various notes outstanding aggregating $2.5 billion. The nearest unsecured maturity is the $600 million 5.75% notes due Oct. 1, 2025.
The company also has a $100 million receivable financing agreement. The borrowers are NuStar and NuStar Finance LLC (NuStar Finance), a special purpose vehicle (SPV) and wholly-owned subsidiary of NuStar. There was $80.9 million of borrowings outstanding under the agreement as of Dec. 31, 2022. The securitization program extends until Jan. 31, 2025.
Issuer Profile
NuStar is a publicly traded master limited partnership that is primarily focused on the transportation and storage of crude oil, refined products and anhydrous ammonia with operations in United States and Mexico.
Summary of Financial Adjustments
Fitch applies 50% equity credit to Logistics' junior subordinated notes due 2043 and 50% equity credit to NuStar's Series A, B and C preferred equity securities. Fitch does not apply any equity credit to NuStar's Series D preferred equity units.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
NUSTAR ENERGY L.P. 
