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Rating Action:

Moody's affirms NuStar Ba1 rating and changes outlook to negative; assigns Ba1 rating to proposed notes

13 Aug 2013

New York, August 13, 2013 -- Moody's Investors Service affirmed the Ba1 Corporate Family Rating (CFR) and other ratings of NuStar Logistics, L.P. and changed the rating outlook to negative. At the same time, it assigned the Ba1 rating to the company's proposed $300 million of senior notes.

NuStar Logistics is the main operating subsidiary and financing entity for NuStar Energy L.P (NuStar), a Public Master Limited Partnership. NuStar and another wholly-owned subsidiary, NuStar Pipeline Operating Partnership L.P., will unconditionally guarantee the notes in accordance with their subordination provisions. NuStar will use the note proceeds for general corporate purposes, including the repayment of borrowings under its $1.5 billion bank credit facility that were incurred to refinance other maturing pari passu long-term debt.

"The change in NuStar's outlook to negative reflects the company's higher than expected financial leverage and reduced earnings prospects, which could continue to pressure cash flow and EBITDA in 2014, particularly in the storage operations," said Tom Coleman, Senior Vice President. "While we continue to see good potential for future earnings growth in the build out of the pipeline segment, where NuStar is focusing on Eagle Ford Shale investments, these investments also have inherent execution risks."

NuStar's existing ratings, which are affirmed, are:

-- NuStar Logistics L.P. Corporate Family Rating affirmed at Ba1 and Probability of Default Rating affirmed at Ba1-PD

-- NuStar Logistics L.P. senior notes rating affirmed Ba1 (LGD 4, 50%)

-- NuStar Logistics L.P. fixed/floating subordinated notes rating affirmed at Ba2 (LGD 6, 94%)

-- Speculative Grade Liquidity Rating affirmed at SGL-3

RATINGS RATIONALE

NuStar Logistics's Ba1 CFR is based on NuStar Energy's consolidated credit quality. NuStar continues to exhibit high financial leverage as it transitions it business lines and makes substantial debt-financed capital investments to build cash flow and increase returns from more stable fee-based transportation and storage operations. We note elevated adjusted Debt/EBITDA of over 7x as of June 30, 2013 and the company has reduced guidance for EBITDA and earnings in 2013 as a result of weaker storage conditions, including a backwardated market affecting demand for storage services, and to a lesser extent from operating issues and lower crude oil blending impacts in the pipeline segment. Poor asphalt refining margins in the recently spun-off asphalt joint venture have also required additional lending and working capital support under a $250 million borrowing facility extended by NuStar to the joint venture.

Despite its elevated leverage and the execution risk on its growth projects, the Ba1 rating is supported by the breadth of NuStar's midstream transportation, storage and terminal assets. NuStar is continuing with its re-positioning strategy focused on fee-based projects in both the pipeline and storage segments, including storage projects and pipeline expansion tied to the TexStar acquisition in 2012 and other Eagle Ford Shale-linked investments. These investments should have a positive impact in the medium-term on capital returns, EBITDA and financial leverage, with expectations that adjusted debt/EBITDA should decline in 2014 as cash flow accrues from pipeline investments and expansion in the Eagle Ford shale and from terminal expansion projects.

For the remainder of 2013 and in 2014 we will watch NuStar's progress in delivering on its growth projects, along with stronger capital returns, EBITDA and cash flow. The company's ratings could be downgraded if consolidated adjusted Debt/EBITDA, which was over 7x at June 30, 2013 (including lease adjustments and maximum use of the asphalt credit line and guarantees), does not show sequential improvement in 2014 and trend below 5.5x on a sustainable basis, and distribution coverage does not improve from current levels of under 1x; or if the flow-through of benefits from its Eagle Ford projects are delayed, which would likely indicate project delays, underperforming assets, or even more aggressive required investment in growth spending. While we believe exposure to the asphalt operation's borrowing and working capital needs should decline in 2014, substantial additional support, if required, could also negatively affect the rating.

While an upgrade is not likely given the high leverage, prospects for adjusted Debt/EBITDA approaching 4x on a sustainable basis and more robust distribution coverage above 1.1x could result in an upgrade in the future.

The Ba1 (LGD4, 50%) senior unsecured note rating is based on NuStar Logistics's Ba1 CFR, which reflects the MLP's consolidated credit quality. The Ba1 rating incorporates the overall probability of default of NuStar Logistics, to which Moody's assigns a Probability of Default (PDR) rating of Ba1/PD. NuStar's various senior unsecured bonds and revolving credit facility are rated equal to the CFR as they are pari passu and comprise the bulk of the debt capital structure and have cross guarantees.

The principal methodology used in this rating was Global Midstream Energy published in December 2010. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

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For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

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Thomas S Coleman
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Steven Wood
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's affirms NuStar Ba1 rating and changes outlook to negative; assigns Ba1 rating to proposed notes
No Related Data.
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