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19 Nov 2007
Moody's affirms NuStar Logistics & Kaneb Baa3 ratings; outlook negative
New York, November 19, 2007 -- Moody's Investors Service affirmed the Baa3 senior unsecured note
ratings of NuStar Logistics, L.P. (formerly Valero
Logistics Operations, L.P.) and Kaneb Pipe Line Operating
Partnership, L.P. (KPOP), both of which are
wholly-owned subsidiaries of NuStar Energy L.P. (formerly
Valero, L.P.). However, the rating outlook
is changed from stable to negative.
This action is prompted by NuStar Energy's pending acquisition of
the long-established CITGO Asphalt Refining Company (CARCO) from
CITGO Refining for $450 million plus $100 million of existing
inventory. Including the cost of inventory, NuStar appears
to be paying a multiple of approximately 5.5 to 6.0 times
EBITDA. CARCO is the largest asphalt refiner in the asphalt short
East Coast region and one of the five largest in the U.S.
The move to a negative outlook reflects that CARCO injects substantial
cyclical, seasonal, and geopolitical risk into NuStar's
heretofore fee-based cash margins; significant additional
volatile working capital investment needs associated with CARCO's
crude oil and product inventories; increased sustaining capital spending
needs; significant downtime risk that is inherent to refining operations;
new environmental risk exposures; and political risk exposure to
the critical 7-year Boscan and Bachaquero crude oil supply contract
extended to NuStar by Petroleos de Venezuela, S.A.
(PDVSA), the national oil company of Venezuela.
While NuStar was a substantially smaller business when it first gained
its investment grade debt ratings, it was focused almost entirely
in the lower risk refined product pipeline business. NuStar's
subsequent acquisitions of the larger Kaneb in 2005 and the St.
James storage and blending facilities in late 2006 injected more volatile
storage cash flows into its business mix, as those cash flows are
impacted markedly depending on whether forward oil and refined product
prices are in contango or backwardation. NuStar's pending
addition of asphalt refining further escalates cash flow volatility.
Asphalt cash flows will fluctuate with (a) macroeconomic activity,
as it impacts residential and commercial construction activity (asphalt
shingles and access roads and driveway paving); (b) governmental
demand and spending patterns for paving; (c) crude oil cost pressure
on margins; and (d) any unscheduled downtime. Distinct from
refineries driven by transportation fuels production, asphalt refineries
face far more limited ability in the short run to pass along crude oil
price increases in the price of asphalt. Furthermore, asphalt
consumption is more elective and deferrable than is gasoline consumption.
Nevertheless, the ratings affirmation reflects NuStar's statements
that it intends to reduce post-acquisition leverage; that
pro-forma leverage is manageable in the meantime for the ratings
in spite of the majority of equity funding for the acquisition being convertible
hybrid equity units rather than straight common units; NuStar's
strategic holdings in long lasting refined product transportation infrastructure;
asset scale and diversification compatible with the ratings; a seven
year firm supply contract for 75,000 barrels per day of the specific
crude oil grades for which the refineries are ideally suited and for 10,000
barrels per day of finished asphalt; and reasonable prospects for
supportive secular (though still volatile) sector forces that may enhance
asphalt margins as long as competitors' pending capacity expansions
into that favorable outlook to not overtake demand.
In the context of MLP ownership structures, one favorable aspect
of NuStar's structure is that its general partner's incentive
distribution rights are capped at 25%. Other fundamental
factors supporting the ratings include the stable core base of NuStar's
pipeline throughput and tariffs; the fact that the pipelines serve
comparatively more stable refined product throughputs, moving product
from long-established refineries and refining centers to long-established
consuming regions; and that NuStar has a reasonably attractive slate
of organic growth projects.
We also assess CARCO's major role in NuStar's evolving growth
strategy in the context of NuStar's status as a master limited partnership
(MLP) whose mission is to distribute all cash flow after maintenance capital
spending to unit holders and pursue growth strategies that generate significant
annual increases in cash distributions. The ability to execute
that mission requires frequent access to common, hybrid, and
debt markets. The addition of a much more volatile asphalt business,
coupled with an MLP's liquidating equity structure, propensity
for acquisitions, and market access requirements amplifies the risks
already faced by NuStar's debt investors. In assessing MLP
ratings, Moody's also considers that in funding growth by
acquisitions, MLP's tend to face rising costs of capital sufficient
to encourage the issuance of a rising proportion of fixed coupon hybrid
equity rather than common units whose distributions must rise over time.
NuStar's throughput does remain tied to refinery operating performance
and maintenance turnarounds, the cyclical/seasonal demand for crude
oil and refined products, and remains exposed to the relatively
lower-return terminal business and the risk that new pipelines
and terminals could raise competitive pressures over the medium term.
Nevertheless, NuStar maintains a strong market position in oil and
refined product pipelines and terminals, it benefits from asset
and geographical diversification, it generates relatively stable
and predictable cash flows from regulated pipeline transportation tariffs,
and it has volume and tariff commitments and environmental indemnifications
from former parent Valero Energy that remain in place subsequent to its
2006 divestiture of NuStar.
CARCO operates a 74,000 barrel per day asphalt refinery in Paulsburo,
New Jersey and a 30,000 barrels per day asphalt refinery at Savannah,
Georgia, owns three terminals, and leases 20 other terminals.
Moody's believes another roughly $100 million of inventory
may be needed by the end of the peak winter inventory build prior to the
spring and summer paving season.
Headquartered in San Antonio, Texas, NuStar Energy L.P.
is a master limited partnership whose general partner is owned by NuStar
GP Holdings. NuStar and its subsidiaries own and operate product
and crude oil pipelines and terminal facilities in the United States,
Canada, St. Eustatius in the Caribbean, the United
Kingdom and the Netherlands.
Corporate Finance Group
Moody's Investors Service
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
No Related Data.
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