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NuStar Energy’s higher debt level is leading to higher costs

Avik Chowdhury

NuStar Energy's 1Q14 earnings release: Key takeaways (Part 9 of 9)

(Continued from Part 8)

NuStar’s debts

As of December 31, 2013, NuStar had approximately $2.6 billion of long-term debt, of which ~$1.8 billion was at fixed interest rates and $0.9 billion was at variable interest rates. Long-term debt increased by 25% in 2013 over 2012; it again increased by ~2.0% in 1Q14 over 2013 level. Note that most of the increases were on account of issuance of senior and subordinated notes that would be used for repayment of existing revolving credit facilities. As a result of the sale of the asphalt operation, a $190.0 million revolving credit facility was converted to a term loan. Subsequently, the term loan will be reduced to $150.0 million by September 2015. The excess cash from asphalt JV will be used to repay the term loan, while the company’s obligation to provide credit support will be reduced in two years.

The ratings of NuStar Logistics’ were downgraded to Ba1 (negative outlook) by Moody’s Investor Service (Moody’s) in January 2013, BB+ (stable outlook) by Standard & Poor’s Ratings Services (S&P) in July 2012, and BB (stable outlook) by Fitch in November 2012. Interest expense increased by ~26% from $27.0 million in 4Q13 to $$34.4 million in 1Q14. As a result of the downgrades, interest rates on borrowings increased effective January 2013. Plus, any cash collateral under its hedging program would have to be funded with borrowings under credit facility. Investors should note that any future downgrades can result in additional increases to the interest rates on borrowings.

NuStar Energy (NS) is a master limited partnerships operating in the midstream energy space. Other major companies operating in the same sector as NS include Boardwalk Energy Partners (BWP), Plains All American Pipeline (PAA), and Energy Products Partners (EPD). Most of these companies are components of the Alerian MLP ETF (AMLP) and MLP ETF (MLPA). NS is part of the Multi Asset Income ETF (CVY)

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