NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed LOCAP LLC's (LOCAP) Issuer Default Rating (IDR) at 'BBB+'. Its short-term IDR and commercial paper rating have been affirmed at 'F2'.
The Rating Outlook is Stable.
The rating action impacts $28 million of commercial paper outstanding which is backed by Throughput and Deficiency (T&D) agreements with LOCAP's owners. LOCAP's owners are a U.S. subsidiary of Royal Dutch Shell plc (41.5%; IDR 'AA'; Rating Watch Negative) and affiliates of Marathon Petroleum Corp. (58.5%; IDR 'BBB'/Outlook Stable).
KEY RATING DRIVERS
The 'BBB+' rating is supported by LOCAP's low leverage, consistent cash flows from operations and the T&D agreement. Given LOCAP's operational ties with LOOP LLC (IDR 'BBB+'/Outlook Stable), Fitch rates the two entities the same.
The ratings also reflect the structural benefits provided to its debt obligations through the right to receive payments under T&D agreements with LOCAP's owners and/or their respective parent companies. Under these agreements, the owners are obligated to ship, or cause to be shipped through LOCAP, enough oil to enable LOCAP to meet its operating expenses and debt service obligations.
If LOCAP has a cash deficiency each owner is obligated to advance LOCAP's pro rata share of the deficiency. Such cash advances are considered a credit against payments for future transportation. Obligations under the T&D agreements are several, not joint. Fitch views the risk of non-performance under the T&D agreement as minimal given the importance of the LOCAP pipeline in meeting the refinery feedstock needs of the T&D obligors.
Concerns for the credit include the changing supply and demand dynamics in the markets that LOCAP serves. Given fast-growing North American shale production, a number of other pipeline companies have been reversing pipeline systems to bring crude oil from landlocked interior points into the Gulf Coast, negatively affecting imported volumes. Additional pipeline reversals are possible which could further impact LOCAP's volumes, including a potential reversal of the 1.2 million barrel per day Capline system. Such changes in LOCAP's operating environment are likely to pressure LOCAP's credit metrics.
Leverage as of June 30, 2015 was 0.9x, down from 1.1x at the end of 2014 which was above recent historical averages. Between 2010 and 2012, LOCAP's year-end leverage averaged 0.7x. Fitch expects 2015's year-end leverage to be in the range of 0.7x to 0.9x.
KEY ASSUMPTIONS
--Fitch forecasts modestly higher throughput volumes for LOCAP in the forecast period through 2018. Rising volumes are expected to result from higher domestic production.
--With higher volumes and an increase in tariffs, revenues and EBITDA are forecasted to rise modestly in each progressing year.
--Dividends to owners are expected to fluctuate based on LOCAP's cash flows. Fitch assumes that past dividend flexibility will continue.
--In the forecast period, leverage is forecasted to be in the range of 0.7x to 1.1x.
--No assumptions are made for Capline potentially reversing crude flows to the north. A reversal of Capline is expected to hurt LOCAP's results.
RATING SENSITIVITIES
Future developments that may, individually or collectively, lead to positive rating action include:
--Positive rating action is not likely given the single asset nature of the issuer.
Future developments that may, individually or collectively, lead to a negative rating action include:
--Deterioration in the underlying credit quality of LOCAP's T&D obligors;
--A further shift in crude transportation dynamics which permanently reduces throughput volumes;
--A significant increase in leverage beyond 3.0x for a sustained period of time.
LIQUIDITY
LOCAP's liquidity as of June 30, 2015 was $13 million which included $1 million of cash on the balance sheet and $12 million revolver availability after accounting for $28 million of commercial paper outstanding. Both the line of credit and the commercial paper are backed by T&D agreements with LOCAP's owners. The $40 million revolver matures in November 2016. There are no other debt obligations. Fitch notes that the dividends payable to LOCAP's owners are discretionary and enhance the company's liquidity if the owners elect to reduce dividends.
FULL LIST OF RATING ACTIONS
--Long-term Issuer Default Rating (IDR) affirmed at 'BBB+';
--Short-term IDR affirmed at 'F2';
--Commercial paper affirmed at 'F2'.
The Rating Outlook is Stable.
Additional information is available on www.fitchratings.com.
Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362
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