S&P Affirms Ratings on Tesoro Logistics L.P (TLLP); Rates Proposed Notes Offering at 'BB'

Standard & Poor's Ratings Services said it affirmed its 'BB' corporate credit and senior unsecured debt ratings on San Antonio-based master limited partnership Tesoro Logistics L.P. (NYSE: TLLP). The outlook is stable. The stand-alone credit profile (SACP) is also 'bb' and we view the partnership as moderately strategic to its general partner, Tesoro Corp.

At the same time, we assigned our 'BB' issue-level rating to the partnership's proposed senior unsecured notes due 2019 and 2022. The partnership will use net proceeds from the notes to partly fund the purchase of QEPFS, fully repay outstanding amounts under the partnership's revolving credit facility, and for general partnership purposes. The recovery rating on the partnership's senior unsecured debt is '4', indicating our expectations of average (30% to 50%) recovery if a payment default occurs. Our recovery expectations are in the upper half of the 30% to 50% range.

"The rating action reflects our view that the transaction is neutral for TLLP's consolidated credit profile," said Standard & Poor's credit analyst Michael Grande.

The transaction will increase the partnership's size and scale, more than doubling EBITDA in 2015 to about $650 million, as well as provide additional asset, customer, and geographic diversity. These benefits are only partly offset by the slightly higher initial pro forma leverage of about 4.3x in 2015 and exposure to some commodity risk and volume risk.

The stable outlook reflects our expectation that TLLP will successfully integrate QEPFS' gathering, processing, and fractionation business, while largely maintaining stable, fee-based cash flow and financial leverage of 4x or less as it continues to pursue growth opportunities.

We could lower our ratings on TLLP if the partnership materially increases leverage such that debt to EBITDA exceeds 4.5x on a sustained basis, or if EBITDA becomes more volatile due to the partnership assuming a greater amount of volume or commodity price risk.

While unlikely in the near term, we could raise ratings on TLLP if the partnership achieves much greater scale, geographic, and asset diversity, while maintaining stable, fee-based cash flows and leverage of 4x or less.

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