Fitch Affirms LOCAP's IDR at 'BBB+'; Outlook Positive

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed LOCAP LLC's (LOCAP) Long-Term Issuer Default Rating (IDR) at 'BBB+'. In addition, LOCAP's Short-Term IDR and Commercial Paper rating have been affirmed at 'F2'.

The Rating Outlook has been revised to Positive from Stable.

The rating action impacts $35 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%; Long-Term IDR 'AA'/Rating Watch Negative) and affiliates of Marathon Petroleum Corp. (58.5%; IDR 'BBB'/Stable Outlook).

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 rated 'BBB+'/ Positive Outlook), Fitch rates the two entities the same.

LOCAP is a federally regulated crude pipeline that primarily connects LOOP's system at Clovelly Hub to LOCAP's facility at St. James for oil distribution to other parts of the U.S and nearby refineries. Recent growth in throughput volume at LOOP is expected to continue to have a positive impact on LOCAP. Given the association of both companies' operation, Fitch views LOCAP's rating to be closely tied to LOOP's.

Furthermore, the ratings also reflect the structural benefits provided to LOCAP's 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 can bring uncertainty to LOCAP's operations and pressure LOCAP's credit metrics.

Leverage as of June 30, 2016 was 1.0x, compared to 1.0x in 2015 and 1.1x in 2014. Fitch expects 2016's year-end leverage to be in the range of 0.8x - 1.3x and remain at 1.0x - 1.5x in future periods.

KEY ASSUMPTIONS

--Fitch forecasts modestly higher throughput volumes for LOCAP in the forecast period through 2018 from investment in debottlenecking projects.

--Revenues and EBITDA are forecasted to rise modestly in each progressing year with higher volumes and an increase in tariffs.

--Dividends to owners are expected to fluctuate based on LOCAP's cash flows. Fitch assumes that past dividend flexibility will continue.

--CAPEX is slightly higher with the construction of an additional storage tank.

--In the forecast period, leverage is forecasted to be in the range of 1.0x to 1.5x.

--No assumptions are made for Capline potentially reversing crude flows to the north.

RATING SENSITIVITIES

Future developments that may, individually or collectively, lead to positive rating action include:

--Should favorable rating action occur at LOOP, Fitch would likely take positive rating action.

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.

--Should negative rating action occur at LOOP, Fitch would likely take negative rating action.

LIQUIDITY

LOCAP's liquidity as of June 30, 2016 was $5.8 million which included approximately $0.8 million of cash on the balance sheet and $5 million revolver availability after accounting for $35 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 and is expected to be extended. 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.

Fitch affirms the following:

LOCAP LLC

--Long-Term Issuer Default Rating (IDR) at 'BBB+';

--Short-Term IDR at 'F2';

--Commercial Paper at 'F2'.

The Rating Outlook has been revised to Positive from Stable.

Additional information is available on www.fitchratings.com .

SUMMARY OF FINANCIAL STATEMENT ADJUSTMENTS:

Fitch has made no material adjustments that are not disclosed within the company's filings.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/site/re/869362

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1011670

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1011670

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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View source version on businesswire.com: http://www.businesswire.com/news/home/20160914006127/en/

Fitch Ratings
Primary Analyst
Kathleen Connelly
Director
+1-212-908-0290
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Peter Molica
Senior Director
+1-212-908-0288
or
Committee Chairperson
Steven Marks
Managing Director
+1-212-908-9161
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
[email protected]

Source: Fitch Ratings

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