Fitch Assigns Valero Energy Partners First-Time Rating of 'BBB-'; Outlook Stable

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned a first-time rating of 'BBB-' to Valero Energy Partners LP's (VLP) Long-Term Issuer Default Rating (IDR) and senior unsecured debt. The Rating Outlook is Stable.

Additionally, Fitch rates VLP's proposed 10-year note offering 'BBB-.' The notes will rank pari passu with the partnership's existing and future senior unsecured debt. Proceeds from the partnership's inaugural bond offering are to be used to reduce revolver borrowings and for general partnership purposes.

VLP's ratings reflect the size, scale, earnings and cash flow stability of the master limited partnership, as well as, VLP's relation to its sponsor Valero Energy Corp. (Valero; Long-Term IDR 'BBB' with a Stable Outlook). The ratings are supported by VLP's planned conservative capital structure as Fitch expects the partnership to continue to operate with reasonable leverage metrics and strong distribution coverage.

Concerns include VLP's current limited size, scale and counterparty diversity, given its sole reliance on Valero, as well as, its plans to grow at a fast pace, which could negatively impact leverage. Fitch notes that VLP has the ability to reduce future growth should market conditions warrant a slower pace.

KEY RATING DRIVERS

SUPPORTIVE SPONSOR

VLP's ratings reflect a linkage with Valero's rating given the strong operational, financial and strategic ties between the entities. VLP's operations and ultimately its credit profile is supported by its strong sponsor, Valero, which owns a 66.5% limited partnership interest and the 2% general partnership interest including incentive distribution rights. Valero currently makes up 100% of VLP's revenue and is expected to be VLP's primary counterparty for the next several years.

VLP was created as a growth vehicle for Valero's midstream assets. Fitch expects long term fee-based contracts with Valero will provide VLP with stable cash flows for several years. Future growth at VLP is expected to come from continued dropdown of midstream assets from Valero which has a significant inventory of assets. In total, Valero currently has roughly $1 billion in rateable EBITDA that may be dropped down to VLP, including pipelines, racks, terminals & storage, railcar, marine, and wholesale fuel marketing. VLP has benefitted from Valero's financial support in the form of equity and debt for the financing of past dropdowns.

Given VLP's limited size, scale and dependency on Valero as its sole counterparty and its plans for significant near-term growth, Fitch believes that VLP's credit profile is slightly weaker than its sponsor and parent Valero and that a one notch separation between the entities is currently warranted.

REASONABLE LEVERAGE; ROBUST DISTRIBUTION COVERAGE

For the latest 12 months (LTM) ending Sept. 30, 2016, VLP's adjusted leverage was 3.7x, up from 3.2x at the end of 2015. Fitch expects leverage to remain below 4.0x in Fitch's forecast period which extends through year-end 2019, as the partnership pursues its planned growth strategies. Distribution coverage has been strong for VLP historically, with the partnership reporting over 2.0x coverage as of Sept. 30, 2016. VLP is targeting annual distribution growth of 25% for 2017 and 20% for 2018. While such strong distribution growth will weigh on current distribution coverage levels, Fitch expects VLP to maintain healthy coverage in excess of 1.2x.

STABLE EARNINGS AND CASH FLOW

VLP's revenues are 100% fee based, supported by long term contracts with minimum volume commitments with Valero. Approximately 85% of VLP's revenues are supported by MVC's with Valero, under 10 year contracts which should help mitigate any volumetric weakness in the near to intermediate term. As such Fitch expects VLP's earnings and cash flow to be very stable over the next several years. Fitch believes VLP's future dropdowns and growth spending will focus on avoiding commodity price exposure and maintaining the partnerships' cash flow stability.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for VLP include the following:

--Revenue growth is rapid given Valero's significant inventory of midstream assets;

--EBITDA margins (adjusted for the net loss attributable to Valero) remain in the low 70% range, in line with historical margins;

--Growth is primarily driven by dropdowns from Valero; modest spending focused on third party acquisitions;

--Acquisitions are financed in a balanced manner with both debt and equity;

--Distributions increase 25% through 2017 and 20% in 2018.

RATING SENSITIVITIES

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

--Favorable rating action at Valero could improve VLP's rating;

--Increase of size and scope of operations with EBITDA above $500 million, leverage below 3.5x on a sustained basis, and distribution coverage above 1.2x.

Negative: Future developments that may, individually or collectively, lead to a negative rating action include:

--A negative rating action at Valero could lead to a negative rating action at VLP;

--Significantly reduced volume or revenue commitments from Valero which could occur as contracts come up for renewal;

--Diversification into activities with more volumetric risk or commodity exposure which materially changes the business profile;

--Increases in capital spending or dropdowns beyond Fitch's expectations that have negative consequences for the credit profile (e.g., if not funded with a balance of debt and equity);

--Increased adjusted leverage beyond 5.0x for a sustained period of time.

LIQUIDITY

Liquidity Adequate: As of Sept. 30, 2016, VLP's total liquidity was $261 million which consisted of $35 million of cash on the balance sheet and $226 million of availability on the revolver. VLP has a $750 million revolving credit facility which matures in November 2020. Availability under the revolver is expected to increase following the completion of this inaugural offering.

The bank agreement does not allow leverage to exceed 5x. With permitted acquisitions, maximum leverage steps up to 5.5x for two consecutive quarters.

FULL LIST OF RATING ACTIONS

Fitch assigns the following ratings:

Valero Energy Partners LP

--Long-Term IDR 'BBB-';

--Senior unsecured rating 'BBB-'.

The Rating Outlook is Stable.

Summary of Financial Statement Adjustments - Fitch adjusts EBITDA for VLP. GAAP requires VLP to include the results from midstream assets when Valero owned them. Valero did not consider most of the assets as business units, and therefore, there were no charges for the use of the assets. There were no revenues, just operating expenses and deprecation. As a result, Fitch believes it is best to use EBITDA adjusted to exclude these expenses (losses attributable to the predecessor).

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria

Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)

https://www.fitchratings.com/site/re/885629

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1015753

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1015753

Endorsement Policy

https://www.fitchratings.com/regulatory

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Source: Fitch Ratings

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