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09 Jul 2002
MOODY'S ASSIGNS Baa2 RATING TO VALERO LOGISTICS OPERATIONS L.P. SENIOR NOTES
Up to $200 Million of Debt Securities Rated (First-Time Rating)
New York, July 09, 2002 -- Moody's Investors Service assigned a prospective senior unsecured rating
of (P)Baa2 and a subordinated rating of (P)Baa3 to a shelf registration
filed by Valero Logistics Operations, L.P. (OLP),
an operating limited partnership wholly owned by Valero L.P.,
a master limited partnership (MLP) whose general partner is controlled
by Valero Energy Corporation (rated Baa2). At the same time,
Moody's also assigned a preliminary (subject to review of documentation)
Baa2 senior unsecured rating to senior notes to be issued by the OLP.
This is the first time that Moody's has rated the securities of Valero
Logistics Operations. The rating outlook is stable.
The Baa2 rating is supported by the relative stability and predictability
of the OLP's cash flows, which are linked to regulated pipeline
transportation tariffs, and by the strategic importance of the MLP's
assets to Valero, which manages and controls the MLP. Also
supporting the rating are certain agreements with Valero that include
volume and tariff commitments, a non-compete agreement,
and an environmental indemnification. However, the rating
also considers that the MLP is highly reliant on transportation to and
from a single refining system, and that utilization of the MLP's
assets will depend on the operating performance of Valero's refineries
and on the demand for crude oil and refined products in its markets.
In addition, new product pipelines could raise competitive pressures
in markets served by the MLP. The stable rating outlook assumes
Valero will maintain management control and majority ownership of the
MLP, that the MLP's operations will continue to be consolidated
into Valero's financials, and that the OLP will maintain reasonably
conservative financial leverage.
The OLP's crude oil and product pipelines and terminal operations provide
transportation and terminalling services to three of Valero's refineries
(McKee, Ardmore, and Three Rivers). Moody's believes
Valero will continue to rely heavily on the OLP's pipelines, terminals,
and other logistics assets to supply these refineries and its retail operations
in the Mid-Continent and in the Southwest. Because these
assets were built to support Valero's system, it could be difficult
or uneconomic for Valero to find an alternative source of transportation
or terminaling services in many of its markets.
At present, virtually all of the OLP's revenues are derived from
a Transportation and Terminalling Agreement with Valero whereby Valero
has committed to either ship a minimum percentage of refinery throughput,
or to pay in lieu of shipment. The agreement provides Valero with
flexibility to reduce, suspend or terminate its obligations under
certain conditions, but Moody's believes the limited practical alternatives
available to Valero's refineries for transportation services, and
the consolidation of the OLP on Valero's balance sheet, will provide
Valero with incentives to continue to support the OLP's operations.
Moody's is also relying on management's statement that it views the MLP
as a growth vehicle and that the MLP's assets are an integral part of
its core refining operations. While Valero has not stated that
it intends to close or sell any of the three refineries served by the
OLP, such an event could have a material adverse effect on the OLP,
since its assets transport most of the refineries' crude and refined products.
About two-thirds of the OLP's cash flow is derived from transportation
and terminalling services to a single refining system (Valero's McKee
refinery in the Texas Panhandle). However, Moody's believes
the concentration risk inherent in the OLP's cash flow is partially mitigated
by the on-going demand for refined products in the OLP's markets,
which would help support utilization of the OLP's product pipelines and
terminals in the event that the McKee refinery's output were to decline.
The OLP's logistics business has a short operating history as a separate
business and legal entity. As it pursues its growth strategy,
the OLP could enter into throughput agreements with third parties unrelated
to Valero and could engage in its own acquisitions and expansion plans,
but these initiatives would most likely be closely coordinated with Valero.
The OLP's financial leverage is conservative, with debt to total
capital of 24% at 3/31/02, but Moody's expects the OLP's
debt levels to increase over time to approximately 50% as it undertakes
system expansions or makes acquisitions. The Baa2 rating assumes
that Valero will continue to manage the OLP (through a servicing agreement),
and that the OLP will finance potential growth expenditures in a conservative
manner to maintain appropriate financial leverage (debt/EBITDA below 3.0
times) and to meet requirements for cash distributions to equity investors.
Moody's notes that there are certain structural and legal risks inherent
in the ten-year bond indenture that are not present in the OLP's
five-year bank credit facility. However, the Baa2
rating assumes these issues will be addressed through a cross-default
clause and through a put option available to bondholders in the event
of a change in control. Other features of the bank revolving facility
not contained in the bond indenture include various financial ratio requirements
and the presence of material adverse effect clauses that could give the
banks the option to not fund under the facility.
The Transporation and Terminalling Agreement and the Servicing Agreement
have a shorter life than the ten-year senior notes, but Moody's
does not view these to be significant risks for the OLP, as long
as Valero continues to control the general partner of Valero L.P.
Valero Logistics Operations L.P. is a Delaware limited partnership
that owns and operates product and crude oil pipelines and terminal facilities
in the mid-continental and southwestern regions of the United States.
It is headquartered in San Antonio, Texas and is a wholly owned
operating subsidiary of Valero L.P., a master limited
partnership whose general partner is controlled by Valero Energy Corporation.
Moody's Investors Service
Alexandra S. Parker
Senior Vice President
Moody's Investors Service
No Related Data.
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