New York, October 19, 2018 -- Moody's Investors Service ("Moody's") placed the
Baa3 senior unsecured rating of Valero Energy Partners LP (VLP) on review
for upgrade. Additionally, Moody's affirmed the ratings of
Valero Energy Corporation (VLO) and its guaranteed subsidiaries,
including its Baa2 senior unsecured rating, Baa3 subordinated debt
rating and Ba1 preferred stock rating. VLO's outlook remains stable.
These rating actions follow the announcement by VLO, VLP's
general partner, of a definitive agreement and merger plan according
to which VLO will acquire for cash all outstanding publically held common
units of VLP. The transaction will involve an approximately $950
million cash payment by VLO, that the corporation expects to meet
from its cash balances. The transaction will amount to the merger
of VLP into VLO, which will be the sole publicly traded company
and the primary entity for raising capital to fund the combined company's
growth going forward.
"The acquisition of VLP by VLO will reverse the financial structure that
was initially set up to facilitate funding growth of midstream assets,
that remain strategic to the operations of VLO. The transaction
will allow VLO to simplify its capital structure and corporate governance,
while the company maintains its focus on organic growth of its refining
assets and supporting infrastructure," commented Elena Nadtotchi,
Moody's Vice President.
Outlook Actions:
..Issuer: Diamond Shamrock Inc.
....Outlook, Remains Stable
..Issuer: Ultramar Diamond Shamrock Corporation
....Outlook, Remains Stable
..Issuer: Valero Energy Corporation
....Outlook, Remains Stable
..Issuer: VEC Trust II
....Outlook, Remains Stable
..Issuer: VEC Trust III
....Outlook, Remains Stable
..Issuer: VEC Trust IV
....Outlook, Remains Stable
..Issuer: Valero Energy Partners LP
....Outlook, Changed To Rating Under
Review From Stable
Affirmations:
..Issuer: Corpus Christi (Port of) TX, Ind.
Dev. Corp.
....Senior Unsecured Revenue Bonds,
Affirmed Baa2
..Issuer: Diamond Shamrock Inc.
....Senior Unsecured Notes, Affirmed
Baa2
..Issuer: Gulf Coast Industrial Development Authority
....Senior Unsecured Revenue Bonds,
Affirmed Baa2
..Issuer: St. Charles (Parish of) LA
....Senior Unsecured Revenue Bonds,
Affirmed Baa2
..Issuer: Ultramar Diamond Shamrock Corporation
....Subordinate Debentures, Affirmed
Baa3
....Senior Unsecured Notes, Affirmed
Baa2
..Issuer: Valero Energy Corporation
....Pref. Shelf, Affirmed (P)Ba1
....Subordinate Shelf, Affirmed (P)Baa3
....Junior Subordinate Shelf, Affirmed
(P)Baa3
....Senior Unsecured Shelf, Affirmed
(P)Baa2
....Pref. Stock Preferred Stock ,
Affirmed Ba1
....Senior Unsecured Notes, Affirmed
Baa2
..Issuer: VEC Trust II
....Pref. Stock Shelf, Affirmed
(P)Baa3
..Issuer: VEC Trust III
....Pref. Stock Shelf, Affirmed
(P)Baa3
..Issuer: VEC Trust IV
....Pref. Stock Shelf, Affirmed
(P)Baa3
Placed on Review:
..Issuer: Valero Energy Partners LP
....Senior Unsecured Notes, Placed Under
Review for Upgrade, currently Baa3
RATINGS RATIONALE
Moody's will conclude the review of VLP's ratings upon closing of the
acquisition by VLO, currently anticipated to occur in 2018.
Moody's expects that following the closing of the transaction, VLP's
unsecured ratings would likely be upgraded to Baa2 with a stable outlook,
assuming that the existing unsecured notes of VLP and VLO become pari
passu through guarantees or other means.
From the perspective of the consolidated credit profile, the acquisition
of VLP is credit supportive, because it will reduce structural complexity
and further enhance corporate transparency of VLO.
VLO's Baa2 senior unsecured rating is supported by its large operating
scale, high process complexity and significant refined product export
opportunities that allow optionality in feedstocks and product slates,
as well as access to a wide selection of markets. VLO's Baa2 rating
is further supported by industry leading returns on capital and solid
leverage metrics and the expectation of free cash flow generation through
the refining cycle, as well as good liquidity and working capital
management. VLO's strong operating performance in 2018 and
substantial cash balances mean that the company will not have to borrow
to fund the transaction.
VLO's higher earnings volatility, compared to US peers with large
downstream assets, and inherent cyclicality of the refining sector
restrain its credit profile. This assessment also reflects management's
focus on shareholder returns, typical for the refining sector,
and our expectation of limited debt reduction opportunities as the company
grows its midstream business and shareholder payouts remain high.
The stable outlook reflects our expectation that VLO will maintain its
prudent financial policies and moderate debt levels, as it pursues
investment led growth in 2018-2019, and maintain a solid
leverage profile in spite of refining sector volatility. The stable
outlook assumes that VLO will continue to fund shareholder distributions
and acquisitions using free cash flow and excess cash balances.
VLO ratings may be upgraded if the company achieves conservatively financed
diversification into other business lines that will have a material positive
impact on the company's quality of earnings and maintain solid leverage
profile with RCF/debt maintained above 30%.
VLO's ratings may be downgraded if the company's leverage
deteriorates and RCF/debt declines below 15% as a result of a change
in financial policy, and a move into heavily debt-financed
acquisitions or share buybacks.
The principal methodology used in rating Valero Energy Corporation,
Ultramar Diamond Shamrock Corporation, Diamond Shamrock Inc.,
VEC Trust II, VEC Trust III, VEC Trust IV, Corpus Christi
(Port of) TX, Ind. Dev. Corp., Gulf Coast
Industrial Development Authority, and St. Charles (Parish
of) LA was Refining and Marketing Industry published in Novemeber 2016.
The principal methodology used in rating Valero Energy Partners LP was
Midstream Energy published in May 2017. Please see the Rating Methodologies
page on www.moodys.com for a copy of these methodologies.
Valero Energy Corporation is one of the largest North American independent
refining and marketing company. It operates 15 refineries,
mainly in the Gulf Coast and Mid-Continent regions and is also
one of the largest ethanol producers in the US. VLO owns 100%
of VLP's general partner (GP), Valero Energy Partners GP LLC,
including all the incentive distribution rights (IDRs) of the GP.
VLO also holds roughly 66% of VLP's limited partner units
outstanding
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and
in relation to a definitive rating that may be assigned subsequent to
the final issuance of the debt, in each case where the transaction
structure and terms have not changed prior to the assignment of the definitive
rating in a manner that would have affected the rating. For further
information please see the ratings tab on the issuer/entity page for the
respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Elena Nadtotchi
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Steven Wood
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
