Fitch Affirms Merey Sweeny, L.P.’s Sr. Unsecured Bonds at ‘BBB+’; Outlook Stable

Fitch Ratings has affirmed the 'BBB+' rating on Merey Sweeny, L.P.'s (MSLP) $350 million ($157 million outstanding) senior unsecured bonds due 2019. The Rating Outlook is Stable.

The rating and Stable Outlook are linked to Fitch's view of the credit quality of Phillips 66, who guarantees the full and timely payment of debt service.

KEY RATING DRIVERS

Operation Risk - Stronger

Stable Operations: MSLP is operated by an experienced, investment-grade sponsor under a fixed-price operating agreement through the rated debt's maturity. The project has maintained generally high utilization.

Supply Risk - Midrange

Low Supply Risk: The project has adequate supply for crude oil through its supply agreement with Petroleos de Venezuela, S.A. (PDVSA; 'CCC'). Exposure to PDVSA is limited as the project has alternative access to U.S. and Western Canadian crude oil supplies, with the cost absorbed by the sponsor if there is insufficient cash flow at MSLP.

Revenue Risk - Midrange

Lack of Revenue Risk: Revenue volatility is mitigated by the annually adjusted floor price established under the offtake agreement with Phillips 66. The sponsor is obligated to provide MSLP with financial support for operating and capital costs and scheduled debt service via a floor processing fee and capital calls. The offtake agreement with Phillips 66 Company expires in 2024, providing five years of unlevered cash flow after debt maturity in 2019.

Debt Structure - Stronger

Conventional Debt Structure; Strong Guarantee: The debt is fully amortizing and fixed-rate maturing in 2019, with a debt service reserve fund currently funded at six months of debt service. Phillips 66 irrevocably and unconditionally guarantees the full and timely payment of principal, interest, premiums, and all other monetary obligations.

Debt Service Reliant on Sponsor Support: Due to a high WTI-Maya differential the project has historically received strong revenue contributing to its operating margins, thus realizing net coverage levels in excess of 1.0x. However, Fitch expects recent volatility in the differential and a sizeable capital plan to result in reliance on financial support from the sponsor. Fitch's rating case scenario, which contemplates coverage under higher expenses and reduced utilization, indicates below 1.0x net coverage through 2019.

Peer Comparison: Merey Sweeny is protected from any project-level operational or financial risk associated with typical energy projects through the debt guarantee. A comparable peer includes Cameron LNG ('A-'/Outlook Stable), whose project risk is significantly mitigated through long-term tolling agreements with no exposure to merchant risk or cost variability. Cameron's rating is linked to the credit quality of its lowest rated counterparty. In the absence of the debt guarantee, Merey Sweeny's financial metrics are comparable to Choctaw Generation ('B/B-'/Outlook Stable), whose near-breakeven coverage projected in Fitch's financial analysis is consistent with the assigned rating.

RATING SENSITIVITIES

Negative/Positive - Phillips 66 Credit Quality: A change in Phillips 66's credit quality would result in a commensurate rating action of MSLP.

CREDIT UPDATE

Financial performance was robust in 2015 with coverage estimated to be 1.91x per the project's rate covenant, based on unaudited financial statements. Fitch estimates coverage to be 1.85x after including capital expenditures. The project's financial performance was driven by strong growth in processing fees, despite a decline in the average WTI-Maya differential. The project received revenue based on the differential less a portion of the outstanding supplemental account balance in 2014, as the WTI-Maya differential was significantly larger than the floor price guaranteed by the sponsor.

The project's capital spending is expected to materially increase from a turnaround scheduled in 2018. Spending is estimated at $17.9 million and $22.8 million in 2017 and 2018, respectively. The majority of the turnaround is focused on environmental compliance.

MSLP is estimating below 1.0x coverage in 2016 based on an average WTI-Maya differential of $4.10. If the WTI-Maya differential is insufficient to cover the debt requirement, the sponsor will provide support to the project through an increase in the processing fee. Based on the sponsor's projections, Fitch estimates approximately $38 million is needed in 2016 to achieve a break-even level of coverage.

Fitch's financial analysis contemplates debt service coverage under scenarios that highlight the project's sensitivity to declining utilization, petcoke prices, and increased operating expenditures. The base case scenario assumes utilization of 90%, declining petcoke prices beginning at approximately $47 dollars, and escalating operating expenses at 4% annually. Fitch's rating case further stresses these factors. Fitch's financial scenarios reflect the project's need for sponsor support given the volatility of the WTI-Maya differential and the project's sizeable five-year capital plan.

TRANSACTION SUMMARY

ConocoPhillips and PDVSA formed a 50/50 partnership in 1998 to build, own, operate and maintain certain facilities and improvements in connection with the Sweeny Refinery. The project consists of a delayed coker, vacuum tower, and associated facilities within the refinery. The refinery has capacity to process 66,700 barrels per day of light, sweet crude oil as well as 180,000 barrels per day of heavy, sour crude.

MSLP is a now wholly owned subsidiary of Phillips 66, although PDVSA still has a pending legal challenge to the 2009 exercise of a call option on its interest. Phillips 66 is the project operator and off-taker, and is responsible for any contractual sponsor support obligations.

Additional information is available on www.fitchratings.com

Applicable Criteria

Rating Criteria for Infrastructure and Project Finance (pub. 28 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=870967

Rating Criteria for Thermal Power Projects (pub. 23 Jun 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=867314

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1000485

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1000485

Endorsement Policy

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

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

View source version on businesswire.com: http://www.businesswire.com/news/home/20160304005619/en/