Fitch Affirms Merey Sweeny L.P.'s Senior Unsecured Bonds at 'BBB'; Outlook Stable

NEW YORK--()--Fitch Ratings affirms the 'BBB' rating on Merey Sweeny L.P.'s (MSLP) $350 million ($213.7 million outstanding) senior unsecured bonds due 2019. The Rating Outlook is Stable.

KEY RATING DRIVERS:

--Sponsor Bond Guarantee for Debt Service: Phillips 66 and Phillips 66 Company irrevocably and unconditionally guarantee the full and punctual payment of the outstanding senior unsecured bonds as a primary obligor.

--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 the floor processing fee and capital calls. The offtake agreement with Phillips 66 expires in 2024, providing five years of unlevered cash flow after debt maturity in 2019.

--Stable Operations: The oil refinery is operated by an experienced investment-grade sponsor with the plant operating as expected.

--Low Supply Risk: The project has adequate supply for crude oil through its supply agreement with Petroleos de Venezuela, S.A. (PDVSA; 'B'/Negative Outlook). Exposure to PDVSA is limited as the project has alternative access to U.S. and Western Canadian crude oil supplies, with cost variability absorbed by the sponsor.

--Conventional Debt Structure: The debt is fully amortizing and fixed-rate maturing in 2019.

RATING SENSITIVITIES:

--Phillips 66 Credit Quality: A change in Phillips 66's credit quality may result in a MSLP rating action.

SECURITY:

The initial security package did not entitle bondholders to any security interest in the project's assets or agreements, which is atypical of most project financings. Under the terms of the Transfer Agreement between ConocoPhillips (COP) and PDVSA, a call event occurred when PDVSA breached its payment obligations in connection with its curtailment of crude supply in 2009. The call event triggered a purchase option in favor of COP, who exercised the option on Aug. 28, 2009 making COP, or Phillips 66 post-separation, the sole sponsor. The Future Pledge Agreement contains a springing lien mechanism that assigned a first priority security interest in the sponsor's 100% interest in the partnership to the bondholders upon the call option being exercised. As a result, a security interest in 100% of the sponsor's equity interest in the project has been assigned to senior bondholders.

As indicated by Fitch in previous reviews, PDVSA challenged COP's exercise of the call option to acquire PDVSA's interest in MSLP on March 1, 2010. An arbitration proceeding before the International Chamber of Commerce is ongoing.

CREDIT UPDATE:

The Phillips 66 and Phillips 66 Company senior bond guarantee and sponsor support obligations provide a specific, tangible linkage between the credit quality of the sponsor and project. Fitch considers the credit rating of MSLP to be equivalent to the credit rating of Phillips 66. Fitch notes that the results of the protracted arbitration proceedings will not alter or limit Phillips 66's liability under the senior bond guarantee.

COP and PDVSA formed a partnership in 1998 to build, own, operate and maintain certain facilities and improvements to 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 wholly owned subsidiary of Phillips 66. Phillips 66 is the project operator, off-taker, and responsible for any contractual sponsor support obligations.

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

Applicable Criteria and Related Research:

--'Rating Criteria for Infrastructure and Project Finance' (July 11, 2012).

Applicable Criteria and Related Research:

Rating Criteria for Infrastructure and Project Finance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=825304

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Contacts

Fitch Ratings
Primary Analyst:
Yvette Dennis, +1-212-908-0668
Senior Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst:
John Kennedy, +1-212-612-7853
Director
or
Committee Chairperson:
Greg Remec, +1-312-606-2339
Senior Director
or
Media Relations:
Brian Bertsch, New York, +1 212-908-0549
brian.bertsch@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst:
Yvette Dennis, +1-212-908-0668
Senior Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst:
John Kennedy, +1-212-612-7853
Director
or
Committee Chairperson:
Greg Remec, +1-312-606-2339
Senior Director
or
Media Relations:
Brian Bertsch, New York, +1 212-908-0549
brian.bertsch@fitchratings.com