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

CHICAGO--(BUSINESS WIRE)--

Fitch Ratings affirms the 'BBB' rating on Merey Sweeny L.P.'s (MSLP) $350 million ($251.1 million outstanding) senior unsecured bonds due 2019. The Rating Outlook is Stable.

KEY RATING DRIVERS:

--Sponsor Bond Guarantee: Effective upon the Conoco-Phillips 66 separation, Phillips 66 and Phillips 66 Company will irrevocably and unconditionally guarantee the full and punctual payment of the outstanding senior unsecured bonds as a primary obligor.

--Sponsorship Support: 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.

--Strong Competitive Position: The competitive position of MSLP suggests its sustainable long-term strategic and economic value to Phillips 66. This is supported by the project's complexity, location, and access to privileged crude supplies and feedstock.

WHAT COULD TRIGGER A RATING ACTION:

--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 Petroleos de Venezuela S.A. (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 the 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 SUMMARY:

The Phillips 66 and Phillips 66 Company senior bond guarantee, effective upon separation, and sponsor support obligations provide a specific, tangible linkage between the credit quality of the sponsor and project. The guarantee by Phillips 66 was provided to satisfy the qualified transfer provisions in the sponsor support agreement, which allows Conoco to transfer its ownership in MSLP. Fitch considers Phillips 66 to have investment-grade characteristics that support the continuation of the current project rating after the separation. Fitch notes that the results of the arbitration proceedings will not alter or limit Phillips 66's liability under the senior bond guarantee.

ConocoPhillips 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.

Effective on the date of the Conoco-Phillips 66 separation and subject to the aforementioned PDVSA arbitration, MSLP will become a wholly owned subsidiary of Phillips 66. Phillips 66 will be the project operator, off-taker, and responsible for any contractual sponsor support obligations.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Rating Criteria for Infrastructure and Project Finance' (Aug. 16, 2011).

Applicable Criteria and Related Research:

Rating Criteria for Infrastructure and Project Finance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648832

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