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Valero Energy Partners LP

Another accretive drop-down completed;
2016E drop-down target achieved
Reiterate Rating: BUY | PO: 56.00 USD | Price: 41.52 USD Equity | 02 September 2016

VLP announces completion of $325mn terminal drop-down

Key Changes
In an 8-K filed Thursday afternoon, VLP disclosed the completion of the previously
announced drop-down of terminal assets from its general partner (GP), Valero Energy (US$) Previous Current
2016E EPS 2.77 2.78
(VLO), for $325mn. The transaction was funded with $66mn of cash on hand, $210mn
of credit revolver borrowings, and 1.17mn of VLP common and GP units issued to VLO. 2017E EPS 2.93 3.06

Management expects the deal to generate $39mn in annual EBITDA, implying an 2018E EPS 2.76 2.91

EV/EBITDA multiple of 8.3x. With the transaction close, VLP entered into a 10-year 2016E EBITDA (m) 269.5 264.9

terminalling agreement with VLO, with major minimum volume commitments (MVCs). 2017E EBITDA (m) 392.1 381.1

VLP has now achieved its 2016 drop-down guidance range 2018E EBITDA (m) 495.7 484.7

The drop-down multiple of 8.3x was in-line with VLP’s March drop-down of terminal
assets (see: Clean drop-down execution continues) and better than we expected – we
Gabe M oreen
previously modelled a $250mn drop-down at the beginning of 3Q16 at a 10x EV/EBITDA Research Analyst
M LPF&S
multiple. We also view deal financing (i.e. VLO taking back VLP units) and the 10-year
+1 646 855 1967
minimum volume commitments (MVC) agreement as continuing to demonstrate VLO’s [email protected]

support for VLP. Thus far in 2016, VLO has executed $565mn of drop-downs in M eng Ge
aggregate, achieving the lower end of its 2016E drop-down target of $500-750mn. Research Analyst
M LPF&S
Based on management commentary and the larger-than-expected drop-down in 3Q16, +1 646 855 4861
[email protected]
we view it as prudent to incorporate no additional drop-downs in 2016E. This compares
to our prior estimate of a $250mn drop-down in 4Q16. Derek Walker
Research Analyst
Not a catalyst per se but it’s still attractive M LPF&S
+1 646 855 3715
Along with the transaction announcement, VLP reiterated its annual cash distribution [email protected]

growth guidance of 25% for 2016 and 2017. VLP currently trades at a 13x 2017E Ray Fu
Research Analyst
adjusted EV/EBITDA multiple, a discount to the MLP drop-down peer group (17x). VLP M LPF&S
remains a top pick within our MLP universe given its visible and attractive cash +1 646 855 1968
[email protected]
distribution growth potential supported by drop-downs, solid balance sheet, ample cash
Katherine Carpenter
distribution coverage, and low business risk profile with entirely fee-based assets. The Research Analyst
partnership’s retained cash from excess coverage and minimal capex should alleviate M LPF&S
+1 646 855 1861
potential equity overhang associated with future drop-downs and potential third-party [email protected]
M&A at the VLP level. However, we do not rule out the possibility VLP may access the
overnight public equity market to maintain its low leverage profile – it filed a $350mn
common unit shelf offering on 25 August 2016.
Stock Data

Price 41.52 USD

Estimates (Dec)
(US$) 2014A 2015A 2016E 2017E 2018E Price Objective 56.00 USD

EPS
[email protected]
1.01 2.10 2.78 3.06 2.91 Date Established 09-Dec-2015
GAAP EPS 1.01 1.10 2.78 3.06 2.91 Investment Opinion C-1-7
EPS Change (YoY) NM 107.9% 32.4% 10.1% -4.9%
52-Week Range 37.96 USD - 54.50 USD
Consensus EPS (Bloomberg) 2.63 3.04 3.24
M rkt Val / Units Out (mn) 2,491 USD / 60.0
DPS 0.94 1.20 1.50 1.86 2.30
Average Daily Value 4.66 USD

BofAM L Ticker / Exchange VLP / NYS

Valuation (Dec)
Bloomberg / Reuters VLP US / VLP.N
2014A 2015A 2016E 2017E 2018E
P/E 41.1x 19.8x 14.9x 13.6x 14.3x DPU Growth 25.0%

GAAP P/E 41.1x 37.7x 14.9x 13.6x 14.3x Net Dbt to Eqty (Dec-2015A) 32.9%
Dividend Yield 2.3% 2.9% 3.6% 4.5% 5.5%
EV / EBITDA* 44.0x 18.0x 12.5x 8.7x 6.8x
Free Cash Flow Yield* 2.9% 4.0% 9.2% 12.0% 15.4%
* For full definit ions of iQm ethod SM measures, see page 13.

BofA Merrill Lynch does and seeks to do business with issuers covered in its research reports. As a
result, investors should be aware that the firm may have a conflict of interest that could affect the
Unauthorized redistribution of this report is prohibited. This report is intended for
objectivity of this report. Investors should consider this report as only a single factor in making
their investment decision.
Refer to important disclosures on page 14 to 16. Analyst Certification on page 11. Price Objective
Basis/Risk on page 11. 11664553

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