TEXT-Fitch affirms Valero Energy 'BBB' rating

Aug 3 - Fitch Ratings has affirmed Valero Energy Corporation's
(Valero; NYSE: VLO) ratings as follows:

--Issuer Default Rating (IDR) at 'BBB';
--Unsecured credit facility at 'BBB';
--Senior unsecured debt at 'BBB'.

$7.04 billion is debt is affected by this rating action.

The Rating Outlook is Stable.

RATING RATIONALE:

Valero's ratings are supported by the size, scale and quality of the company's
refining assets, with approximately 3 million bpd of throughput capacity; its
modest but growing access to discounted North American shale crudes; ample
financial flexibility; good free cash flow (FCF) prospects; reasonable leverage;
and solid export capability out of the Gulf (capturing 25% of U.S. export
volumes) which allows it to take advantage of high product demand abroad,
especially for distillates.

Rating concerns center on uneven global economic growth; an unfavorable
regulatory environment in the U.S.; slowing capacity rationalization (as seen in
Delta's purchase of the Trainer refinery and the Carlyle jv agreement to keep
Sunoco's Philadelphia refinery open); weakness in ethanol blending economics
driven by expensive corn prices; as well as the high cyclicality which
characterizes the industry. Although less exposed to Brent-WTI and related crude
oil spreads than other names in the sector, a sharp decline in those spreads
would unfavorably impact margins. Coking economics remain somewhat soft
currently, but are expected to improve as more heavy oil supplies reach the gulf
coast and spreads widen.

RECENT FINANCIAL PERFORMANCE

Valero's recent financial performance has been solid resulting in credit metrics
that are in line with mid-cycle profitability. Latest 12 months (LTM) EBITDA at
March 31, 2012, was $5.36 billion with total debt of $7.6 billion, for
debt/EBITDA of 1.42x (1.3x on a pro forma basis using $7.04 billion in debt at
June 30, 2012). Valero's net debt reduction of approximately $560 million from
Q1 to Q2 reflects the retirement of $108 million of tax exempt bonds, $750
million 2012 notes, as well as the re-issuance of $300 million in Gulf
Opportunity bonds which the company had held in Treasury.

FCF

The FCF outlook for Valero is relatively strong. 2012 capex of $3.6 billion
includes a large portion of spending associated with completion of the Port
Arthur and St. Charles hydrocrackers. Capex falls off in 2013 to the $2
billion-$2.5 billion level, and of this 'must spend' regulatory and turnaround
capital is just $1.57 billion. In addition, 2013 results will benefit from the
full year impact of the new hydrocracker projects, which are significant. Other
tailwinds include access to heavily discounted shale crudes (up to 200,000 bpd
across the company's system today, with the potential to go to 400,000 bpd), and
ongoing access to cheap natural gas (up to 600,000 mmbtu/day across Valero's
system). Future uses of FCF may include expanded dividends, buybacks ($3.5
billion program authorized at year-end 2011), as well as potential
acquisitions. Fitch anticipates the company will be significantly FCF positive
over the next two years.

PROPOSED RETAIL SEPARTION

At the end of July, Valero announced it was considering a tax-free separation of
its retail business to unlock shareholder value. Fitch anticipates that the
proposed separation will not meaningfully alter the company's overall credit
profile, given the relatively modest contribution of retail to Valero's total
EBITDA (approximately $430 million or 9% of Valero's EBITDA from 2006-2011 as
calculated by Fitch). Other credit considerations which would help offset the
spinoff of the retail segment include the positive integration benefits of the
Pembroke and Meraux refinery acquisitions; the earnings uplift expected in 2013
when the company's large hydrocracker projects at Port Arthur and St. Charles
refineries are expected to come online; and the anticipated retirement of $480
million debt in 2013.

Retail segment assets included 1,027 company owned and operated stores in the
U.S., 775 units in Canada, as well as a home-heating oil business and self-serve
commercial fueling stations in Canada. The rest of Valero's retail fuel sites
are distributor/jobber agreements and would not be included in the separation.

LIQUIDITY

Valero's liquidity was robust at the end of the second quarter, and included
cash on hand, operating cash flows, two committed credit revolvers ($3 billion
unsecured revolver due 2016 and $C115 million due 2012), a $1 billion A/R
securitization facility (recently upsized to $1.5 billion) and other short-term
uncommitted borrowings. Including cash and equivalents of $1.3 billion, total
liquidity at June 30, 2012 was approximately $6 billion.

Near term maturities are manageable, and include $480 million due 2013, $200
million due 2014, and $475 million due 2015. Covenant restrictions on Valero's
debt are light, and include a net debt/capitalization ratio requirement of 60%
on its revolver. Net-debt-to-capitalization was 25.7% at June 30, 2012, which
implies significant headroom. Other covenants include: change-of-control
provisions, and limitations on additional secured debt.

OTHER LIABILITIES

Valero's other obligations were modest. Its asset retirement obligation at YE
2011 was $87 million and was primarily linked to remediation for underground
retail fuel storage tanks. The deficit on the funded status of Valero's Pension
Benefit Obligation (FV Pension Assets - PBO) increased to -$394 million versus
-$264 million at YE 2010, with the increase driven primarily by actuarial
losses, as well as lower returns on plan assets. Pension outflows are manageable
as a percentage of FFO. Valero's hedging program is limited and aimed at hedging
physical commodity transactions (e.g. delays between crude loading and refined
product sales, ethanol corn purchases), although it also has a small trading
operation meant to take views on the market. Valero also uses derivatives to
manage interest rate and FX risk. There are no investment grade ratings triggers
in any of its agreements.

WHAT COULD TRIGGER A RATING ACTION?

Positive: Future developments that may lead to positive rating actions include:

--Debt reductions and a managerial commitment to lower debt levels and
maintaining a higher ratings going forward.

Negative: Future developments that may lead to negative rating action include:

--A change in philosophy on use of balance sheet, which could include debt
funded financing of a large acquisition, capex or share buybacks;

--An extended period of negative FCF and rising leverage resulting in sustained
(through the cycle) debt/EBITDA leverage above approximately 2.0x- 2.5x.