Fitch Affirms Valero Logistics/Kaneb Ratings at 'BBB-'.

NEW YORK -- Fitch Ratings has affirmed the senior unsecured note and Issuer Default Ratings (IDR) for Valero Logistics Operations, L.P. (Valero Logistics) and Kaneb Pipe Line Operating Partnership, L.P. (Kaneb). The Rating Outlook is Stable. Approximately $830 million of outstanding debt is affected. Valero Logistics and Kaneb are the primary operating partnerships of Valero L.P. (VLI). VLI guarantees the debt of Valero Logistics and Kaneb and the debt instruments for the two operating partnerships have cross defaults, closely linking the ratings.

The ratings and Stable Outlook recognize VLI's conservative financial and partnership distribution practices and the low-risk nature of its pipeline and terminal assets. In addition, Fitch believes that the integration of Kaneb into VLI following their July 1, 2005 merger has fully met pre-merger expectations and that VLI has benefited from the scale and diversity of operations that the combination has contributed.

The ratings also consider VLI's increasingly aggressive growth strategy which is expected to put some modest pressure on consolidated credit measures over the near term. Debt-to-EBITDA for the year ended Dec. 31, 2006, was approximately 4.2 times (x), which is weaker than the company's longer term target leverage ratio of 4.0x. However, debt levels were affected by the incurrence of $140 million in bank debt financing to fund the Dec. 1, 2006, acquisition of the St. James crude oil facility in Louisiana from Koch Supply and Trading, L.P. Most future expansion is expected to occur through organic growth projects associated with existing domestic and international assets. VLI expects to spend approximately $230 million in capital expenditures in 2007, of which $185 million is for expansion and $45 million is for reliability. Several additional expansion projects are being evaluated which, if undertaken would push capital expenditures above $400 million for the next couple of years. Key credit measures will be modestly affected since incremental cash flows from the expansion projects will likely trail capital expenditures by several months.

The ratings also consider the recent divestiture by Valero Energy Corp. (VLO, rated 'BBB', Stable Rating Outlook by Fitch) of its indirect ownership interest in VLI, which on balance Fitch views as being credit neutral for VLI. The companies will remain associated through commercial and contractual arrangements and the strategic relationship of the assets. Under an omnibus agreement between the companies, when VLO reduced its ownership of VLI's general partner below 20%, it was no longer prohibited from competing with VLI to provide crude oil and terminal service. Fitch does not consider the competitive risk to VLI from VLO to be material.

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