CORRECTION TO HEADLINE: MOODY'S PLACES PREMCOR RATINGS ON REVIEW FOR DOWNGRADE (SHOULD READ UPGRADE)
Moody's placed Premcor Refining Group (PRG), and Port Arthur Finance Corp.'s (PAF) ratings on review for upgrade. This arises from the potential 50% equity-funded acquisition of a 180,000 barrel per day (bpd), Premcor's fourth refinery, from Motiva. The transaction encompasses the $800 million acquisition (plus $100 million of inventory) of Motiva's 180,000 barrel per day refinery in Delaware City, Delaware. Compensation consists of the assumption of $365 million in tax exempt bonds plus $435 million in cash, plus $100 million for Delaware City's petroleum inventories. Premcor intends to fund the acquisition with roughly $400 million in common equity, the assumption of or, if necessary, the refinancing of the $365 million in bonds, plus some combination of balance sheet cash or revolver drawings. Premcor will pay further potential earnout compensation of up to a combined $125 million.
Though the refinery is a complex deep conversion refinery with a reported Nelson Complexity Rating of 11.7, the acquisition appears to be relatively expensive by historic standards for U.S. East Coast refineries. Premcor will pay a historically expensive $4,444 per daily throughput barrel and somewhat less historically expensive $380 per daily complexity barrel. Premcor will assess the potential to monetize the refineries large 2,300 ton per day coke gasification facility and its associated 160 megawatt cogeneration facility. If it retains the gasification facility, Premcor would face another $175 million in capital outlays in 2006 to take the gasification facility to design performance.
The large bulk of the refinery's heavy Tier II capital spending needs have reportedly already been funded by Motiva. Furthermroe, the unit would add an important fourth leg of operating and regional margin diversification to Premcor's portfolio. On the other hand, the already competitive East Coast market also faces direct Transatlantic arbitrage competition with European and Caribbean refiners.
Amongst other considerations, Premcor's ability to gain an upgrade will rest on the equity funding being common equity, Moody's subsequent review of the refinery's historic performance and pro-forma unit economics, sensitized cash flows readily funding Premcor's already heavy 2004 and 2005 capital spending budget, and the near and medium term outlook for refining margins and light/heavy crude oil differentials.
Ratings under review for upgrade include:
1) Premcor's Ba3 Senior Implied Rating
2) All of PRG's Ba3 senior unsecured notes
3) All of PRG's B2 senior subordinated notes
4) PAF's Ba3 Senior Secured notes
5) Premcor's B1 Senior Unsecured Issuer Rating
Premcor Inc. is headquartered in Old Greenwich, Connecticut.
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