MOODY'S ASSIGNS Ba2 TO PREMCOR REFINING'S SENIOR SECURED TERM BANK REVOLVER; PREMCOR RATINGS REMAIN ON REVIEW FOR UPGRADE
Approximatelh $1.2 Billion of Debt Securities & $1 Billion of Bank Facilities Affected
New York, April 07, 2004 -- Moody's assigned a Ba2 rating to Premcor Refining Group's
(PRG) pending $1 billion 5-year senior bank revolver,
replacing the current Ba2 rated $750 million facility. The
revolver is adequately working capital secured and the borrowing base
is adequately monitored by a seasoned agent bank, warranting a rating
one notch above the Ba3 senior implied rating. Still, the
bank rating is exposed to a high proportion of petroleum inventory in
the borrowing base, a full 80% advance rate on eligible inventory,
volatile oil prices in backwardation, the fact that eligible collateral
include inventory in transit (but covered by letters of credit),
an expanded cash draw sub-limit, and that high oil prices
drive high usage.
Along with PRG's other ratings, the bank facility rating is
under review for upgrade. On January 15, 2004, Moody's
placed PRG's and Port Arthur Finance Corp.'s (PAF)
ratings on review for upgrade upon the pending $800 million acquisition
of Motiva's 180,000 barrel per day (bpd) Delaware City refinery,
plus $100 million for inventory, and a contingent $125
million depending on subsequent performance. The historically expensive
acquisition adds an important fourth major refinery to PRG's portfolio
and core risk diversification. After a planned $400 million
common equity offering, pro-forma debt of $1.852
billion ($2.250 billion lease adjusted) yields a manageable
$245/barrel of debt per weighted average complexity barrel ($290/barrel
lease-adjusted), $2,344/barrel of debt per distillation
capacity barrel, and 55% Debt/Capital.
Ratings support derives from a number of factors mitigating the risks
of an ever volatile sector, PRG's very heavy 2004 through
2006 mandatory capital spending needs, relatively full pro-forma
leverage, Delaware City performance risk, and ongoing acquisition
appetite. At the heart of this support are an expected mid-cycle
or better 2004 margin environment and Premcor's commitment to fund
roughly 50% of acquisitions with common equity.
The refining portfolio would have considerable scale at 790,000
bpd of distillation capacity. Delaware City has a high 11.7
Nelson Complexity Rating and the weighted average Nelson Complexity Rating
of the four refineries approximates 9.657. Operating and
downtime risk would be diversified across four major refineries having
either attractive theoretical levels of value-adding complexity
(Port Arthur, Delaware City, and, to a degree,
Lima) or solid marketing niches (Memphis). PRG's margin diversification
increases to three markets, including the Gulf Coast (Port Arthur
and Memphis), Midwest (Lima), and Atlantic Basin (Delaware
However, the ratings are restrained by PRG's: negligible
expected 2004-2005 free cash flow due to very high low sulfur gasoline
and diesel capital spending needs and capital needed for the Port Arthur
expansion and upgrade project; high leverage even pro-forma
for a full $400 million common equity offering (55% Debt/Capital);
very heavy working capital, liquidity, and letter of credit
needs associated with very high oil prices that would be significantly
higher still absent the crude oil sourcing credit backing arrangement
with Morgan Stanley for the Memphis and Lima refineries; and the
need to accommodate Premcor's aggressive acquisition plans at a
time when quite full value must be paid for mainline refineries.
Additionally, heavy versus light crude oil price differentials
can narrow sharply when OPEC curtails heavy oil production to support
crude oil prices. Premcor's Port Arthur coker margin stabilization
account under its PEMEX/PMI Maya crude oil supply agreement has now grown
to more than $200 million. While the prior and current wider-than-average
heavy versus light crude oil price differentials that drove that surplus
are positive for run-rate margins, Premcor is naked to below
average light/heavy oil price differentials until the PMI surplus is consumed.
Additionally, Premcor's working capital needs are supported
by the fact that Morgan Stanley supplies its credit backing to the purchase
of roughly 5 million barrels a month of crude oil for the Memphis and
Lima refineries. This obviates the need for Premcor to post roughly
$300 million (two months at, say, $30/barrel
of light sweet crude oil) in letters of credit but is also a latent letter
of credit need should this arrangement terminate.
The Delaware City transaction encompasses an $800 million acquisition
(plus $100 million of net working capital) of Motiva's 180,000
barrel per day refinery in Delaware City, Delaware. Premcor
will potentially pay further earnout compensation of up $125 million.
After subsequent capital spending, Moody's expects Delaware
City to be roughly cash flow neutral in the 2004 through 2006 time frame.
The $400 million of associated potential new common equity,
plus Delaware City's own cash flow, would appreciably mitigate
performance risk and follow-on capital needs. Motiva has
invested heavily in the refinery in recent years but received inconsistent
subsequent performance from the refinery.
Though Delaware City is a complex deep conversion refinery, the
acquisition is relatively expensive by historic standards for U.S.
East Coast refineries. Excluding $100 million of net working
capital, Premcor will still pay a historically expensive $4,444
per daily throughput barrel and only somewhat less historically expensive
$380 per complexity barrel. Premcor will assess the potential
to monetize the refinery's large, underperforming, 2,300
ton per day coke gasification facility and associated 160 megawatt cogeneration
unit. If it retains the gasification unit, it faces $175
million in 2006 capital outlays to take that unit to design performance.
Amongst other considerations, Premcor's ability to gain an
upgrade will rest on: pro-forma leverage and our review of
sensitized expected free cash flow after capital spending in the 2004
and 2005 period; adequate pro-forma letter of credit capacity
and back-up liquidity in an environment in which crude oil price
spikes causes a surge in inventory investment and letter of credit volume;
Delaware City equity funding being common equity; Moody's review
of Delaware City's past performance and pro-forma unit economics;
and the near and medium term outlook for refining margins and light/heavy
crude oil differentials.
Moody's anticipates 1Q04 EBITDA in the range of $140 million
to $150 million, 2004 EBITDA in the $600 million to
$700 million range, 2004 gross interest expense in the range
of $160 million, and 2004 capital spending (excluding acquisitions)
of roughly $640 million including $27 million of capitalized
interest. In 2005, we expect almost $700 million in
capital spending (including just under $50 million of capitalized
interest) but, depending on the margin environment, expanded
cash generation capacity as well with a full year of Delaware City operations.
We project roughly $400 million of 2006 capital spending.
The 2004-2006 capital spending estimates (1) exclude any future
projects to improve the Lima refinery's sour crude oil and high value
clean products capacity and (2) are based on present capital cost estimates
for the Port Arthur expansion, Tier 2 and low sulfur diesel capex,
MACT capex, and normal heavy maintenance and turnaround capital
Ratings under review for upgrade include:
1) PRG's Ba2 Senior Secured bank facility rating.
2) Premcor's Ba3 Senior Implied Rating and B1 Senior Unsecured Issuer
3) PRG's Ba3 senior unsecured notes.
4) PRG's B2 senior subordinated notes.
5) PAF's Ba3 Senior Secured notes.
Affected ratings include: PRG's Ba3 senior implied rating;
PAF's Ba3 rated $222 million of 12.5% senior
secured notes due 2009; PRG's Ba3 ratings for $210 million
of 6.750% senior unsecured notes due 2011, $300
million of 7.50% senior unsecured notes due 2015,
$350 million of 9.50% senior unsecured notes due
2013, and $175 million of 9.25% senior unsecured
notes due 2010; and PRG's B2 rating on $175 million
of 7.750% senior subordinated notes due 2012.
Premcor Inc. is headquartered in Old Greenwich, Connecticut.
Corporate Finance Group
Moody's Investors Service
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service