MOODY'S ASSIGNS Ba3 TO PREMCOR REFINING'S SENIOR UNSECURED NOTES; CONFIRMS EXISTING RATINGS; POSITIVE OUTLOOK
Approximately $1.810 Billion of Debt Securities & $1 Billion of Bank Facilities Affected
New York, April 20, 2004 -- Moody's assigned a Ba3 rating to Premcor Refining Group's
(PRG) pending $400 Million of ten year senior unsecured notes and
completed a pending review for upgrade by confirming all existing ratings
with a positive rating outlook. The positive outlook reflects upgrade
potential in 12 to 24 months due to: 2005 completion of most of
Premcor's very heavy low sulfur fuels plus expansion capital spending
and substantially reduced 2006 capital spending; an expanded more
diversified refining portfolio; very substantial forecasted mid-cycle
pre-capex cash generating capacity; and moderating leverage.
Moody's also confirmed Premcor's SGL-2 Speculative
Grade Liquidity Rating.
Together with a pending common equity offering of somewhat over $400
million, a portion of cash balances, the concurrent debt and
equity financings are funding the acquisition of the Delaware City refinery.
The equity funding adequately shares acquisition risks to the equity block
and prepares Premcor for new acquisitions. Moody's believes
Premcor's ongoing adherence to a balanced (though expensive) growth
and equity funding strategy is building a solid base for credit accretion.
Still, negligible free cash flow expected in 2004-2005 on
very heavy capital spending, inherent highly volatile sector refining
margins, and the high price being paid for Delaware City prevent
a ratings upgrade at this time.
On January 15, 2004, Moody's placed PRG's and
Port Arthur Finance Corp.'s (PAF) ratings on review for upgrade
upon the announced pending roughly 50% equity funded acquisition
of Motiva's 180,000 barrel per day (bpd) Delaware City refinery
for $800 million, plus $100 million for net working
capital and $125 million contingent on subsequent performance.
The historically expensive acquisition adds the potential earnings power
of an important fourth major refinery to PRG's portfolio and improves
core risk diversification. Once Premcor demonstrates full remediation
of Delaware City's troubled coke gasification and cogeneration unit
($400 million invested cost by Motiva), Premcor may resume
efforts to monetize that investment.
The SGL-2 Speculative Grade Liquidity Rating reflects: good
expected internal coverage of cash requirements over the next twelve months,
cushioned by roughly $400 million of current balance sheet cash;
good back-up liquidity with at least $300 million of forecasted
undrawn borrowing power under a new committed $1 billion bank revolver
(tested for $700 million in letter of credit outstandings for crude
oil sourcing); very good covenant clearance, enhanced by negligible
covenant constraints; and adequate alternative liquidity with carve
outs in the bank facility permitting sales of unencumbered assets.
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, high pro-forma leverage,
Delaware City performance risk, and ongoing acquisition risk.
At the heart of this support is a comparatively strong refining portfolio,
an expected mid-cycle or better 2004 margin environment,
ample back up liquidity to fund the capital program, industry-seasoned
management, and Premcor's commitment to fund roughly 50%
of acquisitions with common equity. Assuming imminent completion
of just over $400 million of 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.
The pro-forma refining portfolio will 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 East Coast (Delaware City).
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.
After capital spending, Moody's expects Delaware City to be
roughly cash flow neutral in the 2004 through 2006 time frame.
The $400 million of new common equity, plus Delaware City's
own cash flow, 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,
partly due to the coke gasification facility.
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, and including the full cost of the coke gasification facility
in the acquisition cost, Premcor will 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 of monetizing the refinery's large,
underperforming, 2,400 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: acquisition activity and ample common equity
funding of acquisitions; leverage trends; Moody's view
on the near and medium term outlooks for crack spreads and light/heavy
crude oil differentials; Moody's view on sensitized expected
free cash flow after capital spending in the 2004-2006 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; and Delaware
City's post-acquisition performance and unit economics.
Moody's anticipates 1Q04 EBITDA in the range of $145 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 confirmed include:
1) PRG's Ba2 Senior Secured rating of a $1 billion bank facility
($800 million and $200 million tranches).
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.
6) SGL-2 Speculative Grade Liquidity Rating.
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