MOODY'S ASSIGNS Ba3 TO PREMCOR'S SENIOR UNSECURED NOTES; Ba2 TO SENIOR SECURED BANK FACILITY; OUTLOOK STABLE
$2.068 Billion of Premcor USA, Premcor Refining, & Port Arthur Debt Securities and Bank Facilities Affected ($1.786 Billion Pro-Forma)
New York, January 23, 2003 -- Moody's rated Premcor, Inc.'s (PI) debt offerings,
ending a review for upgrade begun November 27 upon PI's now $515
million pending acquisition of Williams' 190,000 barrel per day
capacity (170,000 bpd throughput) Memphis refinery. PI will
pay $315 million for the refinery, terminals, and storage
assets, and roughly $200 million for inventory at current
oil and products prices. Up to $75 million of earnout payments
are also due over 7 years if market margin benchmarks exceed certain levels.
Anticipating ample equity funding from the pending offering, Moody's:
1) Assigned a Ba2 rating to Premcor Refining Group's (PRG) proposed amended
and restated $750 million senior secured three-year working
capital bank facilities.
2) Assigned a Ba3 to PRG's proposed $400 million senior unsecured
notes due 2010 and 2013.
3) Confirmed all ratings for Premcor USA (PUSA), PRG, and
Port Arthur Finance (PAF).
Note proceeds, new equity, and roughly $200 million
of off-balance sheet Memphis inventory funding will fund the acquisition,
redeem $42.4 million of PUSA notes, and repay $240
million of PRG floating rate notes due 2003 and 2004. Moody's anticipates
equity proceeds at the high end of expectations for the pendingcurrent
offering. Year-end 2002 gross Effective Debt/Capital was
59% (pro-forma 58.6%). PI will carry
some $220 of debt per complexity barrel and $2,245
of debt per expected throughput barrel. Neither an exercise of
the equity underwriters' overallotment provision, nor a larger offering,
would immediately affect the ratings. On the other hand,
in need, PI's backup equity plan would likely support the ratings.
The ratings are supported by a number of factors. Though vulnerable,
and softening again in 1Q03, sector margin drivers firmed in 4Q02
after a four-quarter bottom and still point to far firmer 2003
results. Also, the Memphis acquisition and debt and equity
fundings put PI's asset and funding base in the soundest condition in
PI's history. As well, management has a long history of executing
realistic, compatible growth and funding strategies, and assimilating
acquisitions. The Memphis refinery, PI's early 2002 IPO,
PI's Port Arthur coker project, and its other acquisitions,
divestitures, and refinery closures in 1995 through 2002 replaced
a relatively weak and highly leveraged asset base (a marginal retail system
and two small marginal refineries, all divested) with one world-scale
deep conversion refinery at Port Arthur, Texas, the two large
Memphis, Tennessee and Lima, Ohio refineries, and a
reasonable capital and liquidity base.
However, still-high effective leverage and other factors
delay an upgrade. Sustained up-cycle results are needed
to internally fund a heavy capital budget and reduce leverage.
Ever-volatile margins softened in 1Q03, the shut-in
of Venezuelan mostly heavy oil production restrains crude oil differentials,
PI faces a high $700 million of low sulfur fuels and MACT capital
spending through 2007 (up to $1.5 billion of total capex),
high oil prices drive high letter of credit and working capital needs,
and acquisition event risk (though in historically quite able hands) is
high. There are no assurances the next acquisition can be funded
with ample equity.
Furthermore, the bank rating is exposed to a high mix of commodity
inventory in the borrowing base, a full 80% advance on inventories,
oil prices in steep backwardation, the fact that part of inventory
is in transit, and an expanded cash draw sublimit. Moody's
also estimates PI's maximum exposure to its lease guarantees on divested
Clark retail assets (now bankrupt) to be roughly $35 million a
year, though we expect realized gross and net exposure to be far
less. Also, tremendous 2001 coker margins from abnormally
wide crude oil differentials pushed Port Arthur's coker margin stabilization
agreement with Pemex into surplus (now $70 million). Thus,
as in 2002, PI is naked to narrow crude oil price differentials
until the surplus is consumed.
Moody's estimates pro-forma cash operating and gross interest
expense per throughput barrel of $3.10 and $0.61,
respectively. Allowing for scheduled and a degree of unscheduled
downtime, the present geopolitical and market forces cause Moody's
to be prepared for 2003 EBITDA of $350 million to $450 million,
versus roughly $110 million in gross interest and $220 million
in cash capex. We expect cash capex of at least $350 in
2004, or $450 million if margins are sufficiently strong.
In up-cycle crack spread environments, and with at least
average crude oil differentials, Moody's believes PI could generate
$600 million to $680 million of pro-forma EBITDA.
An upgrade could come from some combination of the following factors:
= Memphis operationally performs as expected and its regional margins
retain historic spreads over Gulf Coast benchmarks. PI would avoid
material unscheduled downtime.
= Margins, driven by sector crack spreads and average or
better crude oil price differentials, would need to return to mid-cycle
or better for the bulk of 2003, and not collapse in 2004.
The risk of liquidity-straining oil price spikes would have diminished.
= PI would complete its equity offering at a scale towards the
high end of its estimates.
= PI's next acquisition, which may be substantial,
would be funded 50% with common equity, and associated low
sulfur fuels capex would be manageable.
= PI's final guarantee exposure to its divested retail assets would
not be material to the rating.
Effective debt totaled $1.010 billion at year-end
2002, including roughly $85 million due to Morgan Stanley
under the Lima refinery's crude oil line-fill inventory (2.7
million barrels) monetization. Assuming $250 million of
equity is raised, pro-forma debt after the acquisition would
be roughly $1.330 billion, including the Lima line-fill
funding and now roughly $200 million of off-balance sheet
inventory funding for Memphis. In lieu of the off-balance
sheet funding, PRG would have to borrow some $285 million
to fund the line-fill and inventory.
In a serious down-cycle, and facing high natural gas costs,
PI's adjusted 2002 EBITDA was $173 million before writedowns,
versus an adjusted $635 million in 2001. Fourth quarter
2002 EBITDA was $97.6 million whereas fourth quarter 2001
EBITDA was a negative $1 million. Fourth quarter 2002 benefited
from wider crack spreads and crude oil differentials generally,
and very strong Chicago region crack spreads over $6/barrel.
Had Memphis been owned in 2002, Moody's conservatively estimates
pro-forma 2002 EBITDA of roughly $250 million.
Memphis adds a vital third leg to PI's refining portfolio, strengthens
its light sweet crude oil sourcing and logistics for Lima and Memphis,
strengthen its regional refined product logistics, adds to PI's
capacity to capitalize on regional margin spikes, and may postpone
by one year PI's heavy low sulfur gasoline capital spending at Lima.
Roughly 120,000 BPD of Memphis' throughput is sold within its local
region, with 50,000 BPD shipped north into the Midwest for
sale. The acquisition boosts PI's effective throughput capacity
to roughly 570,000 barrels/day.
The Memphis acquisition appears to be competitive if regional margin differentials
are retained. Excluding earnout payments, inventory,
and low sulfur capex, the $315 million price equates to $270
per daily complexity barrel and $1,853 per throughput barrel.
Memphis is a light sweet cracking refinery with a low Nelson complexity
rating of 6.9. It needs roughly $180 million of capex
to configure it for low sulfur fuels. On the other hand,
Williams had invested some $400 million in Memphis since 1997,
improving its process economics.
Memphis has rated capacity of 190,000 bpd but it runs 170,000
bpd due to local market light product demand constraints and to avoid
producing larger volumes of fuel oil than the region needs. Also,
transportation costs to, and the supply/demand balance of,
other markets restrains higher Memphis production. Memphis' regional
wholesale infrastructure comes with three regionally very important terminals,
including a 70,000 barrel/day truck rack terminal in East Memphis,
a 25,000 barrel/day terminal in West Memphis, and a 25,000
barrel/day jet fuel terminal serving the Memphis air transportation hub.
All terminals are located within five miles of the refinery. The
acquisition includes 3.8 million barrels of liquids storage capacity.
At 90% utilization, 170,000 bpd of crude oil throughput,
at 2002 energy costs, and at mid-cycle Gulf Coast 2-1-1
crack spreads of $3.25/barrel plus transportation differential,
Moody's reasonably believes Memphis can generate $105 million in
mid-cycle EBITDA. PI believes it will generate higher mid-cycle
results, on light sweet crude oil purchasing synergies with Lima
and product marketing synergies with PI's Midwest wholesale terminal complex.
It will take several quarters of operating and market conditions to assess
what PI can do with Memphis.
Moody's notes that four recent and likely refined product pipeline expansions
will increase competing Gulf Coast refined product volumes in the southern
and northern Midwest. The impact on Lima and Memphis does not seem
material in the long run due to recent and potential refinery shutdowns
and regional demand growth. Nevertheless, these expansions
underscore regional margin risks inherent to the evolution of the U.S.
PI's controlling shareholders (The Blackstone Group, Occidental
Petroleum, and CEO Tom O'Malley) agreed to take up to $65
million of the equity offering. Under the refinery purchase and
sale agreement, PI is not obligated to buy Memphis if the equity
market is not sufficiently receptive to PI's pending offering.
In that event, the acquisition may still proceed if William's exercises
its option to accept up to $100 million of PI equity as partial
Ratings confirmed include: PI's Ba3 senior implied rating;
PAF's Ba3 $251 million of 12.5% senior secured notes
due 2009; PUSA's B2 $42 million of 11.5% subordinated
notes due 2009; PRG's Ba3 $110 million of 8.625%
senior unsecured notes due 2008, $100 million of 8.375%
senior unsecured notes due 2007, and $240 million floating
rate term loan due November 15, 2003 and 2004; and PRG's B2
$175 million of 8.875% senior subordinated notes
Premcor Inc. is headquartered in Old Greenwich, Connecticut.
Senior Vice President
Corporate Finance Group
Moody's Investors Service
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service