MOODY'S CONFIRMS CLARK USA, CLARK R&M, PORT ARTHUR FINANCE RATINGS
Moody's Investors Service confirmed the ratings of Clark Refining & Marketing (CRM), its parent Clark USA (CUSA), and Port Arthur Finance Co. (PAF), but continues the negative outlook assigned July 1999. Port Arthur Coker Co. (PACC) wholly owns PAF. The senior implied rating is Ba3. CUSA and PACC's joint parent is Clark Refining Holdings (CRH), owning 100% of CUSA and 90% of PACC. CRH is owned 82% by funds run by The Blackstone Group ($4 billion of equity commitments). Occidental Petroleum (Baa3) owns 17% of CRH and 10% of PACC. The PACC and CUSA/CRM ratings are linked, recognizing ultimately inseparable operating and economic mutual interests between CRM, PACC, and Blackstone, and the value and strategic importance of a successful PACC to CRM and Blackstone's exit strategy. Moody's will shortly update its separate analysis of PACC/PAF and CRM's Port Arthur (PA) refinery, originally released July 30, 1999.
In spite of the serious impact of especially harsh 1999 sector refining margins, the ratings remain supported by a series of considerations. These include (1) reasonable prospects for modest CRH group deleveraging to begin in the first half of 2001 after planned completion of the Port Arthur Coker project in late-2000, (2) reasonable prospects for a 2000 and 2001 firming of sector margins, and, (3) most importantly, the related view that Blackstone's self-interest in protecting its $264 million CRH investment remains sufficiently strong through to coker project completion, a subsequent IPO of CRH in the second half of 2001 or 2002, or other strategic event. This makes the assumption sector conditions and/or downtime problems between now and the IPO will be manageable. Combined, these considerations justify a continuing view that Blackstone remains a source of implied material liquidity support.
Blackstone's enticement is eventual mid-cycle performance or better and the hope of executing an IPO into such a market with the earnings and momentum of a completed Port Arthur deep conversion project behind it. PACC's success would be a critical catalyst for an IPO when market conditions are receptive, for reduction of CRH's group leverage, and for commencement of Blackstone's exit process. And, to effectively serve its own self-interest, Blackstone's support needs to cover both PACC and CUSA/CRM to realize acceptable value out of PACC. While CRM and CUSA debt is structurally subordinated to PACC cash flow, CRH would not be able to go public if the refining affiliate, whose flagship refinery is PACC's host, was not also in good shape.
Moody's acknowledges, however, the ratings confirmation would not be justified if 2000 evolved into yet another very weak refining market. Still, the very volatility of the sector is, on balance, more favorable to the outlook at this time. On 4Q99 and full-year 1999 conditions, CRM's break-even (pre-interest) gross refining margins were $2.17/barrel and $2.11/barrel, respectively, at Port Arthur. Instead, Port Arthur realized gross margins of $1.85/barrel and $2.06/barrel, respectively (when the Gulf Coast 3/2/1 crack spread was $1.66/barrel and $1.71/barrel, respectively). The Gulf Coast crack spread has averaged over $2.80/barrel thus far this year, with the seasonably strong second and third quarters still ahead. On 4Q99 and 1999 results, CRM's Midwest breakeven crack spreads were $2.47/barrel and $2.40/barrel, respectively. Instead, CRM realized $1.54/barrel and $1.84/barrel, respectively, in the Midwest. So far this year, not only have regional crack spreads widened in those regions, but light/heavy price differentials and margins on the heavy end of the product slate have widened as well.
The corrective forces at work during 1999's near-historic low trough conditions, coupled with currently sound demand, have likely prepared the sector for cyclical upside. If sustained, this would solidify Blackstone's support and reinforce its belief in mid-cycle potential. Sector margins were crushed by a long sustained rise in crude oil prices, slimmer light/heavy and sweet/sour differentials, and an inability to pass surging crude oil costs along in prices due to a large refined product overhang. Though margins firmed substantially in 1Q2000, crude oil price spikes could still periodically hurt 2000 margins. But with sector product inventories at lean levels and a downward bias to oil prices, conditions may be favorable for a cyclical firming of crack spreads if demand holds up.
Two hard refining years immediately followed Blackstone's investment in Clark, requiring cash proceeds from asset sales to be largely used to cover cash flow shortfalls instead of debt reduction or reinvestment and materially dampening potential returns on the investment. Still, CRH's mid-cycle earnings potential and a firmer intermediate term refining market support the view that it remains in Blackstone's self-interest to stay the course with CUSA, CRM, and PACC. And, though CRM will substantially outspend expected 2000 EBITDA, the shortfall may reasonably be covered by existing cash and by Blackstone's implied support under expected margin conditions.
Pro-forma for PACC, CRM estimates CRH's mid-cycle EBITDA to be in the range of $375 million to $425 million, assuming a $2.90/barrel Gulf Coast crack spread, $5.25/barrel light/heavy crude price differential, and $1.50/barrel sweet/sour crude price differential. CRM believes PACC would then generate EBITDA in the range of $225 million and CRM would generate about $200 million. If achieved, CRH's potential mid-cycle enterprise value may readily be in the range of $2 billion to $2.5 billion and be ample incentive to keep Blackstone nailed to CRH's mast.
Still, the possibility of a downgrade later in 2000 is material if the expected 2000 cyclical and seasonal firming in margins does not sustain, if CRM's cash balances erode towards $100 million, if debt rises meaningfully from current levels, if PACC experiences completion problems, and/or if Blackstone's commitment to Clark and completion PACC wanes. The outlook may remain negative until later in 2000 when sector recovery and PACC's completion progress can more reliably be assessed. This caution is due to high leverage, sector volatility, CRM's probable need to consume the large majority of year-end 1999 cash (barring very high margins), CRM's central need for unquestioned access to bank credit capacity for up to $500 million in letters of credit to buy crude oil, and a spate of unscheduled downtime, including Blue Island, Illinois, Lima, Ohio, and, today, Port Arthur's catalytic cracker.
CRM believes that, at an average $2.40/barrel Gulf Coast crack spread, $90 million of 2000 maintenance capex, $95 million of PACC-related CRM capex, and $80 million of CRM and CUSA interest expense, CRM/CUSA cash levels would finish the year above $100 million. And, though the bulk of PACC's 2001 cash flow would go to repayment of PACC bank debt, CRH's consolidated earnings, valuation and (market conditions permitting) ability to tap equity would be strengthened.
One uncertainty involves whether the recent spate of Clark operating difficulties in the Midwest has been resolved. Another is whether OPEC producers will hike crude oil production in time to avoid further crude price spikes. It bears repeating that the ratings confirmation is vulnerable to volatile forces inherent to the crude oil and refined product futures and physical markets which render the quarterly forecasting of refining margins an almost random exercise. Moody's will track realized 2000 margins, CRM's ability to end the latest spate of unplanned refinery downtime, and construction and completion progress at PACC.
In line with near historic sector weakness, and before inventory gains and losses and depreciation, CRM's four refineries generated 1999 net refinery margin losses of $49 million before downtime. After downtime, other items, and $48 million of G&A expense, EBITDA was a negative $105 million. Lima, Hartford, and Blue Island generated about $53 million in losses between them, and Port Arthur generated a $4 million loss. Gross cash interest expense was about $100 million. CRM estimates that its non-discretionary capex will average about $90 million per year in 1999, 2000, and 2001. At 12/31/99, consolidated cash balances approximated $308 million, held mostly at CRM. CUSA's 12/31/99 net worth was a negative $33 million and CRM's was a positive $183 million.
Moody's anticipates 2000 CUSA/CRM EBITDA in the range of $80 million to $150 million, with the lower figure associated with average Gulf Coast crack spreads of $2.40/barrel and the higher figure associated with average crack spreads around $2.75/barrel, assuming only normal downtime. In 2001, and assuming the coker project's successful late 2000 completion and successful 2001 performance, Moody's believes CRM's operating and services relationship with PACC could add about $25 million per year directly to CRM's mid-cycle earnings power. CRM expects margin protected PACC itself to generate EBITDA exceeding $200 million.
Excluding PACC debt, Moody's estimates total CUSA and CRM debt on 12/31/99 to be in the range of $970 million ($175 million at CUSA) plus peak needs of over $400 million to $500 million in letters of credit needed for CRM to be able to source crude oil. Additionally, Moody's estimates about $80 million in cumulative preferred shares are outstanding at CUSA and PACC 12/31/99 debt of $360 million. PACC debt will grow as construction proceeds.
The confirmed ratings include: (1) CRM's Ba3 rated 8 5/8% $110 million senior notes due 2008, 8 3/8% $100 million senior notes due 2007, 9 «% $175 million senior notes due 2004, $240 million unsecured floating rate term loan, B2 rated 8 7/8% $175 million senior subordinated notes due 2007, and Ba2 rated $620 million secured revolving facility. (2) CUSA's B3 rated 10 7/8% $175 million of senior notes due 2005. (3) PAF's Ba3 rated 12.5% $255 million senior secured notes due 2009, $325 million of Tranche A and B senior secured bank term loans, and $75 million secured working capital revolver.
PAF provides debt funding for PACC's $715 million share of CRM's $835 million coker project within CRM's flagship refinery at Port Arthur, Texas. Including a key hydrogen plant being built and owned by a third party, the total project cost is $960 million.
Situated within CRM's Port Arthur (PA) refinery, the $960 million project consists of owned and lease assets and several CRM/PACC and third party contracts. These principally include:
(1) PACC's lease of 100% of PA's distillation capacity and three associated hydrotreaters. Atmospheric distillation capacity will be increased from 232,000 barrels per stream day (bpsd) to 250,000 bpsd and vacuum distillation capacity will be increased from 85,000 bpsd to 131,000 bpsd. (2) Construction of an 80,000 bpsd delayed coker, 35,000 bpsd vacuum gas oil hydrocracker, a 417 long tons/day desulfurization complex, and revamps to PA's atmospheric and vacuum crude distillation units, several hydrotreaters, and other offsite units. (3) CRM's assignment to PACC of the key Pemex crude supply/coker margin support contract. (4) The key turnkey project design, engineering, and construction contract with Foster Wheeler and the hydrogen supply agreement with Air Products and Chemicals. (5) Under several contracts, CRM conducts most of PACC's construction and operating management functions. Upon completion, the high-margin project units would enhance PA's overall margins by enabling it to run a much higher mix of cheaper heavy sour crude (Mexican Maya) without reducing PA's high value light products yield or materially increasing its low or negative value heavy products yield.
Clark Refining & Marketing is headquartered in St. Louis, Missouri.
© 2020 Moody's Corporation, Moody's Investors Service, Inc., Moody's Analytics, Inc. and/or their licensors and affiliates (collectively, "MOODY'S"). All rights reserved.
CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. AND/OR ITS CREDIT RATINGS AFFILIATES ARE MOODY'S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY'S (COLLECTIVELY, "PUBLICATIONS") MAY INCLUDE SUCH CURRENT OPINIONS. MOODY'S INVESTORS SERVICE DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT OR IMPAIRMENT. SEE MOODY'S RATING SYMBOLS AND DEFINITIONS PUBLICATION FOR INFORMATION ON THE TYPES OF CONTRACTUAL FINANCIAL OBLIGATIONS ADDRESSED BY MOODY'S INVESTORS SERVICE CREDIT RATINGS. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS, NON-CREDIT ASSESSMENTS ("ASSESSMENTS"), AND OTHER OPINIONS INCLUDED IN MOODY'S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY'S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY'S ANALYTICS, INC. AND/OR ITS AFFILIATES. MOODY'S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND MOODY'S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. MOODY'S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY'S ISSUES ITS CREDIT RATINGS, ASSESSMENTS AND OTHER OPINIONS AND PUBLISHES ITS PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.
MOODY'S CREDIT RATINGS,
ASSESSMENTS, OTHER OPINIONS, AND PUBLICATIONS ARE NOT INTENDED FOR USE BY RETAIL INVESTORS AND IT WOULD BE RECKLESS AND INAPPROPRIATE FOR RETAIL INVESTORS TO USE MOODY'S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS OR PUBLICATIONS WHEN MAKING AN INVESTMENT DECISION. IF IN DOUBT YOU SHOULD CONTACT YOUR FINANCIAL OR OTHER PROFESSIONAL ADVISER.
ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW, AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY'S PRIOR WRITTEN CONSENT.
MOODY'S CREDIT RATINGS,
ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS ARE NOT INTENDED FOR USE BY ANY PERSON AS A BENCHMARK AS THAT TERM IS DEFINED FOR REGULATORY PURPOSES AND MUST NOT BE USED IN ANY WAY THAT COULD RESULT IN THEM BEING CONSIDERED A BENCHMARK.
All information contained herein is obtained by MOODY'S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided "AS IS" without warranty of any kind. MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY'S is not an auditor and cannot in every instance independently verify or validate information received in the rating process or in preparing its Publications.
To the extent permitted by law, MOODY'S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability to any person or entity for any indirect, special, consequential, or incidental losses or damages whatsoever arising from or in connection with the information contained herein or the use of or inability to use any such information, even if MOODY'S or any of its directors, officers, employees, agents, representatives, licensors or suppliers is advised in advance of the possibility of such losses or damages, including but not limited to: (a) any loss of present or prospective profits or (b) any loss or damage arising where the relevant financial instrument is not the subject of a particular credit rating assigned by MOODY'S.
To the extent permitted by law, MOODY'S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability for any direct or compensatory losses or damages caused to any person or entity, including but not limited to by any negligence (but excluding fraud, willful misconduct or any other type of liability that, for the avoidance of doubt, by law cannot be excluded) on the part of, or any contingency within or beyond the control of, MOODY'S or any of its directors, officers, employees, agents, representatives, licensors or suppliers, arising from or in connection with the information contained herein or the use of or inability to use any such information.
NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY CREDIT RATING, ASSESSMENT, OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY'S IN ANY FORM OR MANNER WHATSOEVER.
Moody's Investors Service, Inc., a wholly-owned credit rating agency subsidiary of Moody's Corporation ("MCO"), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by Moody's Investors Service, Inc. have, prior to assignment of any credit rating, agreed to pay to Moody's Investors Service, Inc. for credit ratings opinions and services rendered by it fees ranging from $1,000 to approximately $2,700,000. MCO and Moody's investors Service also maintain policies and procedures to address the independence of Moody's Investors Service credit ratings and credit rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold credit ratings from Moody's Investors Service and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at www.moodys.com
under the heading "Investor Relations — Corporate Governance — Director and Shareholder Affiliation Policy."
Additional terms for Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY'S affiliate, Moody's Investors Service Pty Limited ABN 61 003 399 657AFSL 336969 and/or Moody's Analytics Australia Pty Ltd ABN 94 105 136 972 AFSL 383569 (as applicable). This document is intended to be provided only to "wholesale clients" within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODY'S that you are, or are accessing the document as a representative of, a "wholesale client" and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to "retail clients" within the meaning of section 761G of the Corporations Act 2001. MOODY'S credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors.
Additional terms for Japan only: Moody's Japan K.K. ("MJKK") is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody's Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody's SF Japan K.K. ("MSFJ") is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally Recognized Statistical Rating Organization ("NRSRO"). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.
MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any credit rating, agreed to pay to MJKK or MSFJ (as applicable) for credit ratings opinions and services rendered by it fees ranging from JPY125,000 to approximately JPY250,000,000.
MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.