MOODY'S CONFIRMS PORT ARTHUR FINANCE & PREMCOR RATINGS; RETAINS NEGATIVE OUTLOOK
$630 Million of Port Arthur Project Debt & $1.06 Billion of Premcor Bonds & Prefs Affected
New York, December 13, 2000 -- Moody's Investors Service confirms Port Arthur Coker Co.'s (PACC)
and Premcor's ratings, retaining the present negative rating outlooks.
Confirmations include: (1) Port Arthur Finance Co. (PAF)
Ba3 $255 million of 12.5% senior secured notes due
2009, $325 million of Tranche A and B senior secured bank
debt, and $50 million secured working capital revolver;
(2) Premcor USA (PUSA) B3 $175 million of 11 7/8% senior
unsecured notes due 2005 and "caa" $88 million of 11.5%
PIK preferred stock; (3) The Premcor Refining Group (PRG) Ba3 senior
unsecured $110 million of 8 5/8% notes due 2008, $100
million of 8 3/8% notes due 2007, $172 million of
9 ½% notes due 2004, and $240 million of floating
rate bank loans, and B2 senior subordinated $175 million
of 8 7/8% notes due 2007. Moody's does not rate PRG's $700
million secured working capital facility. The Premcor senior implied
rating is Ba3. These actions follow amendments to PACC's bank credit
and letter of credit insurance facilities, as well as revisions
to Purvin & Gertz' (PG) PACC cash flow forecasts.
PUSA owns all of PRG (together, PUSA and PRG are herein defined
as Premcor). PAF is PACC's financing arm, funding PACC through
intercompany notes. PRG operates PACC; PACC owns key deep
conversion units being built in PRG's flagship refinery. Premcor
Inc. (PI) owns all of PUSA and, through Sabine River Holding
Corp., 90% of PACC. The Blackstone Group controls
81% of PI, Occidental Petroleum owns 18% of PI,
and Occidental directly owns 10% of Sabine/PACC. PACC is
strategic to PRG and to Blackstone's exit plans for its $264 million
Premcor/PACC investment. Moody's ties PACC's ratings to Premcor's.
In spite of full PACC mechanical completion later this month and PRG's
strong 2Q00 results, the rating outlook remains negative.
Moody's is optimistic for PACC's ability to reach design performance in
first-half 2001, but PRG is highly leveraged in a volatile
sector, PACC's fortunes are tightly entwined with PRG's, and
PACC is a cash-consuming project until reaching design performance.
Yet base case forecasts imply PACC might commence dividends to PI by 2003.
But Blackstone's self interest would dictate whether to downstream that
cash to Premcor, realized PACC and PRG margins are volatile,
results below mid-cycle levels would defer PACC dividends,
and PRG may need results above mid-cycle levels to avoid a rise
in net debt.
In addition to a more cautious refining outlook, the outlook reflects:
(1) very high Premcor debt relative to asset value, volatile cash
flow, mid-cycle cash flow after capex and interest,
and liquidity needs; (2) high consolidated Premcor/PACC debt on consolidated
PI asset values and earnings potential; (3) the cash impact of PRG's
3Q00 under-performance; (4) PRG's elevated letter of credit,
working capital, and liquidity needs due to high oil prices;
(5) PRG's exposure on 56% of its throughput volumes to often vexing
Midwest sector margins and under-performance to those margins,
and (6) PACC's remaining hurdle of attaining design performance in first-half
2001. Additionally, though price differentials between heavy
and light and between sour and sweet crude oils are now attractively very
wide, a correction to more normal but still supportive differentials
could evolve if OPEC cuts heavy crude production in 2001 to support oil
The ratings will be reevaluated in first-half 2001. They
are sensitive to 4Q00 and first-half 2001 performance and PRG's
ability to begin reducing net debt to levels compatible with PRG's mid-cycle
potential and down-cycle environments. Premcor's ability
to sustain net debt reduction likely requires 4Q00 and 2001 results above
seasonal averages, and working capital needs not consuming excessive
liquidity. If PRG is not sustaining net debt reduction, a
review for downgrade is likely unless Blackstone declares support for
Premcor's debt and presents an exit strategy that strengthens Premcor's
credit standing. The ratings are not compatible with any strategies
that might reduce the claims of the rated instruments to below original
A review would assess: PRG cash flow, liquidity, capex
needs, and deleveraging prospects; PACC's progress; combined
Port Arthur and PACC performance; extent to which PACC indirectly
or Blackstone directly may firm PRG's standing; and if PACC debt
is sufficiently insulated from Premcor substantive consolidation,
hold-out, and contract renegotiation risk.
The ratings remain supported by: (1) PACC's imminent mechanical
completion roughly on budget, (2) cash benefits of a sector recovery
from March 2000 through November 2000, leaving Premcor with $266
million of 9/30/00 consolidated cash ($38.5 million at PUSA)
prior to the winter season and inventory build before the summer season,
(3) about $250 million to $270 million of expected year-end
2000 cash, (4) potential substantial annual PACC debt reduction
starting in 2001 under PACC's base case scenario, and (5) PRG's
view that its own Port Arthur (PA) margins may be somewhat less volatile
after PACC's commissioning. Also, while a fall in crude oil
prices tends to spur sector inventory building and lower margins,
the reduction in crude oil prices would also free up a layer of liquidity
cash tied up in inventory.
Purvin & Gertz' base case model indicates PACC's ability to repay
about $174 million of debt in 2001-2002, $254
million in 2001-2003, while fully-funding the senior
claim of the $75 million PMI reserve account. However,
these numbers are not sensitized for operating rates and market forces
that can substantially cut cash flow. If realized, base case
debt paydown indirectly benefits Premcor to the degree Blackstone remains
committed to sustaining PRG's health to optimize the value of its exit
strategy. Blackstone's self interest may induce it to provide PRG
an increment of downcycle support if it also believed that the assistance
could be recovered during an up-cycle or from its exit strategy.
Premcor, Inc. and PACC are together one of Blackstone's largest
PRG believes its margin volatility may modestly decline due to substitution
of a significant portion of PRG's current Port Arthur exposure to Gulf
Coast 3-2-1 crack spreads (based on light sweet crude) with
an effectively partially hedged exposure to PACC's eight year coker gross
margin stabilization contract with PMI/PEMEX (Baa3). PACC's earnings
volatility, and with a lagged effect, its cash flows,
are moderated by the PMI margin contract. PEMEX guarantees an average
$15/barrel margin between the light products produced by PACC's
coker (raw feedstocks for gasoline and distillate) and PACC's coker feedstock
(vacuum distillation tower bottoms). Some of this benefit is contractually
passed on to PRG through a web of intercompany lease, processing,
off-take, and management contracts.
PACC's AMENDED BANK FACILITIES AND CASH FLOW FORECAST:
PACC's bank loans and working capital insurance facility have been amended
and increased, and Purvin & Gertz revised its base case cash
flow forecast for PACC. The secured revolver was increased from
$35 million to $50 million, mandatory term loan repayments
were reduced, and Winterthur's letter of credit guarantee facility
was increased from $150 million to $200 million.
PG forecasts PACC's first five years of base case cash flow available
for debt service of $913.4 million (only slightly lower
than planned) and $1.338 billion in its first eight years
(5% below plan). But PG now expects $232 million
of 2001 PACC cash flow available for debt service, about $27
million higher than planned. Still, PACC now likely needs
to pre-fund its $75 million coker margin reserve account
earlier than planned due to strong heavy/light differentials. These
changes result in about a $55 million reduction in PACC's first
three years of debt repayment, causing full repayment of the bank
facilities to be delayed by about one year until late 2004.
Cash flow revisions result from high absolute oil prices, high
natural gas refinery fuel costs, high working capital and letter
of credit needs due to high oil costs, and very wide heavy/light
crude differentials forcing accelerated pre-funding of PACC's coker
margin reserve account.
PACC's RATINGS ARE TIED TO PREMCOR's:
PACC's ratings remain directly tied to Premcor's. This reflects:
(1) functionally inseparable PRG/PACC operations and economics; (2)
PACC reliance on contractual access to vital PRG units for distillation
of PACC's crude oil and the finishing of PACC raw product; (3) material
damage to PACC fair value and asset coverage of PACC debt if PRG defaulted;
(4) the potential for PRG to seek relief on important processing contracts
with PACC if PRG fell into bankruptcy; (5) PACC initially high debt
relative to much reduced cash flow and asset value if PACC had to operate
or be sold in its defined "Stand-alone" mode (worse if it lost
access to the distillation towers), (6) a risk PACC could be rolled-up
in substantive consolidation with Premcor if Premcor went bankrupt;
and (7) the Premcor securities' likely strength in distress negotiations
concerning disposition of PRG, the Port Arthur refinery, PACC
contracts, and PACC itself. PACC cannot be sold for fair
value unless it operates, and is sold, in tandem with Port
UP-DATE SINCE FEBRUARY 2000 RATINGS CONFIRMATION:
In February 2000, after disastrous 1999 sector conditions,
Moody's confirmed Premcor's and PACC's ratings with a negative outlook.
This action recognized cyclical risks to highly leveraged refiners,
but also recognized strong demand and inventory fundamentals, the
role backwardation could play in reinforcing tight inventories and good
margins, and anticipated strong 2000 and supportive 2001 sector
margins. The sector did deliver the strongest margins in six years
and record margins in some regions, led by gasoline and marked by
exceptionally wide crack spreads and light/heavy and sweet/sour crude
oil price differentials. Margins also benefited from reduced fungibility
of gasoline grades due to differing regional and seasonal environmental
standards for gasoline content. Yet, especially in 3Q00,
PRG's margins, cash flow, and cash accumulation did not fully
participate in sector strength.
Moody's is somewhat more cautious now about the refining outlook.
Furthermore, peak margin environments of the 2000 variety are rare,
and Premcor's underperformance caused it to miss a valuable layer of up-cycle
cash accumulation. Premcor substantially underperformed strong
Midwest sector margins and its relative Midwest performance seems to have
worsened after PRG's mid-1998 acquisition of the Lima refinery.
PRG margins were dampened by: very high natural gas fuel costs
(over $45 million impact for 2000); low to negative refining
by-product margins on residual fuel oil, coke, petrochemical
feedstocks, and sulfur; higher than normal byproduct volumes
($100 million impact) due to PRG's heavier than normal Port Arthur
crude runs in preparing for PACC start-up; higher than budgeted
crude oil freight costs; periodic crude oil pipeline supply constraints
into the Midwest; cash hedging and inventory losses due to high,
volatile, and backwardated oil prices; and working capital
and letter of credit needs inflated by high oil prices. Unscheduled
downtime at Blue Island, Lima, and Port Arthur added to unbudgeted
costs, lost earnings, and hedging losses.
Moody's is cautious about winter margins. Crude inventories are
not as tight (particularly offshore), crude prices may face supply
pressure, and gasoline margins substantially tapered off since October.
Gulf Coast 3-2-1 crack spreads remain well above disastrous
1999 levels, but they are now largely supported by very strong distillate
margins still vulnerable to unknown 2000/2001 winter weather severity
and heating oil demand, and uncertainty regarding the actual tightness
of heating oil inventories. Primary inventories are tight,
but it is not yet clear to what degree this may offset by ample secondary
and tertiary inventories. On the other hand, heating oil
prices may gain some support from extraordinarily high natural gas prices.
Regarding 2001 margins, Moody's anticipates average sector crack
spreads due to concerns about decelerating demand and rising crude oil
and gasoline inventory. Falling oil prices have historically prompted
inventory building and product price pressure. Still, Port
Arthur's margins will also benefit from wide light/heavy and sweet/sour
crude oil price differentials on the portion of heavy crude runs not covered
by the PMI margin support contract.
LIQUIDITY AND DEBT CAPACITY:
In PG's base case model, PACC generates an average of $200
per year in EBITDA and its original backcast forecast displayed substantial
swings around that number. Moody's believes PRG's EBITDA at mid-cycle
crack spreads, crude prices, and natural gas costs could be
$150 million to $175 million. PACC is not expected
to upstream cash to PI for at least two years, but it may be able
to pay dividends by 2003 according to PG's base case. Rapid PACC
deleveraging may also induce Blackstone to justify a degree of incremental
support for PRG until PACC cash flow is available to PI and, hopefully,
is made available to PUSA/PRG.
In the meantime, Premcor and consolidated Premcor/PACC carry very
high debt relative to PRG and PRG/PACC processing capacity; likely
asset value; cash flow volatility; severity of sector corrections;
PRG's pattern of untimely downtime; liquidity and letter of credit
needs; and impact of backwardated and volatile oil prices on inventory
and hedging losses.
While it remains highly leveraged, Moody's believes PRG needs consolidated
Premcor cash of around $250 million given that cash is consumed
rapidly when weak margins coincide with crude oil price surges during
peak seasonal inventory build-up, PRG needs to maintain bank
confidence for $700 million of letter of credit capacity,
and that about $120 million in cash is ear-marked for letter
of credit backup and $40 million is PUSA cash for coupon payments.
An oil price surge would consume more letter of credit capacity.
About $600 million of letters of credit are issued and $75
million in cash must be pledged to use the full $700 million credit
DEBT RELATIVE TO ASSET VALUE AND PROCESSING CAPACITY:
Rapid PACC deleveraging and sound Premcor liquidity are important to bridging
the Premcor group to sustainable debt levels. Consolidated Premcor
and PACC debt is high relative to processing capacity and asset value
ranges. Pro-forma for PACC's $580 million of peak
debt, combined PUSA/PRG/PACC debt of $1.555 billion
is $2,752 of debt for each of PRG's 565,000 bpd of
distillation capacity and over $260 per daily complexity barrel.
Adding PUSA's $88 million of preferred stock yields $2,908
of claims per PRG distillation barrel and about $280 per complexity
barrel. Such levels exceed the pro-forma value of PRG's
four refineries, especially considering the range of values for
the smaller landlocked Midwestern units.
In contrast, PRG bought its 170,000 barrel per day Lima,
Ohio refinery in 1998 for about $1,090 per distillation barrel
and $125 per complexity barrel, and, in Moody's opinion,
Blue Island and Hartford likely are less valuable than that. In
1995, PRG bought Port Arthur for $70 million or about $300
per distillation barrel and under $35 per complexity barrel.
Transaction prices rose since PRG bought Lima and Port Arthur.
In 2000, a world scale 250,000 bpd light sweet medium complexity
refinery built in 1971 on the Gulf Coast sold for $2,640
per distillation barrel and about $284 per complexity barrel.
A 295,000 bpd world scale inland refinery in Illinois sold for $1,424
per distillation barrel and about $151 per complexity barrel.
In high-margin California, a high complexity 168,000
bpd refinery sold for $3,900 per distillation barrel,
around $300 per complexity barrel, and $150 million
of performance based compensation. A second very complex 135,000
bpd unit sold for around an extraordinary $5,800 per distillation
barrel, $4,750 per throughput barrel, and around
$400 per complexity barrel. In 1993-1997, the
peak price for California refineries was in 1997, at $2,000
per distillation barrel and $164 per complexity barrel.
The average price nationwide was $842 per distillation barrel and
$79 per complexity barrel, and would be much lower if California
sales are excluded.
Excluding PUSA debt, pro-forma PACC/PRG debt is $2,440
of debt per PRG distillation barrel and about $236 per complexity
barrel. Excluding PACC's debt and conversion units, PUSA/PRG
debt is $1,725 million of debt per distillation barrel and
about $167 per complexity barrel, and debt plus preferred
stock is $1,873 per distillation barrel and $181 per
complexity barrel. PRG's debt is $1,416 of debt per
distillation barrel and $137 per complexity barrel.
The 250,000 barrels per day complex PA/PACC refinery is by far PRG's
most valuable unit. If $315 million of Premcor/PACC's $1.555
billion of debt is assigned to Lima, Blue Island, and Hartford's
315,000 barrels of low to medium complexity capacity, the
remaining debt represents $4,960 of debt per Port Arthur
distillation barrel and $415 to $475 per complexity barrel
depending on the pro-forma complexity rating given to Port Arthur.
PACC's IMPORTANCE TO PREMCOR AND BLACKSTONE:
Successful PACC performance may directly assist Premcor's deleveraging
after two years to the degree (1) PACC has free cash flow after taxes,
capex, debt reduction, and PMI reserve funding, (2)
that cash can be upstreamed to PI, and (3) Blackstone downstreams
those funds to PUSA.
The optimal, if not only, manner in which Blackstone can maximize
the recapture of its PACC investment is an exit strategy including a solvent
PRG and a combined Port Arthur refinery and PACC project. PACC's
fair value would be hurt substantially if it could not be sold in tandem
with its host refinery. Additionally, PI could not be taken
public if PRG was not financially sound. But Moody's would not
be optimistic for material Blackstone support if a down cycle arrives
prematurely or if PRG or PACC suffers material operating problems.
Premcor Refining Financial Update:
The 2000 recovery displayed wide monthly margin swings and regional disparities.
On average, Port Arthur realizes margins above Gulf Coast crack
spreads but the Midwest units realize a substantial discount (that widened
after Lima was purchased) to Midwest margins. In 3Q00 and nine-months
2000, PRG's margins were 55% and 78% of Midwest margins,
respectively. Its 3Q00 Midwest margins were only $2.78/barrel
but were $4.64/barrel for the first three quarters.
Premcor EBITDA before all inventory timing adjustments was $46
million in 3Q00 and $228 million for the first nine months of 2000.
But, after $34 million of 3Q00 cash inventory and hedging
losses, EBITDA was only $12 million. In the first
three quarters of 2000, after $98 million in cash losses,
EBITDA was $130 million. Moody's anticipates 2000 EBITDA
in the range of $150 million to $165 million after cash
losses, assuming normal 4Q downtime. Moody's believes mandatory
annual capex may average $100 million while PUSA/PRG gross interest
expense is about $100 million a year. Total capex may be
in the range of $170 million for 2000 and $130 million for
Cash balances benefit from $124 million in 3Q00 working capital
reduction after a $90 million 2Q00 working capital increase,
and from PRG's 1998 $215 million sale of its retail network.
Consolidated 9/30/00 cash was $266 million and may end the year
around $250 million to $270 million. PUSA's 9/30/00
net worth was $34 million and PRG's was $245 million.
Combined PUSA and PRG debt was $970 million ($175 million
at PUSA). PUSA also accretes dividends on its 11.5%
cumulative PIK preferred shares, with a current face value of $88
PACC PROJECT UPDATE:
Construction was 96% complete by November. Most of the $48
million contingency cushion is scheduled to be spent, but Premcor
believes costs will stay within the $853 million budget.
Remaining outlays are startup costs, including catalysts,
and new costs if startup problems occur. Initial testing of the
coker heaters was delayed. Initial operation of the hydrocracker
is planned for the third week of December and the desulfurization units
are operating. Air Products and Chemicals (APC) achieved mechanical
completion of the hydrogen plant.
Mechanical completion is delayed by one month and is expected for the
third week of December. Moody's would not be surprised if the formal
commencement of commissioning does not begin until January. After
Foster Wheeler declares mechanical completion, Premcor and independent
engineer Purvin & Gertz have ten days to concur. PACC has been
testing the coker with 50,000 to 60,000 bpd of vacuum tower
bottom runs through the coker.
PACC 9/30/00 debt was $498 million, reportedly peaking around
$580 million during commissioning. PG now projects 2001
PACC base case cash flow available for debt service of $232 million
and interest of $64 million and $186 million and $55
million, respectively, in 2002. PACC's base case shows
$107 million of debt paydown in 2001 ($99 million by cash
sweep), $75 million in 2002, $103 million in
2003, and $10 million in 2004 after funding the PMI reserve
account. PG's base case model shows PACC EBITDA averaging $200
PACC debt reduction by cash sweep will be slower than planned if crude
oil price differentials stay wider than the $5.94/barrel
differential implicit (on historical prices) in PACC's PMI coker margin
support agreement. Wide differentials between heavy and light and
between sour and sweet crude oil enhance PACC's natural coker margins.
But its margin volatility will be moderated by the coker margin stabilization
agreement, and the contract requires pre-funding of the margin
guarantee reserve account, to a $75 million maximum,
when coker margins are wider than $15/barrel. These payments
are senior to the bank's cash sweep mechanism.
DESCRIPTION OF PACC PROJECT, ASSETS, AND CONTRACTS:
The PACC project includes PACC-owned deep conversion and desulfurization
units, key assets PACC leases from PRG, and key contracts
amongst PACC, PRG, and third parties. PAF funds the
debt portion of PACC's $715 million share of PRG's $835
million coker project, situated within PRG's Port Arthur,
Texas refinery. Including a vital hydrogen plant built and owned
by Air Products and Chemicals (APC), the total project cost is $960
million. The project is should enhance PA's margins by enabling
it to run a far higher proportion of cheaper heavy sour crude (mostly
Mexican Maya) without reducing PA's combined 80% yield per barrel
of high value gasoline and distillate or materially increasing its low
or negative value heavy products yield.
Principal assets and contracts: (1) PACC's lease of 100%
of PA's distillation capacity and associated hydrotreaters. (2)
A PRG-funded expansion of PA's atmospheric distillation capacity
from 232,000 bpd to 250,000 bpd and vacuum distillation capacity
from 85,000 bpd to 131,000 bpd. PRG also revamped PA's
hydrotreaters and other offsite units. (3) PACC's construction
of an 80,000 bpd delayed coker, 35,000 bpd vacuum gas
oil hydrocracker, and a 417 long tons/day desulfurization complex.
(4) PRG's assignment of the key PEMEX crude supply and coker margin support
contract to PACC. (5) The $544 million lump sum project
design, engineering, and construction contracts with Foster
Wheeler. (6) The take-and-pay (if delivered) hydrogen
supply agreement with APC. (7) PRG conducts PACC's construction
and will source all of PACC's crude oil and buy all of PACC's production
under a portfolio of processing, management, and off-take
PREMCOR REFINING UNITS:
PRG operates four refineries with combined distillation capacity of 565,000
bpd. The currently light sour 250,000 bpd Port Arthur refinery
located at Port Arthur, Texas is PACC's host and will become a heavy
sour unit after PACC commissioning. A 170,000 bpd light sweet
refinery is located in Lima, Ohio, an 80,000 bpd light
sweet refinery is in Blue Island, Illinois, and a 65,000
bpd heavy sour refinery is in Hartford, Illinois. Port Arthur
has ready access to waterborne crude oil but the land-locked Midwestern
units occasionally face crude pipeline constraints.
The Premcor Refining Group, formerly Clark Refining & Marketing,
is headquartered in St. Louis, Missouri.
Robert N. McCreary
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: (212) 553-0376
SUBSCRIBERS: (212) 553-1653
V.P. - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: (212) 553-0376
SUBSCRIBERS: (212) 553-1653