MOODY'S CONFIRMS PREMCOR & PORT ARTHUR FIN. RATINGS
Moody's confirmed, conditional to parent Premcor, Inc. (PI) completing its current launch of an initial public offering, the ratings of Premcor USA (PUSA), Premcor Refining Group (PRG), and Port Arthur Finance (PAF). PI is offering a minimum of 15 million shares (31% of pro-forma shares), targeting $22 to $24 per share. If successful, the offering would establish an equity valuation in the range of $1.2 billion. The IPO would be the first of a four-stage effort to transform PI's financial and corporate structures. The confirmation completes a downgrade review begun February 2002 when PI and PRG confirmed they will close the Hartford, Illinois refinery on October 1, 2002, reducing its portfolio to two refineries.
i) Premcor's Ba3 senior implied rating.
ii) PUSA's B3 senior unsecured rating.
iii) PRG's Ba3 senior unsecured note ratings B2 subordinated note ratings.
iv) PAF's Ba3 senior secured ratings. PAF is Port Arthur Coker Co.'s (PACC) financing arm.
The confirmation reflects Moody's view that, barring market disruption, Premcor can complete an IPO of scale, sufficient to underpin the ratings and begin positioning it for specific sizable organic expansions. Moody's believes eventual acquisitions would be supported by opportunistic equity issuance designed to support PI's growth strategy, mitigating attendant interim risks and positioning PI for its next move. The pending IPO does not include shares held by current shareholders.
Moody's anticipates a (1) subsequent sizable bond issue after the IPO to refinance near-term maturities and (2) PI's subsequent efforts to restructure its corporate and capital structures for greater funding efficiencies.
The ratings are restrained by a number of factors. Consolidated PI is highly leveraged, as are its subsidiaries PUSA/PRG and PACC, and would remain leveraged following the IPO. PI faces large near-term maturities, and is gearing up for heavy capital spending and potentially large refinery acquisitions. During the 2002 through 2006 period, PI contemplates roughly $1 billion in capital spending for low sulfur gasoline and diesel projects, other mandatory outlays, and maintenance and turnaround outlays. In addition, if conditions are supportive, PI contemplates very sizable expansion capital outlays for the Lima and Port Arthur refineries.
First quarter 2002 results were very weak, along with sector conditions, but began firming during March and into April. Moody's expects below average refining margins. Significant PRG liquidity was consumed in the weak fourth and first quarters. Moody's will soon perform a follow-up assessment upon resolution of the IPO effort, in concert with a planned bond offering.
Taking Hartford's capacity out of the region may enhance Premcor's larger 170,000 barrel per day Lima, Ohio refinery's returns and ability to shoulder its own environmental capex. On the other hand, new product volumes from the Centennial and Explorer pipelines will introduce competing volumes into the U.S. Midwest region. Moody's will address Lima's competitiveness in the upcoming review.
It was preferable for PI to avoid uneconomic capital outlays at Hartford, avoid unnecessary operating and margin risks there, and reallocate capital to higher impact higher return projects. Still, as Moody's had written frequently, PI continues to face a basket of risks, partly including high leverage, risk of untimely sharp down-cycles, risk that upon final examination Premcor may still find that Lima might not support the heavy capital spending for mandatory low sulfur fuels specifications, and a view that until the ample liquidity and cash flow from PACC can flow to PRG, PRG's liquidity would recurrently be tight under certain market conditions.
If completed, the IPO would dampen several of these concerns and position PI to contemplate business moves that could strengthen and diversify its asset and earnings portfolio.
The ratings also gain support from the longer-term prospects for PACC to assist in delevering PUSA and PRG.
Key strategic decisions or events in the future include (1) whether Premcor can execute an alternative use for certain Hartford processing units or conducts strategic activity in the Midwest region, (2) whether completes an initial public offering, (3) the size of the offering and proportion of net proceeds that flow down to PRG and PACC, (4) the eventual disposition of Blackstone's and Occidental Petroleum's ownership shares in PI and PACC, (5) when and if Premcor pursues strategic acquisitions.
Blackstone controls about 81% and Occidental Petroleum owns about 18% of PI. PI wholly-owns 90% of Sabine River Holding Corp. which wholly-owns 90% of PACC. Occidental directly owns 10% of Sabine/PACC.
The Premcor Inc. is headquartered Old Greenwich, Connecticut.
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