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Rating Action:

MOODY'S PLACES PREMCOR's RATINGS ON REVIEW FOR UPGRADE

27 Nov 2002
MOODY'S PLACES PREMCOR's RATINGS ON REVIEW FOR UPGRADE

$1.566 Billion of Premcor USA, Premcor Refining, & Port Arthur Debt Securities and Bank Facilities Affected

New York, November 27, 2002 -- Moody's placed Premcor USA (PUSA), Premcor Refining Group (PRG), and Port Arthur Finance Corp.'s (PAF) ratings on review for upgrade. This action arises from the potential credit enhancing impact of Premcor Inc.'s (PI) pending $465 million acquisition of, and funding plans for, Williams Company's 170,000 throughput barrel per day (BPD) Memphis refinery, including the refinery, important terminal and storage assets vital to the refinery's value, and $150 million of inventory. Further potential earnout compensation of up to $75 million over seven years is discussed below.

Ratings potentially affected by the review for upgrade include:

1) PUSA's B1 rated senior unsecured notes

2) PUSA's B2 rated $40 million of 11.5% subordinated notes due 2009.

3) Premcor's Ba3 senior implied rating.

4) PRG's Ba2 $650million senior secured bank revolver and term loan facility.

5) PRG's Ba3 rated $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.

6) PRG's B2 rated $175 million of 8.875% senior subordinated notes due 2007.

7) PAF's Ba3 rated $251 million of 12.5% senior secured notes due 2009.

The $315 million base purchase price is potentially appealing, the proposed financing plan is supportive of sustaining a long-term growth-by-acquisition strategy in a volatile sector, and the back-up financing plan may be adequate as an interim measure. Excluding the up to $75 million earnout for upside performance, $315 million equates to $270 per daily complexity barrel and $1,853 per daily throughput barrel. Memphis is a light sweet crude oil refinery of low complexity, with a reported low Nelson rating of 6.9.

Though the unit has rated capacity of 190,000 barrels/day, the unit has been running 170,000 barrels/day due to local market constraints and to avoid producing larger volumes of fuel oil than are needed in the region. The refinery 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. Total system liquids storage capacity totals 3.8 million barrels.

The refinery would add an important third leg to Premcor's refining portfolio, strengthen its light sweet crude oil sourcing and logistics for Lima and Memphis, strengthen Premcor's regional refined product logistics, and postpone the need to complete heavy low sulfur fuels capital spending at the Lima refinery for another year until January 1, 2006. 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 would boost Premcor's effective throughput capacity to roughly 570,000 barrels/day. For several reasons, the postponement of Lima's Tier II spending is important to Moody's.

Memphis will require roughly $180 million of capital spending by 2006 to configure for Tier II low sulfur gasoline and diesel specifications. On the other hand, Williams had invested roughly $400 million in the refinery since 1997, boosting its energy efficiency and process economics. The $75 million of earnout payments are payable if market benchmarks exceed average levels. If benchmark Gulf Coast 2-1-1 crack spreads plus transportation differential exceed calculated average levels plus transportation differential, Premcor and Williams would share equally in that favorable out-performance until the earlier of $75 million in payments or seven years.

While it will take several quarters of operating and market conditions to assess what Memphis earnings will generate within the Premcor system, Premcor believes that the unit could generate roughly $127 million of EBITDA per year, assuming average Gulf Coast 2-1-1 crack spreads of $3.25/barrel plus transportation differential. Premcor reports that the $127 million nets out $13 million of G&A costs directly linked to the unit and adds $14 million of potential earnings synergies with Lima and from terminaling and selling Memphis volumes shipped north through Premcor's Hartford terminal complex.

Over time, Moody's notes four current and likely refined product pipeline expansions that will increase the flow of competing Gulf Coast refined product into the southern and northern Midwest. The impact of these expansions does not currently appear to be material to Midwest refiners in the long run due to recent and potential future refinery shut-downs as well as ongoing regional demand growth. Nevertheless, such expansions underscore part of the dynamic process underlying the evolution of the U.S.' refining infrastructure.

As proposed, the primary and back-up financing plans are sound. The primary plan includes roughly $230 million of equity before the acquisition closes (scheduled for first quarter 2003), with the remainder funded in the bond market and by increasing Premcor's crude oil inventory funding program with Morgan Stanley. Premcor's controlling shareholder group (The Blackstone Group, Occidental Petroleum, and CEO Tom O'Malley) has agreed to take $65 million of equity to support the offering. A fairly robust back-up financing plan, as it is known known to Moody's, includes (1) substantial equity, (2) a bridge loan from Morgan Stanley, and (3) inventory funding from Morgan Stanley.

Assuming the primary funding plan is executed, the pro-forma capital structure would include roughly $1.050 billion of debt ($1.2 billion of effective debt) and $1.1 billion of book equity. Blackstone controls about 48.4% of PI, public shareholders and PI management control 38.1%, and Occidental Petroleum controls about 13.5%.

Premcor Inc. is headquartered in Old Greenwich, Connecticut.

New York
Mark Gray
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Andrew Oram
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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