MOODY'S RATES PREMCOR REFINING SR. SEC. BANK FACILITY Ba3; CONFIRMS PREMCOR & PORT ARTHUR PROJECT RATINGS
About $2.1 Billion of Premcor Bonds, Prefs, Bank Facilities & Port Arthur Debt Facilities Affected
New York, August 09, 2001 -- Moody's Investors Service assigned a Ba3 rating to Premcor Refining's
(PRG) $500 million secured bank facility which can be increased
to $650 million at PRG's option, a level needed before during
high oil prices. Tranche A ($150 million) is a pre-funded
letter of credit (L/C) facility; Tranche B ($350 million)
is for L/C's and borrowings up to $50 million. The L/C's
mainly support oil and other feedstock purchases. Moody's confirmed
Premcor USA (PUSA), PRG, and Port Arthur Finance (PAF) Ba3
senior unsecured and senior implied ratings.
The rating outlook remains negative, finishing a review begun April
2001 upon Premcor and the Blackstone Group's announced review of strategic
options for Premcor, Inc. (PI). If PI sells assets,
all of PI, or offers equity, Moody's will re-review
the ratings. PI is the parent of PUSA and PACC; PUSA owns
PRG; PAF finances PACC. PACC's ratings may be tied to PRG's
since PACC's margins, cash flows, and value could be impacted
in a PRG bankruptcy if PRG ceased processing PACC production into finished
products or renegotiated processing agreements.
=PRG BANK RATING:
PRG's bank collateral package delivers substantial creditor protection
and control and its bank facility rating is more durable than its bond
ratings. PRG currently carries large cash balances in the borrowing
base (BB), other BB assets are highly liquid and, depending
on changes in the mix of inventory and cash in the BB, the BB can
provide strong cash and receivables coverage.
Still, aggressive advance rates on inventory and a high proportion
of the borrowing base consisting of inventory present material volume
and price exposures, particularly when prices are in the upcycle.
Potential abrupt price declines, challenges and costs encountered
by the lenders while controlling and winding down the borrowing base,
and ramifications of rising duress prior to bankruptcy prevent Moody's
from notching the bank facility above the senior implied rating.
The Ba3 bank rating results from: 80% advance rates on commodity
inventories, inventories have exceeded 70% of the borrowing
base, the in-transit nature of material amounts of eligible
inventory, an absence of third party physical collateral monitoring
other than semi-annually and potential relationship pressures on
the banks, and the weak standing of the senior implied rating.
=GENERAL RATINGS RATIONALE:
PI's credit has improved but the outlook remains negative until de-leveraging
from cash flow, new equity, or the strategic review clearly
deliver capital and liquidity structures suited to margin volatility and
heavy capital needs. It also is uncertain whether PI's strategic
exercise will yield an asset structure compatible at current ratings with
debt levels pro-forma for any asset sales.
As discussed below, PI's and PRG's breakeven cash flow after interest
and heavy mandatory capex might not be covered under mid-cycle
conditions. This would hamper deleveraging. Moody's estimates
breakeven cash flow after mandatory capex in the range of $400
million to $425 million for PI and $285 million to $300
million for PRG. Moody's expects basic sector volatility to expose
PUSA/PRG to periods of negative cash flow after interest expense and capex.
Moody's had prospectively maintained a Ba3 senior implied rating (with
negative outlook) with a view that (1) 2000 and 2001 refining margins
would correct up from extreme cyclical lows and (2) the strategic PACC
project would complete roughly on time and on budget, make a major
2001 contribution to PI results, and begin changing the complexion
of the PUSA/PRG credit.
With unusually strong up-cycle results until late May 2001,
credit accretion progressed ahead of schedule in terms of balance sheet
liquidity. However, four factors, combined with expected
normal sector volatility, postpone moving PRG's outlook to stable.
First, Moody's estimates PI's forthcoming low-sulfur diesel
and gasoline capex to be about $550 million, pressuring cyclical
cash flows and reducing the certainty that Blackstone will view both remaining
Midwest refineries as economically worthy of that unproductive investment
to stay in business. Moody's sees potential cost pressures as the
refining engineering and process equipment sectors are pressed to complete
the sector's low sulfur transformation in a short time frame. Second,
Blue Island was closed for sound economic reasons, but this makes
it more important for PRG's two remaining Midwest refineries to stay in
business. Third, PRG faced heavy cash inventory and hedging
losses that reduced 2000 cash EBITDA by about $170 million.
Moody's expects a far smaller but still material impact on 2001 cash EBITDA.
Fourth, about $70 million of PRG's cash balances derive from
a late 1999 2.7 million barrel sale-repurchase agreement
(now 2.5 million barrels) for the Lima refinery's crude oil pipeline
linefill which currently is a $68.75 million financial obligation.
In 1999, PRG also raised another $249 million in cash by
selling its retail and terminal networks. Much of the cash was
reinvested productively in PRG refineries and much was needed to offset
cash consumed in weak 1998/99 sector conditions. PUSA/PRG retains
the original debt and the crude oil repurchase obligation on an asset
base reduced by the retail, terminal, and linefill sales and
Blue Island closure.
Moody's believes PI's break-even cash flow will be in the $400
million to $425 million range. This includes: (1)
about $60 million of PACC gross interest, $15 million
of PACC annual average maintenance and turnaround capex, and about
$40 million of annual average low sulfur fuels capex, and
(2) about $90 million of PUSA/PRG gross interest, $11
million of PUSA preferred dividends, as much as $100 million
of PRG annual maintenance and turnaround capex, and $85 million
to $100 million of PRG average annual low sulfur fuels capex.
Moody's expects average to below average second half 2001 results and
believes below average results could pull PRG cash balances to under $300
million by year-end, leaving under $200 million of
unencumbered cash. Given PRG's high leverage, Moody's believes
a cushion of $200 million in unencumbered cash is needed to meet
severe cash drains from not infrequent negligible to negative margins
and working capital surges driven by crude oil cost surges.
=OPERATING PERFORMANCE UPDATE:
PRG experienced good refinery on-line performance in the first
half of 2001. Up-cycle margins in 2000 and 2001 through
May and solid throughput levels improved Premcor's weak standing within
the Ba3 rating, but sector conditions have since weakened.
In June, refining margins corrected sharply down due to reduced
crack spreads (inventory and demand pressures) and narrowing light/heavy
crude oil differentials. Crack spreads have partially recovered
in the Gulf Coast region and Chicago crack spreads remained above 1995-2000
averages. The heavy crude/light crude differential remains well
above the 1995-2000 average. Moody's expects average to
below average margins in 2H01, firming if economic conditions support
demand, sector inventories remain in check, and/or the coming
winter delivers average or colder weather.
PRG's and PACC's excellent January through May 2001 results reflected
extraordinary (1) sector crack spreads and (2) cost differentials between
light sweet crude oil and heavy sour crude oil which boosted gross margins.
This offset extraordinarily high natural gas and energy costs.
PACC enabled consolidated PI to run a 45% heavy sour crude slate
at a very opportune time. After start-up in early 2000,
PACC generated extraordinary results through May and sound results thereafter
on its exposure to differentials between light sweet and heavy and sour
crude oil prices (about 80% of PACC crude feed). Premcor
expects PACC commissioning in 3Q01.
Before $164 million in Blue Island ($150 million) and other
write-offs, PRG produced about $272 million in EBITDA
in the first five months of 2001 before margins collapsed. First
half consolidated PI results yielded $481.7 million in EBITDA
before write-offs, consisting of $272 million from
PRG and $209 million from PACC. At June 30, 2001,
consolidated PI debt totaled $1.6 billion. PUSA/PRG
debt totaled $1.067 billion, including $97
million of PUSA preferred stock. PACC debt was $543 million
and PACC carried $50 million of negative working capital.
PI cash was $596 million, including about $150 million
of restricted or dedicated cash held at PUSA and PRG and $185 million
(all effectively restricted) at PACC. PUSA/PRG's June 30,
2001 cash balances of $411 million include $33 million at
PUSA for its coupon payments. The $378 million at PRG includes
about $70 million from the Lima crude oil linefill sale-repurchase
and about $50 million in restricted cash backing other L/C's and
commodity hedging activity.
=CORPORATE STRUCTURE & OWNERSHIP; CONFIRMED RATINGS:
PAF funds PACC through intercompany notes. Blackstone controls
81% and Occidental Petroleum owns 18% of PI. PI wholly-owns
90% of Sabine River Holding Corp. which wholly-owns
90% of PACC. Occidental owns 10% of Sabine/PACC.
PRG operates PACC. PACC is strategic to PRG and to Blackstone's
exit plans for its $264 million PI investment.
Confirmed ratings include: Premcor's Ba3 senior implied rating;
PAF's 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;
PUSA's B3 $175 million of 11.875% senior unsecured
notes due 2005 and Caa3 $97 million of 11.5% PIK
preferred stock; PRG's Ba3 senior unsecured $110 million of
8.625% notes due 2008, $100 million of 8.375%
notes due 2007, $172 million of 9.50% notes
due 2004, and $240 million of floating rate bank loans;
and PRG's B2 senior subordinated $175 million of 8.875%
notes due 2007.
The Premcor Refining Group is headquartered in St. Louis,
Robert N. McCreary
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: (212) 553-0376
SUBSCRIBERS: (212) 553-1653
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: (212) 553-0376
SUBSCRIBERS: (212) 553-1653