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Rating Action:

MOODY'S UPGRADES PREMCOR USA; CONFIRMS PREMCOR REFINING'S & PORT ARTHUR FINANCE'S. RATINGS; UPGRADES PREMCOR BANK FACILITY

17 May 2002
MOODY'S UPGRADES PREMCOR USA; CONFIRMS PREMCOR REFINING'S & PORT ARTHUR FINANCE'S. RATINGS; UPGRADES PREMCOR BANK FACILITY

$1.87 Billion of Premcor USA, Premcor Refining, & Port Arthur Debt Facilities and Securities Affected

New York, May 17, 2002 -- Moody's confirmed Port Arthur Finance Corp.'s (PAF) and Premcor Refining Group's (PRG) note ratings. PAF is Port Arthur Coker Co.'s (PACC) financing arm. PACC and PRG are indirect sister subsidiaries of Premcor Inc. (PI). PI owns 100% of Premcor USA, Inc. (PUSA), which owns 100% of PRG. Moody's also upgraded PUSA's note and PRG's secured bank revolver ratings, anticipating a successful PAF consent solicitation to its $255 million of 12.5% notes to permit, amongst other amendments, the restructuring of PAF/PACC ownership to become a wholly-owned PRG subsidiary.

With a stable rating outlook, Moody's:

i) Upgraded to B1 from B3 PUSA's senior unsecured notes; assigned a B2 to PUSA's senior subordinated notes (previously exchanged for its PIK preferred stock.)

ii) Confirmed Premcor's Ba3 senior implied rating.

iii) Upgraded PRG's senior secured bank revolver to Ba2 from Ba3.

iv) Confirmed PRG's Ba3 senior unsecured note ratings and B2 subordinated note ratings.

v) Confirmed PAF's Ba3 senior secured ratings.

On April 23, 2002, Moody's confirmed PUSA's, PRG's, and PAF/PACC's ratings, with a stable outlook, anticipating completion of PI's large initial public offering. The IPO was the first of a multi-stage effort to transform PI's financial and corporate structure. The IPO netted $463 million to PI and a new issue of common equity to CEO Thomas O'Malley and two of PI's new directors netted another $19 million, for a total of $482 million in proceeds to PI.

Now, in a series of simultaneous transactions, upon the passage of the PAF consent, PI will downstream cash from its IPO to: (1) pre-pay roughly $80 million of PAF bank debt (the remaining $141.4 million to be paid out of available PACC cash), (2) redeem PRG's 9.5% senior unsecured notes for $150.4 million, and (3) redeem PUSA's 10.875% senior unsecured notes for $149.6 million, and (4) eventually redeem or repurchase PUSA's remaining $47.2 million of 11.5% senior subordinated notes for up to $49.9 million.

Pro-forma for the consent solicitation, PAF's Ba3 notes, which currently share first security with PAF's bank debt in PACC's fixed assets, current assets, and processing and supply agreements, would become secured principally by PACC's fixed assets. The PAF notes would also receive a senior unsecured guarantee from PRG.

PAF's $255 million of 12.5% secured notes are not notched up from the senior implied rating due to increased risk of substantive consolidation in bankruptcy, the fact that PACC's assets derive value only in relation to their integration with PRG's Port Arthur refinery, and the fact that PRG's debt would have substantial control over PACC's fate in a bankruptcy.

The PUSA note upgrades reflect their reduced risk after PI's IPO, their pending redemption, and the favorable pro-forma impact on PUSA's and PRG's value when PACC becomes a wholly-owned subsidiary of PRG. The PUSA ratings would be withdrawn following the PUSA notes' redemption.

The upgrade of PRG's secured $650 million bank revolver reflects improved prospects for full coverage in a PRG liquidation due to PRG's reduced pro-forma leverage, the banks' added pro-forma security in PACC receivables and inventory, and PRG enhanced asset values after PACC becomes a wholly-owned PRG subsidiary.

The unsecured PRG and secured PAF/PACC Ba3 note ratings reflect the (1) benefits to PRG of the pending combination of PACC as a wholly-owned PRG subsidiary, tempered by (2) event risk attendant to PI/PRG's very large acquisition appetite, PRG's two-refinery configuration after the October 2002 closure of the Hartford refinery, still full leverage, volatile sector refining margins, and hefty capital expenditure requirements through 2007. PI's ability to de-lever from internal cash flow will depend on volatile sector margins and will be limited by heavy capital spending.

The ratings provide PI with considerable latitude over its choice of optimal funding strategies for potential future acquisitions. Moody's believes PI will conduct an acquisition and funding program that is highly supportive of improving credit trends, however Moody's will maintain the current ratings and stable outlook until future acquisitions and associated funding plans are announced and/or further deleveraging is achieved.

The ratings could be upgraded if PI employs a substantial equity component in future acquisitions, assuming those acquisitions deliver the desired effect of reducing PI's refining portfolio and business risk. Furthermore, while Moody's believes eventual acquisitions would likely be supported by an equity offering, actual proceeds to PI could be diminished if The Blackstone Group or Occidental Petroleum choose to begin exiting PI in a companion secondary offering of PI shares.

During the 2002 through 2006 period, PI contemplates a minimum of 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 substantial expansion and conversion capital outlays for the Lima and Port Arthur refineries.

First quarter 2002 results were very weak, with very weak sector conditions, but began firming during March and continuing generally into May. Moody's expects below average refining margins for the remainder of 2002.

PACC's margins were especially hurt by narrowed cost differentials between heavy and light and sour and sweet crude oils. Its margin support agreement under the approximate 160,000 barrel per day Maya crude oil supply agreement with PMI currently carries a cumulative surplus of $98.6 million. PACC did not receive margin relief (in the form of discounted Maya crude prices) in first quarter 2002, nor will it receive such relief, until the cumulative surplus is consumed by subsequent cumulative coker margins below the stipulated support level.

In first quarter 2002, consolidated PUSA and PRG EBITDA, before $142 million of restructuring costs, was $29.9 million, down from $63.9 million in first quarter 2001 (before $150 million of restructuring charges). In first quarter 2002, PACC's EBITDA fell to $6.3 million from $71.5 million the year before. Last year's quarter benefited from extraordinarily wide heavy and light crude oil and sweet and sour crude oil cost differentials. However, the cumulative margin stabilization account surplus prevented margin assistance in first quarter 2002 when crude oil quality cost differentials narrowed sharply to below historic averages.

Pro-forma for PI's IPO and for the PUSA, PRG, and PAF debt retirements, March 31, 2002 consolidated PI cash would approximate $350.8 million, of which parent PI cash would be $65 million, PUSA-only cash would be $25 million, PRG-only cash would be $191 million, and PACC-only cash would be $69 million. Consolidated PI debt would approximate, $890 million, and book equity would approximate $602 million. PI's present equity market capitalization is $1.5 billion. Annual PRG pro-forma gross interest expense would be down sharply to roughly $94 million. Debt/Book Capital would be approximately 60% and Debt/Enterprise Value would approximate 39%.

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.

Key strategic decisions or events in the future include (1) the scale of expansion, conversion capacity, and hydro-treating projects at the Lima and Port Arthur refineries in time to meet EPA deadlines, (2) the scale, quality, location, relative cost, future capital needs, and funding strategies for potential strategic acquisitions, (3) and the timing of Blackstone's and Occidental Petroleum's eventual disposition of their equity stakes in PI.

Pro-forma for the consent, Blackstone would control about 48.4% of PI, public shareholders and PI management would control 38.1% of PI, and Occidental Petroleum would control about 13.5% of PI. Before the consent, PI owns 90% of Sabine River Holding Corp., which directly and indirectly wholly-owns PACC. Occidental owns the remaining 10% of Sabine.

Ratings upgrades include: PRG's $650 million senior working capital secured bank facility, PUSA's $144.4 million of 10.875% senior unsecured notes due 2005, and PUSA's remaining $47.2 million of 11.5% subordinated debentures due 2009 (formerly $97.3 million before the May 2002 market purchase of $50.1 million of the subordinated notes).

Ratings confirmed include: PAF's Ba3 rated $255 million of 12.5% of senior secured notes due 2009; PRG's Ba3 rated $150.4 million of 9.5% senior unsecured notes due 2004 (to be redeemed), $240 million of floating rate term loans due 2004, $99.6 million of 8.375% senior unsecured notes due 2007, and $109.8 million of 8.625% senior unsecured notes due 2008; and PRG's B2 rated $174.2 million of 8.875% senior subordinated notes due 2007.

Premcor Inc. is headquartered in Old Greenwich, Connecticut.

New York
Robert N. McCreary
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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