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
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
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
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
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
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.
Robert N. McCreary
Senior Vice President
Corporate Finance Group
Moody's Investors Service
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service