Premcor Acquisition Offers Possible Debt Upside, El Paso On Watch

Premcor Refining Group's pending $465 million acquisition of the Williams Company's Memphis refinery and $170 million of inventory, could have positive effects on Premcor's bank debt rating. The $315 million base purchase price is potentially appealing and the proposed financing is supportive of sustaining a long-term growth-by-acquisition strategy in a volatile sector.Moody's Investors Service has placed the Ba2 rating on the $650 million revolver and term loan facility on review for upgrade.

The acquisition is expected to be paid for with $230 million of equity, a bond offering 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 have agreed to take $65 million of equity to support the offering. If the financing fails, there is a back-up plan that includes a combination of equity, a bridge loan from Morgan Stanley and inventory funding from the bank.

The refinery would add an important third leg to Premcor's refining portfolio and strengthen its light sweet crude oil sourcing and logistics for Lima and Memphis locations. While it will take several quarters of operating and market conditions to assess what Memphis' earnings will generate within the Premcor system, Moody's believes the unit will generate roughly $127 million of EBITDA per year.

*Standard & Poor's has placed the BB+ corporate credit rating on El Paso Energy Partners (EPN) on credit watch with negative implications based on the recent downgrade of the general partner El Paso Corp. "The credit watch listing for EPN reflects the greater uncertainties surrounding the credit profile of its general partner. El Paso's involvement as the general partner with a 42% stake in EPN influences the partnership's credit profile in several ways and effectively tethers the ratings of the two entities," said S&P credit analyst Todd Shipman.

EPN has played an important role in El Paso's plan to deleverage its balance sheet plan by enabling it to transfer qualifying midstream assets to EPN. El Paso continues to operate EPN's assets and provide administrative support. The deterioration of El Paso's credit quality pressures EPN's rating irrespective of the partnership's stand-alone credit quality. In resolving the credit watch designation, S&P will assess the El Paso situation's effect on EPN and the degree to which operational, legal, and strategic matters will affect any ratings separation between the two entities. Calls to El Paso were not returned.