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CHICAGO -- Fitch Ratings has affirmed Valero Energy Corp.'s senior unsecured debt rating of 'BBB-', the rating of the company's Premium Equity Participating Security Units (PEPS) and Trust Originated Preferred Securities rating of 'BB+' and the company's short term rating of 'F3.' The rating outlook for Valero is stable.
The company is currently pursuing an early renewal of its $750 million 364-day credit facility, which matures in December 2002. Fitch expects Valero to complete the renewal of the credit facility sometime in the middle of November.
Additionally, Valero announced yesterday that it has signed a letter of intent with El Paso Energy Partners to become a 50-percent partner in the 500,000-barrel per day Cameron Highway Oil Pipeline Project. Based on the current financing plans, Valero's credit ratings will be unaffected by the project. The companies plan to fund the project through permanent project debt financing, which will be non-recourse to the partners. Valero's equity investment beginning in late 2003 is estimated to be approximately $125 million. The 390-mile pipeline will bring crude oil from deepwater Gulf of Mexico to refineries in Port Arthur and Texas City, Texas and is expected to be in service in the third quarter of 2004.
Like other refiners, Valero has been negatively impacted by the poor margin environment this past year. As a result, in late September, Valero's banks agreed to amend the company's credit facilities, reducing the minimum EBITDA-to-cash-interest coverage ratios for the next five quarters, beginning with the fourth quarter of 2002.
Margins, however, have improved recently, including a widening of the spread between sweet and sour crudes, which is particularly advantageous to Valero. Looking forward, the near-term outlook for the sector appears promising, thanks primarily to improving distillate fundamentals. According to the forward curve, fourth quarter distillate margins are currently well above historical levels while gasoline margins are higher than at any time in the past eight years. In addition, gasoline and distillate margins for next year are currently pricing above mid-cycle levels on the Gulf Coast and the East Coast.
Although Fitch remains comfortable with Valero's current debt ratings, the ratings firm has concerns with Valero's acquisitive nature. With several refineries currently on the market, Valero is evaluating several opportunities, including the downstream assets of El Paso Corporation. The current margin environment has significantly weakened Valero's credit profile and additional debt would place added negative pressure on the company's balance sheet. If Valero finances a large acquisition, more than $500 million, in the next few months primarily with debt, Fitch would likely lower the company's debt ratings. The company has stated, however, that it will not enter into any acquisitions that would jeopardize its investment-grade rating and that any acquisitions would be made with a combination of debt and equity.
When Valero acquired Ultramar Diamond Shamrock Corp., the company became the largest independent refining company in the United States with a large, complex refining base, solid geographic diversification and significant integration into the retail sector. With this acquisition, Valero's debt levels increased, bringing total balance sheet debt to nearly $5 billion. The company also has significant off-balance sheet debt, primarily in the form of long-term operating leases, tanker charters and two receivable securitization programs.
As the largest independent refiner in North America, Valero owns and operates 12 refineries with the capacity to process two million barrels per day of crude. Valero also markets fuel through a retail network of approximately 4,600 Diamond Shamrock, Ultramar, Valero, Beacon and Total outlets.