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    Tesoro Downgraded

    Standard & Poor lowers the petroleum company's rating, says outlook is "negative."

    SAN ANTONIO -- Standard & Poor's Ratings Services has lowered its corporate credit rating on Tesoro Petroleum Corp., an independent San Antonio-based refiner/marketer to double-'B'-minus from double-'B' and removed the company's ratings from CreditWatch, where they were placed in August with negative implications. With more than $2 billion in outstanding debt, "the outlook is negative," according to the rating service.

    "The ratings downgrade reflects the effect of dismal refining crack spreads throughout 2002 on Tesoro's cash flow, at a time when the company has been attempting to level its balance sheet," said Standard & Poor's credit analyst John Thieroff. "Reduced cash flow in 2002 and 2003 will likely result in material delay in the execution of Tesoro's debt reduction plan announced in June 2002. However, Standard & Poor's expects the company to ultimately accomplish its target of $500 million in debt repayment, albeit over a longer period of time. Delayed deleveraging has resulted in a weakened financial profile and could expose Tesoro to potential liquidity constraints, should refining margins fail to recover to midcycle ranges by mid-2003."

    Tesoro's ratings reflect its position as a highly leveraged independent oil refiner and marketer operating in a very competitive, erratically profitable industry that is burdened by high fixed costs. These weaknesses are partly offset by strong asset quality, advantaged operating locations, and a degree of retail-derived margin stability, according to Reuters.

    The company operates 260 2Go and Mirastar convenience stores on the West Coast and manages a branded network of some 550 stores. The Mirastar brand is marketed exclusively at Wal-Mart stores through a marketing partnership launched by the two companies in 2000.

    As of June 30, Tesoro's total debt-to-total capital stood near 70 percent. Leverage has been greatly exacerbated by weak cash flow. Recovery to midcycle refining margins by mid-2003, combined with debt reduction achieved from the proceeds expected from asset sales, should improve this measure and restore the company to profitability. While Tesoro's debt levels would likely be manageable under midcycle conditions, extreme market volatility has made the current debt burden excessive, the report said.

    Tesoro currently has minimal cash on its balance sheet, although inventory typically is over $500 million and consists of crude oil and refined products. The company has essentially full availability under its $225 million revolving credit facility, maturing September 2006. Standard & Poor's believes the company's liquidity is adequate to sustain itself through the trough based on current expectations for a second quarter 2003 refining recovery.

    The negative outlook reflects the challenges facing Tesoro as it undertakes much-needed deleveraging during an extended dip in the refining cycle. While liquidity is expected to be adequate to weather a continuation of weak margins through the first quarter of 2003, greater-than-expected margin deterioration, failure to execute asset sales or increased working capital needs beyond current expectations could result in a downgrade.

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