Fitch Ratings Places Tesoro's Debt On Rating Watch Negative

Business Wire, Feb 6, 2002

Business Editors

CHICAGO--(BUSINESS WIRE)--Feb. 6, 2002

Fitch Ratings has placed the debt of Tesoro Petroleum Corporation (Tesoro) on Rating Watch Negative following the company's announcement it will acquire Valero's 168,000-bpd Golden Eagle refinery and 70 associated marketing sites for $945 million plus working capital estimated at $130 million. The agreement also requires Tesoro to make up to $150 million of contingency payments to Valero if California refining industry margins exceed a certain threshold. Fitch currently rates Tesoro's senior secured revolving credit facility at 'BB ' and the company's subordinated debt 'BB-'.

Tesoro's initial plans to finance the acquisition include an issuance of new debt and $250 million of equity. Fitch will continue to review additional details on the transaction, which will be incorporated into Fitch's ratings for the company. Tesoro's debt is being placed on Rating Watch pending the closing, which is expected to occur in April of 2002. A downgrade to the ratings of Tesoro's debt is likely at that time.

The addition of Golden Eagle provides Tesoro with a complex refinery in the highly margin state of California. Although Fitch views the acquisition as a significant positive from an operational and geographical diversification standpoint, the acquisition will require the addition of a significant amount of debt. The Golden Eagle acquisition follows closely behind Tesoro's debt financed acquisition of two refineries and associated retail assets from British Petroleum (BP) in September 2001 for approximately $670 million.

Tesoro operates five wholly owned refineries with a total combined capacity of 390,000 bpd. Tesoro refocused its business strategy in the late 1990s, becoming primarily a downstream player in the oil industry. The Washington and Hawaii refineries were acquired in 1998 and in late 1999, Tesoro sold its exploration and production assets to EEX Corp., effectively exiting the upstream end of the business.

The company sells refined products wholesale or through approximately 675 retail outlets and is beginning to market through the Mirastar brand at Wal-Mart sites in 17 states in the western United States. Tesoro is also the largest operator of marine terminals along the Louisiana and Texas Gulf Coast with 16 terminals and operates several marine terminals on the West Coast as well.