Acquisition of Orion Refinery

Valero Energy Corporation (NYSE:VLO) announced today that the company has executed a purchase agreement to acquire Orion Refining Corporation’s 185,000-barrel-per-day (BPD) refinery in Louisiana for $400 million plus approximately $100 million for working capital.

“This acquisition offers tremendous value for our shareholders as the refinery will be a great strategic fit for Valero’s refining network,” said Bill Greehey, Valero’s Chairman of the Board and Chief Executive Officer. “If you just consider the $2 billion investment made in the plant since 1985, we’re getting the refinery for only 20 cents on-the-dollar of replacement value.”

The sale will be financed with $250 million in cash and the issuance of $250 million of three-year mandatory convertible preferred securities. The majority owners are Credit Suisse First Boston LLC, Trust Company of the West, Jefferies & Company, Inc., and Oaktree Capital Management, LLC. The purchase agreement also calls for a potential earn-out payment if agreed-upon refining margins reach a specified level during any of the next seven years. Any such payment cannot exceed $50 million in a given year or $175 million in the aggregate.

Greehey noted that Valero is well-positioned to make this acquisition. “Our debt-to-capitalization ratio will remain virtually unchanged. At the end of the first quarter, our debt-to-capitalization ratio was just slightly above 41% and when you factor in this acquisition, our debt-to-capitalization ratio will continue to be less than 42%,” he said.

The acquisition has been approved by the board of directors of both Valero and Orion. However, because Orion filed for bankruptcy yesterday, the sale also requires the approval of the bankruptcy court. Orion has petitioned the court for an expedited sales process and if granted, the transaction, which has already received FTC approval, is expected to close in late June.

A Great Deal For Valero and its Shareholders
“The plant’s sour crude processing and significant conversion capacity make it a very complex refinery,” said Greehey. “Its Nelson Complexity ranking of 11.6 is well above the average U.S. refinery. However, its profit potential has historically been impeded by the high overall cost structure required to support a stand-alone facility. It is important to note that we are buying the Orion refinery – not the Orion Refining Corporation. As a part of Valero’s much larger refining system, the refinery’s overhead costs will be dramatically decreased, its purchasing leverage will be substantially enhanced and its on-stream reliability can be significantly improved. The refinery will also benefit from millions of dollars in synergies with our other Gulf Coast refineries as well as Valero’s significant expertise in sour crude processing and economies of scale in sour crude purchasing. As a result, this refinery’s tremendous earnings potential can finally be realized.

“In fact, we’ve identified more than $55 million in annual cost savings from reduced overhead, operational and reliability improvements and synergies with our other Gulf Coast refineries,” said Greehey. “We have also identified a number of low-cost, high-return projects. And, based on our margin assumptions and our planned improvements for the refinery in the first quarter of 2004 alone, we are projecting that the refinery will generate more than $108 million in annual net income, resulting in accretion to our annual earnings of more than 50 cents per share.

“When you consider the low purchase price we’re paying for this asset, the enormous upside potential that we see operationally, and the strong accretion to our earnings, you can see why we believe this is a very strategic acquisition for Valero,” said Greehey.

A Great Refinery With Unrealized Potential
The refinery, which is adjacent to the Mississippi River, is located in the St. Charles Parish, approximately 15 miles west of New Orleans. It has a total throughput capacity of 185,000 BPD and a crude capacity of 155,000 BPD. Approximately 74% of the refinery’s product slate is composed of gasoline, distillate, and other light products.

According to Greehey, the refinery has an excellent logistics infrastructure, with access to the Louisiana Offshore Oil Port (LOOP) where it can receive crude oil via a 24-inch pipeline or over five marine docks along the Mississippi River. Finished products can be shipped over these docks or by pipeline into either the Plantation or Colonial pipeline networks for distribution to the eastern seaboard of the United States.

“And, nearly all of the refinery’s key units are either new or have been recently upgraded,” said Greehey. These units include a 60,000-BPD delayed coker and a 13,000-BPD alkylation unit as well as a new 90,000-BPD fluid catalytic cracking unit (FCCU) that includes a flue-gas scrubber. And, in December of last year, a $70 million, 25,000-BPD continuous catalytic regenerating (CCR) reformer was installed. “This unit is critically important to the enhanced profitability of this refinery,” said Greehey. “It will help us avoid the lost production and product downgrades caused by past hydrogen shortages and it will enhance our ability to produce cleaner, higher value products.”

Great Upside Potential
“The refinery also has substantial upgrade potential that will significantly enhance profitability with minimal capital investment. We have already identified approximately $25 million in expansion and upgrade opportunities that will enable the refinery to process additional heavy feedstocks, increase throughput capacity, upgrade its product yields and improve on-stream reliability. These projects alone are expected to add more than $50 million to annual operating income.”

Some of the projects planned for the first quarter of next year include increasing the plant’s crude processing capacity from 155,000 BPD to 185,000 BPD and expanding the coker capacity to 70,000 BPD. According to Greehey, current projections indicate that cash flow from operations will be more than sufficient to cover all of the projects planned for 2004 and 2005 – including projects to meet the required Tier II sulfur reductions.

A Great Future
“We are looking forward to working with the outstanding refining workforce to realize the plant’s potential and plan to offer pay and benefits that are comparable to or better than what they are currently receiving,” Greehey said.