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Fitch Revises Valero Energy Corp.'s Rating Outlook to Positive

Wednesday, January 12, 2005

CHICAGO (Business Wire) -- Fitch Ratings has revised the Rating Outlook on the debt ratings of Valero Energy Corporation (Valero) to Positive. Fitch rates Valero's senior unsecured debt and unsecured credit facilities 'BBB-' and the company's mandatory convertible preferred securities 'BB+'.

The Positive Outlook recognizes Valero's strong performance over the past several quarters with expectations for continued strong results. The change in Rating Outlook also reflects Fitch's expectation that management is committed to continuing to finance acquisitions conservatively while pursuing further debt reduction. Fitch expects Valero to remain acquisitive and, as noted, to continue to finance these transactions conservatively, specifically no more than 50% debt/cash, including assumed debt.

Fitch also recognizes the structural changes occurring in U.S. refining sector fundamentals and Valero's position as the largest independent refiner to capitalize on these dynamics. Valero has been achieving the full benefits of its sizable, complex operating base of 15 geographically diversified refineries, as well as its integration into the retail sector. Through several strategic upgrades to its refineries, including investments at its most recent acquisitions, the St. Charles (July 2003) and Aruba (March 2004) refineries, Valero continues to maximize its earnings potential in stronger margin environments while in a better position to weather future downturns in the industry cycle than it has been in prior years.

For the 12 months ended Sept. 30, 2004, Valero generated EBITDA of $3.01 billion, providing credit protection in the form of interest coverage of 10.3 times (x) and leverage as measured by debt-to-EBITDA of 1.5x. Adjusted for operating lease expense and the company's accounts receivable securitization program, EBITDAR-to-interest was 5.5x with adjusted debt to EBITDAR of 2.3x. Although Valero continues to invest significant capital into the low sulfur fuels and other required spending, the company has also generated significant free cash in recent quarters, nearly $1.2 billion for the 12 months ended Sept. 30, 2004.

Despite the strong performance, Valero's high debt levels (both on- and off-balance sheet) and aggressive growth strategy have fueled Fitch's uncertainty as to Valero's future financial plans. Fitch expects refiners to maintain less relative leverage than other industries to manage the volatility of cash flows and the significant capital expenditure requirements of the sector. Valero's total adjusted debt was nearly $7.7 billion at Sept. 30, 2004, including balance sheet debt of $4.6 billion. Despite the buyout of $842 million in structured leases since mid-2003, off-balance sheet financings have risen to an estimated $3.1 billion, calculated by Fitch at eight times annualized rental expense of approximately $310 million plus the company's fully drawn $600 million accounts receivable securitization program. Fitch expects Valero to continue to pursue further debt reduction, including approximately $410 million of 2005 maturities.

Like other refiners, Valero is burdened with the major capital program to upgrade its facilities to meet the Tier II low sulfur gasoline and distillate regulations. Valero expects its capital expenditures to remain at very high levels through 2006. Expenditures are currently estimated at $1.8 billion in each of the next two years, which also includes other regulatory expenditures, significant strategic investments and ongoing maintenance. However, Valero's current strong liquidity position should allow the company to manage the expenditures in the event of a downturn for the industry. In addition to the $680 million of cash on the balance sheet at Sept. 30, 2004, Valero also had approximately $1.4 billion in committed liquidity available under its $1.5 billion of U.S. credit facilities and C$115 million credit facility. The company also had approximately $176 million in letters of credit outstanding under its uncommitted bank facilities.

With Fitch's expectations that Valero will perform well in 2005, including further debt reduction and conservative financing of any acquisitions, an upgrade to Valero's ratings will likely be considered over the next several quarters.

Fitch Ratings
Bryan Caviness, 312-368-2056
Sean T. Sexton, CFA, 312-368-3130
Brian Bertsch, 212-908-0549 (Media Relations)