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Valero to Acquire Premcor for $8 Billion

Deal will make Valero the largest refiner in North America

SAN ANTONIO -- Valero Energy Corp. and Premcor Inc. said yesterday that the companies have executed a merger agreement for Valero to acquire Premcor in an $8 billion transaction. As a result, Valero will add four refineries and 790,000 barrels per day (bpd) of throughput capacity to its system, making it the largest refiner in North America.

With this acquisition, Valero will have total assets of $25 billion and annual revenues of nearly $70 billion, which would rank it No. 15 on the current listing of the Fortune 500. Adding Premcor's refineries in [image-nocss] Port Arthur, Texas; Memphis, Tenn.; Delaware City, Del.; and Lima, Ohio, will give Valero 19 refineries with a total throughput capacity of 3.3 million bpd.

The boards of both companies unanimously approved Valero's acquisition of Premcor, which is subject to the approval of Premcor's shareholders and customary regulatory approvals. The transaction is expected to close Dec. 31, 2005, and both companies expect a smooth transition. There will be no changes to Valero's senior management or board of directors.

This transaction is one of the largest and most strategic acquisitions in Valero's history, said Bill Greehey, Valero chairman and CEO. We are acquiring several very strategic refineries for significantly less than their combined replacement value, and we'll be improving the profitability of these plants by capturing synergies, improving their reliability and yields, and increasing their capacities. This acquisition gives us the best geographic diversity among U.S. refiners with a presence in all of the major refining regions, which further increases our earnings stability. What's more, it complements our complex refining system and increases the amount of sour crude oil that we process.

He added, I can't think of a better acquisition for Valero and our shareholders because it's expected to be significantly accretive to our earnings and cash flow. We estimate that we'll benefit from $350 million in annual synergies in the second year after closing. These will include reduced administrative costs, lower interest expenses, crude oil cost savings due to our purchasing leverage and operational profit improvements that require limited capital investment. And, we think that once we have a chance to evaluate each facility more thoroughly, we will find that there are even more synergy opportunities, just as we did with the Ultramar Diamond Shamrock acquisition.

Greehey concluded, This acquisition is also good news for consumers because we have a track record of investing in and expanding our refineries. In fact, from 1996 through the end of this year, we will have increased our refining system's throughput capacity by more than 380,000 bpdthe size of two world-scale refineriesby expanding our existing facilities. Not only do we have the expertise, we also have a strong balance sheet, an investment-grade credit rating, access to low-cost capital and good cash flow, which enables us to make the costly stay-in-business' environmental investments, as well as the capital investments necessary to continue increasing our refining capacity.

Thomas D. O'Malley, Premcor's chairman and holder of more than one million shares of Premcor's common stock, said, This transaction creates the No. 1 investment vehicle in the very attractive U.S. refining sector. The resulting company has the financial strength to take advantage of the many internal opportunities available within Premcor's existing refining system to expand capacity, provide more clean fuels to the American consumer, and continue to strengthen its performance from an environmental and safety perspective. Valero has proven over the past 10 years to be an extremely efficient operator and has demonstrated a unique ability to grow both externally and internally. I intend to remain a long-term and large shareholder of the new Valero.

Jefferson F. Allen, Premcor's CEO, said, This transaction provides Premcor's shareholders with a meaningful increase in the value of their investment, as the terms of the agreement represent a 24.6% increase over the closing price of our stock on April 22, 2005. In addition, our shareholders will retain the option to continue participating in the industry through common stock ownership in Valero.

The equity portion of the $8 billion transaction will be paid 50% in stock and 50% in cash. At closing, Premcor shareholders will receive 46.7 million shares of Valero stock, valued at approximately $3.5 billion as of April 22, 2005. The cash portion, which equates to $3.4 billion, will be financed with a combination of cash on hand and bank debt. In addition, Valero will assume an estimated $1.8 billion of Premcor's existing long-term debt, offset by $800 million in cash as of Dec. 31, 2004. By yearend, Valero expects the combined company to have $2 billion of available cash so it anticipates issuing approximately $1.4 billion in new debt.

Under the terms of the merger agreement, Premcor shareholders will have the right to receive either 0.99 shares of Valero common stock, or $72.76 in cash for each share of Premcor stock they own, or a combination of the two, subject to pro-ration so that 50% of the total Premcor shares are acquired for cash. The merger consideration represents an approximate 20% premium to the recent 30-day trading range of Premcor's stock price.

Taking the effect of the acquisition into account, Valero's debt-to-capitalization ratio is expected to be approximately 33% at the end of 2005, which is in line with the company's peer group. And, Valero expects to retain its investment-grade credit rating upon closing of the merger.

Each of these refineries has a throughput capacity well in excess of 100,000 bpd, has good logistics, enhances our geographic diversity, and has upgrade potential, said Greehey. There are significant benefits to bringing Premcor's refineries into Valero's much-larger refining system. In addition to the operational synergies, the refineries will benefit from our expertise in upgrading and expanding refineries, our experience in sour crude processing and our significant purchasing leverage. With this acquisition, we will have the most conversion capacity of any U.S. refiner at around 2 million bpd. Of course, the more conversion capacity that you have, the heavier and more sour feedstocks you can run and the more gasoline and diesel you can make, which allows you to capture better margins. On a combined basis, our system would initially be processing around 1.8 million bpd of sour feedstocks. And, as projects such as the major expansions at Port Arthur and Aruba come online, we will be increasing our sour crude advantage.

He added, Clearly, the refining industry has entered a new era. As a result, we believe that we will continue to see higher highs and higher lows for both sour crude oil discounts and product margins in the future.

Valero's leverage to sour crude discounts is one of the biggest contributors to its record earnings, Greehey noted. As oil demand continues to grow, the increase is being met by medium and heavier sour crude oil, which makes up approximately 70% of Valero's crude slate. Since there are a limited number of refineries capable of upgrading these crude oils, there is a growing surplus of these feedstocks, which helps keep sour crude discounts at historic levels.

According to Greehey, Valero expects sour crude discounts to be at least 46% better in 2005 than they were in 2004, which would improve the company's operating income by $1.6 billion this year. On top of that, there is limited refining capacity to meet the growing demand for refined products, and it's going to be that way for quite some time, he said. Even if major expansion projects were put in place today, it would take four to five years to complete the engineering, get the necessary permits and build the units. What's more, the bulk of most refiners' capital is tied up meeting Tier II sulfur specifications through 2006 so investments in expansion projects will likely be limited. As a result, refining margins should remain strong for the foreseeable future.

San Antonio-based Valero also operates more than 4,700 retail and wholesale branded outlets in the United States, Canada and the Caribbean under various brand names including Diamond Shamrock, Shamrock, Ultramar, Valero and Beacon.

Premcor, Old Greenwich, Conn., is one of the largest independent petroleum refiners and suppliers of unbranded transportation fuels, heating oil, petrochemical feedstocks, petroleum coke and other petroleum products in the United States.

Click herefor details about the acquired refineries. Click here for details about Valero's existing refineries.

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