Monday, July 2, 2012

Carlyle's PEU Refinery

The Carlyle Group will get a majority stake in Sunoco's Philadelphia refinery with the promise of capital investment.  The new venture will be renamed Philadelphia Energy Solutions.  The deal has plenty of sweeteners:

$25 million in Pennsylvania State grants

The Commonwealth will provide grants to help build a high-speed train unloading facility at the refinery, support a major capital project and upgrade the cracker at the refinery.

Tax exempt financing and other tax saving moves

Officials said they are also moving to include parts of the refinery in the Keystone Opportunity Zone so it can receive tax benefits for new construction.

JP Morgan's working capital assistance

J.P. Morgan Ventures Energy Corporation, will supply the refinery with crude and non-crude feedstocks on a just-in-time basis and will purchase refined products from the refinery for offtake.

Add emission credits, which JP Morgan happens to buy and sell

State and federal environmental regulators have agreed to modify a 2005 consent decree to allow the Philadelphia refinery to receive some of the emissions credits assigned to Sunoco's Marcus Hook refinery, which was shut down in December. Those temporary credits should allow the Philadelphia refinery to more quickly implement its expansion plans.

Union leaders contributed to the deal

The union was to vote Monday night on a new three-year contract that gives Carlyle more flexibility on work rules and pensions.
The White House helped kick off deal discussions:

White House officials also called Carlyle executives..., urging them to talk to Sunoco...
The question is how much capital Carlyle will actually put into this venture? 
The Carlyle Group’s investment will flow directly to the refinery’s balance sheet to fund future capital projects, facility upgrades and enhance the refinery’s working capital. 
Carlyle's equity is coming from two of its funds.

Capital for this investment will come from the Carlyle Equity Opportunity Fund and the Carlyle Energy Mezzanine Opportunities Fund. JPMorgan Chase (NYSE: JPM) has agreed to provide working capital financing for intermediate products owned by the refinery in the form of an asset-backed loan, subject to documentation. 
WSJ painted a different picture of Carlyle's capital:
Carlyle said it will fund improvements at the Philadelphia refinery with money from a small buyout fund and another that invests in debt tied to energy projects.
It sounds like the usual PEU play, a small amount of equity and levered debt, aided by a government nondebt, nonequity capital injection and ample tax avoidance.

Carlyle owned a European refinery company, which it flipped after two years:

Carlyle and Riverstone Holdings LLC in 2005 acquired European refiner Petroplus Holdings AG, reselling it about two years later for five times their original investment, according to people familiar with that deal. 
Carlyle's five bagger set the stage for Petroplus' debt-fueled bankruptcy.  Ironically Petroplus' demise could help Carlyle's latest refinery venture.  
Carlyle is betting it can improve margins partly by taking advantage of a new twist in the energy landscape—the bounty of oil and natural gas unleashed in the U.S. interior in recent years as producers learned to crack open energy-rich shale formations.

Carlyle's wager is a "huge bet" on a continued price difference between U.S.-traded crude-oil and imports from overseas linked to Europe's Brent crude.
Carlyle is betting big on energy, but their equity stake is a fraction of the amount a PEU consortium put into TXU, before renaming it Energy Future Holdings.   KKR & company's hand is dependent on Texas politicians.  How will Carlyle's taxpayer supported bet turn out?  It remains to be seen.

Update 8-21-12:  Carlyle dumped the pension for a 401k.  

Update 12-22-12:  WSJ ran a piece on how politicians helped save jobs via the Carlyle deal.  It mentioned the EPA waiving reviews and the $25 million in state assistance, but none of the other benefits to Carlyle.