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HomeNewsArchivesPotential Buyer Steps Forward at Hovensa Hearing

Potential Buyer Steps Forward at Hovensa Hearing

The Hovensa refinery in December 2011.Calumet, a company that produces specialty hydrocarbon products, stepped forward as a possible buyer for the shuttered Hovensa refinery at a marathon meeting of the Senate Committee of the Whole on St. Croix. The meeting started Monday afternoon and ended well after midnight.

The hearing was held to gather testimony and public comment on a proposed agreement between the V.I. government and Hovensa that would structure the sales process and allow Hovensa to operate the refinery as an oil storage terminal until a sale was complete.

Known as the fourth amendment to the Hovensa concession agreement, the agreement would lower the company’s yearly payment in lieu of property tax (PILOT) from $14 million to $7 million. In exchange the V.I. government would receive 20 percent of the sales price or $50 million, whichever is less.

The agreement calls for the refinery to be sold by Aug. 15, 2014. If it is not, Hovensa can continue to operate the storage facility for up to five years from the ratification of the agreement under the lower PILOT payment. After the five years, Hovensa would have to pay all its deferred PILOT payments – $7 million per year – and would be subject to all of its obligations under the third amendment to the concession agreement, the covenant that governs it currently.

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If the refinery is sold within a year, Hovensa would be freed from its obligations to the V.I. government and a new concession agreement would be negotiated with the buyers.

Hovensa would not be freed from its environmental obligations governed by the Environment Protection Agency.

At the beginning of the hearing, senators questioned members of the government’s negotiating team, led by Attorney General Vincent Frazer and David Herr, managing director of Duff and Phelps, a consulting firm hired by the government to aid in the negotiations.

George Dudley, Hovensa’s legal council, also took questions.

In his opening statement Frazer categorized the agreement as an important step in healing St. Croix’s battered economy.

“The entire purpose of this agreement is to put the refinery back into operation and thereby create jobs for hundreds of Crucians, provide direct economic benefit for thousands in the St. Croix community, and boost the entire Virgin Islands economy,” he said.

Later Debra Gottlieb, director of the Office of Management and Budget, said the full economic impact of the refinery’s closure had yet to be tabulated, but the government was losing approximately $100 million a year in tax revenue alone.

The $7 million in deferred PILOT payments was a sticking point for many senators who questioned why the V.I. government was making any monetary concessions to Hovensa.

Sen. Terrence Nelson accused Frazer of “negotiating blind” by not ordering a standard property tax assessment to establish just how much the refinery should be paying.

Frazer countered that Hovensa had been operating under PILOT payments rather than conventional property taxes for years and later Herr pointed out that if the assessment came back less than $14 million it would have hurt the government’s negotiating position.

Dudley seemed to agree with this statement, saying the land was worth much less with the refinery shuttered than it was when it was operating and the lower PILOT payments reflect the much lower revenue generated by an oil storage terminal.

Frazer said he was confident that the government would recoup all of its deferred payments either through collecting 20 percent of the sale price or through the provision that Hovensa pay back the money if no sale is reached.

Herr added that even if the government were to take some loss, the long term tax value of an operating refinery would more than make up for it.

Senators also questioned just how much the refinery may be worth to a prospective buyer, pointing out that without knowing the sale price, they had no way of knowing how much the government’s 20 percent cut would be.

“We’re hearing low estimates of $35 million and high estimates of $250 million. That’s a huge variance. What is the estimated value of the refinery? Does anyone know?” asked Sen. Judi Buckley.

Herr replied that their estimates of the value ranged as high as $500 million, but “ultimately it will be what someone is willing to pay for it.”

Several senators pointed out that the EPA has mandated several costly upgrades to the refinery’s equipment to bring it into compliance, an overhaul at one time estimated by Hovensa to cost $700 million.

Sen. Janette Millin Young asked why any company would pay to take over such a costly obligation.

Dudley would later clarify that the $700 million was an estimate based off of Hovensa’s operations at the time. He said that when the company considered scaling back its operations, the cost for coming into compliance dropped to around $450 million.

He said that the cost of the EPA requirements for potential buyers would vary depending on various factors such as the scale of their operation and what fuel they choose to use.

Throughout the hearing several senators remained vocally doubtful of the deal and Sens. Kenneth Gittens and Craig Barshinger both objected to the ratification deadline of Aug. 15 outlined in the agreement.

Gittens said that if the governor took 18 months to craft the deal, the legislature deserved more than three weeks to review it.

The most forceful opposition to the agreement came from Sen. Nelson, who advocated taking Hovensa to court for violating its contractual obligations under the concession agreement, an idea explored by several other senators in their questions.

Nelson asked Frazer if he agreed that Hovensa had violated its contract with the V.I. government, to which he replied that he did.

Frazer said his office had worked on strategies for litigation, but he was adamant that it would be best to avoid a lengthy court battle.

“I can sincerely say to you that litigation in this instance is not in our best interest for us or for Hovensa. We believe with the history we’ve had, having an amicable separation is the best way,” he said.

Herr added that if the fourth amendment agreement is not ratified, he believed Hovensa would immediately file for bankruptcy, which would greatly complicate the legal fight as Hovensa could be freed from many of its financial obligations.

He said such a fight would also make it much less likely that the refinery would ever reopen because the longer such a facility sits dormant the more expensive it is to start it back up.

Several members of the public offered testimony during the hearing as well, with the majority opposing the agreement.

Naima Hakim, who described herself as a concerned citizen, opposed the reopening of the refinery, arguing that the jobs it would create would not be enough to compensate the island for the damage it would do to the environment.

Several other testifiers echoed this argument, arguing that Hovensa should be forced to close the facility and honor its obligation to clean the site.

Mark Eckard, president of the St. Croix Chamber of Commerce, argued the other side of the issue, saying the island needed to fill the hole in the local economy left by the refinery’s closure.

“Hovensa employees ate in our restaurants, drank in our bars, shopped in our stores, deposited money in our banks,” he said,

He concluded by saying the territory must seize every possible opportunity to ensure that something is done with the refinery.

Jennifer Jones, a local attorney retained by Calumet, was the very last person to speak at the hearing, beginning her remarks around midnight.

She explained that Calumet, which is headquartered in Indianapolis and has facilities in five states, produced several specialty hydrocarbon products, such as the oils that form the base for sunscreen and lipstick as well as engine additives.

She said the company was interested in using the Hovensa refinery to produce feedstock for its other plants around the country.

Senators peppered her with questions about how soon a sale could take place, what price they would be willing to pay and what concessions they would make to the government, but Jones’ response to each was that those conversations were premature.

She said Calumet officials had yet to even tour the facility so she could not guarantee that an offer would even be made.

Senate president Shawn Michael Malone invited Jones to participate in the hearing on St. Thomas Tuesday so they could further explore Calumet’s interest.

He added that a second company interested in purchasing the refinery was also present during the hearing, but left earlier in the evening. He said they would make testimony available at the Tuesday hearing.

All 15 senators participated in the information gathering hearing. No votes were taken.

The senators have until Aug. 15 to approve or deny the agreement. They cannot make changes to the document.

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The Hovensa refinery in December 2011.Calumet, a company that produces specialty hydrocarbon products, stepped forward as a possible buyer for the shuttered Hovensa refinery at a marathon meeting of the Senate Committee of the Whole on St. Croix. The meeting started Monday afternoon and ended well after midnight.

The hearing was held to gather testimony and public comment on a proposed agreement between the V.I. government and Hovensa that would structure the sales process and allow Hovensa to operate the refinery as an oil storage terminal until a sale was complete.

Known as the fourth amendment to the Hovensa concession agreement, the agreement would lower the company's yearly payment in lieu of property tax (PILOT) from $14 million to $7 million. In exchange the V.I. government would receive 20 percent of the sales price or $50 million, whichever is less.

The agreement calls for the refinery to be sold by Aug. 15, 2014. If it is not, Hovensa can continue to operate the storage facility for up to five years from the ratification of the agreement under the lower PILOT payment. After the five years, Hovensa would have to pay all its deferred PILOT payments – $7 million per year – and would be subject to all of its obligations under the third amendment to the concession agreement, the covenant that governs it currently.

If the refinery is sold within a year, Hovensa would be freed from its obligations to the V.I. government and a new concession agreement would be negotiated with the buyers.

Hovensa would not be freed from its environmental obligations governed by the Environment Protection Agency.

At the beginning of the hearing, senators questioned members of the government’s negotiating team, led by Attorney General Vincent Frazer and David Herr, managing director of Duff and Phelps, a consulting firm hired by the government to aid in the negotiations.

George Dudley, Hovensa’s legal council, also took questions.

In his opening statement Frazer categorized the agreement as an important step in healing St. Croix’s battered economy.

“The entire purpose of this agreement is to put the refinery back into operation and thereby create jobs for hundreds of Crucians, provide direct economic benefit for thousands in the St. Croix community, and boost the entire Virgin Islands economy,” he said.

Later Debra Gottlieb, director of the Office of Management and Budget, said the full economic impact of the refinery’s closure had yet to be tabulated, but the government was losing approximately $100 million a year in tax revenue alone.

The $7 million in deferred PILOT payments was a sticking point for many senators who questioned why the V.I. government was making any monetary concessions to Hovensa.

Sen. Terrence Nelson accused Frazer of “negotiating blind” by not ordering a standard property tax assessment to establish just how much the refinery should be paying.

Frazer countered that Hovensa had been operating under PILOT payments rather than conventional property taxes for years and later Herr pointed out that if the assessment came back less than $14 million it would have hurt the government’s negotiating position.

Dudley seemed to agree with this statement, saying the land was worth much less with the refinery shuttered than it was when it was operating and the lower PILOT payments reflect the much lower revenue generated by an oil storage terminal.

Frazer said he was confident that the government would recoup all of its deferred payments either through collecting 20 percent of the sale price or through the provision that Hovensa pay back the money if no sale is reached.

Herr added that even if the government were to take some loss, the long term tax value of an operating refinery would more than make up for it.

Senators also questioned just how much the refinery may be worth to a prospective buyer, pointing out that without knowing the sale price, they had no way of knowing how much the government’s 20 percent cut would be.

“We’re hearing low estimates of $35 million and high estimates of $250 million. That’s a huge variance. What is the estimated value of the refinery? Does anyone know?” asked Sen. Judi Buckley.

Herr replied that their estimates of the value ranged as high as $500 million, but “ultimately it will be what someone is willing to pay for it.”

Several senators pointed out that the EPA has mandated several costly upgrades to the refinery’s equipment to bring it into compliance, an overhaul at one time estimated by Hovensa to cost $700 million.

Sen. Janette Millin Young asked why any company would pay to take over such a costly obligation.

Dudley would later clarify that the $700 million was an estimate based off of Hovensa’s operations at the time. He said that when the company considered scaling back its operations, the cost for coming into compliance dropped to around $450 million.

He said that the cost of the EPA requirements for potential buyers would vary depending on various factors such as the scale of their operation and what fuel they choose to use.

Throughout the hearing several senators remained vocally doubtful of the deal and Sens. Kenneth Gittens and Craig Barshinger both objected to the ratification deadline of Aug. 15 outlined in the agreement.

Gittens said that if the governor took 18 months to craft the deal, the legislature deserved more than three weeks to review it.

The most forceful opposition to the agreement came from Sen. Nelson, who advocated taking Hovensa to court for violating its contractual obligations under the concession agreement, an idea explored by several other senators in their questions.

Nelson asked Frazer if he agreed that Hovensa had violated its contract with the V.I. government, to which he replied that he did.

Frazer said his office had worked on strategies for litigation, but he was adamant that it would be best to avoid a lengthy court battle.

“I can sincerely say to you that litigation in this instance is not in our best interest for us or for Hovensa. We believe with the history we’ve had, having an amicable separation is the best way,” he said.

Herr added that if the fourth amendment agreement is not ratified, he believed Hovensa would immediately file for bankruptcy, which would greatly complicate the legal fight as Hovensa could be freed from many of its financial obligations.

He said such a fight would also make it much less likely that the refinery would ever reopen because the longer such a facility sits dormant the more expensive it is to start it back up.

Several members of the public offered testimony during the hearing as well, with the majority opposing the agreement.

Naima Hakim, who described herself as a concerned citizen, opposed the reopening of the refinery, arguing that the jobs it would create would not be enough to compensate the island for the damage it would do to the environment.

Several other testifiers echoed this argument, arguing that Hovensa should be forced to close the facility and honor its obligation to clean the site.

Mark Eckard, president of the St. Croix Chamber of Commerce, argued the other side of the issue, saying the island needed to fill the hole in the local economy left by the refinery’s closure.

“Hovensa employees ate in our restaurants, drank in our bars, shopped in our stores, deposited money in our banks,” he said,

He concluded by saying the territory must seize every possible opportunity to ensure that something is done with the refinery.

Jennifer Jones, a local attorney retained by Calumet, was the very last person to speak at the hearing, beginning her remarks around midnight.

She explained that Calumet, which is headquartered in Indianapolis and has facilities in five states, produced several specialty hydrocarbon products, such as the oils that form the base for sunscreen and lipstick as well as engine additives.

She said the company was interested in using the Hovensa refinery to produce feedstock for its other plants around the country.

Senators peppered her with questions about how soon a sale could take place, what price they would be willing to pay and what concessions they would make to the government, but Jones’ response to each was that those conversations were premature.

She said Calumet officials had yet to even tour the facility so she could not guarantee that an offer would even be made.

Senate president Shawn Michael Malone invited Jones to participate in the hearing on St. Thomas Tuesday so they could further explore Calumet’s interest.

He added that a second company interested in purchasing the refinery was also present during the hearing, but left earlier in the evening. He said they would make testimony available at the Tuesday hearing.

All 15 senators participated in the information gathering hearing. No votes were taken.

The senators have until Aug. 15 to approve or deny the agreement. They cannot make changes to the document.