Anne Rhodes
OGJ Online
Ultramar Diamond Shamrock Corp. (UDS), San Antonio, has agreed to buy the Avon refinery of Tosco Corp., Stamford, Conn. UDS will pay $650 million in cash plus a "participation" payment of as much as $150 million, to be paid over the next 8 years, for the 168,000 b/d San Francisco Bay area plant.
Participation payments are contingent on refining margins remaining above certain defined levels.
Additional feedstock and product inventories totaling about 800,000 bbl will be purchased at the closing, says UDS. The firm will finance the purchase with available cash, existing credit facilities, and new debt.
The transaction has been approved by both companies' boards. Definitive documents and due diligence will be completed later this month, says Tosco.
The deal is subject to regulatory approval and other customary closing conditions.
Driving forces
Tosco has been operating the Avon refinery, at Martinez, Calif., at reduced throughput rates in recent months. With two units idle, crude input has been averaging 100,000-125,000 b/d, says Tosco Chairman and CEO Thomas O'Malley, although UDS pegs current throughput at 105,000 b/d.
The decision to shut down the two units was a purely economic one, said O'Malley. "We felt that running at rates lower than perhaps Ultramar Diamond Shamrock is considering was the appropriate way to go."
Operating rates at the plant depend on a number of factors, O'Malley says, including crude gravity. When heavier feeds are used, throughput declines.
The refinery was shut down for about a month last year as a result of a fire in the crude distillation unit (OGJ, Mar. 8, 1999, p. 41). Three workers were killed in that accident. In 1997, an explosion and fire in the Avon hydrocracker killed one worker and injured about 25 others (OGJ, Jan. 27, 1997, p. 38).
Lower returns from the refinery compared with Tosco's other plants and clean fuel regulations drove the decision to sell the plant, says Tosco.
Upgrading the Avon refinery to meet California Air Resources Board Phase III reformulated gasoline specifications would require $250-350 million in capital investments, said O'Malley. That is because only about half of the plant's 75,000 b/d of gasoline output is CARB Phase II gasoline; the rest is conventional gasoline.
Tosco's Santa Maria/Rodeo refinery, also in the San Francisco area, and its Los Angeles refinery both produce 100% CARB Phase II RFG.
During 1991-99, Tosco spent a total of $700 million upgrading the Avon refinery. Adding the cost of upgrading the plant to meet Phase III specs would have pushed spending at the refinery well beyond its book value, which is "somewhat below the $650 million selling price," said O'Malley.
Phase III CARB RFG incorporates California Gov. Gray Davis's MTBE ban without increasing emissions over those of CARB Phase II gasoline. It is due to take effect Dec. 31, 2002.
Significant specification changes associated with Phase III RFG are: a reduction in the sulfur limit to 20 ppm from 40 ppm (flat limit) and to 15 ppm from 30 ppm (average limit); and an increase in the 50% and 90% distillation points by, respectively, 3� F. and 5� F. for both the flat and average limits.
O'Malley said the transaction will enable Tosco to focus on its more profitable assets: "Tosco has numerous opportunities to invest the proceeds of this sale in new facilities and our existing plants, with rates of return above what we expect Avon can deliver for our shareholders.
"This sale does not alter our long-standing strategy of growth through acquisition," he said. "Indeed, it leaves the company with enhanced financial strength and flexibility...We will initially reduce our long-term debt by some $200 million, and our previous plan to issue additional equity during the third quarter is now being reviewed to determine if it is necessary."
Strategic fit for UDS
O'Malley thinks the Avon refinery is a better fit for UDS's refinery network. "We have had our share of problems and difficulties with this refinery," he said. "I think the new owner is going to do a little bit better there."
"We are excited about the opportunities and value we believe the Avon refinery offers," said UDS Chairman and CEO Jean Gaulin. "It creates for our shareholders earnings, return, and cash flow accretion, even at low margins; secures supply for our Beacon-branded retail network; and increases our ability to compete in the West Coast market.
"The Avon employees and community get an experienced California operator with a proven track record of safe and reliable operations. California's consumers gain greater access to a low-price supplier, and [the refinery] provides UDS the opportunity to better serve the independent marketers."
UDS owns a 78,000 b/d refinery in Wilmington, Calif., near Los Angeles.
UDS says it plans to increase run rates and output of clean products at the Avon refinery, including CARB gasoline and diesel. These products will supply UDS's Beacon network, and additional supplies will be made available to independent retail operators.
Throughput will be increased to about 168,000 b/d, says UDS. At the higher throughput and with additional synergies, the firm expects the refinery to generate about $200 million/year of earnings before interest, taxes, depreciation, and amortization.
By the end of the first full year of operations, UDS expects the acquisition to increase operating cash flow by about $125 million. UDS will use the cash flow to repay debt, which will bring it back to its pre-acquisition leverage position, or better, by the end of the second year of operating the refinery.
