Tosco to buy Alliance refinery from BP Amoco

Major independent refiner Tosco Corp., Stamford, Conn., unveiled plans Thursday to buy the Alliance Refinery in Belle Chasse, La., from BP Amoco PLC for $660 million plus hydrocarbon inventories. The acquisition will make Tosco the largest refiner in the US with 1.35 million b/d of wholly owned refining capacity, said Tosco.


Karen Broyles, Anne Rhodes
OGJ Online

Major independent refiner Tosco Corp., Stamford, Conn., unveiled plans Thursday to buy the Alliance Refinery in Belle Chasse, La., from BP Amoco PLC for $660 million plus about $200 million in hydrocarbon inventories. The acquisition will make Tosco the largest refiner in the US with 1.35 million b/d of wholly owned refining capacity, said Tosco.

The Alliance refinery is a 250,000 b/d clean fuels and petrochemical complex. Alliance is ideally configured to produce the clean gasoline and diesel fuel recently mandated by the US Environmental Protection Agency, says Thomas D. O'Malley, president and CEO of Tosco.

The acquisition also will give Tosco its first entry into the competitive Gulf Coast refining market.

The purchase comes close on the heels of Tosco's recent sale of its Avon refinery in Martinez, Calif., to Ultramar Diamond Shamrock Corp., San Antonio (OGJ Online, July 6, 2000). UDS agreed to pay a $650 million purchase price plus a $150 million participation fee for the 168,000 b/d Avon refinery.

Earlier this year, Tosco announced its plan to buy Equilon Enterprises LLC's 295,000 b/d Wood River, Ill., refinery (OGJ, Apr. 17, 2000, p. 42). That acquisition closed in June.

Some industry experts wondered whether the sale of Tosco's Avon refinery was the beginning of a reversal of the company's strategy of buying up key refining assets. But the Alliance acquisition disproves that theory.

Only 10 years ago, Tosco owned one refinery, the Avon plant in Martinez, Calif., which then had a capacity of 132,000 b/d. In only a decade, the company has become a formidable competitor in the US refining industry, slowing expanding its operations by acquiring prime refineries.

Tosco has also become a big player in the retail marketing sector, as well. As of March 2000, its network comprised more than 6,500 retail outlets, 2,000 of which are company-controlled and operated under the Circle K brand. Tosco sells more than 6 billion gal/year of gasoline and diesel fuel.

Alliance refinery
Tosco is using the proceeds from the Avon refinery sale to fund its acquisition of Alliance, which will likely become the "crown jewel" of Tosco's operations, O'Malley told analysts during a conference call Thursday. O'Malley doesn't foresee Tosco issuing any equity to fund the Alliance purchase.

"The investment necessary to produce these cleaner burning fuels [at Alliance] will be well below industry averages and should offer Tosco a significant advantage," said O'Malley. Other advantages include cheaper crude costs due to heavy feedstock processing capability.

Alliance also will produce about 12,000 b/d of refinery-grade propylene when a new unit comes on stream this year, and the refinery has low operating costs compared to other coking refineries on the Gulf Coast, says Tosco.

Processing capabilities at the refinery are: 250,000 b/d of crude and vacuum distillation capacity, 104,000 b/d of fluid catalytic cracking, 25,000 b/d of delayed coking,42,000 b/d of catalytic reforming, 38,000 b/d of HF alkylation, 47,000 b/d of naphtha hydrodesulfurization, 30,000 b/d of diesel hydrotreating, 35,000 b/d of cracked distillate hydrotreating, and 42,000 b/d of jet treating. The refinery also has a 26,000 b/d aromatics extraction unit, a 6,500 b/d thermal hydrodealkylation unit, and a 2,400 b/d light-ends recovery unit.

The facility has about 300 employees, most of which will be retained by Tosco.

BP Amoco originally announced its intent to sell Alliance last July as part of a strategic plan to reduce BP Amoco's ownership of refining assets in the US and other countries and place a greater focus on exploration-production, chemicals, and marketing activities.

The deal is expected to close by the end of 2000, pending regulatory approval and satisfaction of certain conditions.

Pipelines for sale
Doug Ford, CEO of refining and marketing at BP Amoco, said the announced sale attracted a "considerable amount" of interest from potential buyers. BP Amoco acquired the Alliance refinery, built in 1971, and associated business units from Gulf Oil Co. in the mid-1980s.

The Alliance Business Unit consists of the Alliance refinery, 140 miles of crude oil pipeline linking the refinery with Louisiana Offshore Oil Port and other nearby sources of crude oil feedstocks, and a 150-mile petroleum products pipeline. That pipeline links the refinery with the Colonial and Plantation products pipelines at Collins, Miss., and BP Amoco's Collins products terminal.

BP Amoco said it has entered "advanced stage of negotiations" with possible buyers for the Alliance crude and products pipeline interests. It expects to announce agreements for those sales within the next few weeks.

BP Amoco said it expects total revenues of $1.1 billion from the sale of the refinery and pipeline interests. Buyers who enter agreements for the pipeline interests also will agree to provide for the transportation of feedstocks and products to and from the refinery, BP Amoco said.

Deal reaction
Moody's Investors Service and Fitch both confirmed Tosco's senior unsecured debt ratings following the announcement.

"The rating confirmation reflects the strategic benefits associated with the Alliance acquisition, Moody's favorable outlook for near-term average refining margins, and the roughly $800 million of cash Tosco expects to generate from the pending sale of its Avon refinery to Ultramar Diamond Shamrock," said Moody's.

"Tosco does not plan to issue any common equity to finance the purchase of Alliance, but Moody's believes that the company will have sufficient cash from the sale of Avon and from internal sources to finance the transaction and maintain financial leverage appropriate for its rating category."

Moody's expects the broader geographic diversification resulting from this acquisition to stabilize Tosco's overall earnings and cash flow. In addition, "Opportunities for Tosco to enhance the earnings and cash flow generated by the refinery will come primarily from broadening the types of crude oil processed," the service said. Alliance uses mostly heavy, sweet crudes and benefits from a widening in the light-heavy price differential.

More than 90% of the Alliance refinery's output consists of higher-value light products, including reformulated gasoline, notes Moody's. And Tosco will enter into a long-term agreement to sell a majority of that output to BP Amoco. "...But we expect that, over time, Alliance will also supply Tosco's retail network in the Southeast [US]," said Moody's�a conjecture that O'Malley confirmed.

Moody's notes that Tosco's purchase of the Wood River and Alliance refineries' will increase the portion of its refined products output sold into the wholesale market, which tends to be less stable than the retail market. In addition, the Gulf Coast tends to have excess refining capacity and is therefore intensely competitive.

Although Moody's recognizes that the outlook for refining margins this year is favorable, "Tosco will need to maintain an adequate equity cushion in anticipation of the next industry trough," said the ratings firm.

"Although Tosco will be assuming all refinery-related on-site environmental liabilities from BP Amoco, Alliance is a fairly new refinery and is in good condition, with relatively low expected annual maintenance [and] turnaround requirements. Environmental compliance costs for the refining industry are likely to rise over the next few years due to more stringent regulations concerning the sulfur content of gasoline. However, compliance costs at Alliance are expected to be only about $60 million, and Tosco will have until 2004 to meet the new sulfur specifications," said Moody's.

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