St. Croix Energy became Limetree’s official stalking horse bidder Monday evening in a U.S. bankruptcy court hearing in the southern district of Texas, setting the low bar for bids on the defunct refinery at $20 million, with conditions.
One condition is a higher than usual break-up fee of $1 million should the deal not transpire. Attorneys said that St. Croix Energy had been a low bidder at $11.5 million until they negotiated the breakup fee over the weekend after Limetree failed to receive a deposit from a competing firm.
“It’s not really a breakup fee. It’s more like a commission. That really bothers me a lot,” Judge David Jones expressed concern at the hearings’ outset. “A fee whether I close or not, that gives me heartburn.”
Jones approved the deal after lawyers testified that the $1 million fee covers the actual costs for performing due diligence to make the offer, including hiring attorneys and environmental consultants and developing a business plan to run the refinery as a going concern.
Limetree has alluded to other offers it has or could receive from other bidders by the Tuesday deadline, including several interested in selling off the refinery’s assets rather than operating it. Among them are Goldman Sachs and Arena Investors, the debtor-in-possession that is funding the refinery’s Chapter 11 reorganization.
The $1 million breakup fee kicks in should one of those emerge the winner.
St. Croix Energy’s other condition is an acceptable transition services agreement with Limetree and the U.S. Environmental Protection Agency that it expects will be decided before Thursday’s auction.
“The transition services agreement is more for the debtors,” St. Croix Energy counsel Gregg Galardi explained. “They are going to keep the facility in their name for the next three to four months while we try to negotiate with EPA.”
The outcome of that negotiation heading into the auction will determine whether the firm remains the stalking horse. If it’s not favorable, St. Croix Energy retains the right to revert to its $11.5 million offer and forego the $1 million breakup fee.
“The EPA rejected the preliminary restart plan put together by our team, but we have since revised the proposal and are hoping that we can have a final decision before the auction,” St. Croix Energy Communications Director Ashely Scotland said in a prepared statement.
“We recognize and do not take for granted the costly and time-consuming process that may await us or another successful bidder on the LBR asset. Nevertheless, SCE remains wholly committed to this process in that our leadership is not driven solely by profit. The SCE partners live on St. Croix and are interested in what is best for the territory and being good fiduciaries of the natural resources of the Virgin Islands, which is ultimately an environmentally safe restart,” Scotland said.
According to Galardi, St. Croix Energy kept its bid low because of the “hundreds of millions of dollars” that would be required to restart the facility. During the bankruptcy process, those estimated figures were provided to bidders in a private due diligence room.
As well, “The St. Croix refinery right now cannot restart without certain approvals from the EPA,” Galardi said.
Previously, Limetree was able to restart under Hovensa’s Title V operating permit, which grandfathered the refinery to federal Clean Air Act standards that have since been surpassed. The Title V permit specifies exactly what measures the permit holder must take to control emission levels.
Limetree was also allowed to restart without a Prevention of Significant Deterioration permit, requiring new and long-dormant refineries to use modern technologies to control their emissions. Given the plant’s age and poor environmental track record, the EPA could enforce the permit this time around, increasing the cost of ownership substantially.
“That’s one of the big likelihoods,” Galardi said.
If the winning bidder opts to liquidate Limetree’s assets rather than operate them, a cleanup will ensue, helped by funds from a $50 million letter of credit that the V.I. government inked as part of Limetree’s original agreement.
“The letter of credit can only be used if Limetree fails to make a payment or to remediate any environmental concerns (including demolition) should the refinery fail,” Governor Albert Bryan, Jr. explained in an earlier email.