Carlyle Group – a private equity firm that manages around $195 billion in assets – pulled a classic corporate raid on Philadelphia Energy Solutions, the largest oil refining complex on the eastern seaboard. Now Carlyle Group wants Pennsylvania to foot the bill for millions that Carlyle owes in state taxes, while the firm also wants to evade millions that it owes in federal taxes that that would go towards helping the climate.
In 2012, Carlyle Group paid $175 million to buy up two-thirds of PES (a subsidiary of Energy Transfer Partners also co-owns PES). Soon after this, Carlyle Group began a corporate raid on the company – stripping PES of its financial assets and running it into the ground, all while turning a huge profit to walk away with.
In 2015, PES signed a contract with North Yard Logistics LP – PES’s operating partner, which Carlyle Group also owns – for North Yard to deliver crude oil to PES. Reuters characterized North Yard as “a firm with no offices or employees that PES spun off in 2015.”
In the deal, PES paid $30 million per quarter to North Yard for this service. But there was just one problem: North Yard hardly delivered any oil to PES because rising crude prices made the planned delivery by rail unprofitable. Nevertheless, PES still paid the tens of millions of dollars to North Yard even though there were no or few crude deliveries. And to to finance the payments, PES took out huge loans against its assets. PES did all this while giving huge payouts to its investors – mainly, Carlyle Group.
All told, Reuters reports that PES paid North Yard a total of $298 million between 2015 until August 2017, and that the Carlyle-led investor group raked in $151 million of this through eight distributions. Carlyle Group collected huge “dividend-style distributions” that were financed by “asset-backed loans the refiner ultimately could not repay.”
In effect, Carlyle Group funneled itself gobs of cash from one part of its company to another, making a huge profit while wrecking PES. By the time it filed for bankruptcy in January 2018, PES was $600 million in debt and had just $43 million cash on hand. Meanwhile, the Carlyle-led investor group made out with a whopping $594 million.
The state of Pennsylvania asked the court to reject PES’s bankruptcy petition because, it said, the company still owes $3.8 billion in taxes to the state. According to State Impact, the taxes owed “consist mostly of unsecured priority claims of about $3.1 billion in liquid fuels tax, interest and penalties from Jan. 1, 2015 to Dec. 31, 2017” as well as “some $700 million in sales and use tax, interest and penalties from Jan 1, 2015 until Jan 21, 2018.”
However, the $3.8 billion figure is probably a stretch – it was likely a bargaining tactic by Pennsylvania as it attempts to recoup some of the lost taxes.
Then, this Monday, a U.S. Bankruptcy Court in Delaware approved PES’s bankruptcy application. Under the agreement, PES will be infused with $260 million in new capital and its debt will be restructured. Moreover, Carlyle Group and Energy Transfer Partners will get their collective share of the company slashed to just 25%, while two asset managers – Credit Suisse Asset Management and Halcyon Capital Management – will become the largest shareholders. Carlyle Group, meanwhile, will still walk away with tens of millions in quick profits.
In addition, Scott Pruitt’s EPA is forgiving around half of the $467 million that PES owes in RIN credits to comply with the Renewable Fuel Standard program, which aims to increase the amount of ethanol that is blended into oil. Critics of this deal with PES say that it undermines the Clean Air Act. PES’s claim that the RIN credit payments were bankrupting an otherwise healthy company is belied by the fact that comparable companies also have to pay the fees.
Pennsylvania also agreed to the bankruptcy deal. According to Reuters, the state withdrew its claim of the bloated figure of $3.8 billion in unpaid taxes “after the parties agreed to language that preserved the state’s ability to collect any unpaid taxes.” This means that PES may need to pay back some taxes, though likely not as much as it would fully owe.
With the deal and the restructuring, PES will exit bankruptcy by April 10, 2018 and stay in business – though Carlyle Group will still walk away with millions in quick profits and an unpaid tax bill it owes to the state of Pennsylvania.
All told, Carlyle Group pulled a con job that is emblematic of private equity raids: it invested in PES with the intent to strip the refinery of its assets, make a huge, quick profit, and left the company, its workers, and taxpayers to suffer the consequences.
It is also another example that attests to the clear fact that – amidst a period where we desperately need more well-paying jobs, a growing tax base to fund social goods, and more collective and economic stability for regular people – corporate raiders like Carlyle Group serve no useful social purpose.
Carlyle Group’s three co-founders are all billionaires. One of them, David Rubenstein, is worth $2.8 billion. A 2013 Financial Times profile of Rubenstein remarked that Rubenstein “has all the trappings of a billionaire,” including homes in Colorado and Nantucket, a $65 million Gulfstream private jet, and an account at the Four Seasons restaurant in New York, the “favoured watering hole of the city’s private equity tycoons.”
The billions that Rubenstein uses to prop up this lush lifestyle, however, come at the expense of the economic security and well-being of working people and the fiscal bases of states like Pennsylvania that are robbed of billions in taxes.
In addition to cashing in off distressed companies, Carlyle Group owns Combined Systems, which sells to tear gas to repressive police forces from Ferguson, Missouri to Egypt and Palestine.