CHICAGO - BP this week sold $200 million of tax-exempt bonds to launch a roughly $1 billion pollution-control project that's part of a controversial expansion of a crude oil refinery located in northwest Indiana.
Issued through the city of Whiting, the $200 million bond issue comes a few weeks after Whiting officials authorized the issuance of up to $1 billion in additional tax-exempt pollution control bonds to finance the four-year, $3.8 billion expansion project.
Goldman, Sachs & Co. acted as underwriter on the transaction. Chapman and Cutler LLP was bond counsel.
The solid-waste revenue bonds, which priced Tuesday, captured an interest rate of 1.15%, according to Robert Ollis, BP's bond counsel at Chapman and Cutler. The bonds were issued in an initial flexible-rate mode, meaning BP will pay 1.15% until May 31, 2009. At that point the company may decide to convert to another variable-rate or fixed-rate mode, Ollis said. The bonds mature on Dec. 1, 2048.
Proceeds from the sale will be used to finance construction of solid-waste disposal facilities at the refinery, the largest crude oil refinery in the Midwest. The cost of the pollution-control piece of the overall expansion is still uncertain, but it could account for up to $1.4 billion of the total $3.8 billion project, according to reports. BP declined to announce the date of its next tax-exempt financing for the project.
Located less than 30 miles from Chicago along Lake Michigan, the Whiting refinery's expansion was started this year amid protests from local, state, and federal critics. The project, which won air and water permits from Indiana, would allow the plant to process Canadian crude oil. That would allow the nation to reduce its reliance on oil from the Middle East as well as promote development in northwest Indiana, according to BP.
BP began construction on the expansion earlier this year, and expects to a complete it by late 2011, said spokesman Scott Dean.
Whiting issues bonds on behalf of BP as part of an Indiana program administered by the Indiana Finance Authority that allows local municipalities to issue tax-exempt bonds on behalf of manufacturing and industrial companies located in their districts. Under Internal Revenue Service rules, the bonds must finance pollution-control projects in order to qualify for tax exemption.
The bonds are secured by BP, and not by a mortgage on or a security interest in the project, according to bond documents.
"It's a perfect no-brainer, win-win situation," said Whiting City Council President Chris Sarvanidis, who also is president of the Whiting Economic Development Commission, which also must sign off on any bond issuances on behalf of BP. "We are talking about increasing pollution control in our community, and there's absolutely zero liability or risk for the city."
BP's northwest Indiana presence covers Whiting, Hammond, and East Chicago. With a population of only 5,000, Whiting is dominated by BP - $0.55 cents on every property tax dollar collected by the city comes from the company, according to Sarvanidis.
Last year, under intense public and political pressure from Chicago, BP agreed to scale back its plan to increase the pollutants it releases into Lake Michigan as part of the expansion. At the time, Chicago officials' anger over the water permits prompted Alderman Ed Burke to bar Goldman Sachs and Banc of America Securities from engaging in any city bond business, as board members of those investment banks also sit on BP's board of directors. The ban was dropped when BP agreed to scale back its expansion plan in August 2007.
While Chicago's protests centered on the water permits, the newest challenges are focused on the air permits, which are currently facing challenges in both state and federal court.
Earlier this year, a group of local activists joined by California-based Global Community Monitor challenged the permits in state court and are currently engaged in a year-long discovery process, said Steven Kozel, president of Whiting-based Calumet Project.
On the federal side, the New York-based Natural Resources Defense Council last summer filed a challenge to BP's air permits in the Hammond Division of the Northern District of Indiana federal court. The federal challenge argues that BP and the Indiana Department of Environmental Management - which granted the permits - have not accounted for increases in pollution that will result from the refinery expansion, and that the increased pollution requires greater controls and more stringent permits.
Both challenges are expected to be heard in court next year.