As space launches go, this was possibly the most hyped one since a Mercury capsule carried Alan Shepard on a suborbital trip in 1961, making him the first American in space. Only this time a Falcon Heavy rocket’s payload was Elon Musk’s personal Tesla roadster electric car. A pretend person in an astronaut’s space suit, cutely dubbed Starman, was posed as if he was driving.
The plan was for that roadster to be put into an elliptical orbit between Mars and Earth; but, apparently, during a secondary stage burn the car went far past its intended distance. Musk promptly tweeted that it would make his Tesla to the asteroid belt; others who actually understand the math and science of these things pointed out that there was no way that would happen.
The three critical parts of the Falcon Heavy rocket were supposed to be recaptured for reuse in later missions; only two were. Well, as Meatloaf once sang, “Two out of three ain’t bad”— but, from an accounting perspective, not retrieving the rocket’s main section whole will be a really expensive problem for future flights.
So, to debrief: The payload didn’t go where it was intended to go, retrieval of the three main parts of the rocket failed, and the person pretending to be driving that Tesla roadster in space is an empty suit. Other than that, some claimed, this was a successful launch of the most powerful rocket booster yet — until someone pointed out that the old Saturn 5 rockets of the Sixties still hold that record.
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Oh, and as late as the 23rd of February, media outlets such as CNBC and Newsweek were breathlessly reporting that astronomers would actually see Elon Musk’s Tesla roadster in space. No word on whether Starman was waving back at them.
What if, in the summer of 1969, the Saturn 5 carrying the Apollo 11 mission’s astronauts had had just a bit too much power in its secondary stage rockets, leaving Neil Armstrong, Buzz Aldrin and Michael Collins somewhere just past the moon; President Nixon had told the media the boys were on their way to the asteroid belt, and Mission Command in Houston had responded that they wouldn’t travel that far out in space? Would the headlines that week in newspapers across America have read, “Saturn 5 Moon Launch Another NASA Success”?
Just in case you don’t remember, we’ve already sent three electric vehicles to the moon, where real people in real space suits drove them. And we did that almost half a century ago, and everyone and every vehicle ended up exactly where we wanted them on the moon. The differences between then and now: Back then the moon missions worked as planned. And we didn’t have an iPhone app to track Musk’s wayward roadster.
It’s Ethanol Crack
This second story started with a refinery, Philadelphia Energy Solutions, going bankrupt in late January. They blamed their financial failure on having to buy ethanol credits, or RINs, from the federal government because this firm doesn’t blend it into the fuels it produces. The cost being bandied about at first was around an extra $800 million in expenses for the pleasure of making gasoline without ethanol, the Hamburger Helper™ of fossil fuels in this country. Now, according to the CME Group’s quotes for the futures market on crack spreads for oil, or how much gross profit there is in a barrel of crude, February’s closing number of $12.25 will increase to $20.06 in March. When one is processing 335,000 barrels of oil per day, that will cover a lot of ethanol credits.
Still, the crack spread wasn’t even part of the story put out for consumption. No, not using ethanol in gas is so expensive for refineries today that it literally broke the financial back of Philadelphia Energy Solutions. Moreover, last week management and the refinery’s labor union invited Texas Senator Ted Cruz to a town hall meeting where everyone could air their ethanol grievances. That’s ironic. While Cruz, like this author, is a known critic of the government’s ethanol mandates, it is almost humorous to think of our Ted Cruz as the champion of unionized refinery workers in a Yankee state. I’ll let that image sit with you for awhile.
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President Donald Trump called for a meeting this week with cabinet officials and members of Congress, listed as follows: Ted Cruz, Chuck Grassley, Joni Ernst, Scott Pruitt of the EPA; Sonny Perdue, our AG Secretary; and “potentially” Energy Secretary Rick Perry to discuss this very issue. Really? One critical official who deals with this stuff, the Energy Secretary, is only on the potential attendee list? (Believe it or not, at that meeting small government conservatives, such as Grassley and Ernst, did not want the ethanol mandate altered in any way. Of course, their home state of Iowa grows a lot of corn. So apparently some big government mandates are just fine with them.)
But maybe, just maybe, this entire refinery bankruptcy is just another political setup. No one knows for sure, but there are now two completely different stories about this bankruptcy in the open.
Reuters managed to go through the bankruptcy filings and found other, more troubling financial issues. Turns out that the Carlyle Group, a private equity company, purchased two thirds of this refinery back in 2012 for a mere $175 million, with the previous owner, Sunoco, taking the minority position. Now, according to Reuters, the Carlyle Group set about improving the rail terminal access to that refinery three years later though North Yard Logistics, once owned by that refinery, but made into a separate financial entity, one without any employees or offices, by the Carlyle Group. These improvements would cost the Philadelphia refinery around $10 million per month, or $30 million quarterly. Only, just as this took place, the price of oil collapsed.Rail tank shipments of oil fell to nearly nothing, which negated the need for an improved rail yard. But the refinery’s payments continued.
Oh, and like many private equity deals, the Carlyle Group also took out huge bank loans in the refinery’s name to pay themselves for buying the refinery. All told, the Carlyle Group invested $175 million in the refinery and drew out of it, including cash from those bank loans in the refinery’s name, profits and rail yard payments, somewhere around $594 million. As of the bankruptcy filing, PES declared $600 million in debt, $43 million in cash on hand, and 2017 ethanol compliance liabilities of $218 million. And they owed the EPA a $350 million balance for their ethanol RINs.
I never thought I would take the side of the ethanol lobby, but other refineries also buy ethanol credits instead of blending ethanol into their gasoline, and they are earning reasonable, if not good, profit years. Further, the refinery’s management is solely blaming that $350 million in unpaid RINs for their collapse; suggesting the $594 million paid to Carlyle and having $600 in overall debt had nothing to do with their financial problems.
Well, there’s some easy math here. $594 million paid out, both in cash and debt, is higher than $350 million in unpaid ethanol RINs. The crack spreads, or gross profits per barrel of oil, are good and about to become great again with the spring market. But here’s the political part that is troubling. The bankruptcy filing does not try to claw back any of the monies the Carlyle Group took out of this venture —even if those repaid undue profits would reduce the bank loans taken out. But the refinery does want the $350 million it owes our government in unpaid ethanol RINs written off. And, because they apparently aren’t having to take a huge haircut on the loans they made, the banks are good with this plan.
No, PES is blaming its bankruptcy on ethanol, or on the cost of not using ethanol and having to buy government credits instead. Nothing is mentioned about the poor decision-making of the Carlyle Group, which enlarged a rail yard right before oil collapsed, thereby making rail too expensive a delivery system, while the refinery continues to pay out tens of millions for that enlarged rail yard every quarter. Nobody is protesting that, while this refinery claims to lose money because they don’t blend ethanol into their gasoline, other refineries under the same circumstance are doing just fine. Although, to be fair, other refiners also complain viciously about having to buy those credits.
So, private equity has made a mess of this venture, leaving the company in debt and bankrupt; and the only thing the company wants out of this is to stiff the American taxpayers on those ethanol credits to the tune of $350 million. And Ted Cruz shows up as the champion of Yankee unionized workers by giving them his support on this issue.
On June 17, 2010, the Ethanol Industry published a list of its 10 Greatest Enemies. I came in at No. 10. I was shattered; I thought I should have won the Oscar that year for best performance as an enemy of ethanol. No, the Wall Street Journal, the California Air Resource Board, and Time magazine outranked me. But I’m proud to be on the list, because ethanol had never done one thing that was promised.
It doesn’t make the air cleaner, it didn’t lower the price of fuel and it didn’t reduce our dependence on foreign oil; shale drilling did that. Ethanol was never anything more than another government farm subsidy — and corn was already one of America’s most heavily subsidized crops. Yet if they’d called it an agricultural policy and ensured minimum damage to our vehicles by limiting how much of it could be added to gasoline, I would have been fine with that.
What I always reported, particularly at Business Week, took apart the deceptions used to sell us on this third-rate fuel additive. It also exposed the fact that we’ve used this snake oil twice in our history and it failed both times.
In this particular case, however, the divergent facts make clear that a prudent and fair federal bankruptcy judge alone should determine the real reasons why Philadelphia Energy Solutions failed. Was it the poor business judgments — maybe a bit of greed— of the Carlyle Group, or was it the cost of ethanol credits? Maybe both. But there are two major business issues here that the public should have to look at and come up with an informed opinion about: How private equity firms really work to maximize their payouts, even if doing so damages the viability of the company they have taken over. And what to do about the ethanol industry and the ever-increasing mandates that in time will damage our personal vehicles.
Instead, it becomes another cheap political issue where, when the dust clears, it’s likely nothing that matters will come of it — except that the taxpayers will probably get stiffed for that $350 million owed in RINs.
Gee, one would think slashing the corporate tax rate would have been enough for some of these companies, but apparently it wasn’t.
© Ed Wallace 2018 Ed Wallace is a recipient of the Gerald R. Loeb Award for business journalism, bestowed by the Anderson School of Business at UCLA, and hosts the top-rated talk show, Wheels, 8:00 to 1:00 Saturdays on 570 KLIF AM. Email: email@example.com