What’s the Real Story behind Philadelphia Energy Solutions’ Bankruptcy, Crude Oil, and the Renewable Fuel Standard?

February 02, 2018

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by Joelle Simonpietri (Biofuels Digest) On Jan 21^st 2018, Carlyle-backed Philadelphia Energy Solutions(PES), the largest refinery complex on the U.S. east coast at 335,000 barrels per day, filed for Chapter 11 bankruptcy, blaming Renewable Fuel Standard (RFS) compliance costs. In the week since the filing, the Washington Examiner reports several other small refiners have piled on, asking the Environmental Protection Agency to waive the Renewable Volume Obligations under the RFS.

The governors of Pennsylvania and Delaware weighed in as well, writing letters to the EPA requesting to have the refineries in their states receive hardship exemptions from RFS obligations.

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Under terms of the filing in Delaware late Sunday reported by Bloomberg, PES seeks to sell off assets while leaving behind $300 million to $350 million worth of the compliance liabilities, effectively erasing the RFS2 liabilities.

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Union leaders piled on to the EPA and RFS blame wagon, despite PES’s announcement that the refineries will keep operating and none of the 1,100 employees would lose their jobs.

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None of the union statements appear to touch on the large debt load carried by the company since the launch of the leveraged buyout/joint venture in 2012, or the original market reasons why the Philadelphia refineries were shuttered in the first place and needed rescuing in 2012.

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How could Philadelphia Energy Solutions (PES) have (mis) managed its business as to accrue an aggregate $832 million in RIN compliance costs in five years, over 3 times the value of the refineries themselves, while others in the independent petroleum refining sector were enjoying record high profits and earnings per share at the same time and under the same regulatory regime?

Looking at PES’s bankruptcy filing from a different point of view, that of a student of private equity finance, it tells a very different story. The non-bankrupt parent company, Philadelphia Energy Solutions LLC, will invest $65 million in exchange for 25 percent of equity in the newly reorganized PES, thereby valuing the newly reorganized company at $260 million. This is less than half the value of the debt that the company took on in Carlyle’s and Sunoco’s original leveraged buyout deal in 2012. In the bankruptcy filing, the company also asks the court to effectively erase the company’s RFS renewable volume obligations, along with its other liabilities. In doing so, they take the highly unusual step of asking the court to approve their walking away from statutory compliance obligations, as well as financial ones.

What PES didn’t mention…

PES also didn’t highlight in the company’s public statements that they actually had held sufficient RIN credits to meet their compliance needs for 2017. Nearly a quarter of a billion dollars in 2017 RINs were dumped on the RFS exchange from a single large East Coast seller on January 19^th, according to OPIS reports. “Everyone knew Philadelphia was selling,” stated some market insiders to me. Now with the bankruptcy declaration made public, it looks like the company sold the RINS in an attempt to raise cash after they decided they were going to enter Chapter 11 reorganization, and banked on a political strategy to modify the RFS to erase their volume obligations.

The volume of 2017 RINs held out for sale was sufficient to move the market downward, settling at 66 cents per RIN, over 30% lower than the flirting-with-$1 level that RINS had touched in the last quarter of 2017. Could PES have been trying to do what Patrick Keefe’s article in The New Yorker alleged Carl Icahn and CVR did, which was to effectively “short” the RIN market and sell RINs at high value, then try to move the market downward by lobbying the White House and EPA to relax the obligations and thereby move the value lower, then buy the RINs back in time to close their short position and meet their obligations at the end of the year?

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Other independent refiners, like Andeavor (NYSE: ANDV, formerly Tesoro), and Par Pacific (NYSE: PARR), among others, had managed to achieve higher-than average profits and earnings per share during this same five-year period.

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“Declaring bankruptcy doesn’t suddenly relieve a company’s OSHA regulations. Why should the RFS regulation be any different?” opined one of my colleagues from one of the RFS-compliant actors in the independent refining line of business.

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PES could have followed suit and bought some gasoline and ethanol blending and distribution capability in the Northeast market with some of the $832 million, but instead spent time and money in a failed lobbying effort to the EPA to reduce the Renewable Volume Obligations, and also to change the “point of sale obligation,” from blenders to distributors, a position which their competitors in the independent refining industry opposed. (See Tesoro’s docket filed with the EPA in opposition).

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There appeared to be little substantive discussion of the company’s inability to:

Take advantage of historically high crack spreads, which traditionally benefit independent refineries in this narrow-margin business;
Reposition itself after the Marcellus and Bakken shale boom and bust bankruptcies;
Engage in qualifying biofuel procurement and blending in order to satisfy its Renewable Volume Obligations with organic operations;
Properly oversee JP Morgan Chase who was both their supplier and customer for crude oil and product sales; and
Conserve precious leadership time and bandwidth, instead spending years and political capital lobbying the EPA to reduce the RFS2 volume obligations and change the point-of-sale obligation

The Stranding of PES by…cheap oil

A joint venture between Carlyle Group LP and Sunoco Inc., Philadelphia Energy Solutions was launched to great political fanfare by the Governor of Pennsylvania in 2012, revitalizing one shuttered refinery and capitalizing on the disruptive change of the Marcellus shale boom. It was the same time period in which Delta Airlines purchased another ailing refinery, the Trainer Pennsylvania refinery with pipeline supply to Newark Airport. The PES new joint venture planned to use thousand-car-long rail lines to bring in domestic crude oil suddenly made available by hydraulic fracturing in the Marcellus and Bakkan shale regions, and raise the share of domestically supplied crude oil processed at the refinery to 50%.

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... Republican party rallying point – the Dakota Access Pipeline. As soon as the pipeline was complete and began operations, the cheap crude-by-rail trains (literally) stopped loading and going to Philadelphia. PES’s investment in the crude oil rail yard there in Philadelphia was stranded, but the company continued to avoid making similar infrastructure investments to be able to bring in, blend, and distribute ethanol or other biofuels.

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(T)he company suddenly needed to find international suppliers of more expensive Atlantic Ocean crudes who could deliver by sea again.

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Last I checked, ethanol refining is, like petroleum refining, part of the U.S. manufacturing sector and employs lots of plumbers and pipe-fitters. It is also an important manufacturing sector for rural economic areas in America inside and outside the rust belt. READ MORE

Refiner Bankruptcy Adds to Pressure to Overhaul Biofuel Program

Scott Pruitt: EPA is getting back to core mission of the agency (Fox Business VIDEO start at 1:40)

Philadelphia refinery bankruptcy shows need for biofuel reform -EPA chief (Reuters)

EPA chief riles ethanol advocates with call for biofuels policy reform (Reuters)

Marathon looks for spring fuel mandate change (Argus Media)

Del. wants in on RFS waivers (E&E News)

Bankrupt refiner made missteps (Washington Times)

Dry the Starting Tear for PES’s Bankruptcy (Wall Street Journal)

One good read: ethanol and refineries (in four parts) (Axios)

Part 1: Philadelphia Energy Solutions Bankruptcy Basics (Kleinman Center for Energy Policy)

Part 2: Philadelphia Energy Solutions Ch. 11 Fact and Fiction (Kleinman Center for Energy Policy)

Part 3: Philadelphia Energy Solutions Investors Prioritized Stronger Investments (Kleinman Center for Energy Policy)

Part 4: The Speculative Future of Philadelphia Energy Solutions (Kleinman Center for Energy Policy)

Interview: Dinneen Blames PES' Problems on Manageme0nt, Not RFS (Oil Price Information Service (OPIS))

What Others Are Saying About the PES Bankruptcy and RINs (Renewable Fuels Association)

REINING IT RIN (Politico's Morning Energy)

Excerpt from Politico's Morning Energy: : EPA Administrator Scott Pruitt discussed the recent bankruptcy of Pennsylvania's oil refiner Philadelphia Energy Solutions again on Thursday, telling Fox Business News: "We need RIN reform." Pruitt said he's already discussed the issue with lawmakers. "It's something I've talked to Congress about," he said. "We've got to take steps to address this. And I think there are many that understand that."

And in response to comment raising the possibility of getting rid of ethanol requirements, Pruitt honed it that it wouldn't be "getting rid" of the requirement. "This is about the accounting mechanism to ensure that we have a certain percentage of our fuel actually has ethanol," Pruitt said. "So it truly is an enforcement mechanism that is being used in ways that really it wasn't intended. We need to get reform around that." Watch it here.

The backlash was swift: "Administrator Pruitt's recent comments completely contradict his own rule and repeated promises to support the letter and spirit of the RFS," Growth Energy CEO Emily Skor said. "His claim that RFS compliance is in any way is the cause of PES's troubles is not only false, it is an about-face to now try and gut the most successful energy program in American history."

“Administrator Pruitt’s recent comments completely contradict his own rule and repeated promises to support the letter and spirit of the RFS,” Growth Energy CEO Emily Skor said. “His claim that RFS compliance is in any way is the cause of PES’s troubles is not only false, it is an about-face to now try and gut the most successful energy program in American history.” READ MORE