Philadelphia refinery fights to survive after 2012 rescue

Bloomberg

Five years after dodging a shutdown, the largest oil refinery on the East Coast is once again teetering on the brink.
Sunoco Inc. and the private equity firm Carlyle Group LP formed Philadelphia Energy Solutions, a joint venture, in 2012 to rescue the refinery in an effort that also included $25 million in state aid. Now, after spending more than $800 million in the interim, the company is mired in debt. It has been cutting jobs and benefits since last fall, drawing the ire of unionized workers, and this month delayed planned maintenance for the second time in two years.
The culprits: Compliance with the government biofuel mandate that’s costing twice what the company pays its employees, an industry-wide downturn in margins and a challenging East Coast market increasingly relying on imports as domestic crude flows to the Gulf Coast’s refining and export hub.
“It’s no secret” the refinery has faced headwinds, PES Chief Executive Officer Greg Gatta wrote this month in a letter to employees. The company took on debt to fuel growth but now needs to “assess our capital structure,” he said.
The company’s biggest expense: Renewable Identification Numbers, or RINs, which the company says will cost more than $300 million this year. Refiners are required to blend petroleum-based fuels with ethanol and biodiesel to meet annual quotas. Those that can’t blend the biofuel themselves must purchase RINs credits. With the Environmental Protection Agency set to reject the Carl Icahn-backed bid to shift the burden of the mandate, those costs are unlikely to abate.
WEIGHING OPTIONS
The company is still weighing options, said John Auers, executive vice president at energy consultant Turner Mason & Co. Those could include shutting down only half of the refining complex, finding a buyer, or reaching some other deal with lenders and investors, he said. PES is already “on the edge,” and could fall into deeper trouble if refining economics deteriorate, according to Auers. “They’re buying time to see how the environment plays out,” he said. “It’s clear they haven’t made a decision.”
The 335,000-barrel-a-day refinery will continue operating as it tackles its debt. Because the company isn’t public, it doesn’t regularly report its financials. As of March 31, 2015, PES had about $539 million of debt outstanding under its refining term loan, according to a regulatory filing. The $550 million loan matures next year. “They’ve got plenty of debt they need to deal with,” said Andy Lipow, president of consultant Lipow Oil Associates LLC in Houston. That’s “what really dragging them down.”
The company “is currently assessing its capital structure with the goal of improving financial flexibility in light of current market and regulatory challenges, including the significant financial burden imposed by renewable energy obligations (RINs), that have affected the company’s profitability,” said spokeswoman Cherice Corley in an emailed statement.
“We are working constructively with our lenders to find a solution that will enable us to move forward with the right financial foundation to support our business into the future.”