Major East Coast supplier of gasoline blames federal rules on
ethanol blending
By Peg Brickley and Christopher M. Matthews
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (January 23, 2018).
Philadelphia Energy Solutions LLC affiliates accounting for more
than one-quarter of the fuel-refining capacity on the East Coast
filed for bankruptcy protection, blaming the steep cost of
complying with a federal environmental regulation.
The company, which operates two refineries just miles from
center city Philadelphia, said in court papers on Monday that it
intends to operate normally while awaiting judicial approval for
its reorganization plan possibly by the end of February.
Philadelphia Energy said it worked out the details with its top
creditors ahead of its chapter 11 filing on Sunday.
The company cited the Clean Air Act's renewable-fuel-standard
program as the primary reason for its financial distress, saying it
is a victim of "regulatory compliance costs that specifically
penalize independent merchant refiners." It also blamed adverse
economics in the energy sector.
Independent refiners have long complained about the program,
which was introduced during President George W. Bush's
administration to boost the amount of ethanol in the country's
gasoline supply. The Renewable Fuel Standard requires companies to
either blend ethanol with the gasoline they produce or buy credits.
Refiners that don't purchase the credits have to pay penalties to
the government.
The credits are awarded where ethanol and gasoline are blended,
which for the most part means facilities owned by integrated oil
companies like Chevron Corp. and Exxon Mobil Corp. and by large
retail gas-station chains. The system disadvantages smaller
refiners like Philadelphia Energy with few blending facilities.
If it wants to avoid fines, Philadelphia Energy has to purchase
blending credits, exposing the company to an "unpredictable,
escalating, and unintended compliance burden" that has cost it $832
million since operations began in September 2012, the company said
in court papers. Philadelphia Energy said it paid $13 million to
comply in 2012, with the figure rising to $231 million by 2016.
For years, independent refiners have unsuccessfully lobbied the
Environmental Protection Agency to move the point of obligation for
adding ethanol from refiners to the retail level. Those efforts
drew scrutiny when billionaire investor Carl Icahn, who holds a
majority stake in independent refiner CVR Energy Inc. and was a
special adviser to President Donald Trump, became involved.
The Trump administration backed away from changes to the
Renewable Fuel Standard favored by independent refiners in October,
after senators from corn-producing states -- corn is the major
source of ethanol in the U.S. -- threatened to block its EPA
nominees. CVR disclosed in November that federal prosecutors are
looking into Mr. Icahn's role as adviser to Mr. Trump.
Private-equity firm Carlyle Group and Sunoco Inc., which is now
a subsidiary of Energy Transfer Partners LP, formed Philadelphia
Energy to buy the refining complex from Sunoco in 2012. Carlyle
Group declined to comment Monday, but in a release Philadelphia
Energy said Carlyle and Sunoco are investing new money into the
reorganized company. Energy Transfer Partners referred questions to
Philadelphia Energy.
The problems for East Coast refiners run deeper than regulatory
obligations. Those refiners were in economic peril at the start of
the decade because of their dependence on expensive foreign crude
imported from places like Nigeria and Russia, which forced several
to close between 2010 and 2012.
They saw a short-term reprieve as frackers in places like North
Dakota pumped more oil. Between 2013 and 2015, East Coast refiners
increased their profitability by using cheaper crude from the
Bakken basin in the Northern U.S., which had been languishing due
to a dearth of pipelines and a ban on exports of U.S. oil.
At one point, a barrel of U.S. oil was selling for $25 less than
a foreign one. That margin disappeared once U.S. Congress lifted
the export ban in 2015 and American producers started to ship crude
overseas. New conduits like the Dakota Access Pipeline have also
come online, connecting North Dakota's oil to U.S. refining centers
on the Gulf Coast.
Despite paying billions to comply with the regulations, many
independent refiners have been reaping huge profits. Over the past
five years, the biggest four fuel processors that don't produce oil
or gas delivered a total return of 180% to shareholders, including
dividends, beating the S&P 500 index by almost 75 percentage
points, according to FactSet. U.S. refiners, including Valero
Energy Corp., Andeavor Corp., Marathon Petroleum Corp. and others,
provided $53 billion in cash to shareholders in dividends and
buybacks.
Refiners on the Gulf Coast have benefited from their close
proximity to shale-oil producers in Texas and their ability to
import and export through the Gulf of Mexico.
Philadelphia Energy will ask a bankruptcy judge to let it
refashion its business in bankruptcy -- "free and clear" of the
regulatory-compliance liabilities that it blames for snarling its
finances -- by using a sale structure to transfer ownership to
existing stakeholders.
At current market prices, Philadelphia Energy would have to
purchase credits with an aggregate market value of about $350
million before March 31 to settle its compliance obligations, court
papers say.
Philadelphia Energy Solutions, the parent company, didn't file
for bankruptcy protection. It is part of the turnaround strategy,
committed to contributing $65 million to retain 25% of the refinery
operation once it is out of bankruptcy. The Philadelphia company's
chapter 11 plan calls for a sale, but there is no outside buyer,
according to spokeswoman Cherice Corley. Instead, Philadelphia
Energy's operations are to be sold to existing stakeholders or
reorganized if the sale proposal is rejected by the bankruptcy
court, she said.
Write to Peg Brickley at peg.brickley@wsj.com and Christopher M.
Matthews at christopher.matthews@wsj.com
(END) Dow Jones Newswires
January 23, 2018 02:47 ET (07:47 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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