Refiner goes belly-up after payouts to Carlyle Group

Throughout 2016 and 2017, a rail terminal built to accept crude oil for the largest East Coast refinery often sat idle, with few trains showing up to unload. Although little oil flowed, plenty of money did. Under a deal Philadelphia Energy Solutions (PES) signed in 2015, the refiner paid minimum quarterly payments of $30 million to terminal owner North Yard Logistics LP — even if little crude arrived.
Much of that cash, in turn, flowed to the investors that own both PES and North Yard, led by the Carlyle Group, a global private equity firm with $178 billion in assets.
The deal in effect guaranteed lucrative payouts to Carlyle regardless of whether the refinery benefited from the arrangement.
When oil market conditions made the rail shipments unprofitable later that year, the refinery took heavy losses while its investors continued to collect large distributions for two more years.
The rail contract exemplifies the financial demands Carlyle imposed on PES in the years leading up to the refiner’s bankruptcy in January.
The Carlyle-led consortium collected at least $594 million in cash distributions from PES before it collapsed.
Carlyle paid $175 million in 2012 for its two-thirds stake in the refiner.
More than half the distributions to the Carlyle-led investors were financed by loans against PES assets that the refiner now can’t pay back, the filings show.
The rest came from the refiner’s operating budget and payments PES made under the terminal deal to North Yard, a firm with no offices or employees that PES spun off in 2015.
PES has blamed its bankruptcy on environmental regulations that require all US refiners to cover the costs of blending corn-based ethanol into the nation’s gasoline.
But the ill-fated train terminal deal and other large payouts to investors played key roles in the refiner’s collapse, according to filings and five current or former PES employees who were involved in the refinery’s decision-making.
The investor payouts, along with a slump in refining economics, left PES unable to cover its obligations under the decade-old US Renewable Fuel Standard or the loans it took to finance the distributions to Carlyle, the filings show.
PES had $600 million in debt and $43 million in cash on hand when it filed bankruptcy last month.
It now hopes to restructure and continue operations, which employ about 1,100 people.
PES spokeswoman Cherice Corley defended the payments to Carlyle and said the biofuels regulations played a “significant” role its collapse.
“We feel our capital structure was appropriate, and any suggestion that it was the cause of our restructuring is completely ignoring the significant effect of the flawed Renewable Fuel Standard (RFS),” Corley said.
Other refiners and Pennsylvania officials have also blamed biofuels regulation for the South Philadelphia refinery’s failure, triggering renewed debate about the program on Capitol Hill.
Refiners without the necessary blending facilities, such as PES, are required to purchase regulatory credits, known as RINs, from firms that do such blending.
The cost of compliance for PES rose from $13 million in 2012 to $218 million in 2017 as prices increased for the credits, which are traded in an open market.
The refiner, however, failed to pay a large portion of that obligation.
In addition to its conventional debt, PES still owes the US Environmental Protection Agency (EPA) regulatory credits worth about $350 million, an amount tied to the fuel it produced over the past two years, according to filings.
The firm stopped buying RINs last year — and instead sold them to other refiners for what likely amounted to tens of millions of dollars.
The corn and ethanol lobby has pushed back on the argument that biofuels regulation sunk PES, pointing out that other refiners governed by the same law are raking in their highest profits in years.
The refinery’s failure had more to do with the hefty profits it paid to Carlyle as its cash reserves dwindled and its debt soared, said Brooke Coleman, head of the Advanced Biofuels Council.
“The Carlyle Group looks more like a corporate raider than a saviour in this deal,” Coleman said. — Reuters

Jarrett Renshaw