The cost of repairing damage from Friday’s devastating fire at the Philadelphia Energy Solutions refinery in South Philadelphia could push the cash-strapped owner closer to the financial brink, just a year after emerging from bankruptcy.
As federal investigators arrived Monday to examine what triggered the spectacular fire, which injured five refinery workers and took more than a day to extinguish, the cost and the extent of the damage remained unclear.
What is clear is that PES was on shaky financial ground before the explosions reverberated across the city early Friday.
The refinery’s cash balance has declined over the last six months, according to quarterly reports that its parent company, PES Holdings LLC, files with U.S. Bankruptcy Court in Delaware. Its long-term debt increased 7.5 percent during the first quarter of this year, to $755 million. The value of the owner’s stake declined 43 percent in the first quarter, to $82 million at the end of March.
The owner may not have the resources to finance the cost of replacing the equipment that was destroyed in Friday’s fire, an alkylation unit that produced a high-octane additive required for making premium gasoline. The cost of replacing the equipment could easily top $100 million, say industry experts.
“I would be really skeptical they’re going to be able to raise the money to retool,” said Christina E. Simeone, an energy analyst who wrote a report for the University of Pennsylvania’s Kleinman Center for Energy Policy last fall that suggested the refinery is so uncompetitive and debt-burdened that it is “likely” to face bankruptcy again by 2022.
The company this year has shuffled its management team, frozen employee bonuses, and told employees it was deferring matching payments to their retirement accounts until 2020. The company has sought to reopen contract negotiations and asked for concessions ahead of the September contract expiration.
Investigators from the U.S. Chemical Safety and Hazard Investigation Board (CSB), the Bureau of Alcohol, Tobacco, Firearms and Explosives, and the Occupational Safety and Health Administration began their inquiries Monday.
“CSB and other agencies are on site, and they have our full cooperation during this investigation," PES spokesperson Cherice Corley said in an email. She did not respond to other questions.
The investigators may examine whether PES properly maintained the refinery during its most recent “turnaround," when the refinery is shut down and major repairs are conducted.
“Investigators should be looking at the most recent turnarounds to ensure they were completed to all the regulatory and technical requirements,” said Simeone. “They’re going to be looking at that kind of stuff.”
PES said Friday the refining complex was still running “at a reduced rate,” but has not quantified how much it is currently producing. Refinery operators are typically tight-lipped about disclosing production details, which can affect market speculation.
Gasoline prices in New York Harbor, which sets the regional price, were unchanged on Monday after spiking nearly 4 percent on Friday. Tom Kloza, the global head of energy analysis for the Oil Price Information Service, said he believes there is sufficient supply among Gulf Coast and European refiners to take up any slack from PES.
“I’m not in the crowd that believes this will be a major factor in contributing to a gasoline spike during the driving season,” Kloza said.
AAA reported Monday that retail gasoline prices, which have been falling in recent weeks, remained “mostly unchanged” over the weekend and appeared unaffected by the fire.
The PES complex is actually two refineries. The former Gulf Oil Corp. refinery at Girard Point, which opened in 1926, contains the unit where the fire occurred.
The second refinery, opened by Atlantic Refining Co. in 1870 at Point Breeze, was resuming normal operations Thursday after being forced to shut down June 10 when a smaller fire impacted its catalytic cracking unit, one of the main processing units, separating crude oil into gasoline and fuels like heating oil. Refinery workers said the restart was likely unrelated to Friday’s accident in the adjacent Girard Point plant, since the operations are not closely interconnected.
The refinery’s owner has attributed its financial woes to competition and the cost to comply with federal ethanol-blending mandates. PES is also disadvantaged because it is configured to use light, sweet crude, which is more expensive to buy than heavy crude.
The refinery’s competition in regional markets is well-documented. Though PES is the largest refinery in the Northeast, the region is dependent upon fuels shipped in by pipeline from the U.S. Gulf Coast, and by ships from Europe and Canada. Philadelphia refiners have also been fighting a bruising battle with Buckeye Pipeline LP, which has given Midwestern refiners more access to western and central Pennsylvania markets. The Philadelphia refiners fear the pipeline owners will eventually try to move Midwestern fuel all the way to Philadelphia on the route.
But PES’s critics, including ethanol-industry advocates who have been jousting with small refiners over ethanol mandates, say that PES’s problems are largely of its own making. Previous owners could have invested more into the operations to improve profitability and efficiency, they argued during the bankruptcy proceeding last year.
Sunoco, which acquired the two plants in 1988 and 1994 and merged them, formed a joint venture in 2012 with the private-equity Carlyle Group to keep the refinery open. The joint venture declared bankruptcy in January 2018, and completed the $635 million financial restructuring Aug. 7.
As PES was undergoing bankruptcy, it sought relief from its obligations to pay past ethanol mandates, and still faces claims from the Commonwealth of Pennsylvania over disputed tax payments.
Robert Harris, a certified public accountant hired by the U.S. Justice Department to examine the refiner’s books, said it would impose a “significant risk” if PES were forced to meet its past ethanol obligations.
After emerging from bankruptcy last August, the refinery’s cash reserve plunged from $149 million to $87.8 million in the last three months of 2018.
The hemorrhage appears to have subsided in the first quarter of this year, and the cash balance stood at $85.8 million at the end of March, according to the latest filing with the Delaware Bankruptcy Court. But long-term debt increased by $52.4 million to $755 million, up 7.5 percent.