All the Cogs in the Machine - Philadelphia Energy Solutions' Bankruptcy
Earlier this week, Philadelphia Energy Solutions (PES), operator of the largest crude oil refinery on the East Coast, and owned by The Carlyle Group and a subsidiary of Energy Transfer Partners, L.P., filed a prepackaged plan of reorganization under Chapter 11 of the U.S. Bankruptcy Code. The company and its supporters, including U.S. Senator Patrick Toomey, blamed the bankruptcy on "the counterproductive, job-killing, EPA-imposed Renewable Fuel Standard." But are market forces, which have led to a contentious regulatory proceeding in Pennsylvania over a pipeline reversal, really to blame? What does this mean for contracts held by PES?
As Insights readers know, the lack of takeaway capacity can greatly suppress the price of the commodity in a region, and intelligence into regulatory and legal matters offer a window into the impact of market forces. That certainly occurred in the Dakotas as the region awaited new pipeline capacity , including the Dakota Access Pipeline (DAPL), to come online. Producers in the region saw lower pricing and used railcar transportation when there was a pipeline constraint. Much of that railcar traffic was directed to East Coast refineries, such as PES. But, as the basin prices recovered after DAPL came online, following litigation in multiple jurisdictions, PES was impacted by changing price dynamics and reduction in feedstock from the Dakotas.
PES is also opposing the proposed reversal of Buckeye Partners' Laurel Pipeline that is currently awaiting a decision before from the Pennsylvania Public Utility Commission. In that proceeding, PES has explained that it is connected to the eastern portion of the Laurel pipeline and relies upon its transportation services to deliver petroleum products from the Philadelphia area to Pittsburgh. According to PES, for the period of January through May 2017, 23% of its total production was going into the Laurel pipeline, a 3% increase over 2016. In fact, PES' regulatory briefs explained the dire circumstances it will confront should the pipeline be reversed: "There is only one probable outcome - - reduced production which leads to partial or total refineries closure."
This may come as no surprise to those familiar with PES' debt maturities, including a $550 million loan, and changes to PES's creditworthiness ratings. In November, Moody's downgraded Philadelphia Energy Solutions Refining and Marketing LLC's (PESRM) Corporate Family Rating (CFR) to Ca from B3, its Probability of Default Rating to Ca-PD from B3-PD, and the rating on its senior secured credit term loan to Ca from B3. In announcing the downgrades, Moody's explained that "PESRM's Ca CFR reflects the high likelihood of default or debt restructuring in early 2018 as the company hasn't been able to resolve its refinancing negotiations with its lenders." So what?
For one thing, natural gas shippers may spot an opportunity to gain access to natural gas firm transportation. PESRM is currently engaged in two transportation contracts with Spectra Energy's Texas Eastern Transmission . LawIQ customers could easily spot these contracts that PES may choose to cancel in coming months, which are slated to expire in 2018.
It would appear that PES has a number of issues to deal with, in addition to the Renewable Fuel Standard. Therefore, the bankruptcy should not come as a surprise. This situation may be a textbook case of how the resolution of pipeline constraints can help the producer community, but can cause ripple effects throughout the energy supply chain. Our subscribers know that having information regarding shipping and pricing, both statistical and qualitative, can allow them to avoid or mitigate the problems caused by delayed pipeline construction
Contact us to see how the LawIQ Energy regulatory and legal analytics and intelligence platform can provide you insights into the unforeseen and a competitive advantage. AND,
Join us for an upcoming webinar, Profit or Loss? Financial Risks of Tax Cuts on Gas Pipelines, on February 7 at 1pm EST co-hosted with energy law firm Wright & Talisman and energy consultancy Brown, Williams, Moorhead, and Quinn, . Register here: Registration