Bankrupt Philly refinery gets interest from 15 potential bidders; aims for a January auction

Nov. 10--The next two months could determine the fate of the 1,300-acre Philadelphia Energy Solutions refinery complex, which shut down after a catastrophic explosion on June 21.

The company, which declared bankruptcy after the dramatic fire and explosion, has proposed a Jan. 10 date for an auction to sell the South Philadelphia complex, the largest refinery on the East Coast. U.S. Bankruptcy Court Judge Kevin Gross has scheduled a hearing in Wilmington on Thursday to consider the refinery's request to establish bidding procedures.

PJT Partners, the refinery's investment bank, granted 37 potential bidders access to detailed data about the refinery's assets, and 15 submitted written indications of interest, according to the refinery's filing. Potential bidders must submit proposals by Nov. 22 to qualify for the final bidding process. In recent weeks, potential bidders and their investors have taken bus tours to examine the damaged complex.

Two potential bidders have publicly declared an interest in the property. A group led by former chief executive officer Philip Rinaldi is the only known bidder that proposes to restart the refinery, adding renewable natural gas production to the mix. S.G. Preston, a Philadelphia biofuels marketer, wants to convert the refinery into a producer of renewable diesel and jet fuel.

Several other energy logistics companies have proposed turning a portion of the site into a fuel terminal, according to industry insiders, but it's unclear whether those plans include fuel production. Some real estate developers have also expressed interest in building warehouse or distribution centers that would tie into the site's proximity to sea, rail, highway, and airport access. PES did not identify any potential bidders in court.

The refinery said the interest from potential bidders indicated that an auction will generate "significant value." PES said it may select one or more "stalking horse" bidders whose offers would become the floor price for other contenders to beat. A stalking horse would be selected no later than Jan. 9, according to the proposed bidding procedure.

The refinery's aim to maximize the sale price may put it on a collision course with community and environmental activists, who urged Mayor Jim Kenney's Refinery Advisory Group this summer to recommend repurposing the site to something more benign than oil refining. The advisor group's final report is expected this month.

The city, in "limited objections" filed with the court on Thursday, said any significant change in the refinery's use may require City Council rezoning of the site and could also entail an "adjustment" of current soil and groundwater contamination remediation efforts by the refinery's previous owner, Sunoco, under a 2012 consent order.

"Whatever the outcome of the sale process and auction, development and operation of the site by any one of the variety of market players expressing interest in the debtors' assets will not occur in a vacuum," wrote Megan N. Harper, deputy city solicitor.

The U.S. Trustee's also filed objections Thursday to the bidding procedure, saying there was insufficient time between the Jan. 9 date to name a stalking horse bidder and the deadline the following day for competing bids. Any auction to allow bidders to raise their offers would be difficult to conclude before the proposed Jan. 22 confirmation hearing date to affirm the outcome, wrote Andrew R. Vara, the acting U.S. trustee.

"The result of these deficiencies will tend to discourage rather than encourage potential bids," the trustee said.

In its Oct. 24 court filing, PES says it has a fiduciary responsibility to generate the most money possible for the refinery's stakeholders, including lenders who were owed $800 million at the time the refinery filed for bankruptcy in July.

"The bidding procedures are designed to facilitate orderly yet competitive bidding to maximize the value realized from the sale by these estates," the company said. It envisions an "open auction process" that will allow potential bidders sufficient time to submit well-informed bids.

The disaster at PES began with a 4 a.m. failure of an elbow section of pipe that had corroded to half the thickness of a credit card, according to investigators for the U.S. Chemical Safety and Hazard Investigation Board.

A fire triggered three successive explosions, which launched projectiles as large as a truck across the refinery and released 5,000 pounds of dangerous hydrofluoric acid used in the alkylation unit that was destroyed. Miraculously, only five workers suffered minor injuries, and there were no reports of offsite injuries.

PES announced the plant's closure on June 26, throwing most of the 1,100 workers out of jobs, and filed for Chapter 11 bankruptcy protection in July. About 80 union workers remain employed as caretakers during shutdown and cleanup, but 60 of them have received notice that their jobs could be terminated after Dec. 1, said Ryan O'Callaghan, a spokesman for Steelworkers Local 10-1, which represents refinery workers.

The 335,000-barrel-a-day refinery complex -- actually two adjacent refineries with separate histories dating to 1870 -- has struggled financially for years. It went through bankruptcy in 2018, and emerged owned primarily by its former creditors: Credit Suisse Asset Management and Bardin Hill Investment Partners, formerly known as Halcyon Capital Management. Together, the two funds own about 56 percent.

The potential sale of the refinery -- the owners reserve the right to reject bids and retain ownership -- is only one of several unresolved issues before the bankruptcy court.

A separate legal action before Judge Gross focuses on a battle among creditors over competing claims to potential proceeds of an insurance settlement. PES carried $1.25 billion in insurance coverage for property damage and business interruption.

The refinery has already received some insurance money to cover its property losses. Insurance carriers in September advanced PES $50 million of a settlement for property damage, providing the refiner with a cash infusion to cover its closure and bankruptcy costs. The costs include undisclosed bonuses paid to retain key executives, which the court allowed last month.

But it's unclear how much, if any, settlement the insurance carriers will pay to cover the refinery's loss of business because of the closure. The policies cover business losses for a period up to two years beginning 60 days after the accident.

The insurance carriers are balking at paying for the business interruption coverage. "They believe, like we do, that the refinery could have kept operating," said O'Callaghan, the Steelworkers' spokesman. The labor union argues that the damage was confined to a single unit in one of the fuel complex's two refineries, and that the older Point Breeze refinery was unaffected by the accident.

In a parallel court action, PES and the lead bank on its $699 million term loan, Cortland Capital Market Services LLC, are suing another bank that provided financing for crude oil purchases and sale of refined products under a so-called intermediation agreement. The two banks have competing claims to proceeds of the business interruption insurance.

The second bank, ICBC Standard Bank PLC, consummated its agreement with the refinery only three days before the explosion, and owned about 3.3 million barrels of crude oil and refined products located within the refining complex at the time of the accident, according to court filings.

A shorter version of this article that appears in the Sunday Nov. 8, 2019, print edition of the Inquirer does not include objections that were filed with the court after the newspaper's print deadline.

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