Governors' Biofuels Coalition

NEW YORK (Reuters) – Oil refiner Philadelphia Energy Solutions (PES) has raised tens of millions of dollars in cash by selling U.S. biofuels credits in recent weeks, according to sources familiar with the transactions, an unusual move for a company that requires the credits to meet federal regulations.

The U.S. Renewable Fuel Standard (RFS) requires oil refiners to blend increasing amounts of biofuels like ethanol into their fuels every year, or purchase credits from those who do. Independent refiners like PES, lacking blending facilities, typically are dependable buyers in the niche market.

Over the past several weeks, PES has sold roughly 40 million credits in clips of roughly 5 million at a time, according to one of the sources. During that time they have not bought any credits, the source said.

The second source said PES was selling credits recently, but did not have specific volumes.

Officials at PES declined to confirm or comment on the sales. In August, the company’s chief executive told employees in a letter that it had hired financial and legal advisors to look at ways to tackle its debt burden. Included in the PES debt load is a $550 million term loan that comes due early next year.

Sources told Reuters the company tapped investment bank PJT Partners Inc

Last year, the Philadelphia refiner disclosed that it had sold credits and amassed the equivalent of a $111.4 million short position. The company still has a significant short position, according to other sources familiar with its finances.

PES is majority owned by private equity firm Carlyle Group. Energy Transfer Partners, which owns a minority stake, disclosed the company’s detailed financial statements in its annual report filed in February. Subsequent quarterly reports did not update PES’s position.

One possible reason behind the short position is that refiners can defer buying or sell credits to manage cash flow. The company might also believe prices for the biofuels credits will fall before the refiner must hand them in to the Environmental Protection Agency in March 2018 to meet the requirements of the RFS.

Pennsylvania’s Democratic Governor Tom Wolf in October asked the administration of President Donald Trump to grant a waiver that would reduce the number of credits PES and other refiners need to purchase this year and in 2018.

Such a waiver would likely reduce prices for the credits.

“It looks like it could be a clever play, but frankly, it might be the only option they have to stay afloat,” Ed Hirs, an energy economist at the University of Houston said. “They have found a way to borrow money using the EPA.”

An EPA spokesperson said the agency was still reviewing the request, adding administrator Scott Pruitt will not take “any steps to undermine the objectives in the statute of the RFS.”

PES took on the $550 million term loan five years ago after Carlyle and Sunoco Inc cut a deal, supported by tax breaks and grants, to rescue the company.

Biofuels credits are now trading above 90 cents. That is up from this year’s low of 34 cents in March when billionaire investor and refinery owner Carl Icahn was proposing price-crushing changes to the biofuels program as an unpaid advisor to Trump – a role from which he has since resigned.

Under pressure from the corn lobby, the EPA has said it does not plan to adopt Icahn’s proposals.

Like PES, Icahn’s refining company, CVR Energy, had a short position in the credit market when he was advising the White House. The U.S. attorney’s office out of Manhattan is investigating his actions.

The Renewable Fuel Standard was introduced under former President George W. Bush more than a decade ago as a way to reduce imports, help farmers, and cut pollution. The regulation has helped corn growers, but has hurt refiners.

PES said the program cost it $250 million last year, more than its payroll, and blamed it for jobs cuts and reduced pension benefits.

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