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July 21, 2019 − PES Holdings, LLC and seven affiliated Debtors (“Philadelphia Energy” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case number 19-11626. The Debtors, who own and operate the Point Breeze and Girard Point oil refineries in Philadelphia, are represented by Laura Davis Jones of Pachulski Stang Ziehl & Jones LLP. Further board-authorized engagements include (i) Kirkland & Ellis LLP as general bankruptcy counsel, (ii) PJT Partners LP (“PJT”) as financial advisor, (iii) Alvarez & Marsal North America, LLC ("Alvarez & Marsal") as restructuring advisor and (iv) Omni Management Group, Inc. as claims agent.
The Debtors’ lead petition notes between 1,000 and 5,000 creditors; estimated assets between $1.0bn and $10.0bn; and estimated liabilities between $1.0bn and $10.0bn. Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) Trinity Industried Leasing Company ($4.1mn trade debt), (ii) CSX Transportation Inc. ($3.9mn trade debt) and BNSF Railway Company ($3.5mn trade debt). All 50 of the Debtors' top 50 unsecured creditors have claims in excess of $150k, 11 with claims in excess of $1.0mn.
This is the second time in Chapter 11 for these Debtors in under two years, having emerged from their first iteration as recently as August 2018. In its first trip through Chapter 11, advised by the same trio of PJT, Alavarez & Marsal and Kirkland & Ellis, the Debtors restructured more than $635.0mn of funded debt while securing access to $260.0mn in new financing. In a press release announcing the 2018 emergence, Greg Gatta, the Debtors' then Chief Executive Officer, advised that "PES has a bright future ahead as the longest continuously operating refinery on the East Coast. We will invest in the refinery, building on the more than $900 million that has been invested in the complex since PES was formed in 2012 to implement world-class refining capabilities."
That rosy forecast was already looking misplaced when just after 4am on June 21st an explosion and fire occurred at the Debtors' South Philadelphia refinery complex, the largest on the East Coast. It took only five days for the Debtors to announce the refinery's closing with new CEO Mark Smith (Gatta's post-bankruptcy replacement) stating that “While our team included some of the most talented people in the industry, the recent fire at the refinery complex has made it impossible for us to continue operations. We are grateful that the fire resulted in only a few minor injuries. I want to thank our employees for their hard work and dedication and to thank the Philadelphia community for their support.”
The explosion and fire will likely provide some smoke cover for what was apparently already a struggling business (those woes perhaps explaining the rapidity with which the Debtors determined to close shop), Reuters having reported in February 2019 "that the company is facing another financial crisis just months after emerging from a bankruptcy in August;" and further reported in March 2019 that the Debtors were in the midst of a management shake-up. Like many of the Debtors' creditors, we look forward to further detail on the Debtors' pre-explosion insurance arrangements and would also expect a drawn-out process as the Debtors' role (and responsibility) as a major player in what is being called "cancer alley" is addressed by the bankruptcy Court. Not a positive development for other east coast refineries.
Objectives of the Chapter 11 Filings
The Stein Declaration (defined below) states: “The Debtors intend to use the tools of chapter 11 to engage with their stakeholders, insurers, and third parties around a value-maximizing plan transaction and seek to preserve and restore the operations of their refinery and maximize the value of their assets.”
Events Leading to the Chapter 11 Filing
In a declaration in support of the Chapter 11 filing (the “Stein Declaration”) [Docket No. 32], Jeffrey S. Stein, the Debtors’ Chief Restructuring Officer detailed the events leading to the Debtors’ Chapter 11 filing. Curiously, there is no mention of the Reuters-reported financial crisis or management shake-up. According to Stein, the bankruptcy is a cruel blow coming only days after the Debtors were otherwise emerging from the shadow of their first Chapter 11 and comes down to the damage caused by the blast/fire and a laggy insurer. In sum, "These insurance proceeds are the very heart of these chapter 11 cases: the sooner the Debtors can recover, the sooner the business can complete its recovery.”
The Stein Declaration states: “Following the effective date of the Prior Chapter 11 Cases, the Debtors continued to pursue initiatives to improve their profitability, while also implementing and transitioning their highly complex Intermediation Facility with ICBCS over multiple stages. This transition was completed on June 18, 2019, and was a major boost to the Debtors.
Just days later, on June 21, 2019, the Girard Point Incident occurred, which caused substantial property damage and left the Girard Point refinery significantly damaged. The Girard Point Incident and the unavailability of an immediate advance on the related insurance proceeds severely jeopardized the Debtors’ liquidity, forced the Debtors into a preservation-focused operational status until they receive such proceeds, and ultimately forced the Debtors to seek debtor-in-possession financing and to commence these chapter 11 cases. The Debtors’ goal in the near term remains continuing to preserve the safe operation of the Refining Complex while they seek to recover as quickly as possible on their property and business interruption insurance claims and pursue various transactions to preserve their operations and maximize value The Debtors have $1.25 billion in property and business interruption insurance coverage to protect against these kinds of losses (in addition to other insurance policies that cover other aspects of the Girard Point Incident). The Debtors are working with the insurers under that program to make the Debtors whole for the physical loss of the refinery and the resulting interruption of the Debtors’ business. These insurance proceeds are the very heart of these chapter 11 cases: the sooner the Debtors can recover, the sooner the business can complete its recovery.”
About the Debtors
PES Holdings, LLC is the parent company of Philadelphia Energy Solutions Refining and Marketing (“PESRM”). PESRM owns and operates the Point Breeze and Girard Point oil refineries located on an integrated, 1,300-acre refining complex in Philadelphia. The 335,000 barrels per day of combined capacity makes PESRM the largest refining complex on the Eastern Seaboard.
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