Chicago developer Hilco’s $240 million bid wins auction for bankrupt Philadelphia refinery

Bankrupt Philadelphia Energy Solutions has agreed to sell its shuttered South Philly refinery complex to a Chicago development company with experience repurposing old industrial properties for new uses, likely marking an end to the site’s 150-year-old history as a petroleum refinery.

Hilco Redevelopment Partners, a Chicago real estate firm that has acquired old power plant sites in Boston and New Jersey, and is building warehouses on a former steel mill site in Baltimore, agreed to pay $240 million to acquire the 1,300-acre refinery site during a closed-door auction Friday, according to a U.S. Bankruptcy Court filing.

PES chief executive Mark Smith announced the deal Tuesday in a memo to employees, saying that Hilco’s affiliate, HRP Philadelphia Holdings LLC, would announce its plans for the site at a later date.

“We will continue to maintain the refinery complex, remove the hydrocarbon inventory in the facility, protect the facility and prepare for a safe handoff of the facility to HRP Philadelphia Holdings LLC, which is expected to occur within 60-90 days,” Smith said in his memo.

Hilco’s selection means that Philadelphia’s largest available commercial real estate parcel may emerge from bankruptcy with a less intensive industrial capacity, a goal of environmental and community activists who have rallied against the oil refinery. After more than a century of refining, the site will also need environmental remediation. But it’s not immediately clear when that will happen, and who will pay the bill.

Hilco officials could not be reached Tuesday afternoon. The Inquirer reported Friday that Hilco was a finalist.

» READ MORE: Bankrupt Philly refinery gets interest from 15 potential bidders; aims for a January auction

PES filed a formal notice of the agreement with U.S. Bankruptcy Court in Wilmington, where the company filed for bankruptcy protection last July after a devastating fire June 21 closed the refinery. The sales agreement needs to be confirmed by the court at a scheduled Feb. 6 hearing.

Hilco’s precise plans could not be determined, and it’s possible it could lease some part of the site to operate as a fuel-production facility. The fire left one of the two refineries in the complex undamaged.

PES, the East Coast’s largest refinery, employed 1,100 people before its closure. The Steelworkers Union contended that the refinery was capable of producing fuel but that the out-of-town investors who owned it cut their losses after the fire and shut it down, hoping to recover some of the plant’s $1.25 billion in insurance coverage. An insurance settlement is unresolved.

Environmentalists and community activists had pushed for a permanent closure of the refinery, which was the city’s largest stationary source of air pollution, and for area residents the catastrophic explosion in June was a dramatic reminder of the risks posed by the fuel-refining complex.

With the approval of the bankruptcy court, representatives of Philadelphia city government were present during Friday’s auction in New York and consulted with the bidders.

“We welcome the selection of Hilco Redevelopment Partners as the winning bidder for the refinery site," Mayor Kenney said in a statement Wednesday. “Though many challenges and years of work lie ahead, we are optimistic that the firm can develop this site in way that supports the core values in the city’s recent report summarizing the work of the Refinery Advisory Group: a diverse range of uses on the site that put the public’s safety as a top priority, has a more positive impact on the environment, engages meaningfully with the surrounding communities, and contributes significantly to the region’s economy.”

In the end, it was probably market forces that doomed any efforts to restart the plant, including a proposal by the refinery’s former chief executive, Philip Rinaldi. According to sources, Rinaldi’s group, Philadelphia Energy Industries, was unable to obtain sufficient financing to restart the refinery in a market that seems to be oversupplied with refineries, and faces a long-term decline in the use of fossil fuels.

» READ MORE: Philadelphia refinery hit with $132,000 fine for violations related to June fire

Rinaldi made no secret of his interest in reviving the plant. He began organizing a rescue effort just days after the June fire, and in August announced the formation of his venture to make a formal bid.

Fifteen potential bidders submitted written indications of interest, PES told the court last year, but the number of contenders was winnowed down during subsequent bid rounds. Final bids were due Jan. 10.

At least one other industrial redevelopment firm was said to be in the final competition.

Hilco is redeveloping the former Sparrows Point steel mill in Baltimore, a 3,100-acre waterfront site with deep-water access, into an industrial site called Tradepoint Atlantic.

Hilco is also remediating several sites of shuttered power-generation stations, including the proposed L Street Station mixed-use property in South Boston. Last year Hilco bought two New Jersey closed coal-fired plants, including one near Trenton, and plans to develop them into industrial ventures.

Oil has been refined at the South Philadelphia site since the 1860s, and the soil is heavily contaminated. A previous owner, Sunoco Inc., set up a mechanism to finance environmental remediation at all its former properties after it got out of the refining business in 2012.

Evergreen Resources Group LLC, which is managing the site restoration, aims to clean up the property for continued use as a refinery, and it’s unclear if a less intensive commercial or light-industrial use would require more extensive cleanup. The fund for remediation of all of Sunoco’s legacy sites was valued at $207 million at the end of 2017.

The PES complex is actually two refineries: Atlantic Refining Co. opened the Point Breeze refinery in 1870 and Gulf Oil Corp. opened an adjacent facility at Girard Point in 1926. Sunoco acquired the plants in 1988 and 1994. Eight years ago, Sunoco transferred ownership to a new entity, PES.

It was the larger Girard Point refinery that was damaged in the fire.

The property is linked to highways, railways, the Schuylkill, and pipelines, and contains a significant number of fuel storage tanks, which may be attractive to an energy company.

Sunoco’s affiliate, Sunoco Logistics, retained ownership of some key infrastructure assets after 2012, including the Fort Mifflin Terminal on the Delaware River, where crude oil is unloaded and stored in a Sunoco tank farm on Darby Creek. Sunoco also retained the Belmont Terminal, at 26th and Passyunk Avenue, where much of the refinery’s fuel is loaded onto trucks.

Energy Transfer LP, the current owner of Sunoco Logistics, still maintains a critical interest in the outcome of the bankruptcy. It also provided a $75 million loan to the refinery, which was secured by some of its storage equipment.

Energy Transfer owns the Marcus Hook Industrial Complex on the Delaware River south of Philadelphia, and is also building the contentious Mariner East project to move natural gas liquids, such as propane and butane, across Pennsylvania to Marcus Hook. The Marcus Hook property, also a former refinery, is still connected by pipelines to the Philadelphia refinery site.

The Philadelphia site seems likely to host a renewable energy producer, RNG Energy Solutions, which already had an agreement in place with PES before the fire to build a $120 million digester to convert food waste into renewable methane gas. That facility, which would be built on a 23-acre site on the north edge of the refinery property, could operate independently of a petroleum refinery.

If PES does not reopen, it would be the fourth refinery to shut down in the Philadelphia area in the last 10 years, leaving only three refineries: PBF Energy Inc. plants in Paulsboro, Gloucester County, and in Delaware City, Del., and the Monroe Energy Refinery owned by Delta Air Lines in Trainer, Delaware County.

The PES refinery lacks the processing units of more complex refineries that can turn lower grades of petroleum into high-value fuels. PES is configured to use costlier light crude oil, which put it at a competitive disadvantage to other refineries.

Rinaldi had rescued a refinery out of bankruptcy in Coffeyville, Kan., before joining up with Carlyle Group to take on the PES project. Aided with a $25 million state grant, PES spent $130 million of its own money to build a rail terminal to receive long trains that delivered domestic crude oil from North Dakota. For a few years, the refinery thrived with a source of discounted crude oil.

But the bounty was short-lived: Oil prices fell in 2014, and the oil trains became a less attractive option. The refinery was required to pay the rail terminal – a separate company -- under a take-or-pay agreement and profit margins disappeared. So did PES’s plans to go public in 2015.

The refinery paid back its investors, including Carlyle Group, and critics say that arrangement doomed the business. Rinaldi blamed what he called an unfair system requiring the refinery to pay hundreds of millions of dollars for biofuels credits to blend ethanol into fuel.

Rinaldi retired at the end of 2017. A few months later, PES declared bankruptcy for the first time.

When it emerged from bankruptcy in 2018, PES was largely owned by previous creditors, but weighed down by $700 million in debt. Without a change in business fundamentals, a 2018 report by Penn’s Kleinman Center for Energy Policy said, the refinery remained so uncompetitive that it was “likely” to face bankruptcy again by 2022.