By Jarrett Renshaw
(Reuters) - Delta Air Lines Inc has stopped buying the credits its oil refining arm needs to comply with U.S. biofuel laws, leaving it with a $346 million liability at the end of the first quarter, as it tries to persuade the White House to ease its obligations, according to previously unreported financial filings and sources familiar with the matter.
The decision to suspend buying is a risky gamble by the airline as these credits hit record highs and Delta works to convince the White House to ease its obligations to comply with the U.S. Renewable Fuel Standard (RFS), the sources said.
Merchant refiners like Delta-owned Monroe Energy have long opposed the RFS, which requires refiners to blend billions of gallons of biofuels into their fuel each year or purchase credits from those who do, often at a cost of hundreds of millions of dollars.
Delta's refinery, along with a handful of others, is seeking a temporary waiver of biofuel laws from the U.S. Environmental Protection Agency, arguing the costs are overly burdensome and threaten their plants.
The issue looms large for Delta because it owns the 185,000 barrel-per-day Monroe Energy refinery in Trainer, Pennsylvania, a facility it has tried but failed to sell in recent years.
Delta did not respond directly to questions about the decision to stop buying the fuel credits, known as RINS.
A spokesman pointed to comments on an April 15 investor call by the airline's co-chief financial officer, Gary Chase, who said a "huge escalation in the cost of RINS" from 60 cents to 70 cents at the end of the fourth quarter to above $1 now has impacted "near-term performance." Chase suggested the price movements were among "short-term dislocations" affecting the refinery.
A refiner might stop buying credits for reasons including that they were short on cash, or that they thought RIN prices were likely to fall in the future, or expected some regulatory relief that would reduce their compliance requirements.
For example, Philadelphia Energy Solutions, a nearby shuttered refinery, stopped buying credits and built up a massive liability ahead of filing for bankruptcy in 2018.
The Trump administration eventually waived roughly $200 million of Philadelphia Energy's credit liability, angering the nation's Farm Belt, but rescuing the refinery for a brief time.
Delta's $346 million outstanding liability on biofuel credits is roughly double its full-year 2020 RFS compliance costs of $172 million and significantly higher than the $58 million it paid in 2019, according to company filings.
The $346 million figure represents the current value of credits the company would need to buy to comply with the RFS. Those credits are meant to be handed in annually to the Environmental Protection Agency.
Delta reported an overall adjusted net loss of $2.26 billion for the quarter ended March 31, its fifth quarterly loss in a row, as air travel continued to be stifled by the COVID-19 pandemic.
WHITE HOUSE PUSH
The refinery, which employs 450 people and hundreds of contract workers, mostly from trade unions, is also looking to join with union labor in the upcoming weeks to ratchet up pressure on U.S. President Joe Biden, according to two sources familiar with the planning.
Refinery and labor leaders plan to argue that without any relief from the White House, hundreds of union jobs are at risk.
Biden helped rescue the U.S. East Coast refining industry as vice president years ago. But the current environment will be a major test of whether Biden can juggle his ambitious climate goals with supporting high-paying union jobs.
"Delta, quite honestly, might not have the cash to devote to this right now," said Ed Hirs, an energy economist at the University of Houston who has been critical of Delta’s decision to buy the refinery. "If they get relief from the government, then great, but it could be a risky bet."
Most merchant refiners buy credits daily to avoid amassing a large liability and exposure to fluctuating prices, but Monroe Energy has slowed or halted purchases, according to two market sources with knowledge of the company’s trading activity.
"We haven't seen them in the market for months. It’s unusual," said one of the sources who trades the credits.
Monroe Energy did not respond to requests for comment on their activities.
Delta RIN credit liability was detailed in a footnote in its most recent securities filing for the quarter ending March 31. Last year, at the same time, the company had an outstanding obligation of $33 million, records show.
(Reporting by Jarrett Renshaw in Philadelphia; Additional reporting by Tracy Rucinski in Chicago; Editing by Heather Timmons, Richard Valdmanis and Matthew Lewis)