The joint venture between the Carlyle Croup and Sunoco Inc. that will keep a Philadelphia-based oil refinery from closing its doors is a credit positive for the city, Moody’s Investors Service said in a report.
“The joint venture, called Philadelphia Energy Solutions, is a credit positive for the city because it saves 850 direct jobs, and an estimated 15,000 ancillary jobs, that would have been lost had Sunoco closed the plant,” said Moody’s analyst Geordie Thompson.
Maintaining and increasing employment is especially important in Philadelphia as a large percentage of its revenue comes from wage taxes.
According to Moody’s, 37% of its revenue in fiscal 2011 came from wage taxes the city collected from residents and non-residents working in Philadelphia.
“Philadelphia’s labor market continues to lag, so retaining the refinery, and all of its associated jobs, is critical to fostering an economic recovery,” Thompson said.
The city’s unemployment rate is currently almost three percentage points higher than Pennsylvania’s, but saving the refinery prevents Philadelphia’s from rising by one percentage point, Moody’s said.
The venture will also help create new jobs, with the Carlyle Group estimating at least 1,000 additional jobs resulting from a planned upgrade for the refinery.
Mostly due to the high cost of imported petroleum, Sunoco announced in September 2011 that if it did not find a buyer, it would close its Philadelphia refinery and a nearby refinery in Marcus Hook.
The Philadelphia refinery processes 330,000 barrels of oil per day and is the oldest continuously operating refinery on the East Coast.
Sunoco shut down the Marcus Hook plant last summer, but the Carlyle-Sunoco joint venture, announced July 2, will save the Philadelphia refinery from a similar fate.
“Together we’ve re-imagined the Philadelphia refinery and its role as a critical energy hub in the Northeast,” said Carlyle managing director Rodney Cohen. “This joint venture will keep one of the region’s most important economic engines up and running.”
Under the terms of the agreement Sunoco, a logistics and retail company, will contribute its Philadelphia refinery assets to the joint venture in exchange for a non-operating minority interest.
The Carlyle Group, a global alternative asset manager, will fund future capital projects and facility upgrades, and enhance the refinery’s working capital.
The private-equity firm will hold the majority interest and oversee day-to-day operations.
Phil Rinaldi, who has led other refining and chemical business turnarounds, will serve as the chief executive of Philadelphia Energy Solutions.
The joint venture will focus on returning the refinery to profitability by relying more heavily on domestic energy sources instead of expensive foreign sources and by upgrading its facilities, with the help from the Pennsylvania government.
The state, rated Aa1 with a stable outlook by Moody’s, has committed $25 million toward the upgrade.
Gov. Tom Corbett said the announcement of the joint venture is “a testament to what can be accomplished when the public and private sectors work together toward a common goal — creating job opportunities for current and future generations.”
The commonwealth will provide grants to help build a high-speed train unloading facility, a mild hyrdocracker and hydrogen plant, and an upgrade to the refinery’s catalytic cracker.
Legal counsel to the Carlyle Group were Vinson & Elkins and Buchanan Ingersoll & Rooney.
Credit Suisse was financial advisor to Sunoco, and Kirkland & Ellis LLP was legal counsel.
The transaction is subject to customary closing conditions.