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28 Jan 2004
MOODY'S AFFIRMS SUNOCO INC.'S Baa2 SR. UNSECURED RATING; OUTLOOK STABLE
Approximately $1.1 Billion of Long-Term Debt Instruments Affected
New York, January 28, 2004 -- Moody's Investors Service affirmed the long-term senior unsecured
ratings of Sunoco Inc. ("Sunoco") at Baa2 with a stable
outlook in response to Sunoco's announcement of its agreement to
acquire ConocoPhillips Company's Mobil-branded retail network
for approximately $190 million (including $3 million in
inventory), comprising 385 sites in Delaware, Maryland,
Washington DC and Virginia. The proposed acquisition, which
is subject to regulatory approval, is expected to close in the second
quarter of 2004.
Moody's affirmation of Sunoco's ratings reflects the strategic
benefits of the acquisition and the company's ability to fund the
transaction with cash on the balance sheet.
Sunoco's stable rating outlook reflects Moody's expectations
that (1) reasonably strong average refining margins (at or above mid-cycle
levels) will continue over the next 12 months, (2) Sunoco's
management will continue to maintain conservative financial policies,
including issuing common equity or selling assets, as necessary,
to finance acquisitions, and (3) the company's acquisition
of the ConocoPhillips retail sites and its recent purchase of the Eagle
Point refinery, combined with other acquisitions/investments completed
over the past twelve months in retail and in chemicals, will improve
its financial performance during periods of low average refining margins.
However, Sunoco has sizable near-term non-discretionary
capital expenditure requirements. An overly aggressive growth strategy
and an over-reliance on asset sales proceeds to fund transactions,
combined with the possibility of opportunistic share repurchases,
could pressure the company's ratings if margins deteriorate.
In Moody's view, the purchase price of the ConocoPhillips retail
network acquisition appears reasonable. The transaction will strengthen
and diversify Sunoco's retail marketing business by allowing the
company to expand its brand beyond its core northeastern market.
It will also provide the company with additional sites in a profitable
geographic region, including the heavily traveled I-95 turnpike.
The acquisition is expected to generate cash flow that is immediately
accretive to Sunoco. Any environmental liabilities of the retail
network relating to events that occurred prior to the date of the acquisition
will remain the responsibility of ConocoPhillips.
Over the past twelve months, Sunoco has financed a series of acquisitions
with cash on the balance sheet that was generated from relatively robust
average refining margins and volume increases achieved during 2003,
as well as proceeds from divestitures. Management expects that
these acquisitions, when taken together, will result in stronger
earnings and cash flow during the next cyclical downturn. With
a cash balance of $431 million at December 31, 2003 and proceeds
of $91 million from the recent sale of its chemical division's
plasticizers business, Sunoco should be able to finance the ConocoPhillips
transaction without incurring incremental debt.
Sunoco remains interested in pursuing additional acquisitions in all of
its business lines and will also consider new investments in facilities
such as cokemaking plants. At the same time, management plans
to continue its share repurchase program (there is $243 million
remaining under the stock repurchase program authorized by Sunoco's board).
The company plans to increase its capital expenditures (excluding acquisitions)
in 2004 to $750 million from $425 million in 2003.
The 2004 budget includes $175 million to comply with clean fuels
specifications (as compared to $23 million in 2003), as well
as $112 million to construct the Haverhill coke plant. The
current environment of strong refining margins and a successful divestment
strategy have helped Sunoco maintain adequate financial flexibility for
its Baa2 rating while pursuing strategies to enhance shareholder value.
However, in light of above-average maintenance and environmental
capital expenditure requirements over the next two years, Sunoco
could experience negative free cash flow and higher debt levels if margins
were to decline and remain low for an extended period.
Sunoco maintains an acceptable liquidity profile. The volatility
of its earnings and cash flow and rising regulatory capital expenditures
are balanced by good quality credit facilities, modest upcoming
debt maturities, and manageable pension funding requirements.
Sunoco's bank facilities include a $385 million committed
three-year bank revolving credit facility maturing in July 2005
and a $400 million committed 364-day bank revolver with
a one-year term out option maturing in July 2004. At year-end
2003, no amounts were outstanding for either the bank credit facilities
or commercial paper. The company remains in compliance with financial
covenants in its bank credit agreements. Sunoco also has a $200
million trade receivables securitization, which contains a rating
trigger whereby the agreement terminates in the event of a rating downgrade
Ratings affirmed are Sunoco, Inc.'s Issuer rating at
Baa2; its notes, medium-term notes, and debentures
at Baa2; its bank debt at Baa2; its shelf registration for senior
unsecured debt, subordinated debt, and preferred stock at
(P)Baa2, (P)Baa3, and (P)Ba1, respectively, and
its rating for commercial paper at Prime-2. Also affirmed
are the (P)Baa3 shelf ratings for Sunoco Capital Trust 1 and Sunoco Capital
II preferred stock, and the Baa3 rated senior unsecured notes of
Aristech Chemical Corporation, a wholly-owned subsidiary
of Sunoco, Inc.
Sunoco, Inc. is an independent refining and marketing company
headquartered in Philadelphia, PA. The company's operations
also include chemicals, cokemaking, and logistics.
Corporate Finance Group
Moody's Investors Service
Alexandra S. Parker
Senior Vice President
Corporate Finance Group
Moody's Investors Service
No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.
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