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30 Apr 2003
MOODY'S CONFIRMS SUNOCO'S Baa2 SR. UNSECURED RATING; OUTLOOK STABLE
Approximately $1.2 Billion of Securities Affected.
New York, April 30, 2003 -- Moody's Investors Service confirmed Sunoco, Inc.'s Baa2 senior
unsecured debt rating with a stable outlook. The rating action,
prompted by Sunoco's announcement of its intention to purchase El
Paso Corporation's Eagle Point refinery, also incorporates
the company's recent formation of a chemicals joint venture with
Equistar Chemicals, L.P. (Equistar) and its purchase
of Equistar's Bayport polypropylene plant. The proposed Eagle
Point refinery acquisition is subject to regulatory approval and is expected
to close by the end of the second or third quarter.
Moody's confirmed Sunoco's ratings based on the strategic benefits associated
with the proposed Eagle Point refinery acquisition and the Equistar transactions.
The rating confirmation also reflects Sunoco's ability to finance
all announced acquisitions with cash on the balance sheet ($459
million at March 31, 2003).
Sunoco's stable rating outlook assumes management will take steps over
the next several months to rebuild the company's financial cushion,
which Moody's believes is important for the Baa2 rating in light
of the cyclical nature of the refining and chemicals industries.
A lack of progress in improving its financial flexibility could pressure
Sunoco's ratings. Moody's notes management remains interested
in acquiring additional assets in all of its business lines. The
stable outlook also assumes Sunoco will finance a meaningful portion of
any future material acquisitions with common equity.
Sunoco intends to acquire the Eagle Point refinery for $130 million
plus working capital. Located in Westville, New Jersey,
across the Delaware River from Sunoco's Philadelphia Refining Complex,
Eagle Point is strategically situated to supply Sunoco's Northeast
retail network. In addition, similar to Sunoco's existing
Northeast refineries, Eagle Point processes light, sweet crude
oils. Synergies the company expects to realize from the acquisition
include the ability to optimize crude oil purchases, reduce transportation
costs, share product streams, and more efficiently utilize
processing units. Based on Moody's estimate of the cost of
the transaction at approximately $867 per distillation barrel (excluding
the value of crude oil and refined product inventory), or $115
per complexity barrel, and projected future maintenance turnaround
and environmental capital requirements, the purchase price appears
The Eagle Point acquisition includes certain pipeline and other logistics
assets associated with the refinery, which Sunoco intends to make
available for sale to Sunoco Logistics Partners, L.P.,
its 75 percent owned master-limited partnership. However,
Moody's analysis of the Eagle Point transaction does not consider
a potential sale of the logistics assets to Sunoco Logistics Partners,
L.P., as the details of such a transaction have not
yet been finalized.
Sunoco recently formed a new limited partnership involving the La Porte,
TX ethylene facility of Equistar (rated Ba3 senior implied). The
partnership will supply Sunoco with propylene under a long-term
supply contract. Sunoco also purchased Equistar's Bayport
polypropylene plant. Sunoco paid a total consideration of $198
million (including approximately $8 million of net working capital)
in order to purchase the Bayport facility and to form the partnership.
The Equistar joint venture will provide Sunoco with a secure supply of
propylene for its Gulf Coast polypropylene operations. Propylene
supplies are expected to remain tight for the foreseeable future,
which could squeeze margins for polypropylene producers that rely on the
spot market for raw material purchases. The partnership will supply
700 million pounds of propylene per year to Sunoco over a 15-year
period. The contract includes fixed and variable discounts on 500
million of the 700 million pounds of propylene to be delivered under the
The Bayport polypropylene plant, with a capacity of 400 million
pounds, will mainly provide benefits of scale. With 2.5
billion pounds of annual capacity, Sunoco is now the third-largest
manufacturer of polypropylene in North America. The Bayport plant
is less technologically advanced than Sunoco's existing polypropylene
plants, but its low acquisition cost helps mitigate this risk.
Furthermore, management believes it will be able to improve the
facility's capacity utilization, as well as take advantage
of some synergies with Sunoco's LaPorte, TX plant through
shared services and common management.
Sunoco accumulated a sizeable cash balance during 2002, which helped
mitigate its poor cash flow-to-debt coverage measures during
a period of weak average refining margins. Sunoco financed the
recent Equistar transactions with existing cash resources and expects
to finance the proposed Eagle Point refinery acquisition, as well
as certain previously announced retail acquisitions, in a similar
manner. Moody's expects that the company's recent and
announced acquisitions will likely absorb most of its existing cash balances.
Sunoco maintains an acceptable liquidity profile. The volatile
nature of its earnings and cash flow and rising regulatory capital expenditures
are balanced by good quality credit facilities and modest upcoming debt
maturities. At December 31, 2002, the company had no
borrowing under its committed bank revolving credit facilities and no
outstanding commercial paper. Sunoco remains in compliance with
financial covenants in its bank credit agreements. The company's
$200 million trade receivables securitization contains a rating
trigger whereby the agreement terminates in the event of a rating downgrade
Ratings confirmed 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 confirmed are the (P)Baa3
shelf ratings for Sunoco Capital Trust I and Sunoco Capital Trust 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.
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