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Rating Action:

MOODY'S CONFIRMS SUNOCO'S Baa2 SR. UNSECURED RATING; OUTLOOK STABLE

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 reasonable.

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 contract.

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 below Ba2.

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.

New York
John Diaz
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Alexandra S. Parker
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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