Fitch Ratings Affirms Ratings of Sunoco, Inc.

CHICAGO -- Fitch Ratings has affirmed the ratings of Sunoco Inc. (Sunoco). The Rating Outlook remains Stable. Fitch affirms Sunoco's debt as follows:

-- Long-term issuer default rating (IDR) at 'BBB';

-- Short-term IDR at 'F2';

-- Senior unsecured debt at 'BBB';

-- Subordinated debentures at 'BBB-';

-- Commercial paper at 'F2'.

The rating affirmation is supported by Sunoco's sizable refining base, its strong market position in the Northeast and Midwest regions of the United States, its diversified operations and modest credit profile. Like other refiners, Sunoco continues to generate strong earnings, cash flows and credit metrics. EBITDA in 2005 totaled $2.1 billion providing interest coverage of 22.0 times (x) with leverage adjusted for operating leases of 1.3x. The company also ended 2005 with $919 million in cash.

From a credit perspective, the company remains consistent with its strategy - maintaining its credit profile, strategically investing across its business segments and using excess cash to buyback stock. The company's asset base is significantly stronger than during the downturn of 2002 including the addition of the Eagle Point refinery in 2004. Absent a radical change in strategy, Fitch anticipates no changes to Sunoco's ratings as the company is expected to manage the 'BBB' rating over the longer term. Of note is that the company has also made significant improvements to its balance sheet with the debt restructuring in late 2004.

Over the next few years, the capital program for Sunoco's refining segment will reflect a shift from environmental and regulatory spending to more strategic projects as investments in low sulfur spending wind down. The company is initiating several projects to add approximately 100 thousand barrels per day (mbpd) of refining capacity to its 900 mbpd year-end 2005 base. The company remains acquisitive across its segments with the most recent transactions in 2005 including $105 million for pipeline assets at the Sunoco Logistics Partners L.P. (Sunoco Logistics) subsidiary, a master limited partnership (MLP) in which Sunoco Inc. owns a 48% interest including the 2% controlling general partnership. The MLP is consolidated due to Sunoco's controlling interest.

The primary concern with Sunoco remains its exposure to the volatility of margins in the refining, marketing and commodity chemical sectors. The company also lacks heavy crude capacity, limiting the company's flexibility to only higher priced light sweet crudes, but also lacks the higher costs of these facilities. Of additional concern from a credit perspective is Sunoco's historic use of free cash to buyback common stock. Net stock repurchases have totaled more than $1.0 billion over the last three years. Of note is that this excludes issuances of Sunoco Logistics partnership units over the three year period which netted proceeds of $289 million. Fitch expects buybacks to be significant in 2006 given the year-end cash balance and expected strong results for the company, but also expects buybacks to be dependent on the free cash flow generated. Fitch expects the company to manage buybacks prudently as it did during the downturn in 2002 when Sunoco did not buyback any shares.

While balance sheet debt has remained relatively flat over the last several years at between $1.4 billion and $1.5 billion, off-balance sheet debt has increased significantly in recent years. The primary driver is the conversion of several of Sunoco's spot crude tanker agreements into new longer term charters to reduce tanker costs which have risen dramatically for the industry in recent years. While these transactions are positive as an effort to reduce operating costs, the costs are also now classified as rental expense due to the length and nature of the agreements. As a result, the estimate of Sunoco's off-balance-sheet debt has risen to approximately $1.6 billion based on 8x annualized gross rental expense of nearly $200 million (approximately 36% of which was for tanker charters).

Based on Fitch's forecasts for 2006, credit protection as measured by EBITDA-to-interest should again eclipse 20.0 times (x) with debt-to-EBITDA of under 1.0x and adjusted debt-to-EBITDAR of under 2.0x. Sunoco maintains liquidity through cash on hand, its $900 million five-year revolving credit facility maturing in 2010 and a $200 million receivable securitization program maturing in December 2006. Balance sheet debt at Dec. 31, 2005 was approximately $1.41 billion, which includes $250 million of long-term notes at Sunoco Logistics as well as $107 million in borrowings under the Sunoco Logistic's $300 million credit facility. Balance sheet debt also includes the consolidation of the $120 million of debt from the Epsilon polypropylene joint venture as part of the adoption of FASB Interpretation No. 46 at the end of 2003. Sunoco has no borrowings under its receivable securitization program. Of note is that Sunoco transferred a significant interest in its coke facilities to third-party investors in exchange for most of the cash flows and tax benefits through 2007 and beyond. These transactions are treated as minority interests and have resulted in cash outflows of approximately $40 million annually from Sunoco to the investors. The year-end 2005 minority interest in the coke-making operations was down to $234 million.

Sunoco is one of the largest independent petroleum refiners and marketers in the United States. The company's five sweet crude refineries have a combined crude capacity of 900 thousand barrels per day (mbpd) including 655 mbpd from its three refineries in the Northeast. In 2005, crude utilization averaged 98% with total throughput including other feedstocks of 940 mbpd. The company's retail presence includes approximately 4,800 outlets along the East Coast and in the Midwest. The company is also a large petrochemical producer, predominantly chemical intermediates, with annual sales of approximately five billion pounds. Sunoco also operates coke-making facilities in Virginia, Ohio and Indiana and currently owns approximately 48% of Sunoco Logistics Partners L.P.

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