Fitch Upgr Phillips Petroleum Following Acquisition Of Tosco.

Business Editors & Analysts

CHICAGO--(BUSINESS WIRE)--Sept. 17, 2001

Fitch has upgraded the senior unsecured debt rating of Phillips Petroleum Company (Phillips) to `A-` following the completion of its acquisition of Tosco Corporation (Tosco) in an all stock transaction today. Concurrently, Fitch also upgraded Tosco's senior unsecured debt to `A-`. The upgrades cover approximately $6.3 billion of Phillips senior unsecured debt and approximately $2 billion of assumed Tosco senior unsecured debt. Fitch has also upgraded Tosco's secured debt, the $150 million of Bayway Bonds, to an `A' rating and the preferred stock rating of Phillips' $650 million of trust originated preferred to `BBB+`. Phillips commercial paper rating remains at `F2'. The Rating Outlook for Phillips is Stable.

Phillips Petroleum completed the acquisition of Tosco today for $7 billion in stock plus the assumption of approximately $2 billion of Tosco debt. As part of the transaction, Tosco shareholders receive 0.8 shares of Phillips stock for each share of Tosco stock. Financially, the issuance of equity significantly strengthens Phillips' balance sheet as adjusted debt-to-capital falls to the low 40% range. Going forward in a `mid-cycle' pricing environment, coverages, as measured by EBITDA/interest, should be above 7.0 times (x) and leverage, as measured by debt/EBITDA, should be less than 2.0x. It is anticipated that the combined company will fund capital expenditures and payment of dividends internally.

The Tosco acquisition is positive from an operational viewpoint as Phillips' upstream presence complements Tosco's strong downstream operations. The combined company is the second largest refiner and one of the largest marketers in the US. Prior to the acquisition, Phillips operated three refineries with a capacity to process 368,000 barrels per day (bpd) of crude and other feedstocks in support of a marketing network of over 6,800 retail sites under the Phillips 66 brand. As the largest independent refiner in the United States, Tosco provides Phillips with over 1,400,000-bpd of additional refining capacity through seven refinery systems. The Tosco retail network of approximately 6,500 outlets is the nation's largest operation of company-operated convenience stores through the Circle K and 76 Products branded sites. With the addition of Tosco, Phillips now markets through retail sites in 46 states.

Over the last 18 months, Phillips has transformed itself into one of the largest, most diversified and fully integrated oil companies in the US. The Tosco acquisition completes Phillips' strategy to establish a solid presence in the four primary areas of the oil industry:

-- Oil and gas exploration and production - Acquired Arco Alaska assets in
April 2000;

-- Chemicals and plastics manufacturing - Formed 50/50 joint venture (JV) with
Chevron in July 2000;

-- Gas gathering, processing and marketing - 30.3% interest in JV with Duke
Energy in March 2000;

-- Refining, marketing and transportation (RM&T) - Acquired Tosco in September
2001.

In 2000, RM&T made up 56% of revenues but only 10% of Phillips' operating income, whereas exploration and production made up 40% of revenues and over 86% of operating income. With the acquisition of Tosco, the RM&T segment operating income contribution will likely increase to over 30%. Management also anticipates $250 million of synergies to come from the transaction. The company is expected to focus growth capital on the upstream business going forward. In the near term, the chemicals and gas gathering, processing and marketing segments will continue to be minor contributors to the bottom line of Phillips. The combination of these two segments will equate to a total of only 7%-10% of operating income going forward. The chemicals segment continues to be in the trough of the industry cycle and will likely be only break even for the company this year.