Fitch Ratings has assigned the following initial ratings to Sunoco Logistics Partners L.P. (the Master Limited Partnership - MLP) and its operating subsidiary, Sunoco Logistics Partners Operations L.P. (the Operating Partnership):
Sunoco Logistics Partners L.P.
--Long-term Issuer Default Rating (IDR) 'BBB'.
Sunoco Logistics Partners Operations L.P.
--Long-term IDR 'BBB';
--Senior unsecured debt rating 'BBB';
--Senior unsecured bank facility rating 'BBB';
--Short-term IDR 'F2'.
These ratings affect $1.1 billion of publicly-held senior unsecured notes and all borrowings under the $395 million and $62.5 million senior unsecured bank facilities. All the debt is at the Operating Partnership.
Key rating factors include the following strengths:
--Good, diversified asset base that serves high-demand markets;
--Stable, fee-based operations that account for a large majority of the company's EBITDA;
--Supportive financial credit metrics that benefit from a less aggressive capital structure relative to its peers.
These strengths are partially offset by the following concerns:
--Volatility and working capital needs associated with market-related operations;
--Relationship with lower-rated sponsor Sunoco, Inc. (Sunoco; IDR 'BBB-'; Stable Outlook), including some customer concentration, shared management duties, and ownership and effective control of the MLP by Sunoco.
Sunoco Logistics benefits from a mix of fee-based assets consisting of crude oil pipelines, refined product pipelines, and refined product and crude oil terminal facilities. Diversification of operating risk is further enhanced by the scope of assets within each of these segments. In addition to outright ownership of its own assets, Sunoco Logistics also owns economic interests in four refined product pipelines, including a 9.4% interest in Explorer Pipeline Company, and two crude oil pipelines, including a 91% interest in the Mid-Valley Pipeline Company. These pipelines primarily serve the high-demand Midwest market, while Sunoco Logistics' refined product terminals serve the high demand Northeast market. A further strength of the company's asset base is its Nederland Terminal, a 20 million barrel crude oil terminal that is strategically located on the Texas Gulf Coast and connected to several pipelines and the U.S. Strategic Petroleum Reserve.
The company's fee-based assets provide a stable source of cash flows with a minimal amount of maintenance capital expenditures. Management has combined these steady cash flows with a relatively moderate use of leverage - even after considering the recapitalization that occurred earlier this year from the company's $500 million issuance of senior notes - to produce supportive financial credit metrics. Fitch expects Sunoco Logistics to maintain a long-term debt-to-EBITDA ratio of less than 3.7 times (x), although total debt-to-EBITDA may exceed this level when including short-term borrowings associated with the company's market-related operations.
Sunoco Logistics uses its geographically diverse asset base and significant storage capabilities to opportunistically take advantage of market conditions. These market-related operations are typically shorter in duration than three months, use a flat trading book, and are liquid investments. Sunoco Logistics is able to earn a margin on the simultaneous purchase and forward sale and storage of crude oil when the crude oil market is in contango. However, by being dependent on certain crude oil market conditions in order for profit opportunities to exist, the cash flow associated with these market-related operations is inherently volatile. In addition, the contango investments require a significant amount of crude oil inventory, which is usually purchased with borrowings from the company's $395 million bank facility.
Exposure to and affiliation with Sunoco is an additional concern. Although the percentage of revenues and EBITDA attributable to Sunoco has declined significantly since 2002 as Sunoco Logistics has grown and diversified its operations, Sunoco remains an important customer to the company's financial performance. A decline in Sunoco's refining business or a shutdown of another refinery that Sunoco Logistics serves would negatively impact Sunoco Logistics. Furthermore, in addition to owning 30% of the MLP's limited partner units, Sunoco and its affiliates own all of the general partner (GP) units and incentive distribution rights, giving it effective control of Sunoco Logistics. Shared management and treasury functions also pose some risk to avoiding potential conflicts of interest between the two companies, although Sunoco Logistics does have a conflicts committee in place to mitigate such risk.
Liquidity is adequate, supported by sufficient availability under Sunoco Logistics' $395 million revolving credit facility maturing on Nov. 22, 2012, and its $62.5 million revolving credit facility maturing on Sept. 30, 2011. In addition, management maintains a prudent distribution policy that does not include any earnings from the company's more volatile market-related operations in its projections for distributable cash flow.
Sunoco Logistics is an MLP with operations focused on the transportation, terminalling, and storage of refined products and crude oil and the purchase and sale of crude oil in 13 states located in the Northeast, Midwest, and Southwest United States. Sunoco Partners LLC is the GP.
Additional information is available at 'www.fitchratings.com'
Applicable criteria available on Fitch's web site at 'www.fitchratings.com' include:
--'Corporate Rating Methodology' (Aug. 16, 2010);
--'Rating Master Limited Partnerships' (Feb. 12, 2008);
--'U.S. Power and Gas Comparative Operating Risk (COR) Evaluation and Financial Guidelines' (Aug. 22, 2007);
--'Utilities Sector Notching and Recovery Ratings' (March 16, 2010); and
--'Parent and Subsidiary Rating Linkage' (July 14, 2010).
Related Research:
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646
Rating Master Limited Partnerships
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=371982
U.S. Power and Gas Comparative Operating Risk (COR) Evaluation and Financial Guidelines
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=338030
Utilities Sector Notching and Recovery Ratings
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=504546
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Contacts:
Fitch Ratings
Primary Analyst
Kevin L. Beicke, CFA,
+1-212-908-9112
Associate Director
or
Secondary Analyst
Ralph
G. Pellecchia, +1-212-908-0586
Senior Director
or
Committee
Chairperson
Glen Grabelsky, +1-212-908-0577
Managing Director
or
Media
Relations:
Brian Bertsch, +1-212-908-0549
brian.bertsch@fitchratings.com