Fitch Rates Sunoco Logistics' Senior Unsecured Note Offering 'BBB'

NEW YORK--()--Fitch rates Sunoco Logistics Partners L.P.'s (Sunoco Logistics) senior unsecured notes 'BBB'. The notes are to be issued by Sunoco Logistics Partners Operations L.P. and guaranteed by Sunoco Logistics Partners. Proceeds are to be used to repay borrowings on its revolving credit facility.

A full list of ratings for Sunoco Logistics and Sunoco Logistics Partners Operations L.P. is at the end of this press release.

KEY RATING DRIVERS

Sunoco Logistics' rating is supported by the following strengths:

--Large diversified asset base that serves high-demand markets;

--Stable, fee-based operations that account for a majority of the partnership's EBITDA;

--Growth projects which are planned and in development that will provide Sunoco Logistics with additional long-term fee-based cash flows;

--Supportive financial credit metrics including a strong distribution coverage ratio which indicate a less aggressive capital structure relative to its peers with similar ratings.

The ratings also factor in the following concerns:

--Expectations for a temporary increase in leverage in 2015 and 2016 as significant spending pressures credit metrics;

-Volatility and working capital needs associated with market-related operations.

Diversified Asset Base: Sunoco Logistics benefits from a mix of fee-based assets consisting of crude oil pipelines, product pipelines, and refined product and crude oil terminal facilities. Sunoco's latest 12 months (LTM) third quarter 2015 (3Q15) adjusted EBITDA was $1.073 billion and comprised: 37% crude oil pipelines, 10% crude oil acquisition and marketing, 36% terminal facilities, and 17% from refined products pipelines.

Leverage: At Sept. 30, 2015, leverage (as defined by Fitch as debt-to-adjusted EBITDA) was 4.6x, up from 4.4x at the end of 2014. Higher debt associated with increased growth capital spending accounted for the uptick in leverage since the end 2014.

Capital Expenditures: Sunoco Logistics expects 2015 expansion capex to approximately $2.5 billion. This figure was revised upward by $500 million following the partnership's announcement in May that it has acquired a 30% stake in a Bakken crude oil pipeline from Energy Transfer Partners L.P.(ETP; IDR: 'BBB-'/Stable Outlook). The current year's budget is slightly above 2014's spending of $2.4 billion. Fitch believes the bulk of Sunoco Logistics' capital spending is to be done on generally low-risk projects supported by contractual commitments for capacity. Sunoco Logistics currently projects 2016 growth capex to be approximately $2.5 billion.

Distributable Cash Flow and Coverage: Distributable cash flow (DCF) generated in the LTM ending 3Q15 was $809 million, up from $750 million in 2014. The distribution coverage remained strong at 1.3x, but below even stronger coverage seen historically. Fitch believes the current coverage ratio is high and will likely decline as distributions continue to grow. In recent years, the year-end coverage ratio ranged from a high of 2.4x in 2012 to a low of 1.3x in 2010.

ETP owns the general partner (GP) interest, 100% of the incentive distribution rights and a 28% limited partnership interest in Sunoco Logistics. ETE owns 90% of the cash distributions and other economic attributes of the GP interest and incentive distribution rights of SXL, as well as, limited and GP interests in ETP.

KEY ASSUMPTIONS

--EBITDA exceeds $1 billion in 2015 and increases significantly after that given large new projects scheduled to come on line;

--Growth capex in the current year approximates $2.5 billion and maintenance capex is $70 million;

--In 2015, proceeds from debt and equity issuances will be used to fund spending in a balanced manner to protect the balance sheet.

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to positive rating action include:

--Positive rating action is not expected at this time. Leverage would need to be reduced to below 3.0x on a sustained basis.

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

--Leverage (defined as debt-to-adjusted EBITDA) in excess of 4.5x on a sustained basis.

--Increased exposure to market-sensitive businesses and other more volatile operations without offsetting adjustments.

LIQUIDITY

At the end of 3Q15, Sunoco Logistics had approximately $1.7 billion of liquidity which consisted of $45 million of cash and over $1.6 billion undrawn on its revolver.

The $2.5 billion revolver had $879 drawn, including $44 million of commercial paper (CP) as of the end of 3Q15. On Nov. 11, total revolver borrowings increased to $1.5 billion including $168 million of CP.

In March 2015, the partnership entered into a new five-year $2.5 billion revolver due 2020 which replaced a $1.5 billion revolving credit facility due 2018. The revolver limits leverage (as defined by the bank agreement) to 5.0x at the end of each quarter. With certain acquisitions, leverage could temporarily increase to 5.5x. The bank definition of EBITDA gives pro forma credit for acquisitions and material projects. The definition of debt carves out borrowings used for contango trades up to $500 million.

As of the end of 3Q15, bank defined leverage was 3.4x, leaving significant cushion for the bank covenant. Maturities are manageable and the next bond maturity is $175 million due in 2016.

FULL LIST OF RATINGS

Fitch currently rates Sunoco Logistics as follows:

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 'BBB';

--Senior unsecured bank facilities 'BBB';

--Short-term IDR 'F2';

--Commercial paper (CP) 'F2'.

The Rating Outlook for both entities is Stable.

Date of Relevant Rating Committee: Sept. 1, 2015.

Additional information is available on www.fitchratings.com.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=993896

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Kathleen Connelly
Director
+1-212-908-0290
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Peter Molica
Senior Director
+1-212-908-0288
or
Committee Chairperson
Shalini Majahan
Managing Director
+1-212-908-0351
or
Media Relations:
Alyssa Castelli, +1-212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Kathleen Connelly
Director
+1-212-908-0290
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Peter Molica
Senior Director
+1-212-908-0288
or
Committee Chairperson
Shalini Majahan
Managing Director
+1-212-908-0351
or
Media Relations:
Alyssa Castelli, +1-212-908-0540
alyssa.castelli@fitchratings.com