Sunoco 2003 Annual Report Download - page 24

Costs and Expenses—Total pretax costs and expenses were $17.43 billion in 2003, $14.46
billion in 2002 and $13.56 billion in 2001. The 21 percent increase in 2003 was primarily
due to significantly higher crude oil and refined product acquisition costs, largely as a result
of crude oil price increases. Also contributing to the increase were higher crude oil costs in
connection with the crude oil gathering and marketing activities of the Company’s Logis-
tics operations, higher consumer excise taxes, higher selling, general and administrative
expenses and the cost of higher merchandise sales at the Company’s convenience store
outlets. In 2002, the 7 percent increase was primarily due to higher crude oil and refined
product acquisition costs, higher consumer excise taxes, higher crude oil costs in con-
nection with the crude oil gathering and marketing activities of the Company’s Logistics
operations and the cost of higher merchandise sales at the Company’s convenience store
outlets. Partially offsetting these increases were lower operating costs due to a decline in
refinery fuel costs.
Financial Condition
Capital Resources and Liquidity
Cash and Working Capital—At December 31, 2003, Sunoco had cash and cash equivalents
of $431 million compared to $390 million at December 31, 2002 and $42 million at De-
cember 31, 2001 and had a working capital deficit of $102 million compared to working
capital of $122 million at December 31, 2002 and a working capital deficit of $268 million
at December 31, 2001. The $41 million increase in cash and cash equivalents in 2003 was
due to $993 million of net cash provided by operating activities (“cash generation”), parti-
ally offset by a $720 million net use of cash in investing activities and a $232 million net
use of cash in financing activities. The $348 million increase in cash and cash equivalents
in 2002 was due to $547 million of net cash provided by operating activities and $233 mil-
lion of net cash provided by financing activities, partially offset by $432 million of net cash
used in investing activities. Sunoco’s working capital position is considerably stronger than
indicated because of the relatively lowhistorical costs assigned under the LIFO method of
accounting for most of the inventories reflected in the consolidated balance sheets. The
current replacement cost of all such inventories exceeded their carrying value at December
31, 2003 by $1,025 million. Inventories valued at LIFO, which consist of crude oil, and pe-
troleum and chemical products, are readily marketable at their current replacement values.
Management believes that the current levels of cash and working capital are adequate to
support Sunoco’s ongoing operations.
Cash Flows from Operating Activities—In 2003, Sunoco’s cash generation was $993 million
compared to $547 million in 2002 and $779 million in 2001. The $446 million increase in
cash generation in 2003 was largely due to an increase in net income, higher deferred in-
come tax expense, higher depreciation, depletion and amortization and a $73 million in-
come tax refund received in 2003, partially offset by a decrease in other working capital
sources pertaining to operating activities. The $232 million decrease in cash generation in
2002 was primarily due to a decrease in net income and lower deferred income tax ex-
pense, partially offset by a decrease in working capital uses pertaining to operating activ-
ities. The cash generated from working capital changes in 2002 was largely the result of the
liquidation of approximately 6 million barrels of crude oil and petroleum products. In-
creases in crude oil prices in both 2003 and 2002 increased cash generation as the payment
terms on Sunoco’s crude oil purchases are generally longer than the terms on product sales.
Other Cash Flow Information—Divestment activities have also been a source of cash. During
the 2001-2003 period, proceeds from divestments totaled $151 million and related primar-
ily to the divestment of retail gasoline outlets.
In 2002, Sunoco transferred an additional interest in its Indiana Harbor cokemaking oper-
ation to a third-party investor for $215 million in cash. Sunoco did not recognize any gain
or loss at the date of this transaction. (See Note 13 to the consolidated financial
statements.)
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