Sunoco 2003 Annual Report Download - page 25

On February 8, 2002, the Company contributed a substantial portion of its Logistics busi-
ness to Sunoco Logistics Partners L.P. in exchange for a 73.2 percent limited partner inter-
est, a 2 percent general partnership interest, incentive distribution rights and a $245
million special distribution, representing the net proceeds from the Partnership’s sale of
$250 million ten-year 7.25 percent senior notes. The Partnership concurrently issued 5.75
million limited partnership units, representing a 24.8 percent interest in the Partnership,
in an initial public offering at a price of $20.25 per unit. Proceeds from the offering, which
totaled approximately $96 million net of underwriting discounts and offering expenses,
were used by the Partnership to establish working capital that was not contributed to the
Partnership by Sunoco. Sunoco liquidated this retained working capital subsequent to the
Partnership’s formation. The proceeds from the liquidation and from the special dis-
tribution were used by Sunoco for general corporate purposes, including the repayment of
outstanding commercial paper.
The Partnership, which is included in Sunoco’s consolidated financial statements, distrib-
utes to its general and limited partners all available cash (generally cash on hand at the
end of each quarter less the amount of cash the general partner determines in its reason-
able discretion is necessary or appropriate to: provide for the proper conduct of the
Partnership’s business; comply with applicable law, any of the Partnership’s debt instru-
ments or other agreements; pay fees and expenses, including payments to the general part-
ner; or provide funds for distribution to unitholders and to the general partner for any one
or more of the next four quarters). The minimum quarterly distribution is 2 percent of all
available cash to the general partner and $.45 per limited partnership unit, or a total of $42
million per year. Sunoco’s 17.02 million limited partnership units consist of 5.64 million
common units and 11.38 million subordinated units. Distributions on Sunoco’s sub-
ordinated units are payable only after the minimum quarterly distribution for the common
units held by the public and Sunoco, including any arrearages, have been made. The sub-
ordinated units convert to common units when certain financial tests related to earning
and paying the minimum quarterly distribution for the preceding three consecutive one-
year periods have been met. The Partnership earned and made its minimum quarterly dis-
tributions per unit in 2002 and 2003. The Partnership increased its quarterly distribution
per unit from the minimum of $.45 to $.4875 for the fourth quarter of 2002 and then to
$.50 for the second quarter of 2003, $.5125 for the third quarter of 2003 and $.55 for the
fourth quarter of 2003.
The Partnership acquired interests in numerous pipelines during 2002, which were fi-
nanced with long-term borrowings (see “Capital Expenditures and Acquisitions” below).
The Partnership intends to implement additional growth opportunities in the future, both
within its current system and with third-party acquisitions. The Partnership expects to fi-
nance these capital outlays with a combination of long-term borrowings and the issuance
of additional limited partnership units to the public to maintain a balanced capital struc-
ture. Any issuance of limited partnership units to the public would dilute Sunoco’s owner-
ship interest in the Partnership.
Concurrent with the initial public offering, Sunoco entered into various agreements with
the Partnership which require Sunoco to pay for minimum storage and throughput usage of
certain Partnership assets. These commitments represent approximately 85 to 90 percent
of Sunoco’s usage of the various assets during 2003 and generated approximately $130 mil-
lion of revenue for the Partnership in 2003. If, other than as a result of force majeure,
Sunoco fails to meet its minimum obligations under these agreements, it would be required
to pay the amount of any shortfall to the Partnership. Any such payments would be avail-
able as a credit in the following year after Sunoco’s minimum obligation for the year had
been met. Sunoco’s obligations under these agreements may be reduced or suspended under
certain circumstances. These agreements also establish fees for administrative services pro-
vided by Sunoco to the Partnership and provide indemnifications by Sunoco to the Part-
nership for certain environmental, toxic tort and other liabilities.
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