Sunoco 2005 Annual Report Download - page 23

borrowings under its revolving credit facility, which had been used to partially fund its
$100 million acquisition of the crude oil pipeline system and related storage facilities lo-
cated in Texas from ExxonMobil. Upon completion of these transactions, Sunoco’s inter-
est in the Partnership, including its 2 percent general partnership interest, decreased to
47.9 percent.
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 $.45 per limited
partnership unit. As of December 31, 2005, Sunoco owned 12.06 million limited partner-
ship units consisting of 3.52 million common units and 8.54 million subordinated units.
Distributions on Sunoco’s subordinated units are payable only after the minimum quarterly
distributions for the common units held by the public and Sunoco, including any arrea-
rages, have been made. The subordinated units convert to common units if certain finan-
cial tests related to earning and paying the minimum quarterly distribution for the
preceding three consecutive one-year periods have been met. In February 2006 and 2005,
when the quarterly cash distributions pertaining to the fourth quarters of 2005 and 2004
were paid, the first two three-year requirements were satisfied. As a result, a total of
5.70 million of Sunoco’s subordinated units have been converted to common units,
2.85 million each in February 2006 and February 2005. If the Partnership continues to
make at least the minimum quarterly distributions through the fourth quarter of 2006, all
of Sunoco’s remaining 5.69 million subordinated units would be converted to common
units by February 2007. During the 2002-2005 period, the Partnership increased its quar-
terly distribution per unit from the minimum of $.45 to $.7125.
The Partnership’s issuance of common units to the public has resulted in an increase in the
value of Sunoco’s proportionate share of the Partnership’s equity as the issuance price per
unit exceeded Sunoco’s carrying amount per unit at the time of issuance. The resultant
gain to Sunoco on these transactions, which totaled approximately $125 million pretax at
December 31, 2005, has been deferred as a component of minority interest in the Compa-
ny’s consolidated balance sheet as the common units issued do not represent residual
interests in the Partnership due to Sunoco’s ownership of the subordinated units. The de-
ferred gain would be recognized in income when Sunoco’s remaining subordinated units
convert to common units at which time the common units become the residual interests.
The Partnership acquired interests in various pipelines and other logistics assets during the
2003-2005 period, which were financed with long-term borrowings or from the proceeds
from the equity offerings (see “Capital Expenditures and Acquisitions” below). The Part-
nership intends to implement additional growth opportunities in the future, both within
its current system and with third-party acquisitions. The Partnership expects to finance
these capital outlays with a combination of long-term borrowings and the issuance of addi-
tional limited partnership units to the public to maintain a balanced capital structure. Any
issuance of limited partnership units to the public would dilute Sunoco’s ownership inter-
est in the Partnership.
Sunoco has entered into various agreements with the Partnership which require Sunoco to
pay for minimum storage and throughput usage of certain Partnership assets. Sunoco’s us-
age of the various assets during 2005, which generated approximately $145 million of rev-
enue for the Partnership, is expected to exceed the minimum required amounts under
these agreements. If, other than as a result of force majeure, Sunoco fails to meet its mini-
mum obligations under these agreements, it would be required to pay the amount of any
shortfall to the Partnership. Any such payments would be available as a credit in the
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