Sunoco 2006 Annual Report Download - page 21

due to significantly higher crude oil and refined product acquisition costs resulting from
price increases. Also contributing to the increase in total pretax costs and expenses in 2006
were higher crude oil costs in connection with the crude oil gathering and marketing
activities of the Company’s Logistics operations. In 2005, the 31 percent increase was pri-
marily due to significantly higher crude oil and refined product acquisition costs. The
higher crude oil acquisition costs in 2005 reflect crude oil price increases and higher crude
oil throughputs, while the higher refined product acquisition costs reflect refined product
price increases and purchases to supply the Mobil®retail sites acquired in April 2004
located primarily in Delaware, Maryland, Virginia and Washington, D.C. Also con-
tributing to the increase in total pretax costs and expenses during 2005 were higher con-
sumer excise taxes, higher selling, general and administrative expenses, higher refinery
operating costs and higher crude oil costs in connection with the crude oil gathering and
marketing activities of the Company’s Logistics operations.
Financial Condition
Capital Resources and Liquidity
Cash and Working Capital—At December 31, 2006, Sunoco had cash and cash equivalents
of $263 million compared to $919 million at December 31, 2005 and $405 million at De-
cember 31, 2004 and had a working capital deficit of $740 million compared to $484 mil-
lion at December 31, 2005 and $471 million at December 31, 2004. The $656 million
decrease in cash and cash equivalents in 2006 was due to a $1,089 million net use of cash
in investing activities and a $551 million net use of cash in financing activities, partially
offset by $984 million of net cash provided by operating activities (“cash generation”). The
$514 million increase in cash and cash equivalents in 2005 was due to $2,069 million of
cash generation, partially offset by a $1,035 million net use of cash in investing activities
and a $520 million net use of cash in financing activities. Sunoco’s working capital posi-
tion is considerably stronger than indicated because of the relatively low historical 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, 2006 by $2,273 million. Inventories valued at LIFO,
which consist of crude oil as well as petroleum and chemical products, are readily market-
able 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 2006, Sunoco’s cash generation was $984 million
compared to $2,069 million in 2005 and to $1,747 million in 2004. The $1,085 million
decrease in cash generation in 2006 was primarily due to an increase in working capital
levels pertaining to operating activities, reflecting an increase in refined product in-
ventories. Also contributing to the decrease in cash generation were a $95 million pay-
ment of damages to Honeywell in connection with a phenol supply contract dispute and
the absence of $48 million of cash proceeds received in 2005 in connection with a power
contract restructuring. The $322 million increase in cash generation in 2005 was primarily
due to an increase in net income and the $48 million of cash proceeds from the power
contract restructuring, partially offset by an increase in working capital levels pertaining to
operating activities and a reduction in noncash charges. Working capital sources in 2004
included $100 million of proceeds attributable to the sale of the Company’s private label
credit card program. Increases in crude oil prices typically increase cash generation as the
payment terms on Sunoco’s crude oil purchases are generally longer than the terms on
product sales. Conversely, decreases in crude oil prices typically result in a decline in cash
generation. Crude oil prices were essentially flat in 2006 after increasing in 2005.
Other Cash Flow Information—Divestment activities also have been a source of cash. During
the 2004-2006 period, proceeds from divestments totaled $305 million and related primar-
ily to the divestment of retail gasoline outlets as well as to the sale of the Company’s
plasticizer business in 2004.
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