Sunoco 2004 Annual Report Download - page 25

Financial Condition
Capital Resources and Liquidity
Cash and Working Capital—At December 31, 2004, Sunoco had cash and cash equivalents
of $405 million compared to $431 million at December 31, 2003 and $390 million at De-
cember 31, 2002 and had a working capital deficit of $471 million compared to a working
capital deficit of $73 million at December 31, 2003 and working capital of $122 million at
December 31, 2002. The $26 million decrease in cash and cash equivalents in 2004 was
due to a $1,060 million net use of cash in investing activities and a $713 million net use of
cash in financing activities, partially offset by $1,747 million of net cash provided by oper-
ating activities (“cash generation”). The $41 million increase in cash and cash equivalents
in 2003 was due to $1,000 million of net cash provided by operating activities, partially
offset by a $721 million net use of cash in investing activities and a $238 million net use of
cash in financing activities. Sunoco’s working capital position 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, 2004 by $1,550 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 2004, Sunoco’s cash generation was $1,747 million
compared to $1,000 million in 2003 and $547 million in 2002. The $747 million increase
in cash generation in 2004 was primarily due to an increase in net income and an increase
in working capital sources pertaining to operating activities. The working capital changes
in 2004 include $100 million of proceeds attributable to the sale of the Company’s private
label credit card program. Working capital sources in 2003 include a $73 million income
tax refund for the 2002 tax year. The $453 million increase in cash generation in 2003 was
largely due to an increase in net income, higher deferred income tax expense, higher
depreciation, depletion and amortization and the income tax refund received in 2003,
partially offset by a decrease in other working capital sources pertaining to operating activ-
ities. Increases in crude oil prices in both 2004 and 2003 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 also have been a source of cash. During
the 2002-2004 period, proceeds from divestments totaled $304 million and related primar-
ily to the divestment of retail gasoline outlets as well as to sales of the Company’s plasti-
cizer business and its one-third partnership interest in BEF.
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.)
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 7.25 percent senior notes due 2012. 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 totaled
approximately $96 million, net of underwriting discounts and offering expenses. On April
7, 2004, the Partnership issued 3.4 million limited partnership units under its shelf
registration statement (see below) at a price of $39.75 per unit. Proceeds from the offering,
net of underwriting discounts and offering expenses, totaled approximately $129 million.
Coincident with the offering, the Partnership redeemed 2.2 million limited partnership
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