Sunoco 2004 Annual Report Download - page 26

units owned by Sunoco for $83 million. Upon completion of the offering and related re-
demption of Sunoco’s limited partnership units, Sunoco now has a 62.6 percent interest in
the Partnership, including its 2 percent general partnership interest.
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, 2004, Sunoco owned 14.84 million limited partner-
ship units consisting of 3.46 million common units and 11.38 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 cetain financial
tests related to earning and paying the minimum quarterly distribution for the preceding
three consecutive one-year periods have been met. In February 2005, when the quarterly
cash distribution pertaining to the fourth quarter of 2004 was paid, the first three-year re-
quirement was satisfied. As a result, on February 16, 2005, 2.85 million, or 25 percent, of
Sunoco’s subordinated units were converted to common units. If the Partnership continues
to make at least the minimum quarterly distributions through the fourth quarter of 2006,
all of Sunoco’s remaining subordinated units would be converted to common units by Feb-
ruary 2007. 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, $.55 for the fourth quarter of 2003, $.57 for the
first quarter of 2004, $.5875 for the second quarter of 2004, $.6125 for the third quarter of
2004 and $.625 for the fourth quarter of 2004.
The Partnership acquired interests in various pipelines and other logistics assets during the
2002-2004 period, which were financed with long-term borrowings or from the proceeds
from the April 2004 equity offering (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.
Sunoco has 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 2004 and generated approximately $140 million of revenue for the Partner-
ship in 2004. 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 available 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. Sunoco also
has agreements with the Partnership which 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.
Financial Capacity—Management currently believes that future cash generation will be
sufficient to satisfy Sunoco’s ongoing capital requirements, to fund its pension obligations
(see “Pension Plan Funded Status” below) and to pay the current level of cash dividends
on Sunoco’s common stock. However, from time to time, the Company’s short-term cash
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