Sunoco 2007 Annual Report Download - page 20

ing from price increases. Also contributing to the increase in total pretax costs and ex-
penses in 2006 were 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, 2007, Sunoco had cash and cash equivalents
of $648 million compared to $263 million at December 31, 2006 and $919 million at
December 31, 2005 and had a working capital deficit of $1,002 million compared to $740
million at December 31, 2006 and $484 million at December 31, 2005. The $385 million
increase in cash and cash equivalents in 2007 was due to $2,367 million of net cash pro-
vided by operating activities (“cash generation”), partially offset by a $1,193 million net
use of cash in investing activities and a $789 million net use of cash in financing activities.
The $656 million decrease in cash and cash equivalents in 2006 was due to a $1,089 mil-
lion net use of cash in investing activities and a $551 million net use of cash in financing
activities, partially offset by $984 million of cash generation. 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 ex-
ceeded their carrying value at December 31, 2007 by $3,868 million. Inventories valued at
LIFO, which consist of crude oil as well as petroleum 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 2007, Sunoco’s cash generation was $2,367 million
compared to $984 million in 2006 and $2,069 million in 2005. The $1,383 million in-
crease in cash generation in 2007 was primarily due to a decrease in working capital levels
pertaining to operating activities and the absence of a $95 million payment of damages to
Honeywell International Inc. in 2006 in connection with a phenol supply contract dispute,
partially offset by lower net income. The $1,085 million decrease in cash generation in
2006 was primarily due to an increase in working capital levels pertaining to operating ac-
tivities, reflecting an increase in refined product inventories. Also contributing to the de-
crease in cash generation were the $95 million payment of damages to Honeywell and the
absence of $48 million of cash proceeds received in 2005 in connection with a power con-
tract restructuring. 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 increased in 2007, which generated significant cash for
Sunoco, and were essentially flat at year-end 2006 compared to year-end 2005.
Other Cash Flow Information—Divestment activities also have been a source of cash. During
the 2005-2007 period, proceeds from divestments totaled $174 million and related primar-
ily to the divestment of retail gasoline outlets.
During the 2005-2006 period, Sunoco Logistics Partners L.P. issued a total of 7.1 million
limited partnership units in a series of public offerings, generating $270 million of net pro-
ceeds. Coincident with certain of these offerings, the Partnership redeemed 2.8 million
limited partnership units owned by Sunoco for $99 million. Upon completion of these
transactions, Sunoco’s interest in the Partnership, including its 2 percent general partner-
ship interest, decreased to 43 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-
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