Sunoco 2007 Annual Report Download - page 21

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, 2007 and 2006, Sunoco owned 12.06 million limited
partnership units. At December 31, 2006, this ownership interest consisted of 6.37 million
common units and 5.69 million subordinated units. Distributions on Sunoco’s sub-
ordinated units were payable only after the minimum quarterly distributions for the com-
mon units held by the public and Sunoco, including any arrearages, had been made. The
subordinated units were convertible to common units if certain financial tests related to
earning and paying the minimum quarterly distribution for the preceding three consecutive
one-year periods had been met. In February 2007, 2006 and 2005, when the quarterly cash
distributions pertaining to the fourth quarters of 2006, 2005 and 2004 were paid, all three
three-year requirements were satisfied. As a result, all of Sunoco’s subordinated units have
been converted to common units, 5.69 million in February 2007 and 2.85 million each in
February 2006 and February 2005. During the 2002-2007 period, the Partnership increased
its quarterly distribution per unit from the minimum of $.45 to $.87.
The Partnership’s prior issuance of common units to the public 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. Prior to
February 2007, the resultant gain to Sunoco on these transactions had been deferred as a
component of minority interest in the Company’s consolidated balance sheet as the com-
mon units issued did not represent residual interests in the Partnership due to Sunoco’s
ownership of the subordinated units. The deferred gain, which amounted to $90 million
after tax, was recognized in income during the first quarter of 2007 when Sunoco’s remain-
ing subordinated units converted to common units at which time the common units be-
came the residual interests.
The Partnership acquired interests in various pipelines and other logistics assets during the
2005-2007 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 take advantage of 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. Sunoco’s us-
age of the various assets during 2007 is expected to exceed the minimum required amounts
under substantially all of these agreements. 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 avail-
able 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 provided by Sunoco to the Partnership and provide in-
demnifications by Sunoco to the Partnership 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
requirements may exceed its cash generation due to various factors including reductions in
margins for products sold and increases in the levels of capital spending (including acqui-
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