Sunoco 2008 Annual Report Download - page 51

Cash Flows from Operating Activities—In 2008, Sunoco’s cash generation was $836 million compared
to $2,367 million in 2007 and $984 million in 2006. The $1,531 million decrease in cash generation in 2008 was
primarily due to an increase in working capital levels pertaining to operating activities. The $1,383 million
increase 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. 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 decreased in 2008 after increasing in 2007.
Other Cash Flow Information—Divestment activities also have been a source of cash. During the 2006-
2008 period, proceeds from divestments totaled $140 million and related primarily to the divestment of retail
gasoline outlets.
In 2006, Sunoco Logistics Partners L.P. issued 2.7 million limited partnership units in a public offering,
generating $110 million of net proceeds. Upon completion of this transaction, Sunoco’s interest in the
Partnership, including its 2 percent general partnership interest, decreased to 43 percent. Sunoco’s general
partnership interest also includes incentive distribution rights, which provide Sunoco, as the general partner, up
to 50 percent of the Partnership’s incremental cash flow.
The Partnership acquired interests in various pipelines and other logistics assets during the 2006-2008
period, which were financed with borrowings or from the proceeds from the equity offering (see “Capital
Program” below). The Partnership expects to finance future growth opportunities with a combination of
borrowings and the issuance of additional limited partnership units to the public to maintain a balanced capital
structure. Any issuance of limited partnership units to the public would dilute Sunoco’s ownership interest in the
Partnership.
Sunoco is a party to various agreements with the Partnership which require Sunoco to pay for minimum
storage and throughput usage of certain Partnership assets. 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 indemnifications by
Sunoco 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 acquisitions)
and working capital. During those periods, the Company may supplement its cash generation with proceeds from
financing activities.
The Company has a $1.3 billion revolving credit facility with a syndicate of 19 participating banks (the
“Facility”), of which $1.2245 billion matures in August 2012 with the balance to mature in August 2011. The
Facility provides the Company with access to short-term financing and is intended to support the issuance of
commercial paper, letters of credit and other debt. The Company also can borrow directly from the participating
banks under the Facility. In September 2008, Lehman Brothers, one of the participating banks with a
commitment under the Facility amounting to $20 million, declared bankruptcy and the Company believes
Lehman Brothers will not fund its loan commitment. The Facility is subject to commitment fees, which are not
material. Under the terms of the Facility, Sunoco is required to maintain tangible net worth (as defined in the
Facility) in an amount greater than or equal to targeted tangible net worth (targeted tangible net worth being
determined by adding $1.125 billion and 50 percent of the excess of net income over share repurchases (as
defined in the Facility) for each quarter ended after March 31, 2004). At December 31, 2008, the Company’s
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