Sunoco 2010 Annual Report Download - page 58

Inventories valued at LIFO, which consist primarily of crude oil and petroleum and chemical products, are
readily marketable at their current replacement values. The Company received federal income tax refunds
totaling $526 million during 2010 for the carryback of its 2009 net operating loss.
Certain pending legislative and regulatory proposals effectively could limit, or even eliminate, use of the
LIFO inventory method for financial and income tax purposes. Although the final outcome of these proposals
cannot be ascertained at this time, the ultimate impact to Sunoco of the transition from LIFO to another inventory
method could be material.
Cash Flows from Operating Activities—In 2010, Sunoco’s cash generation was $1,694 million compared
to $548 million in 2009 and $836 million in 2008. The $1,146 million increase in cash generation in 2010 was
primarily due to higher net income and a decrease in working capital levels pertaining to operating activities.
Cash generation includes federal income tax refunds totaling $526 million received by the Company during 2010
for the carryback of its 2009 net operating loss. Partially offsetting these positive factors were cash contributions
to the Company’s defined benefit pension plans. The $288 million decrease in cash generation in 2009 was
primarily due to a decrease in operating results, partially offset by a decrease in cash used to fund working capital
levels and an increase in noncash charges. 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 have increased in
2009 and 2010.
Other Cash Flow Information—Divestment activities also have been a source of cash. During the 2008-
2010 period, proceeds from divestments totaled $785 million and related primarily to the divestments of the
polypropylene business in 2010 and the Tulsa refinery and related inventory and the retail heating oil and
propane distribution business in 2009 as well as the sale of retail gasoline outlets throughout the 2008-2010
period.
In 2009, Sunoco Logistics Partners L.P. issued 2.25 million limited partnership units in a public offering,
generating approximately $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 40 percent. Sunoco’s general
partnership interest also includes incentive distribution rights, which have provided Sunoco, as the general
partner, up to 50 percent of the Partnership’s incremental cash flow. Sunoco received approximately 56 percent
of the Partnership’s cash distributions during 2009 attributable to its limited and general partnership interests and
its incentive distribution rights. In February 2010, Sunoco received $201 million in cash from the Partnership in
connection with a modification of the incentive distribution rights and sold 2.20 million of its limited partnership
units to the public, generating approximately $145 million of net proceeds, which further reduced its interest in
the Partnership to 33 percent. In August 2010, the Partnership issued 2.01 million limited partnership units in a
public offering, generating $144 million of net proceeds. Upon completion of this transaction, Sunoco’s interest
in the Partnership decreased to 31 percent. As a result of these transactions, Sunoco’s share of Partnership
distributions is expected to be approximately 46 percent at the Partnership’s current quarterly cash distribution
rate.
The Partnership acquired interests in various pipelines and other logistics assets during the 2008-2010
period (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.
Financial Capacity—Management currently believes that future cash generation is expected to be
sufficient to satisfy Sunoco’s ongoing capital requirements, to fund its pension obligations (see “Retirement
Benefit Plans” below) and to pay 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
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