| Additional risks that we do not yet know of or that we currently think are immaterial also may impair our business operations |
| If any of the following risks actually occur, our business, results of operations, cash flows and financial condition could be affected materially and adversely |
| We may not be able to generate sufficient cash from operations to allow us to make the required payments to our debt holders or to pay quarterly distributions |
| The amount of cash we can distribute on our common units principally depends upon the cash we generate from our operations |
| This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control |
| Because the cash we generate from operations will fluctuate from quarter to quarter, we may not be able to pay all the applicable interest and principal obligations on our debt, or to pay quarterly distributions |
| In the future, we may not be able to generate sufficient cash flow from operations, realize currently anticipated operating improvements or borrow amounts under our revolving credit facility sufficient to fund our liquidity needs |
| We may need to refinance all or a portion of our indebtedness on or before maturity |
| We may not be able to refinance any of our indebtedness on or before maturity on commercially reasonable terms, or at all |
| Our ability to pay quarterly distributions depends primarily on cash flow, including cash flow from financial reserves and working capital borrowings, and not solely on profitability, which is affected by non-cash items |
| As a result, we may pay cash distributions during periods when we record net losses and may be unable to pay cash distributions during periods when we record net income |
| Our general partner’s discretion in determining the level of cash reserves may adversely affect our ability to make cash distributions to our unitholders |
| Our partnership agreement provides that our general partner may reduce operating surplus by establishing cash reserves to provide funds for our future operating expenditures |
| In addition, the partnership agreement provides that our general partner may reduce available cash by establishing cash reserves for the proper conduct of our business, to comply with applicable law or agreements to which we are a party or to provide funds for future distributions to our unitholders in any one or more of the next four quarters |
| These cash reserves will affect the amount of cash available for current distribution to our unitholders |
| Cost reimbursements, which will be determined by our general partner in good faith, and fees due our general partner and its affiliates will be substantial and could materially and adversely affect our financial condition, results of operations, or cash flows |
| We currently pay Sunoco, Inc |
| an annual administrative fee for the provision by Sunoco, Inc |
| or its affiliates of various general and administrative services for our benefit |
| This fee is subject to periodic re-negotiation, and 20 ______________________________________________________________________ [49]Table of Contents there can be no assurance that future administrative fees charged by Sunoco, Inc |
| will be at or below the current level |
| This fee may increase if an expansion of our operations requires an increased level of general and administrative services from Sunoco, Inc |
| or its affiliates |
| If we are unable to obtain such services from Sunoco, Inc |
| or third parties at or below the current cost, it could materially and adversely affect our financial condition, results of operations, or cash flows |
| In addition, our general partner is entitled to reimbursement for all other expenses it incurs on our behalf, including the salaries of, and the cost of employee benefits for, our general partner’s employees, including senior executives, who provide services to us |
| Our general partner will determine the amount of these expenses in good faith |
| Our general partner may cause us to borrow funds in order to make cash distributions, even where the purpose or effect of the borrowing benefits the general partner or its affiliates |
| In some instances, our general partner may cause us to borrow funds from affiliates of Sunoco, Inc |
| or from third parties in order to permit the payment of cash distributions |
| These borrowings are permitted even if the purpose and effect of the borrowing is to enable us to make a distribution on the subordinated units, to make incentive distributions, or to hasten the expiration of the subordination period |
| Our general partner has a limited call right that may require our unitholders to sell their common units at an undesirable time or price |
| If at any time our general partner and its affiliates own more than 80prca of the common units, our general partner will have the right, but not the obligation, which it may assign to any of its affiliates or to us, to acquire all, but not less than all, of the common units held by unaffiliated persons at a price not less than their then-current market price |
| As a result, unitholders may be required to sell their common units at an undesirable time or price, may not receive a return on the investment, and may incur a tax liability upon the sale |
| Even if unitholders are dissatisfied, they cannot remove our general partner without its consent, which could lower the trading price of the common units |
| Unlike the holders of common stock in a corporation, unitholders have only limited voting rights on matters affecting our business and, therefore, limited ability to influence management’s decisions regarding our business |
| Unitholders did not elect our general partner or its board of directors and will have no right to elect our general partner or its board of directors on an annual or other continuing basis |
| The board of directors of our general partner is chosen by the members of our general partner, all of which are subsidiaries of Sunoco, Inc |
| Furthermore, if the unitholders are dissatisfied with the performance of our general partner, they will have little ability to remove our general partner |
| As a result of these limitations, the price at which the common units trade could be diminished because of the absence or reduction of a control premium in the trading price |
| The partnership agreement also contains provisions limiting the ability of unitholders to call meetings or to acquire information about our operations, as well as other provisions limiting the unitholders’ ability to influence the manner or direction of management |
| The control of our general partner may be transferred to a third party without unitholder consent |
| The general partner may transfer its general partner interest to a third party in a merger or in a sale of all or substantially all of its assets without the consent of the unitholders |
| Furthermore, there is no restriction in the partnership agreement on the ability of the owner of the general partner from transferring its ownership interest in the general partner to a third party |
| The new owner of the general partner would then be in a position to replace the board of directors and officers of the general partner with its own choices and to control the decisions taken by the board of directors and officers |
| and its affiliates have conflicts of interest and limited fiduciary responsibilities, which may permit them to favor their own interests to the detriment of our unitholders |
| indirectly owns and controls our general partner, which holds the 2 percent general partner interest and holds a 45dtta9 percent limited partner interest in us |
| Conflicts of interest may arise between Sunoco, Inc |
| and its affiliates, including our general partner, on the one hand, and us and our unitholders, on the other hand |
| As a result of these conflicts, the general partner may favor its own interests and the interests of its affiliates over the interests of our unitholders |
| These conflicts include, among others, the following situations: • Sunoco R&M, as a shipper on our pipelines, and a customer at our terminals, could seek lower tariff rates or terminalling fees, once the terms of Sunoco R&M’s obligations under the pipelines and terminals storage and throughput agreements expire in 2007 through 2009 |
| • neither our partnership agreement nor any other agreement requires Sunoco, Inc |
| to pursue a business strategy that favors us or utilizes our assets, including whether to increase or decrease refinery production, whether to shut down or reconfigure a refinery, or what markets to pursue or grow |
| ’s directors and officers have a fiduciary duty to make these decisions in the best interests of the stockholders of Sunoco, Inc |
| ; • our general partner is allowed to take into account the interests of parties other than us, such as Sunoco, Inc, in resolving conflicts of interest; • under our partnership agreement, our general partner has limited liability and restricted fiduciary duties with respect to actions that, without these limitations and restrictions, might constitute breaches of fiduciary duty; • under our partnership agreement, the remedies available to our unitholders with respect to conduct by our general partner that may constitute a breach of fiduciary duty have been limited; • our general partner determines the amount and timing of asset purchases and sales, capital expenditures, borrowings, issuance of additional partnership securities, and reserves, each of which can affect the amount of cash that is distributed to our unitholders; • our general partner determines which costs incurred by Sunoco, Inc |
| and its affiliates are reimbursable by us; • our partnership agreement does not restrict our general partner from causing us to pay it or its affiliates for any services rendered on terms that are fair and reasonable to us or entering into additional contractual arrangements with any of these entities on our behalf; • our general partner controls the enforcement of obligations owed to us by our general partner and its affiliates, including the pipelines and terminals storage and throughput agreements with Sunoco R&M; and • our general partner decides whether to retain separate counsel, accountants, or others to perform services for us |
| We conduct our operations through our subsidiaries and depend on cash flow from our subsidiaries to service our debt obligations |
| We conduct our operations through our subsidiaries |
| As a result, our cash flow and ability to service our debt is dependent upon the earnings of our subsidiaries |
| In addition, we are dependent on the distribution of earnings, loans or other payments from our subsidiaries to us |
| Any payment of dividends, distributions, loans or other payments from our subsidiaries to us could be subject to statutory or contractual restrictions |
| Payments to us by our subsidiaries also will be contingent upon the profitability of our subsidiaries |
| If we are unable to obtain funds from our subsidiaries we may not be able to pay interest or principal on our debt securities when due or to obtain the necessary funds from other sources |
| 22 ______________________________________________________________________ [51]Table of Contents We depend upon Sunoco R&M for a substantial portion of the crude oil and refined products transported on our pipelines and handled at our terminals, and our crude oil sales |
| For the year ended December 31, 2005, Sunoco R&M accounted for approximately 70 percent of our Eastern Pipeline System total revenues, 69 percent of our Terminal Facilities total revenues, and 43 percent of our Western Pipeline System total revenues |
| The balance of our revenues was received from third parties, and we will continue to remain dependent on third parties for these additional revenues |
| Our pipelines and terminals storage and throughput agreements with Sunoco R&M provide for escalation of the fees charged to Sunoco R&M, but the increased fees may be inadequate to cover increased costs in the future |
| We expect to continue to derive a substantial portion of our revenues from Sunoco R&M for the foreseeable future |
| If for any reason, Sunoco R&M were to decrease the throughput transported on our pipelines, the volumes of crude oil or refined products handled at our terminals or the amounts of crude oil purchased from us, it could materially and adversely affect our financial condition, results of operations, or cash flows |
| Sunoco R&M’s obligations to us under the pipelines and terminals storage and throughput agreements and other arrangements may be reduced or suspended in some circumstances |
| Sunoco R&M’s obligations to us under the pipelines and terminals storage and throughput agreements may be permanently reduced in some circumstances |
| These events, some of which are within the exclusive control of Sunoco R&M, include: • The inability of Sunoco R&M and us to agree on the amount of any surcharge required to be paid by Sunoco R&M to cover substantial and unanticipated costs that may be incurred in complying with new laws or governmental regulations applicable to our Terminal Facilities; • A decision by Sunoco R&M to shut down or reconfigure one or more of its refineries if Sunoco R&M reasonably believes in good faith that such event will jeopardize its ability to satisfy its minimum revenue or throughput obligations; and • Federal or state governmental action that prohibits Sunoco R&M from using MTBE in the gasoline it produces if Sunoco R&M reasonably believes in good faith that this action will jeopardize its ability to satisfy its minimum revenue or throughput obligations |
| Depending on the ultimate cost of complying with existing and future environmental regulations or proceedings, Sunoco R&M may determine that it is more economical to reduce production at a refinery or shut down all or a portion of a refinery rather than make these capital expenditures |
| Sunoco R&M’s obligations to us under the pipelines and terminals storage and throughput agreements would be reduced in this event |
| Furthermore, Sunoco R&M’s obligations to us would be temporarily suspended during the occurrence of an event that is outside the control of the parties, which renders performance impossible with respect to an asset for at least 30 days |
| The occurrence of any of these events could materially and adversely affect our financial condition, results of operations, or cash flows |
| actively manages its assets and operations, and therefore, changes of some nature, possibly material to our business relationship, may occur at some point in the future |
| If Sunoco R&M satisfies only its minimum obligations to us under, or if we are unable to renew or extend the pipelines and terminals storage and throughput agreements, it could materially and adversely affect our financial condition, results of operations, or cash flows |
| Sunoco R&M may reduce the volume it transports on our pipelines or delivers at our terminals to the minimum amounts it is obligated to transport or deliver under the pipelines and terminals storage and throughput agreements |
| In addition, the terms of Sunoco R&M’s obligations to us under the pipelines and terminals storage and throughput agreements entered into at the time of our initial public offering are of relatively brief duration, 23 ______________________________________________________________________ [52]Table of Contents generally expiring in 2007 through 2009 |
| If Sunoco R&M reduces its use of our facilities after expiration of this agreement or any other storage and throughput agreements between us and Sunoco R&M, or if the terms under a new agreement are materially changed in a way that reduces revenues, and we are unable to generate additional revenues from third parties, it could materially and adversely affect our financial condition, results of operations, or cash flows |
| A sustained decrease in demand for refined products in the markets served by our pipelines and terminals could materially and adversely affect our financial condition, results of operations, or cash flows |
| Factors that could lead to a sustained decrease in market demand for refined products include: • a recession or other adverse economic condition that results in lower purchases of refined petroleum products; • higher refined product prices due to an increase in the market price of crude oil, changes in economic conditions, or other factors; • higher fuel taxes or other governmental or regulatory actions that increase, directly or indirectly, the cost of gasoline or other refined products; • a shift by consumers to more fuel-efficient or alternative fuel vehicles or an increase in fuel economy, whether as a result of technological advances by manufacturers, pending legislation proposing to mandate higher fuel economy, or otherwise; and • a temporary or permanent material increase in the price of refined products as compared to alternative sources of refined products available to our customers |
| When the price of foreign crude oil delivered to the United States is greater than that of domestic crude oil, or the price for the future delivery of crude oil falls below current prices, customers are less likely to store crude oil, thereby reducing storage revenues at our Nederland Terminal |
| Most of the crude oil stored at our Nederland Terminal is foreign crude oil |
| When the price of foreign crude oil delivered to the United States is greater than that of domestic crude oil, the demand for this storage capacity may decrease |
| If this market condition occurs, our storage revenues will be lower |
| When the price of crude oil in a given month exceeds the price of crude oil for delivery in a subsequent month, the market is backwardated |
| When the crude oil market is backwardated, the demand for storage capacity at our Nederland Terminal may decrease because crude oil producers can capture a premium for prompt deliveries rather than storing it for sale later |
| Although a backwardated market generally has a favorable impact on marketing margins because crude oil marketers can continue to purchase crude oil from producers at a fixed premium to posted prices while selling crude oil at a higher premium to such prices, we may be unable to completely offset the lower storage revenues in a backwardated market |
| A material decrease in crude oil available for transport through our Western Pipeline System could materially and adversely affect our financial position, results of operations, or cash flows |
| The volume of crude oil transported in our crude oil pipelines depends on the availability of attractively priced crude oil produced in the areas accessible to our crude oil pipelines and received from other common carrier pipelines |
| If we do not replace volume lost due to a material temporary or permanent decrease in supply, the volume of crude oil transported through our pipelines would decline |
| In addition, sustained low crude oil prices could lead to a decline in drilling activity and production levels or the shutting-in or abandonment of marginal wells |
| Similarly, a temporary or permanent material increase in the price of crude oil supplied from any of these sources, as compared to alternative sources of crude oil available to our customers, could cause the volume of crude oil transported in our pipelines to decline |
| 24 ______________________________________________________________________ [53]Table of Contents Any reduction in the capability of, or the allocations to, our shippers in interconnecting, third-party pipelines would cause a reduction of volumes transported in our pipelines and through our terminals |
| Sunoco R&M and the other users of our pipelines and terminals are dependent upon connections to third-party pipelines to receive and deliver crude oil and refined products |
| Any reduction of capabilities of these interconnecting pipelines due to testing, line repair, reduced operating pressures, or other causes would result in reduced volumes transported in our pipelines or through our terminals |
| Similarly, if additional shippers begin transporting volume over interconnecting pipelines, the allocations to our existing shippers could be reduced, which also would reduce volumes transported in our pipelines or through our terminals |
| If we are unable to complete capital projects at their expected costs and/or in a timely manner, or if the market conditions assumed in our project economics deteriorate, our financial condition, results of operations, or cash flows could be affected materially and adversely |
| Delays or cost increases related to capital spending programs involving construction of new facilities (or improvements and repairs to our existing facilities) could adversely affect our ability to achieve forecasted internal rates of return and operating results |
| Delays in making required changes or upgrades to our facilities could subject us to fines or penalties as well as affect our ability to supply certain products we make |
| Such delays or cost increases may arise as a result of unpredictable factors in the marketplace, many of which are beyond our control, including: • denial or delay in issuing requisite regulatory approvals and/or permits; • unplanned increases in the cost of construction materials or labor; • disruptions in transportation of modular components and/or construction materials; • severe adverse weather conditions, natural disasters, or other events (such as equipment malfunctions explosions, fires, spills) affecting our facilities, or those of vendors and suppliers; • shortages of sufficiently skilled labor, or labor disagreements resulting in unplanned work stoppages; • market-related increases in a project’s debt or equity financing costs; and/or • nonperformance by, or disputes with, vendors, suppliers, contractors, or sub-contractors involved with a project |
| Our forecasted internal rates of return also are based upon our projections of future market fundamentals which are not within our control, including changes in general economic conditions, available alternative supply and customer demand |
| Potential future acquisitions and expansions, if any, may increase substantially the level of our indebtedness and contingent liabilities, and we may be unable to integrate them effectively into our existing operations |
| From time to time, we evaluate and acquire assets and businesses that we believe complement or diversify our existing assets and businesses |
| Acquisitions may require substantial capital or the incurrence of substantial indebtedness |
| If we consummate any future acquisitions, our capitalization and results of operations may change significantly |
| Acquisitions and business expansions involve numerous risks, including difficulties in the assimilation of the assets and operations of the acquired businesses, inefficiencies and difficulties that arise because of unfamiliarity with new assets and the businesses associated with them and new geographic areas |
| Further, unexpected costs and challenges may arise whenever businesses with different operations or management are combined and we may experience unanticipated delays in realizing the benefits of an acquisition |
| In some cases, we have indemnified the previous owners and operators of acquired assets |
| Following an acquisition, we may discover previously unknown liabilities associated with the acquired business for which we have no recourse 25 ______________________________________________________________________ [54]Table of Contents under applicable indemnification provisions |
| An acquisition may require us to assume certain prior known or unknown liabilities |
| Our operations are subject to operational hazards and unforeseen interruptions for which we may not be adequately insured |
| Our operations and those of our customers and suppliers may be subject to operational hazards and unforeseen interruptions such as natural disasters (including hurricanes), adverse weather, accidents, fires, explosions, hazardous materials releases, and other events beyond our control |
| These events might result in a loss of equipment or life, injury, or extensive property damage, as well as an interruption in our operations |
| In some instances, certain insurance could become unavailable or available only for reduced amounts of coverage |
| If we were to incur a significant liability for which we were not fully insured, it could materially and adversely affect our financial condition, results of operations, or cash flows |
| We are exposed to the credit and other counterparty risk of our customers in the ordinary course of our business |
| There can be no assurance that we have adequately assessed the credit worthiness of our existing or future counterparties or that there will not be an unanticipated deterioration in their credit worthiness, which could have an adverse impact on us |
| In those cases in which we provide division order services for crude oil purchased at the wellhead, we may be responsible for distribution of proceeds to all parties |
| In other cases, we pay all of or a portion of the production proceeds to an operator who distributes these proceeds to the various interest owners |
| There can be no assurance that we will not experience material losses in dealings with other parties |
| Competition with respect to our operating segments could ultimately lead to lower levels of profits and could materially and adversely affect our financial condition, results of operations, or cash flows |
| We face competition from other pipelines, terminals and crude oil marketers, as well as from other means of transporting, storing and distributing petroleum products |
| Our customers demand delivery of products on tight time schedules and in a number of geographic markets |
| If our quality of service declines or we cannot meet the demands of our customers, they may utilize the services of our competitors |
| If a competing crude oil or refined product pipeline or other crude oil marketer charged lower rates than we do, we could be forced to reduce our rates to remain competitive |
| Mergers among our customers and competitors could result in lower volumes being shipped on our pipelines or products stored in or distributed through our terminals, or reduced crude oil marketing margins or volumes |
| Mergers between existing customers could provide strong economic incentives for the combined entities to utilize their existing systems instead of ours in those markets where the systems compete |
| As a result, we could lose some or all of the volumes and associated revenues from these customers and we could experience difficulty in replacing those lost volumes and revenues, which could materially and adversely affect our financial condition, results of operations, or cash flows |
| Rate regulation may not allow us to recover the full amount of increases in our costs |
| A successful challenge to our rates could materially and adversely affect our financial condition, results of operations, or cash flows |
| The primary rate-making methodology of the Federal Energy Regulatory Commission, or FERC, is price indexing |
| We use this methodology in all of our interstate markets |
| In an order issued February 24, 2003, the FERC announced that, effective July 1, 2003, the index would equal the change in the producer price index for finished goods (previously, the index was equal to the change in the producer price index for finished goods 26 ______________________________________________________________________ [55]Table of Contents minus 1prca) |
| If the index falls, we would be required to reduce rates that are based on the FERC’s price indexing methodology if they exceed the new maximum allowable rate |
| In addition, changes in the index might not be large enough to fully reflect actual increases in our costs |
| The FERC’s rate-making methodologies may limit our ability to set rates based on our true costs or may delay the use of rates that reflect increased costs |
| Under the Energy Policy Act adopted in 1992, certain interstate pipeline rates were deemed just and reasonable or “grandfathered |
| ” Most of our revenues are derived from grandfathered rates on our FERC-regulated refined products pipelines |
| A person challenging a grandfathered rate must, as a threshold matter, establish a substantial change since the date of enactment of the Act, in either the economic circumstances or the nature of the service that formed the basis for the rate |
| A complainant might assert that the creation of the partnership itself constitutes such a change, an argument that has not previously been specifically addressed by the FERC If the FERC were to find a substantial change in circumstances, then the existing rates could be subject to detailed review |
| There is a risk that some rates could be found to be in excess of levels justified by our cost of service |
| In such event, the FERC would order us to reduce rates prospectively and could order us to pay reparations to complaining shippers |
| Reparations could be required for a period of up two years prior to the date of filing the complaint in the case of rates that are not grandfathered and for the period starting with the filing of the complaint in the case of grandfathered rates |
| On July 20, 2004, the United States Court of Appeals for the District of Columbia Circuit, or the DC Circuit, issued its opinion in BP West Coast Products, LLC v |
| FERC, which upheld FERC’s determination that the rates of an interstate petroleum products pipeline, SFPP, LP, or SFPP, were grandfathered rates under the Energy Policy Act of 1992 and that SFPP’s shippers had not demonstrated substantially changed circumstances that would justify modification of those rates |
| The court also vacated the portion of the FERC’s decision applying the Lakehead policy |
| In the Lakehead decision, the FERC allowed an oil pipeline master limited partnership to include in its cost-of-service an income tax allowance to the extent that its unitholders were corporations subject to income tax |
| The BP West Coast decision is likely to be appealed to the DC Circuit, and the new tax allowance policy is subject to rehearing and further action by the FERC The ultimate outcome of this proceeding is not certain, and could result in changes to the FERC’s treatment of income tax allowances in cost-of-service |
| In May and June 2005, the FERC issued a statement of general policy, as well as an order on remand of BP West Coast, respectively, in which the FERC has stated it will permit pipelines to include in cost-of-service a tax allowance to reflect actual or potential tax liability on their public utility income attributable to all partnership or limited liability company interests, if the ultimate owner of the interest has an actual or potential income tax liability on such income |
| Whether a pipeline’s owners have such actual or potential income tax liability will be reviewed by the FERC on a case-by-case basis |
| Although the new policy is generally favorable for pipelines that are organized as pass-through entities, it still entails rate risk due to the case-by-case review requirement |
| However, on December 16, 2005, the FERC issued its first case-specific review of the income tax allowance issue in the SFPP, LP proceeding |
| The FERC ruled favorably to SFPP LP on all income tax issues and set forth guidelines regarding the evidence necessary for the pipeline to determine its income tax allowance |
| In addition, a state commission could also investigate our intrastate rates or terms and conditions of service on its own initiative or at the urging of a shipper or other interested party |
| If a state commission found that our rates exceeded levels justified by our cost of service, the state commission could order us to reduce our rates |
| Sunoco R&M has agreed not to challenge, or to cause others to challenge or assist others in challenging, our tariff rates in effect during the term of the pipelines and terminals storage and throughput agreement |
| This agreement does not prevent other current or future shippers from challenging our tariff rates |
| At the end of the term of the agreement, Sunoco R&M will be free to challenge, or to cause other parties to challenge or assist others in challenging, our tariff rates in effect at that time |
| Potential changes to current rate-making methods and procedures may impact the federal and state regulations under which we will operate in the future |
| In addition, if the FERC’s petroleum pipeline ratemaking methodology changes, the new methodology could materially and adversely affect our financial condition, results of operations, or cash flows |
| 27 ______________________________________________________________________ [56]Table of Contents Our operations are subject to federal, state, and local laws and regulations relating to environmental protection and operational safety that could require substantial expenditures |
| Our pipelines, gathering systems, and terminal operations are subject to increasingly strict environmental and safety laws and regulations |
| The transportation and storage of refined products and crude oil result in a risk that refined products, crude oil, and other hydrocarbons may be suddenly or gradually released into the environment, potentially causing substantial expenditures for a response action, significant government penalties, liability to government agencies for natural resources damages, personal injury, or property damages to private parties and significant business interruption |
| We own or lease a number of properties that have been used to store or distribute refined products and crude oil for many years |
| Many of these properties also have been previously owned or operated by third parties whose handling, disposal, or release of hydrocarbons and other wastes were not under our control, and for which, in some cases, we have indemnified the previous owners and operators |
| Failure to comply with these laws and regulations may result in assessment of administrative, civil and criminal penalties, imposition of cleanup and site restoration costs and liens and, to a lesser extent, issuance of injunctions to limit or cease operations |
| We may be unable to recover these costs through increased revenues |
| Our business is subject to federal, state and local laws and regulations that govern the product quality specifications of the petroleum products that we store and transport |
| Petroleum products that we store and transport are sold by our customers for consumption into the public market |
| Various federal, state and local agencies have the authority to prescribe specific product quality specifications to commodities sold into the public market |
| Changes in product quality specifications could reduce our throughput volume, require us to incur additional handling costs or require the expenditure of capital |
| In addition, different product specifications for different markets impact the fungibility of the system and could require the construction of additional storage |
| We may be unable to recover these costs through increased revenues |
| Restrictions in our debt agreements, and in Sunoco, Inc |
| ’s debt agreements may prevent us from engaging in some beneficial transactions or paying distributions to unitholders |
| As of December 31, 2005, our total outstanding long-term indebtedness was approximately dlra355dtta6 million, consisting of dlra248dtta9 million of senior notes, net of unamortized discount of dlra1dtta0 million and dlra106dtta6 million of borrowings under our credit facility |
| Our payment of principal and interest on the debt will reduce the cash available for distribution on our units, as will our obligation to repurchase the senior notes upon the occurrence of specified events involving a change in control of our general partner |
| In addition, we are prohibited by our credit facility and the senior notes from making cash distributions during an event of default, or if the payment of a distribution would cause an event of default, under any of our debt agreements |
| The termination of our pipelines and terminals storage and throughput agreements with Sunoco R&M would constitute an event of default under our credit facility |
| Failure to renew these agreements could lead to an event of default under our credit facility |
| Our leverage and various limitations in our credit facility and our senior notes may reduce our ability to incur additional debt, engage in some transactions, and capitalize on acquisition or other business opportunities |
| owns and controls our general partner, we are not permitted to incur additional debt if the effect would be to cause an event of default under Sunoco, Inc |
| ’s revolving credit agreements |
| Any subsequent refinancing of Sunoco, Inc |
| ’s or our current debt or any new debt could have similar or greater restrictions |
| 28 ______________________________________________________________________ [57]Table of Contents We could incur a substantial amount of debt in the future, which could prevent us from fulfilling our debt obligations |
| We are permitted to incur additional debt, subject to certain limitations under our revolving credit facility and, in the case of secured debt, under the indenture governing the notes |
| If we incur additional debt in the future, our increased leverage could, for example: • make it more difficult for us to satisfy our obligations under our debt securities or other indebtedness and, if we fail to comply with the requirements of the other indebtedness, could result in an event of default under our debt securities or such other indebtedness; • require us to dedicate a substantial portion of our cash flow from operations to required payments on indebtedness, thereby reducing the availability of cash flow from working capital, capital expenditures and other general corporate activities; • limit our ability to obtain additional financing in the future for working capital, capital expenditures and other general corporate activities; • limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; • detract from our ability to successfully withstand a downturn in our business or the economy generally; and • place us at a competitive disadvantage against less leveraged competitors |
| Rising short-term interest rates could increase our financing costs and reduce the amount of cash we generate |
| As of December 31, 2005, we had dlra106dtta6 million of floating-rate debt |
| Rising short-term rates could materially and adversely affect our financial condition, results of operations, or cash flows |
| ’s credit rating could result in a down-grading in our credit rating, which could adversely affect our ability to obtain financing |
| Due to our relationship with Sunoco, Inc, our credit rating is partly dependent on Sunoco, Inc |
| ’s credit rating could result in a down-grading in our credit rating, which could, among other things, limit our ability to obtain financing on the terms currently available to us, if at all |
| Terrorist attacks aimed at our facilities could adversely affect our business |
| Since the September 11, 2001 terrorist attacks, the US government has issued warnings that energy assets, specifically the nation’s pipeline and terminal infrastructure, may be the future targets of terrorist organizations |
| Any future terrorist attack at our facilities, those of our customers and, in some cases, those of other pipelines, refineries, or terminals could materially and adversely affect our financial condition, results of operations, or cash flows |
| Due to our lack of asset diversification, adverse developments in our businesses could materially and adversely affect our financial condition, results of operations, or cash flows |
| We rely exclusively on the revenues generated from our businesses, and dividends from our equity investments |
| Due to our lack of asset diversification, an adverse development in one of these businesses could have a significantly greater impact on our financial condition and results of operations than if we maintained more diverse assets |
| 29 ______________________________________________________________________ [58]Table of Contents We may issue additional common units without unitholder approval, which would dilute our unitholders’ ownership interests |
| During the subordination period, our general partner, without the approval of our unitholders, may cause us to issue up to 5cmam691cmam820 additional common units |
| Our general partner also may cause us to issue an unlimited number of additional common units or other equity securities of equal rank with the common units, without unitholder approval, in a number of circumstances |
| After the end of the subordination period, we may issue an unlimited number of limited partner interests of any type without the approval of our unitholders |
| Our partnership agreement does not give our unitholders the right to approve our issuance of equity securities ranking junior to the common units at any time |
| The issuance of additional common units, or other equity securities of equal or senior rank, will decrease the proportionate ownership interest of existing unitholders and may reduce the amount of cash available for distribution and/or the market price of our common units |
| and its affiliates may engage in limited competition with us |
| Pursuant to the omnibus agreement, Sunoco, Inc |
| and its affiliates have agreed not to engage in the business of purchasing crude oil at the wellhead or operating refined product or crude oil pipelines or terminals or LPG terminals in the continental United States |
| The omnibus agreement, however, does not apply to: • any business operated by Sunoco, Inc |
| or any of its subsidiaries at the closing of our initial public offering; • any logistics asset constructed by Sunoco, Inc |
| or any of its subsidiaries within a manufacturing or refining facility in connection with the operation of that facility; • any business that Sunoco, Inc |
| or any of its subsidiaries acquires or constructs that has a fair market value of less than dlra5dtta0 million; and • any business that Sunoco, Inc |
| or any of its subsidiaries acquires or constructs that has a fair market value of dlra5dtta0 million or more if we have been offered the opportunity to purchase the business for fair market value, and we decline to do so with the concurrence of our conflicts committee |
| Upon a change of control of Sunoco, Inc |
| or a sale of the general partner by Sunoco, Inc, the non-competition provisions of the omnibus agreement may terminate |
| A unitholder may not have limited liability if a state or federal court finds that we are not in compliance with the applicable statutes or that unitholder action constitutes control of our business |
| The limitations on the liability of holders of limited partner interests for the obligations of a limited partnership have not been clearly established in some states |
| A unitholder could be held liable in some circumstances for our obligations to the same extent as a general partner if a state or federal court determined that: • we had been conducting business in any state without complying with the applicable limited partnership statute; or • the right or the exercise of the right by the unitholders as a group to remove or replace our general partner, to approve some amendments to the partnership agreement, or to take other action under the partnership agreement constituted participation in the “control” of our business |
| Under applicable state law, our general partner has unlimited liability for our obligations, including our debts and environmental liabilities, if any, except for our contractual obligations that are expressly made without recourse to the general partner |
| In addition, Section 17-607 of the Delaware Revised Uniform Limited Partnership Act provides that under some circumstances a unitholder may be liable to us for the amount of a distribution for a period of three years from the date of the distribution |
| 30 ______________________________________________________________________ [59]Table of Contents Our tax treatment depends on our status as a partnership for federal income tax purposes, as well as our not being subject to entity level taxation by individual states |
| If the Internal Revenue Service, or IRS, treats us as a corporation or we become subject to entity level taxation for state tax purposes, it would substantially reduce the amount of cash available for distribution to unitholders |
| The anticipated after-tax economic benefit of an investment in the common units depends largely on our being treated as a partnership for federal income tax purposes |
| We have not requested, and do not plan to request, a ruling from the IRS on this matter |
| The IRS may adopt positions that differ from the ones we take |
| A successful IRS contest of the federal income tax positions we take may impact adversely the market for our common units, and the costs of any IRS contest will reduce our cash available for distribution to unitholders |
| If we were treated as a corporation for federal income tax purposes, we would pay federal income tax at the corporate tax rate, and likely would pay state income tax at varying rates |
| Distributions to unitholders generally would be taxed again as corporate distributions |
| Treatment of us as a corporation would result in a material reduction in anticipated cash flow and after-tax return to unitholders |
| Current law may change so as to cause us to be treated as a corporation for federal income tax purposes or to otherwise subject us to entity-level taxation |
| In addition, because of widespread state budget deficits, several states are evaluating ways to subject partnerships to entity level taxation through the imposition of state income, franchise and other forms of taxation |
| If any of these states were to impose a tax on us, the cash available for distribution to unitholders would be reduced |
| The partnership agreement provides that, if a law is enacted or existing law is modified or interpreted in a manner that subjects us to taxation as a corporation or otherwise subjects us to entity-level taxation for federal, state, or local income tax purposes, the minimum quarterly distribution amount and the target distribution amounts will be adjusted to reflect the impact of that law on us |