Sunoco 2003 Annual Report Download - page 20

Effective March 31, 2003, Sunoco formed a limited partnership with Equistar involving
Equistar’s ethylene facility in LaPorte, TX. Equistar is a joint venture between Lyondell
Chemical Company and Millennium Chemicals Inc. In connection with this transaction,
Equistar and the new partnership entered into a 700 million pounds-per-year, 15-year
propylene supply contract with Sunoco. Of this amount, 500 million pounds per year is
priced on a cost-based formula that includes a fixed discount that declines over the life of
the contract, while the remaining 200 million pounds per year is based on market prices.
Sunoco also purchased Equistar’s polypropylene facility in Bayport, TX. Sunoco paid $194
million in cash and borrowed $4 million from the seller to form the partnership and acquire
the Bayport facility. Through the new partnership and supply contract, the Company be-
lieves it has secured a favorable long-term supply of propylene for its Gulf Coast poly-
propylene business. Realization of these benefits is largely dependent upon performance by
Equistar, which has a credit rating belowinvestment grade. Equistar has not given any in-
dication that it will not perform under its contracts. In the event of nonperformance,
Sunoco has collateral and certain other contractual rights under the partnership agreement.
The acquisition of the Bayport facility has increased the Company’s polypropylene capacity,
complementing and enhancing the Company’s existing polypropylene business and
strengthening its market position (see Note 3 to the consolidated financial statements).
Effective January 1, 2001, Sunoco completed the acquisition of Aristech, a wholly owned
subsidiary of Mitsubishi Corporation (“Mitsubishi”), for $506 million in cash and the as-
sumption of $163 million in debt. The purchase price included $107 million for working
capital. Contingent payments with a net present value as of the acquisition date of up to
$167 million (the “earn out”) may also be made if realized margins for polypropylene and
phenol exceed certain agreed upon thresholds through 2006. As of December 31, 2003, no
such payments have been earned. Since the $167 million represents a present value as of
January 1, 2001, the actual amounts that could ultimately be paid under the earn out
provisions increase over time by a contract-specified 11 percent per year. However, these
contingent payments are limited to $90 million per year. Any earn out payments would be
treated as adjustments to the purchase price. Sunoco also entered into a margin hedge
agreement with Mitsubishi whereby Mitsubishi provided polypropylene margin protection
for 2001 of up to $6.5 million per quarter. In connection with the margin hedge agree-
ment, Sunoco received $19.5 million from Mitsubishi in 2001 related to Aristech’s oper-
ations for the first nine months and an additional $6.5 million in the first quarter of 2002
related to the 2001 fourth quarter’s operations. These payments were reflected as reduc-
tions in the purchase price when received. In addition, Mitsubishi is responsible during a
25-year indemnification period for up to $100 million of potential environmental liabilities
of the business arising out of or related to the period prior to the acquisition date.
Logistics
The Logistics business operates refined product and crude oil pipelines and terminals and
conducts crude oil acquisition and marketing activities primarily in the Northeast, Mid-
west and South Central regions of the United States. In addition, the Logistics business
has an ownership interest in several refined product and crude oil pipeline joint ventures.
Logistics operations are conducted primarily through Sunoco Logistics Partners L.P., the
master limited partnership that is 75.3 percent owned by Sunoco (see “Capital Resources
and Liquidity—Other Cash FlowInformation” below).
2003 2002 2001
Income (millions of dollars) $26 $33 $42
Pipeline and terminal throughput (thousands of barrels daily)*:
Unaffiliated customers 827 768 554
Affiliated customers 1,225 1,286 1,435
2,052 2,054 1,989
* Consists of 100 percent of the throughput of pipelines and terminals owned and operated by the Partnership.
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