Sunoco 2005 Annual Report Download - page 32

management does not believe, based on current information, that it is likely that any of
the former owners will not perform under any of these agreements. Other than the preced-
ing arrangements, the Company has not entered into any arrangements with third parties
to mitigate its exposure to loss from environmental contamination. Claims for recovery of
environmental liabilities that are probable of realization totaled $22 million at De-
cember 31, 2005 and are included principally in deferred charges and other assets in the
consolidated balance sheets.
Regulatory Matters
The U.S. Environmental Protection Agency (“EPA”) adopted rules under the Clean Air
Act (which relates to emissions of materials into the air) that phase in limitations on the
sulfur content of gasoline beginning in 2004 and the sulfur content of on-road diesel fuel
beginning in mid-2006 (“Tier II”). The rules include banking and trading credit systems,
which could provide refiners flexibility until 2006 for the low-sulfur gasoline and until
2010 for the on-road low-sulfur diesel. These rules are expected to have a significant im-
pact on Sunoco and its operations, primarily with respect to the capital and operating ex-
penditures at its five refineries. The Tier II capital spending is expected to be essentially
completed in 2006, while the higher operating costs will be incurred when the low-sulfur
fuels are produced. The Company’s estimate of total capital outlays to comply with the
Tier II low-sulfur gasoline and on-road diesel fuel requirements is approximately $750 mil-
lion. Capital spending to meet these requirements totaled $637 million through De-
cember 31, 2005. In May 2004, the EPA adopted a third rule which will phase in
limitations on the allowable sulfur content in off-road diesel fuel beginning in mid-2007.
The off-road diesel rule is not expected to require significant capital expenditures by
Sunoco. The ultimate impact of the rules may be affected by such factors as technology
selection, the effectiveness of the systems pertaining to banking and trading credits, timing
uncertainties created by permitting requirements and construction schedules and any effect
on prices created by changes in the level of gasoline and diesel fuel production.
In 1997, the EPA promulgated new, more stringent National Ambient Air Quality Stan-
dards (“NAAQS”) for ozone and fine particles, which has resulted in identification of
non-attainment areas throughout the country, including Texas, Pennsylvania, Ohio, New
Jersey and West Virginia, where Sunoco operates facilities. In 2004, the EPA issued final
non-attainment area designations for ozone and fine particles. These standards will result
in further controls of nitrogen oxide, sulfur dioxide and volatile organic compound emis-
sions. The EPA has designated certain areas, including Philadelphia and Houston, as
“moderate” non-attainment areas for ozone, which would require them to meet the ozone
requirements by 2010, before currently mandated federal control programs would take ef-
fect. If a region is not able to demonstrate attainment by 2010, there would be more strin-
gent offset requirements, and, if a region cannot submit an approvable State Implemen-
tation Plan, there could be a moratorium on new highway projects and imposition of a
Federal Implementation Plan, including potentially significant lifestyle changes to bring
the region to attainment. However, EPA’s designation of ozone non-attainment areas and
the EPA’s rule on state implementation are currently being challenged by the State of
Ohio, trade associations and health and environmental groups. In 2005, EPA issued a final
rule revoking a previously proposed 1-hour ozone standard and related provisions in favor
of a more stringent 8-hour standard. The EPA issued a subsequent rule codifying the
revocation of the 1-hour ozone standard for the areas with effective 8-hour ozone
non-attainment designations. Both industry and environmental groups have filed lawsuits
challenging various provisions of the final rule. In 2005, the EPA also identified 21 coun-
ties which, based on 2003-2004 data, now are in attainment of the fine particles standard.
Sunoco’s Toledo refinery is within one of these attainment areas. Regulatory programs,
when established to implement the EPA’s standards, could have an impact on Sunoco and
its operations. However, the potential financial impact cannot be reasonably estimated
until the EPA promulgates regulatory programs to attain the standards, and the states, as
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