Sunoco 2005 Annual Report Download - page 54

write-down of its MTBE production facility to its esti-
mated fair value at that time. The estimated fair value
was determined by an independent appraiser using pres-
ent value techniques which reflect various alternative
operating assumptions. Sunoco’s share of this provision,
which is included as an equity loss in other income (loss),
net, in the 2003 consolidated statement of income,
amounted to $23 million ($15 million after tax).
Under an off-take agreement with BEF, which expired in
2004, Sunoco had agreed to purchase all of the MTBE
production from the facility. Sunoco’s total MTBE pur-
chases from BEF, which are included in costs of products
sold and operating expenses in the consolidated state-
ments of income, were $149 and $183 million during
2004 and 2003, respectively.
Plasticizer Business—During 2003, Sunoco announced
its decision to sell its plasticizer business and recorded a
$23 million provision ($15 million after tax) to write
down the assets held for sale to their estimated fair values
less costs to sell and established a $5 million accrual ($2
million after tax) for employee terminations under a
postemployment plan and for other exit costs. These
charges were recognized in the provision for write-down
of assets and other matters in the 2003 consolidated
statement of income. Sunoco sold this business and re-
lated inventory in January 2004 to BASF for approx-
imately $90 million in cash. The sale included the
Company’s plasticizer facility in Pasadena, TX. The
Company’s Neville Island, PA site was not part of the
transaction and continues to produce plasticizers ex-
clusively for BASF under a three-year tolling agreement.
Sunoco also agreed to provide terminalling services at
this facility to BASF for a 15-year period.
The following table summarizes the changes in the ac-
crual for exit costs and terminations related to the sale of
the plasticizer business as well as for other exit costs and
terminations:
(Millions of Dollars) 2005 2004 2003
Balance at beginning of year $11 $ 17 $10
Additional accruals 2615
Payments charged against the
accruals (7) (12) (8)
Balance at end of year $6 $ 11 $17
Other Matters
Phenol Supply Contract Dispute—During the third quar-
ter of 2005, an arbitrator ruled that Sunoco was liable in
an arbitration proceeding for breaching a supply agreement
concerning the prices charged to Honeywell International
Inc. (“Honeywell”) for phenol produced at Sunoco’s
Philadelphia chemical plant from June 2003 through April
2005. In January 2006, the arbitrator ruled that Sunoco
should bill Honeywell based on the pricing formula estab-
lished in the arbitration until a second arbitration, set to
begin in the second quarter of 2006, finalizes pricing for
2005 and beyond (see below). Damages of approximately
$95 million ($56 million after tax), including prejudgment
interest, were assessed, of which $27, $48 and $20 million
pertained to 2005, 2004 and 2003, respectively. Such
damages were recorded as a charge against earnings in
other income (loss), net, in the 2005 consolidated state-
ment of income. Sunoco is contesting the finding of li-
ability and determination of damages as well as the
arbitrator’s authority to establish 2005 pricing. The phenol
supply agreement provides for a reopener for pricing on
and after January 1, 2005 and sets forth specific standards
for determining such pricing. The parties have been un-
successful in negotiating the post-2004 price, and a new
price will be determined in a second arbitration to be held
before a different arbitrator. Sunoco believes the basis for
the post-2004 pricing is substantially different from the
basis of the award in the first arbitration.
Power Contract Restructuring—In December 2004,
Sunoco and a subsidiary of FPL Energy (“FPL”) agreed to a
restructuring of an agreement under which Sunoco may
purchase steam from a natural gas fired cogeneration
power plant owned and operated by FPL at Sunoco’s Mar-
cus Hook refinery. Under the restructured terms, FPL sur-
rendered its easement interest in land adjacent to the
power plant on which four auxiliary boilers were con-
structed, thereby transferring ownership of the auxiliary
boilers, which have an estimated fair market value of $33
million, to Sunoco. FPL operates the auxiliary boilers on
Sunoco’s behalf. When the cogeneration plant is in oper-
ation, Sunoco has the option to purchase steam from the
facility at a rate equivalent to that set forth in the origi-
nal agreement. As part of the restructuring, Sunoco has
agreed to a long-term lease of the land on which the co-
generation facility was constructed to FPL and to modify
certain terms in the existing agreement for an aggregate
cash payment of $48 million, most of which is attribut-
able to prepaid rent. Sunoco received this $48 million
payment in January 2005. No gain or loss was recognized
in connection with the restructuring. Upon completion
of the restructured agreement in January 2005, deferred
revenue of $81 million was recorded in other deferred
credits and liabilities in the consolidated balance sheet,
which is being amortized into income over the 30-year
contract term.
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