Sunoco 2005 Annual Report Download - page 65

Southern District of New York (MDL 1358). Motions to
remand these cases to state courts have been denied.
Motions to dismiss were denied. Discovery is proceeding
in four focus cases. Sunoco is a defendant in three of
those cases. In addition, several of the private well owner
cases are moving forward. Sunoco is a focus defendant in
two of those cases. Up to this point, for the group of
MTBE cases currently pending, there has been insufficient
information developed about the plaintiffs’ legal theories
or the facts that would be relevant to an analysis of
potential exposure. Based on the current law and facts
available at this time, Sunoco believes that these cases
will not have a material adverse effect on its consolidated
financial position.
Conclusion
Many other legal and administrative proceedings are
pending or possible against Sunoco from its current and
past operations, including proceedings related to
commercial and tax disputes, product liability, antitrust,
employment claims, leaks from pipelines and under-
ground storage tanks, natural resource damage claims,
premises-liability claims, allegations of exposures of third
parties to toxic substances (such as benzene or asbestos)
and general environmental claims. The ultimate outcome
of pending proceedings and other matters identified
above cannot be ascertained at this time; however, it is
reasonably possible that some of them could be resolved
unfavorably to Sunoco. Management believes that these
matters could have a significant impact on results of
operations for any one year. However, management does
not believe that any additional liabilities which may arise
pertaining to such matters would be material in relation
to the consolidated financial position of Sunoco at De-
cember 31, 2005.
13. Minority Interests
Cokemaking Operations
Since 1995, Sunoco has received, in four separate trans-
actions, a total of $724 million in exchange for interests
in its Jewell and Indiana Harbor cokemaking operations.
Sunoco did not recognize any gain at the dates of these
transactions because the third-party investors were enti-
tled to a preferential return on their investments. The
preferential returns are currently equal to 98 percent of
the cash flows and tax benefits from the respective coke-
making operations during the preferential return periods,
which continue until the investors recover their invest-
ments and achieve a cumulative annual after-tax return
that averages approximately 10 percent. Income is recog-
nized as coke production and sales generate cash flows
and tax benefits which are allocated to Sunoco and the
third-party investors, while expense is recognized to re-
flect the investors’ preferential returns.
The preferential return period for the Jewell operation is
projected to end during 2011, while the preferential re-
turn period for the Indiana Harbor operation is projected
to end during 2007. Due to the difficulty of forecasting
operations and tax benefits into the future, the accuracy
of these estimates is subject to considerable uncertainty.
The estimated lengths of these preferential return periods
are based upon the Company’s current expectations of
future cash flows and tax benefits, which are impacted by
sales volumes and prices, raw material and operating
costs, capital expenditure levels and the ability to recog-
nize tax benefits under the current tax law (see below).
Higher-than-expected cash flows and tax benefits will
shorten the investors’ preferential return periods, while
lower-than-expected cash flows and tax benefits will
lengthen the periods.
Following the expiration of these preferential return peri-
ods, the investor in the Jewell operation will be entitled
to a minority interest in the related cash flows and tax
benefits amounting to 18 percent, while the investors in
the Indiana Harbor operation will be entitled to a minor-
ity interest in the related cash flows and tax benefits ini-
tially amounting to 34 percent and thereafter declining to
10 percent by 2038.
Under preexisting tax law, the coke production at Jewell
and Indiana Harbor would not be eligible to generate
nonconventional fuel tax credits after 2007. The energy
policy legislation enacted in August 2005 includes addi-
tional tax credits pertaining to a portion of the coke pro-
duction at Jewell, all of the coke production at Haverhill,
where operations commenced in March 2005, and all fu-
ture domestic coke plants placed into service by Jan-
uary 1, 2010. The new credits cover a four-year period,
effective January 1, 2006 or the date any new facility is
placed into service, if later. However, prior to their
expiration dates, all of the tax credits would be phased
out, on a ratable basis, if the average annual price of
domestic crude oil at the wellhead is within a certain
inflation-adjusted price range. (This range was $51.35 to
$64.47 per barrel for 2004, the latest year for which the
range is available.) If this were to occur, the Company
could be required under tax indemnity agreements to
make cash payments to the third-party investors. Pay-
ments would be required only if the expected end of the
applicable preferential return period was extended by two
years or more and if the respective third-party investor
was expected to achieve a cumulative after-tax return of
less than approximately 6.5 percent. The Company
currently does not believe that any payments would be
required, even if the average annual wellhead crude oil
price were to exceed the threshold at which the credits
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