Sunoco 2005 Annual Report Download - page 66

are completely phased out. The domestic wellhead price
averaged $50.26 per barrel for the year ended De-
cember 31, 2005.
The Company also indemnifies the third-party investors
for certain tax benefits available to them during the pref-
erential return period in the event the Internal Revenue
Service disallows the tax deductions and benefits allo-
cated to the third parties or if there is a change in the tax
laws that reduces the amount of nonconventional fuel tax
credits. These tax indemnifications are in effect until the
applicable tax returns are no longer subject to Internal
Revenue Service review. In certain of these cases, if per-
formance under the indemnification is required, the
Company also has the option to purchase the third-party
investors’ interests. Although the Company believes it is
remote that it will be required to make any payments
under these indemnifications, at December 31, 2005, the
maximum potential payment under these tax in-
demnifications and the options to purchase the third-
party investors’ interests, if exercised, would have been
approximately $615 million. If this were to occur, the
minority interest balance would be reduced by approx-
imately $195 million.
The following table sets forth the minority interest balan-
ces and the changes in these balances attributable to the
third-party investors’ interests in cokemaking operations:
(Millions of Dollars) 2005 2004 2003
Balance at beginning of year $287 $328 $379
Nonconventional fuel credit and
other tax benefits* (57) (52) (58)
Preferential return* 42 47 55
Cash distributions to third-party
investors (38) (36) (48)
Balance at end of year $234 $287 $328
*The nonconventional fuel credit and other tax benefits and the preferential return,
which comprise the noncash change in the minority interest in cokemaking operations,
are included in other income (loss), net, in the consolidated statements of income
(Note 3).
Logistics Operations
In the second quarter of 2004, Sunoco Logistics Partners
L.P., a master limited partnership in which Sunoco had a
75.3 percent interest, issued 3.4 million limited partner-
ship units at a price of $39.75 per unit. Proceeds from the
offering, net of underwriting discounts and offering ex-
penses, totaled $129 million. Coincident with the offer-
ing, the Partnership redeemed 2.2 million limited
partnership units owned by Sunoco for $83 million. The
proceeds from the offering also were principally used by
the Partnership to finance its acquisitions during 2004
(Note 2). In the second quarter of 2005, the Partnership
issued an additional 2.8 million limited partnership units
at a price of $37.50 per unit. Proceeds from the offering,
net of underwriting discounts and offering expenses, to-
taled approximately $99 million. These proceeds were
used to redeem an equal number of limited partnership
units owned by Sunoco. In the third quarter of 2005, the
Partnership issued an additional 1.6 million limited part-
nership units at a price of $39.00 per unit. Proceeds from
the offering, which totaled approximately $61 million,
net of underwriting discounts and offering expenses, were
used by the Partnership principally to repay a portion of
the borrowings under its revolving credit facility, which
had been used to partially fund its $100 million acquis-
ition of the crude oil pipeline system and related storage
facilities located in Texas from ExxonMobil (Notes 2 and
10). Upon completion of these transactions, Sunoco’s
interest in the Partnership, including its 2 percent general
partnership interest, decreased to 47.9 percent. The ac-
counts of the Partnership continue to be included in
Sunoco’s consolidated financial statements.
As of December 31, 2005, Sunoco owned 12.06 million
limited partnership units consisting of 3.52 million com-
mon units and 8.54 million subordinated units. Dis-
tributions on Sunoco’s subordinated units are payable
only after the minimum quarterly distributions for the
common units held by the public and Sunoco, including
any arrearages, have been made. The subordinated units
convert to common units if certain financial tests related
to earning and paying the minimum quarterly distribution
for the preceding three consecutive one-year periods have
been met. In February 2006 and 2005, when the quarterly
cash distributions pertaining to the fourth quarters of
2005 and 2004 were paid, the first two three-year
requirements were satisfied. As a result, a total of 5.70
million of Sunoco’s subordinated units have been con-
verted to common units, 2.85 million each in February
2006 and February 2005. If the Partnership continues to
make at least the minimum quarterly distributions
through the fourth quarter of 2006, all of Sunoco’s re-
maining 5.69 million subordinated units would be con-
verted to common units by February 2007.
The Partnership’s issuance of common units to the public
has resulted in an increase in the value of Sunoco’s pro-
portionate share of the Partnership’s equity as the issu-
ance price per unit exceeded Sunoco’s carrying amount
per unit at the time of issuance. The resultant gain to
Sunoco on these transactions, which totaled approx-
imately $125 million pretax at December 31, 2005, has
been deferred as a component of minority interest in the
Company’s consolidated balance sheet as the common
units issued do not represent residual interests in the
Partnership due to Sunoco’s ownership of the sub-
ordinated units. The deferred gain would be recognized in
income when Sunoco’s remaining subordinated units
convert to common units at which time the common
units become the residual interests.
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