Sunoco 2006 Annual Report Download - page 55

exit costs. Sunoco sold this business and related inventory
in January 2004 to BASF for approximately $90 million
in cash.
Other Matters
Phenol Supply Contract Dispute—During the third
quarter of 2005, an arbitrator ruled that Sunoco was li-
able 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 established in the arbitration until a second arbi-
tration finalized pricing for 2005 and beyond under provi-
sions of a supply agreement which provide for a price
reopener on and after January 1, 2005. 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, which were paid to
Honeywell in April 2006, were recorded as a charge
against earnings in other income (loss), net, in the 2005
consolidated statement of income. In March 2006, a U.S.
District Court judge upheld the first arbitrator’s ruling. In
July 2006, the second arbitrator ruled that the pricing
through July 2009 should be based essentially on the pric-
ing formula established in the first arbitration. The prices
charged to Honeywell during 2006 have been based on
this formula.
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 with 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 operation,
Sunoco has the option to purchase steam from the facility
at a rate equivalent to that set forth in the original
agreement. As part of the restructuring, Sunoco has
agreed to a long-term lease to FPL of the land on which
the cogeneration facility was constructed 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.
3. Other Income (Loss), Net
(Millions of Dollars) 2006 2005 2004
Gain pertaining to income tax matters
(Note 4) $— $3 $28
Loss on phenol supply contract
dispute (Note 2) —(95) —
Loss on early extinguishment of debt
(Note 12) —— (53)
Equity income:
Pipeline joint ventures
(Notes 2 and 7) 22 16 19
Other 410 7
Noncash (increase) reduction in
minority interests in cokemaking
operations (Note 15) (3) 15 5
Loss pertaining to purchase of
minority interest in Jewell
cokemaking operations (Note 2) (5) ——
Gain on divestments (Note 2) 18 10 5
Other 928 19
$45 $(13) $ 30
4. Income Taxes
The components of income tax expense are as follows:
(Millions of Dollars) 2006 2005 2004
Income taxes currently payable:
U.S. federal $370 $470 $212
State and other 114 133 55
484 603 267
Deferred taxes:
U.S. federal 122 — 100
State and other (5) 323
117 3 123
$601 $606 $390
The reconciliation of income tax expense at the U.S. stat-
utory rate to the income tax expense is as follows:
(Millions of Dollars) 2006 2005 2004
Income tax expense at U.S.
statutory rate of 35 percent $553 $553 $348
Increase (reduction) in income
taxes resulting from:
Manufacturers’ deduction (13) (14) —
Income tax settlements —(19) (5)
State and other income taxes, net
of federal income tax effects
(see below) 71 88 51
Other (10) (2) (4)
$601 $606 $390
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