Sunoco 2006 Annual Report Download - page 67

the Partnership issued $175 million of senior notes due
2016 and 2.7 million limited partnership units at a price
of $43.00 per unit. Proceeds from the 2006 offerings, net
of underwriting discounts and offering expenses, totaled
approximately $173 and $110 million, respectively. These
proceeds were used by the Partnership in part to repay the
outstanding borrowings under its revolving credit facility
with the balance used to fund a portion of the Partner-
ship’s 2006 growth capital program. Upon completion of
the equity offerings, Sunoco’s interest in the Partnership,
including its 2 percent general partnership interest, de-
creased to 43 percent. The accounts of the Partnership
continue to be included in Sunoco’s consolidated finan-
cial statements.
As of December 31, 2006, Sunoco owned 12.06 million
limited partnership units consisting of 6.37 million com-
mon units and 5.69 million subordinated units. Dis-
tributions on Sunoco’s subordinated units are payable
only after the minimum quarterly distributions of $.45 per
unit for the common units held by the public and Suno-
co, including any arrearages, have been made. The sub-
ordinated 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 2007, 2006
and 2005, when the quarterly cash distributions pertain-
ing to the fourth quarters of 2006, 2005 and 2004 were
paid, all three three-year requirements were satisfied. As a
result, all of Sunoco’s subordinated units were converted
to common units, 5.69 million in February 2007 and
2.85 million each in February 2006 and February 2005.
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 $150 million pretax at December 31, 2006, was
deferred as a component of minority interest in the
Company’s consolidated balance sheet as the common
units issued did not represent residual interests in the
Partnership at that time due to Sunoco’s ownership of the
subordinated units. The deferred gain will be recognized
in income during the first quarter of 2007 when Sunoco’s
remaining subordinated units converted to common units
at which time the common units became the residual in-
terests.
Sunoco is a party to various agreements with the Partner-
ship which require Sunoco to pay for minimum storage
and throughput usage of certain Partnership assets. These
agreements also establish fees for administrative services
provided by Sunoco to the Partnership and provide in-
demnifications by Sunoco for certain environmental,
toxic tort and other liabilities.
The following table sets forth the minority interest bal-
ance and the changes to this balance attributable to the
third-party investors’ interests in Sunoco Logistics
Partners L.P.:
(Millions of Dollars) 2006 2005 2004
Balance at beginning of year $397 $232 $104
Net proceeds from public equity
offerings 110 160 129
Minority interest share of income* 42 28 19
Increase attributable to Partnership
management incentive plan 25—
Cash distributions to third-party
investors** (48) (28) (20)
Balance at end of year $503 $397 $232
* Included in selling, general and administrative expenses in the consolidated
statements of income.
** During the 2004-2006 period, the Partnership increased its quarterly cash
distribution per unit from $.55 to $.8125.
Epsilon Joint Venture Operations
Epsilon Products Company, LLC (“Epsilon”) is a joint
venture that consists of polymer-grade propylene oper-
ations at Sunoco’s Marcus Hook, PA refinery and an ad-
jacent polypropylene plant. The joint venture is a
variable interest entity for which the Company is the
primary beneficiary. As such, the accounts of Epsilon are
included in Sunoco’s consolidated financial statements.
Epsilon was unable to repay its $120 million term loan
that was due in September 2006 and $31 million of bor-
rowings under its $40 million revolving credit facility that
matured in September 2006. Upon such default, the
lenders made a demand on Sunoco, Inc., as guarantor,
and Sunoco, Inc. satisfied its guarantee obligations in the
third quarter of 2006. Sunoco, Inc. is now subrogated to
the rights and privileges of the former debtholders. In
January 2007, Sunoco, Inc., as subrogee, made a demand
for payment of the outstanding amounts, but Epsilon was
unable to make payment. Sunoco, Inc., Epsilon and the
Epsilon joint-venture partners are currently in litigation
to resolve this matter.
The following table sets forth the minority interest bal-
ance and the changes to this balance attributable to the
other joint-venture partner’s interest in Epsilon:
(Millions of Dollars) 2006 2005 2004
Balance at beginning of year $16 $11 $ 8
Minority interest share of income
(loss)* (3) 53
Balance at end of year $13 $16 $11
*Included in selling, general and administrative expenses in the consolidated
statements of income.
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