Sunoco 2009 Annual Report Download - page 100

investments. The returns of the investors were equal to 98 percent of the cash flows and tax benefits from such
cokemaking operations during the preferential return period, which continued until the fourth quarter of 2007 (at
which time both investors had recovered their investment and achieved a cumulative annual after-tax return of
approximately 10 percent). Those investors are now entitled to a noncontrolling interest amounting to 34 percent
of the partnership’s net income, which declines to 10 percent by 2038.
The Company indemnifies the third-party investors (including a former investor in Sunoco’s Jewell
cokemaking operations) for certain tax benefits that were available to them during the preferential return period
in the event the Internal Revenue Service disallows the tax deductions and benefits allocated to the third parties.
These tax indemnifications are in effect until the applicable tax returns are no longer subject to Internal Revenue
Service review. Although the Company believes the possibility is remote that it will be required to do so, at
December 31, 2009, the maximum potential payment under these tax indemnifications would have been
approximately $90 million.
Logistics Operations
The Partnership’s issuance of common units to the public resulted in an increase in the value of Sunoco’s
proportionate share of the Partnership’s equity as the issuance price per unit exceeded Sunoco’s carrying amount
per unit at the time of issuance. In accordance with accounting guidance in effect until January 1, 2009, prior to
the conversion of Sunoco’s remaining subordinated units to common units in February 2007, the resultant gain to
Sunoco on the issuance of common units to the public had been deferred as a component of the noncontrolling
interest in the Company’s consolidated balance sheets as the common units issued did not represent residual
interests in the Partnership due to Sunoco’s ownership of the subordinated units. A deferred gain of $151 million
($90 million after tax) was recognized in income in 2007 when Sunoco’s remaining subordinated units converted
to common units at which time the common units became residual interests. An additional $23 million ($14
million after tax) was recognized in income in 2008 attributable to a correction of an error in the computation of
the gain that was recorded in 2007. The prior-period amount has not been restated as this adjustment was not
deemed to be material.
In 2009, Sunoco Logistics Partners L.P. issued 2.25 million limited partnership units in a public offering,
generating $110 million of net proceeds. Upon completion of this transaction, Sunoco’s interest in the
Partnership, including its 2 percent general partnership interest, decreased to 40 percent. Since the issuance of the
limited partnership units did not result in a loss of control of the Partnership, in accordance with accounting
guidance effective January 1, 2009, it has been accounted for as an equity transaction with $88 million of the net
proceeds reflected as an increase in noncontrolling interests and the remaining $22 million as an increase in
capital in excess of par value within shareholders’ equity. Sunoco’s general partnership interest also includes
incentive distribution rights, which have provided Sunoco, as the general partner, up to 50 percent of the
Partnership’s incremental cash flow. Sunoco received approximately 56, 56 and 53 percent of the Partnership’s
cash distributions during 2009, 2008 and 2007, respectively, attributable to its limited and general partnership
interests and its incentive distribution rights. In February 2010, Sunoco received $201 million in cash from the
Partnership in connection with a modification of the incentive distribution rights which was financed by the
Partnership’s issuance of $500 million of long-term debt, consisting of $250 million of 5.50 percent notes due in
2020 and $250 million of 6.85 percent notes due in 2040. In February 2010, Sunoco also sold 2.20 million of its
limited partnership units to the public, generating approximately $145 million of net proceeds, which further
reduced its interest in the Partnership to 33 percent. As a result of these two transactions, Sunoco’s share of
Partnership distributions is expected to be approximately 48 percent at the Partnership’s current quarterly cash
distribution rate. The accounts of the Partnership continue to be included in Sunoco’s consolidated financial
statements.
The Partnership distributes to its general and limited partners all available cash (generally cash on hand at
the end of each quarter less the amount of cash the general partner determines in its reasonable discretion is
necessary or appropriate to provide for the proper conduct of the Partnership’s business). During the 2007-2009
period, the Partnership increased its quarterly distribution per unit from $.8125 to $1.09.
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