Sunoco 2011 Annual Report Download - page 86

In September 2011, Sunoco announced its decision to exit its refining business and initiated a formal
process to sell its remaining refineries located in Philadelphia and Marcus Hook, PA (together, the “Northeast
Refineries”). Sunoco indefinitely idled the main processing units at its Marcus Hook refinery in December 2011
due to deteriorating refining market conditions. As the Company has received no proposals to purchase Marcus
Hook as a refinery, Sunoco is pursuing options with third parties for alternate uses of the Marcus Hook facility.
Sunoco continues to operate its Philadelphia refinery while it seeks a buyer for that facility. Sunoco has seen
some degree of interest in the Philadelphia refinery and therefore continues to pursue a sale of this facility as an
operating refinery. However, if a suitable sales transaction cannot be implemented, the Company intends to
permanently idle the main processing units at both facilities no later than July 2012. In connection with these
decisions, Sunoco recorded a $2,363 million noncash provision ($1,405 million after tax) primarily to write down
long-lived assets at the Northeast Refineries to their estimated fair values and recorded provisions for severance,
contract terminations and idling expenses of $248 million ($144 million after tax) in the second half of 2011.
These accruals include an estimated loss to terminate a ten-year polymer-grade propylene supply contract with
Braskem in connection with the sale of Sunoco’s discontinued polypropylene chemicals business in March 2010.
After these write-downs, the refining assets are recorded at $105 million. The estimated fair values were
determined based upon discounted projected cash flows, comparable sales transactions and offers by potential
purchasers as adjusted to reflect the probability of completing a sales transaction. The estimate also reflects
potential alternative uses of the facilities, where appropriate. Since these fair values were estimated primarily
based upon unobservable inputs, they were determined to be level 3 fair value measurements within the fair value
hierarchy under current accounting guidance. If such units are permanently idled, additional provisions of up to
$300 million, primarily related to shutdown expenses and severance and pension costs, could be incurred. Upon a
sale or permanent idling of the main processing units, Sunoco expects to record a pretax gain related to the
liquidation of all of its crude oil and a significant portion of its refined product inventories at the Northeast
Refineries totaling approximately $2 billion based on current market prices. The actual amount of this gain will
depend upon the market value of crude and refined products and the volumes on hand at the time of liquidation.
In 2009, the Company permanently shut down all process units at the Eagle Point refinery. In connection
with this decision, Sunoco recorded a $476 million provision ($284 million after tax) to write down the affected
assets to their estimated fair values and to establish accruals for employee terminations, pension and
postretirement curtailment losses and other related costs. The estimated fair value of the Eagle Point assets was
largely based upon an independent appraiser’s use of observable current replacement costs of similar new
equipment adjusted to reflect the age, condition, maintenance history and estimated remaining useful life. Since
the fair value reflected both observable and unobservable inputs, it was determined to be a level 3 fair value
measurement within the fair value hierarchy under current accounting guidance. The Company recorded
additional provisions of $57 and $5 million ($34 and $3 million after tax) in 2010 and 2011, respectively,
primarily for additional asset write-downs and contract losses in connection with excess barge capacity resulting
from the shutdown of the Eagle Point refining operations. Sunoco also recognized LIFO inventory gains of $92
and $168 million ($55 and $100 million after tax) during 2009 and 2010, respectively, from the liquidation of
refined product inventories in connection with the shutdown of the Eagle Point refinery (Note 6).
In 2009, management implemented a business improvement initiative to reduce costs and improve business
processes. The initiative included all business and operations support functions, as well as operations at certain
facilities. In connection with this initiative, the Company recorded a $169 million provision ($100 million after
tax) in 2009 for employee terminations, pension and postretirement settlement and curtailment losses and other
related costs. Sunoco recorded additional provisions of $68 and $13 million ($40 and $8 million after tax) in
2010 and 2011, respectively, primarily for pension settlement losses and employee terminations and related
costs.
In 2010, the Company recognized a $16 million gain ($9 million after tax) on an insurance settlement
related to MTBE coverage (Note 13).
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