Sunoco 2003 Annual Report Download - page 62

Many other legal and administrative proceedings are
pending or possible against Sunoco from its current and
past operations, including proceedings related to
commercial and tax disputes, product liability, antitrust,
employment claims, leaks from pipelines and under-
ground storage tanks, natural resource damage claims,
premises-liability claims, allegations of exposures of third
parties to toxic substances (such as benzene or asbestos)
and general environmental claims. The ultimate outcome
of these proceedings and the matters discussed above
cannot be ascertained at this time; however, it is reason-
ably possible that some of them could be resolved un-
favorably to Sunoco. Management believes that these
matters could have a significant impact on results of
operations for any one year. However, management does
not believe that any additional liabilities which may arise
pertaining to such matters would be material in relation
to the consolidated financial position of Sunoco at
December 31, 2003.
13. Minority Interests
Cokemaking Operations
In July 2002, Sunoco transferred an additional interest in
its Indiana Harbor cokemaking operation to a third-party
investor for $215 million in cash. Since 1995, Sunoco has
received $724 million in exchange for interests in its In-
diana Harbor and Jewell cokemaking operations in four
separate transactions. Sunoco did not recognize any gain
at the dates of these transactions as the third-party
investors are entitled to a preferential return on their
investments, currently equal to 98 percent of the cash
flows and tax benefits from the respective cokemaking
operations, during preferential return periods which con-
tinue until they recover their investments and achieve a
cumulative return that averages approximately 10 percent
after tax thereon. Income is recognized as coke pro-
duction and sales generate cash flows and tax benefits
which are allocated to Sunoco and the third-party
investors, while expense is recognized to reflect the
investors’ preferential returns.
The preferential return period for the Jewell operation is
expected to end in 2011. The preferential return period
for the first investor in the Indiana Harbor operation
ended in July 2002, at which time the first investor’s
interest in the cash flows and tax benefits from Indiana
Harbor decreased from 95 percent to 5 percent. As a re-
sult of the additional investment in July 2002, third-party
investors’ interests in Indiana Harbor increased from 5
percent to 98 percent. The newinvestor’s preferential
return period for the Indiana Harbor operation is ex-
pected to end in 2007. The estimated lengths of these
preferential return periods are based upon the Company’s
current expectations of future operations, including sales
volumes and prices, rawmaterial and operating costs and
capital expenditure levels. Better-than-expected results
will shorten the investors’ preferential return periods,
while lower-than-expected results will lengthen the
periods.
After these preferential return periods, the investor in the
Jewell operation will be entitled to a minority interest in
the cash flows and tax benefits from Jewell amounting to
18 percent, while the investors in the Indiana Harbor
operation will be entitled to a minority interest in the
cash flows and tax benefits from Indiana Harbor initially
amounting to 34 percent and declining to 10 percent by
2038.
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) 2003 2002 2001
Balance at beginning of year $379 $223 $316
Nonconventional fuel credit and
other tax benefits* (58) (77) (69)
Preferential return* 55 42 32
Additional cash investments by
third-party investors —215 —
Cash distributions to third-party
investors (48) (24) (56)
Balance at end of year $328 $379 $223
* The nonconventional fuel credit and other tax benefits and the preferential return,
which comprise the noncash reduction in the minority interest in cokemaking
operations, are included in other income in the consolidated statements of operations
(Note 2).
In each of the four transactions in which the Company
transferred interests in its cokemaking operations to
third-party investors, Sunoco has provided tax in-
demnifications to the third parties for certain tax benefits
allocated to them during the preferential return periods.
In certain of these cases, the Company also has the op-
tion to purchase the third-party investors’ interests.
These indemnifications would require the Company to
make payments in the event the Internal Revenue Serv-
ice disallows the tax deductions and benefits allocated to
the third parties or if there is a change in the tax laws
that reduces the amount of nonconventional fuel tax
credits which would be available to them. These tax in-
demnifications are in effect until the applicable tax re-
turns are no longer subject to Internal Revenue Service
review. Although the Company believes it is remote that
it will be required to make any payments under these in-
demnifications, at December 31, 2003, the maximum
potential payment under the tax indemnifications and
the options to purchase the third-party investors’ inter-
ests, if exercised, would have been approximately $770
million. If this were to occur, the minority interest bal-
ance would be reduced by approximately $290 million.
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