Sunoco 2004 Annual Report Download - page 68

higher operating costs, operate these refineries at reduced
levels and/or pay significant penalties. There are no li-
abilities accrued at December 31, 2004 in connection
with this initiative. With respect to the Company’s Eagle
Point refinery acquired effective January 13, 2004 (Note
2), El Paso Corporation, its prior owner, has entered into
a consent decree with the EPA and the New Jersey
Department of Environmental Protection as part of EPA’s
enforcement initiative. Sunoco does not anticipate sub-
stantial capital expenditures on its part as a result of El
Paso’s consent decree.
Energy policy legislation continues to be debated in the
U.S. Congress. The Bush Administration and the U.S.
Senate and U.S. House have been unable to reach
agreement on final legislation. There are numerous issues
being debated, including an MTBE phase-out, ethanol and
MTBE “safe harbor” liability provisions, ethanol and re-
newable fuels mandates and other issues that could im-
pact gasoline production. Sunoco uses MTBE and ethanol
as oxygenates in different geographic areas of its refining
and marketing system. While federal action is uncertain,
California, New York and Connecticut began enforcing
state-imposed MTBE bans on January 1, 2004. Sunoco
does not market in California but is complying with the
bans in New York and Connecticut. These bans have
resulted in unique gasoline blends, which could have a
significant impact on market conditions depending on
the details of future regulations, the impact on gasoline
supplies, the cost and availability of ethanol and alternate
oxygenates if the minimum oxygenate requirements re-
main in effect, and the ability of Sunoco and the industry
in general to recover their costs in the marketplace. A
number of additional states, including some in the north-
eastern United States, are considering or have approved
bans of MTBE, with legislative and administrative actions
underway that could lead to additional MTBE bans by
2007.
MTBE Litigation
Sunoco, along with other refiners, manufacturers and sell-
ers of gasoline, owners and operators of retail gasoline
sites, and manufacturers of MTBE, are defendants in over
60 cases in 17 states involving the manufacture and use of
MTBE in gasoline and MTBE contamination in ground-
water. Plaintiffs, which include private well owners, water
providers and certain governmental authorities, allege
that refiners and suppliers of gasoline containing MTBE
are responsible for manufacturing and distributing a de-
fective product. Plaintiffs also generally are alleging
groundwater contamination, nuisance, trespass, negli-
gence, failure to warn, violation of environmental laws
and deceptive business practices. Plaintiffs are seeking
compensatory damages, and in some cases injunctive re-
lief and punitive damages. Most of the public water pro-
vider cases have been removed to federal court by motion
of the defendants and consolidated for pretrial purposes
in the U.S. District Court for the Southern District of
New York. Motions to remand these cases to their re-
spective state courts have been denied. Up to this point,
for the group of MTBE cases currently pending, there has
been little information developed about the plaintiffs’
legal theories or the facts that would be relevant to an
analysis of potential exposure. Based on the current law
and facts available at this time, Sunoco believes that
these cases will not have a material adverse effect on its
consolidated financial position.
Conclusion
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, 2004.
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, in four separate transactions, a total of $724
million in exchange for interests in its Indiana Harbor
and Jewell cokemaking operations. Sunoco did not
recognize any gain at the dates of these transactions be-
cause the third-party investors were entitled to a prefer-
ential return on their investments. The preferential
returns are currently equal to 98 percent of the cash flows
and tax benefits from the respective cokemaking oper-
ations during the preferential return periods, which con-
tinue until the investors currently entitled to preferential
returns recover their investments and achieve a cumu-
lative annual after-tax return that averages approximately
10 percent. Income is recognized as coke production and
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