Sunoco 2007 Annual Report Download - page 15

2007 2006 2005
Income (millions of dollars) $26 $43 $94
Margin* (cents per pound):
All products** 9.8¢ 9.9¢ 12.1¢
Phenol and related products 8.5¢ 8.0¢ 10.9¢
Polypropylene** 11.6¢ 12.4¢ 13.9¢
Sales (millions of pounds):
Phenol and related products 2,508 2,535 2,579
Polypropylene 2,297 2,243 2,218
Other 80 88 91
4,885 4,866 4,888
* Wholesale sales revenue less the cost of feedstocks, product purchases and related terminalling and transportation divided by sales
volumes.
** The polypropylene and all products margins include the impact of a long-term supply contract with Equistar Chemicals, L.P. which is
priced on a cost-based formula that includes a fixed discount.
Chemicals segment income decreased $17 million in 2007 primarily due to higher ex-
penses ($9 million), lower margins ($3 million) and the absence of a deferred tax benefit
recognized in 2006 as a result of a state tax law change ($4 million).
Chemicals segment income decreased $51 million in 2006 primarily due to lower margins
for both phenol and polypropylene ($67 million). The decrease in margins reflects softness
in product demand and higher feedstock costs. Partially offsetting these negative factors
were lower expenses ($9 million) and the deferred tax benefit ($4 million) resulting from
the state tax law change.
During 2007, Sunoco decided to permanently shut down a previously idled phenol pro-
duction line at its Haverhill, OH plant that had become uneconomic to restart. In con-
nection therewith, the Company recorded an $8 million after-tax provision to write off the
affected production line. During 2007, Sunoco also recorded a $7 million after-tax loss
associated with the sale of its Neville Island, PA terminal facility, which included an ac-
crual for enhanced pension benefits associated with employee terminations and for other
required exit costs. These items are reported as part of the Asset Write-Downs and Other
Matters shown separately in Corporate and Other in the Earnings Profile of Sunoco Busi-
nesses (see Note 2 to the consolidated financial statements).
During the third quarter of 2005, an arbitrator ruled that Sunoco was liable in an arbi-
tration proceeding for breaching a supply agreement concerning the prices charged to
Honeywell International Inc. (“Honeywell”) for phenol produced at Sunoco’s Philadelphia
chemical plant from June 2003 through April 2005. Damages of approximately $95 million
($56 million after tax), including prejudgment interest, were assessed. Such damages,
which were paid to Honeywell in April 2006, were recorded as a charge against 2005 earn-
ings and are shown separately as Phenol Supply Contract Dispute under Corporate and
Other in the Earnings Profile of Sunoco Businesses. The pricing through July 2009 will be
based essentially on the pricing formula established in the arbitration proceeding. (See
Note 2 to the consolidated financial statements.)
Epsilon, the Company’s consolidated joint venture, was unable to repay its $120 million
term loan that was due in September 2006 and the $31 million of borrowings 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. As a result, Sunoco, Inc. became sub-
rogated 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 were
parties in litigation to resolve this matter. In December 2007, in connection with mediation
concerning this litigation, Sunoco agreed to purchase the joint-venture partner’s interest in
Epsilon for $18 million. All litigation concerning this matter is now settled.
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