Sunoco 2007 Annual Report Download - page 31

plementation. These include federal and state actions to develop programs for the reduc-
tion of GHG emissions. While it is currently not possible to predict the impact, if any, that
these issues will have on the Company or the industry in general, they could result in in-
creases in costs to operate and maintain the Company’s facilities, as well as capital outlays
for new emission control equipment at these facilities. In addition, regulations limiting
GHG emissions or carbon content of products, which target specific industries such as
petroleum refining or chemical or coke manufacturing could adversely affect the
Company’s ability to conduct its business and also may reduce demand for its products.
Under a law that was enacted in August 2005, a new renewable fuels mandate for ethanol
use in gasoline was established (immediately in California and on May 5, 2006 for the rest
of the nation). Although the act did not ban MTBE, during the second quarter of 2006,
Sunoco discontinued the use of MTBE and increased its use of ethanol in gasoline. This
change by Sunoco and other refiners in the industry has price and supply implications in
the marketplace. In December 2007, another law was enacted which increases automobile
mileage standards nearly 40 percent to 35 miles per gallon by 2020 and increases the
renewable fuels mandate to 36 billion gallons per year by 2022. Any additional federal and
state legislation could also have a significant impact on market conditions and the profit-
ability of Sunoco and the industry in general.
MTBE Litigation
Sunoco, along with other refiners, manufacturers and sellers of gasoline are defendants in
approximately 77 lawsuits in 18 states and the Commonwealth of Puerto Rico which allege
MTBE contamination in groundwater. Plaintiffs, who include water purveyors and munici-
palities responsible for supplying drinking water and private well owners, allege that refin-
ers and suppliers of gasoline containing MTBE are responsible for manufacturing and
distributing a defective product that contaminates groundwater. Plaintiffs are asserting
primarily product liability claims and additional claims including nuisance, trespass, negli-
gence, violation of environmental laws and deceptive business practices. In addition, sev-
eral actions commenced by state authorities allege natural resource damages. Plaintiffs are
seeking to rely on a “joint liability of industry” theory at trial, although there has been no
ruling as to whether the plaintiffs will be permitted to pursue this theory. Plaintiffs are
seeking compensatory damages, and in some cases injunctive relief, punitive damages and
attorneys’ fees.
The majority of MTBE cases have been removed to federal court and consolidated for pre-
trial purposes in the U.S. District Court for the Southern District of New York (MDL 1358)
(“MDL Litigation”). Discovery is proceeding in four focus cases. Sunoco is a defendant in
three of those cases. In one of the four cases, the Suffolk County Water Authority case, the
court has set a trial date in September 2008. In addition, several private well owner cases
are moving forward. Sunoco is a defendant in two of those cases. The Second Circuit
Court of Appeals (“Second Circuit”) recently rendered a decision in two MTBE cases that
are part of the MDL Litigation in which it held that there was no federal jurisdiction for the
removal of these cases to federal court and consequently ordered that the cases be re-
manded back to the state courts from which they originated. The parties and the judge in
the MDL Litigation are evaluating the impact of the Second Circuit’s decision on the re-
maining cases that are part of the MDL Litigation and a number of additional cases have
been remanded back to the state court.
In December 2007, Sunoco, along with other refiners, entered into a settlement in princi-
ple pertaining to certain MTBE cases. This settlement will cover 53 of the cases referred to
above, including the Suffolk County Water Authority case. The settlement for these cases
will require a cash payment by the group of settling refiner defendants of approximately
$424 million (which includes attorneys’ fees) plus an agreement in the future to fund costs
of treating existing wells as to which MTBE has not currently been detected which later is
detected, over four consecutive quarters, above certain concentration levels. As MTBE is
no longer used, and based on a generally declining trend in MTBE contamination, the
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