Sunoco 2007 Annual Report Download - page 62

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 re-
moval of these cases to federal court and consequently
ordered that the cases be remanded 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 remaining 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 principle pertaining to cer-
tain MTBE cases. This settlement will cover 53 of the
cases referred to above, including the Suffolk County Wa-
ter Authority case. The settlement for these cases will re-
quire a cash payment by the group of settling refiner
defendants of approximately $424 million (which in-
cludes 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 gen-
erally declining trend in MTBE contamination, the Com-
pany does not anticipate substantial costs associated with
the future treatment of existing wells. Under the settle-
ment, Sunoco was assigned an allocation percentage and
will be required to make a cash payment of approximately
$28 million. In addition to the cash payment, Sunoco
will participate on the same basis in any costs of future
treatment of existing wells. Sunoco is attempting to
recover the amount it is required to pay in settlement
from its insurance carriers. In connection with the
settlement, the Company established a $28 million ac-
crual ($17 million after tax) in 2007 (Note 2).
For the group of MTBE cases that are not covered by the
settlement, there has been insufficient information
developed about the plaintiffs’ legal theories or the facts
that would be relevant to an analysis of the ultimate li-
ability to Sunoco. Based on the current law and facts
available at this time, no accrual has been established for
any potential damages at December 31, 2007 and 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 may be brought against Sunoco arising out of
its current and past operations, including matters related
to commercial and tax disputes, product liability, anti-
trust, employment claims, leaks from pipelines and
underground 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. Although
the ultimate outcome of these proceedings and other
matters identified above cannot be ascertained at this
time, it is reasonably possible that some of these matters
could be resolved unfavorably to Sunoco. Management
believes that these matters could have a significant im-
pact on results of operations for any future quarter or year.
However, management does not believe that any addi-
tional liabilities which may arise pertaining to such mat-
ters would be material in relation to the consolidated
financial position of Sunoco at December 31, 2007.
15. Minority Interests
Cokemaking Operations
Sunoco received a total of $309 million in exchange for
interests in its Jewell cokemaking operations in two sepa-
rate transactions in 1995 and 2000. Sunoco also received
a total of $415 million in exchange for interests in its In-
diana Harbor cokemaking operations in two separate
transactions in 1998 and 2002. Sunoco did not recognize
any gain as of the dates of these transactions because the
third-party investors were entitled to a preferential return
on their respective investments. In December 2006,
Sunoco acquired the limited partnership interest of the
third-party investor in the Jewell cokemaking operation
for $155 million and recognized a $3 million after-tax loss
in other income (loss), net, in the 2006 consolidated
statement of income in connection with this transaction.
As a result, such third-party investor is no longer entitled
to any preferential or residual return in this operation.
The returns of the investors in the Indiana Harbor coke-
making operations were equal to 98 percent of the cash
flows and tax benefits from such cokemaking operations
during the preferential return period, which continued
until the fourth quarter of 2007 at which time the
investor entitled to the preferential return recovered its
investment and achieved a cumulative annual after-tax
return of approximately 10 percent. After payment of the
preferential return, the investors in the Indiana Harbor
operations are now entitled to a minority interest in the
related net income amounting to 34 percent which de-
clines to 10 percent by 2038.
The Company indemnifies the third-party investors
(including the former investor in the Jewell cokemaking
operations) for certain tax benefits that were available to
them during the preferential return period in the event
the Internal Revenue Service disallows the tax de-
ductions and benefits allocated to the third parties or if
there is a change in the tax laws that reduces the amount
60