Sunoco 2007 Annual Report Download - page 63

of nonconventional fuel tax credits. 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 the possibility is
remote that it will be required to do so, at December 31,
2007, the maximum potential payment under these tax
indemnifications would have been approximately $265
million.
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) 2007 2006 2005
Balance at beginning of year $102 $234 $287
Nonconventional fuel credit and
other tax benefits* (3) (45) (57)
Preferential return* 20 48 42
Cash distributions to third-party
investors (36) (43) (38)
Acquisition of third-party investor’s
interest in Jewell cokemaking
operations (Note 2) —(92) —
Balance at end of year $83 $102 $234
*The nonconventional fuel credit and other tax benefits and the preferential return are
included in other income (loss), net, in the consolidated statements of income (Notes
1 and 3). The preferential return for 2006 includes an $11 million increase ($7 million
after tax) attributable to a correction of an error in the computation of the preferential
return relating to prior years. Prior-period amounts have not been restated as this
adjustment was not deemed to be material.
Logistics Operations
During the 2005-2006 period, Sunoco Logistics Partners
L.P. issued a total of 7.1 million limited partnership units
in a series of public offerings, generating $270 million of
net proceeds. Coincident with certain of these offerings,
the Partnership redeemed 2.8 million limited partnership
units owned by Sunoco for $99 million. Upon completion
of these transactions, Sunoco’s interest in the Partner-
ship, including its 2 percent general partnership interest,
decreased to 43 percent. The accounts of the Partnership
continue to be included in Sunoco’s consolidated finan-
cial statements.
As of December 31, 2007 and 2006, Sunoco owned
12.06 million limited partnership units. At December 31,
2006, this ownership interest consisted of 6.37 million
common units and 5.69 million subordinated units. Dis-
tributions on Sunoco’s subordinated units were payable
only after the minimum quarterly distributions of $.45 per
unit for the common units held by the public and Suno-
co, including any arrearages, had been made. The sub-
ordinated units were convertible to common units if
certain financial tests related to earning and paying the
minimum quarterly distribution for the preceding three
consecutive one-year periods had been met. In February
2007, 2006 and 2005, when the quarterly cash dis-
tributions pertaining to the fourth quarters of 2006, 2005
and 2004 were paid, all three three-year requirements
were satisfied. As a result, all of Sunoco’s subordinated
units have been converted to common units, 5.69 million
in February 2007 and 2.85 million each in February 2006
and February 2005.
The Partnership’s prior issuance of common units to the
public resulted in an increase in the value of Sunoco’s pro-
portionate share of the Partnership’s equity as the issuance
price per unit exceeded Sunoco’s carrying amount per unit
at the time of issuance. Prior to February 2007, the re-
sultant gain to Sunoco on these transactions had been de-
ferred as a component of minority interest in the
Company’s consolidated balance sheets as the common
units issued did not represent residual interests in the
Partnership due to Sunoco’s ownership of the subordinated
units. The deferred gain, which amounted to $151 million
($90 million after tax), was recognized in income in the
first quarter of 2007 when Sunoco’s remaining sub-
ordinated units converted to common units at which time
the common units became the residual interests.
Sunoco is a party to various agreements with the Partner-
ship which require Sunoco to pay for minimum storage
and throughput usage of certain Partnership assets.
Sunoco also has agreements with the Partnership which
establish fees for administrative services provided by
Sunoco and provide indemnifications by Sunoco for cer-
tain environmental, toxic tort and other liabilities related
to operation of the Partnership’s assets prior to its initial
public offering in February 2002.
The following table sets forth the minority interest balance
and the changes to this balance attributable to the third-
party investors’ interests in Sunoco Logistics Partners L.P.:
(Millions of Dollars) 2007 2006 2005
Balance at beginning of year $ 503 $397 $232
Gain recognized in income related to
prior issuance of the Partnership’s
limited partnership units (151) ——
Net proceeds from public equity
offerings —110 160
Minority interest share of income* 56 42 28
Increase attributable to Partnership
management incentive plan 325
Cash distributions to third-party
investors** (55) (48) (28)
Balance at end of year $ 356 $503 $397
* Included in selling, general and administrative expenses in the consolidated
statements of income.
** During the 2005-2007 period, the Partnership increased its quarterly cash
distribution per unit from $.625 to $.87.
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