Sunoco 2003 Annual Report Download - page 48

value can be made. The associated asset retirement costs
are capitalized as part of the carrying amount of the fixed
asset and depreciated over its estimated useful life. Prior
to January 1, 2003, a liability for an asset retirement obli-
gation was recognized using a cost-accumulation
measurement approach.
In conjunction with the adoption of SFAS No. 143 in
January 2003, Sunoco recorded an increase in asset
retirement obligations of $5 million and a related increase
in net properties, plants and equipment of $3 million re-
lated to certain of its branded marketing retail sites, coal
and cokemaking facilities and chemical assets. The $2
million cumulative effect of this accounting change ($1
million after tax) has been included in cost of products
sold and operating expenses in the 2003 consolidated
statement of operations. Sunoco did not reflect the $1
million after-tax charge as a cumulative effect of account-
ing change as it was not material. Other than the cumu-
lative effect, this change did not have a significant impact
on Sunoco’s results of operations during 2003. At De-
cember 31, 2003, Sunoco’s liability for asset retirement
obligations amounted to $8 million. Sunoco has legal as-
set retirement obligations for several other assets, includ-
ing its refineries, pipelines and terminals, for which it is
not possible to estimate when the obligations will be set-
tled. Consequently, the retirement obligations for these
assets cannot be measured at this time.
Exit or Disposal Activities
In July 2002, Statement of Financial Accounting Stan-
dards No. 146, “Accounting for Costs Associated with
Exit or Disposal Activities” (“SFAS No. 146”), was issued.
SFAS No. 146 supersedes Emerging Issues Task Force
(“EITF”) Issue No. 94-3, “Liability Recognition for Cer-
tain Employee Termination Benefits and Other Costs to
Exit an Activity (including Certain Costs Incurred in a
Restructuring).” SFAS No. 146 requires that a liability for
a cost associated with an exit or disposal activity be
recognized when the liability is incurred. SFAS No. 146
also establishes fair value as the objective for initial
measurement of the liability. The provisions of SFAS No.
146 are effective for exit or disposal activities that are ini-
tiated after December 31, 2002. Under prior accounting
principles, certain costs associated with restructuring
plans were recognized as of the date of commitment to
the plan. Adoption of SFAS No. 146 had no impact on
Sunoco’s consolidated financial statements during 2003.
Guarantees
In November 2002, FASB Interpretation No. 45,
“Guarantor’s Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of In-
debtedness of Others” (“FASB Interpretation No. 45”),
was issued. The accounting recognition provisions of
FASB Interpretation No. 45 became effective January 1,
2003 on a prospective basis. FASB Interpretation No. 45
requires that a guarantor recognize, at the inception or
subsequent modification of a guarantee, a liability for the
fair value of the obligation undertaken in issuing the
guarantee. Under prior accounting principles, a guarantee
would not result in recognition of a liability until a loss
was probable and reasonably estimable. Adoption of the
accounting recognition provisions of FASB Interpretation
No. 45 did not materially impact Sunoco’s consolidated
financial statements during 2003.
New Accounting Principles
In January 2003, FASB Interpretation No. 46,
“Consolidation of Variable Interest Entities” (“FASB
Interpretation No. 46”), was issued. Among other things,
FASB Interpretation No. 46 defines a variable interest
entity (“VIE”) as an entity that either has investor voting
rights that are not proportional to their economic inter-
ests or has equity investors that do not provide sufficient
financial resources for the entity to support its activities.
FASB Interpretation No. 46 requires a VIE to be con-
solidated by a company if that company is the primary
beneficiary. The primary beneficiary is the company that
is subject to a majority of the risk of loss from the VIE’s
activities or, if no company is subject to a majority of
such risk, the company that is entitled to receive a ma-
jority of the VIE’s residual returns.
Sunoco currently intends to adopt FASB Interpretation
No. 46 effective January 1, 2004. Upon adoption, the
Company will be required to consolidate its Epsilon Prod-
ucts Company, LLC (“Epsilon”) polypropylene joint ven-
ture. The Epsilon joint venture, which had revenues
totaling $226 million for the year ended December 31,
2003 and assets totaling $194 million at December 31,
2003, consists of polymer-grade propylene operations at
Sunoco’s Marcus Hook, PA refinery and an adjacent
polypropylene plant. Sunoco’s maximum exposure to loss
as a result of its involvement with Epsilon amounted to
$224 million at December 31, 2003, consisting of its $49
million investment in Epsilon, $15 million of trade ac-
counts receivable and the guarantee of the joint venture’s
$120 million term loan and $40 million revolving credit
facility.
Reclassifications
Certain amounts in the prior years’ financial statements
have been reclassified to conform to the current year
presentation.
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