Sunoco 2004 Annual Report Download - page 52

Notes to Consolidated Financial Statements Sunoco, Inc. and Subsidiaries
1. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements of Sunoco, Inc.
and subsidiaries (collectively, “Sunoco” or the
“Company”) contain the accounts of all entities that are
controlled (generally more than 50 percent owned) and
variable interest entities for which the Company is the
primary beneficiary (see below). Corporate joint ventures
and other investees over which the Company has the
ability to exercise significant influence but that are not
consolidated are accounted for by the equity method.
FASB Interpretation No. 46, “Consolidation of Variable
Interest Entities,” as revised (“FASB Interpretation No.
46”), defines a variable interest entity (“VIE”) as an entity
that either has investor voting rights that are not propor-
tional to their economic interests 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 consolidated by a company if that
company is the primary beneficiary. The primary benefi-
ciary 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 majority of the VIE’s residual returns.
In connection with the adoption of FASB Interpretation
No. 46 in the first quarter of 2004, Sunoco consolidated
Epsilon Products Company, LLC (“Epsilon”) and restated
its 2003 financial statements to conform to the 2004 pre-
sentation. Epsilon is a joint venture that consists of
polymer-grade propylene operations at Sunoco’s Marcus
Hook, PA refinery and an adjacent polypropylene plant.
The following is a summary of the impact of consolidat-
ing Epsilon on Sunoco’s consolidated financial position at
January 1, 2003:
(Millions of Dollars)
Increase (decrease) in:
Current assets $ 11
Investments and long-term receivables (50)
Properties, plants and equipment, net 132
Deferred charges and other assets 49
Current liabilities (21)
Long-term debt 155
Minority interests 8
Epsilon’s long-term debt at January 1, 2003 was com-
prised of $120 million of floating-rate notes due 2006 and
$35 million outstanding under Epsilon’s $40 million re-
volving credit facility that matures in 2006. The floating-
rate notes are collateralized by the joint venture’s
polypropylene facility, which has a carrying value of $84
million at December 31, 2004. Sunoco, Inc. guarantees
100 percent of Epsilon’s long-term debt. The con-
solidation of Epsilon did not impact Sunoco’s net income
or have a significant effect on any other amounts in its
consolidated statements of operations for 2004 and 2003.
Use of Estimates
The preparation of financial statements in conformity
with U.S. generally accepted accounting principles re-
quires management to make estimates and assumptions
that affect the amounts reported in the financial state-
ments and accompanying notes. Actual amounts could
differ from these estimates.
Revenue Recognition
The Company sells various refined products (including
gasoline, middle distillates, residual fuel, petrochemicals
and lubricants), coke and coal and also sells crude oil in
connection with the crude oil gathering and marketing
activities of its logistics operations. In addition, the
Company sells a broad mix of merchandise such as gro-
ceries, fast foods and beverages at its convenience stores
and provides a variety of car care services at its retail
gasoline outlets. Revenues related to the sale of products
are recognized when title passes, while service revenues
are recognized when services are provided. Title passage
generally occurs when products are shipped or delivered
in accordance with the terms of the respective sales
agreements. In addition, revenues are not recognized un-
til sales prices are fixed or determinable and collectability
is reasonably assured.
Crude oil and refined product exchange transactions,
which are entered into primarily to acquire crude oil and
refined products of a desired quality or at a desired loca-
tion, are netted in cost of products sold and operating ex-
penses in the consolidated statements of operations based
upon the concepts set forth in APB Opinion No. 29,
“Accounting for Nonmonetary Transactions.” The Emerg-
ing Issues Task Force (the “EITF”) is currently considering
the appropriate reporting for exchange transactions in Is-
sue 04-13, “Accounting for Purchases and Sales of In-
ventory with the Same Counterparty.” In the event the
EITF requires reporting on a gross basis, Sunoco’s sales and
other operating revenue and cost of products sold and
operating expenses would reflect corresponding increases.
Consumer excise taxes on sales of refined products and
merchandise are included in both revenues and costs and
expenses, with no effect on net income.
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