Sunoco 2009 Annual Report Download - page 79

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acceptable margins for various refined products and to lock in the price of a portion of the Company’s electricity
and natural gas purchases or sales and transportation costs. Sunoco Logistics Partners L.P., the 33-percent owned
consolidated master limited partnership through which Sunoco conducts a substantial portion of its Logistics
operations (the “Partnership”), uses interest rate swaps to manage interest costs and minimize the effects of
interest rate fluctuations on cash flows associated with its credit facilities.
While all of these derivative instruments represent economic hedges, certain of these derivatives are not
designated as hedges for accounting purposes. Such derivatives include certain contracts that were entered into
and closed during the same accounting period and contracts for which there is not sufficient correlation to the
related items being economically hedged.
All of these derivatives are recognized in the consolidated balance sheets at their fair value. Changes in fair
value of derivative instruments that have not been designated as hedges for accounting purposes are recognized
in net income as they occur. If the derivative instruments are designated as hedges for accounting purposes,
depending on their nature, the effective portions of changes in their fair values are either offset in net income
against the changes in the fair values of the items being hedged or reflected initially as a separate component of
shareholders’ equity and subsequently recognized in net income when the hedged items are recognized in net
income. The ineffective portions of changes in the fair values of derivative instruments designated as hedges, if
any, are immediately recognized in net income. The amount of hedge ineffectiveness on derivative contracts
during the 2007-2009 period was not material. Sunoco does not hold or issue derivative instruments for trading
purposes.
Income Tax Uncertainties
Effective January 1, 2007, the Company adopted new accounting guidance that clarifies the accounting for
uncertainty in income taxes recognized in an entity’s financial statements by prescribing the minimum
recognition threshold and measurement attribute a tax position taken or expected to be taken on a tax return is
required to meet before being recognized in the financial statements. As a result of the implementation of this
new guidance, the Company recorded a $12 million reduction in retained earnings at January 1, 2007 to
recognize the cumulative effect of the adoption of this standard. The Company recognizes interest related to
unrecognized tax benefits in interest cost and debt expense and penalties in income tax expense in the
consolidated statements of operations. Unrecognized tax benefits and accruals for interest and penalties are
included in other deferred credits and liabilities in the consolidated balance sheets.
Retirement Benefit Liabilities
The funded status of defined benefit and postretirement benefit plans is fully recognized on the balance
sheet. It is determined by the difference between the fair value of plan assets and the benefit obligation, with the
benefit obligation represented by the projected benefit obligation for defined benefit plans and the accumulated
postretirement benefit obligation for postretirement benefit plans. Actuarial gains (losses) and prior service
benefits (costs) which have not yet been recognized in net income are recognized as a credit (charge) to the
accumulated other comprehensive loss component of shareholders’ equity. The credit (charge) to shareholders’
equity, which is reflected net of related tax effects, is subsequently recognized in net income when amortized as a
component of defined benefit plans and postretirement benefit plans expense. In addition, the credit (charge) may
also be recognized in net income as a result of a plan curtailment or settlement.
Noncontrolling Interests in Cokemaking Operations
Cash investments by third parties in cokemaking operations were recorded as an increase in noncontrolling
interests in the consolidated balance sheets. There was no recognition of any gain at the dates cash investments
were made as the third-party investors were entitled to a preferential return on their investments.
Nonconventional fuel credit and other net tax benefits generated by the Company’s cokemaking operations
that were allocated to third-party investors prior to the completion of the preferential return period during the
fourth quarter of 2007 were recorded as a reduction in noncontrolling interests and were included as income in
71