Sunoco 2007 Annual Report Download - page 53

measurement attribute a tax position taken or expected
to be taken on a tax return is required to meet before be-
ing recognized in the financial statements. As a result of
the implementation of FASB Interpretation No. 48, 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 following table sets forth the changes in unrecog-
nized tax benefits during 2007:
(Millions of Dollars)
Balance at beginning of year $38
Additions attributable to tax positions taken in the current
year 9
Additions attributable to tax positions taken in prior years 28
Reductions attributable to tax positions taken in prior years (5)
Settlements (1)
Balance at end of year $69*
*Includes $27 million ($17 million after federal income tax benefits) related to tax
positions which, if recognized, would impact the Company’s effective tax rate.
During 2007, the Company recognized $4 million in inter-
est on unrecognized tax benefits. Accruals for interest and
penalties totaled $17 million at December 31, 2007.
The Company’s federal income tax returns have been
examined by the Internal Revenue Service for all years
through 2004. There are no outstanding controversies
other than whether the Company is entitled to interest
on previously overpaid taxes. State and other income tax
returns are generally subject to examination for a period
of three to five years after the filing of the respective re-
turns. The state impact of any amended federal returns
remains subject to examination by various states for a
period of up to one year after formal notification of such
amendments to the states. The Company and its sub-
sidiaries have various state and other income tax returns
in the process of examination or administrative appeal.
Among the issues applicable to those tax years which are
under examination is the deductibility of certain inter-
company expenses that were claimed in the returns as
filed and whether certain Sunoco entities have economic
nexus in various jurisdictions. It is reasonably possible
that a number of the state examinations will be com-
pleted within 12 months of year end. If the examinations
were to be completed and settled, the Company antici-
pates that the total amount of unrecognized tax benefits
could decrease by $10-$15 million as a result of the
examination proceedings.
5. Earnings Per Share Data
The following table sets forth the reconciliation of the
weighted-average number of common shares used to
compute basic earnings per share (“EPS”) to those used to
compute diluted EPS:
(In Millions) 2007 2006 2005
Weighted-average number of
common shares outstanding—
basic 119.7 128.3 136.6
Add effect of dilutive stock incentive
awards .3 .7 .9
Weighted-average number of
shares—diluted 120.0 129.0 137.5
6. Inventories
December 31
(Millions of Dollars) 2007 2006
Crude oil $ 341 $ 325
Petroleum and chemical products 647 735
Materials, supplies and other 162 159
$1,150 $1,219
The current replacement cost of all inventories valued at
LIFO exceeded their carrying value by $3,868 and $2,273
million at December 31, 2007 and 2006, respectively.
During 2007 and 2006, Sunoco reduced certain inventory
quantities which were valued at lower LIFO costs prevail-
ing in prior years. The effect of these reductions was to
increase 2007 and 2006 results of operations by $21 and
$20 million after tax, respectively.
7. Investments and Long-Term Receivables
December 31
(Millions of Dollars) 2007 2006
Investments in affiliated companies:
Pipeline joint ventures (Notes 2 and 3) $88 $85
Brazilian cokemaking operations 41 2
Other 25 22
154 109
Accounts and notes receivable 21 20
$175 $129
Dividends received from affiliated companies amounted
to $25, $41 and $14 million in 2007, 2006 and 2005, re-
spectively. Retained earnings at December 31, 2007 in-
clude $35 million of undistributed earnings of affiliated
companies.
Sunoco is the operator of a cokemaking plant in Vitória,
Brazil which commenced operations in the first quarter of
2007. During the fourth quarter of 2007, Sunoco in-
creased its investment in the project company that owns
the Vitória facility, as planned, by becoming its sole sub-
scriber of preferred shares for a total equity interest of $41
million. The project company is a variable interest entity
for which Sunoco is not the primary beneficiary.
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