Sunoco 2003 Annual Report Download - page 35

Sunoco, along with other refiners, manufacturers and sellers of gasoline, and owners and
operators of retail gasoline sites, are defendants in various cases in 17 states alleging MTBE
contamination in groundwater. Plaintiffs include private litigants, governments and quasi-
governmental entities, including various water authorities and towns, and the State of
NewHampshire. Plaintiffs generally are alleging product liability for defective product,
groundwater contamination, nuisance, trespass, negligence, failure to warn, violation of
environmental laws and deceptive business practices. Plaintiffs are seeking compensatory
damages, and in some cases injunctive relief and punitive damages. Up to this point, for
the group of MTBE cases currently pending, there has been little information developed
about the plaintiffs’ legal theories or the facts that would be relevant to an analysis of po-
tential exposure. Based on the current lawand facts available at this time, Sunoco believes
that these cases will not have a material adverse effect on its consolidated financial
position.
Management believes that the environmental matters discussed above are potentially sig-
nificant with respect to results of operations or cash flows for any one year. However, man-
agement does not believe that such matters will have a material impact on Sunoco’s
consolidated financial position or, over an extended period of time, on Sunoco’s cash flows
or liquidity.
Derivative Instruments
Sunoco uses swaps, options, futures, forwards and other derivative instruments to hedge a
variety of risks. Derivative instruments are used from time to time to achieve ratable pric-
ing of crude oil purchases, to convert certain refined product sales to fixed or floating
prices, to lock in what Sunoco considers to be acceptable margins for various refined prod-
ucts and to lock in a portion of the Company’s electricity and natural gas costs. In addi-
tion, Sunoco uses derivative contracts from time to time to reduce foreign exchange risk
relating to certain export sales denominated in foreign currencies. Sunoco does not hold or
issue derivative instruments for trading purposes.
Sunoco is at risk for possible changes in the market value of all of its derivative contracts;
however, such risk would be mitigated by price changes in the underlying hedged items. At
December 31, 2003, Sunoco had accumulated net derivative losses, before income taxes, of
$1 million on its open derivative contracts. The potential incremental loss on these de-
rivatives from a hypothetical 10 percent adverse change in the year-end market prices of
the underlying commodities that were being hedged by derivative contracts at December
31, 2003 was estimated to be $8 million. This hypothetical loss was estimated by multi-
plying the difference between the hypothetical and the actual year-end market prices of
the underlying commodities by the contract volume amounts. The Company also had
accumulated net derivative gains, before income taxes, of $2 million at December 31, 2003
on closed options and futures contracts, which relate to hedged transactions occurring in
2004.
Sunoco also is exposed to credit risk in the event of nonperformance by derivative counter-
parties. Management believes this risk is negligible as its counterparties are either regulated
by exchanges or are major international financial institutions or corporations with
investment-grade credit ratings. (See Note 16 to the consolidated financial statements.)
Cash Dividends and Share Repurchases
The Company has paid cash dividends on a regular quarterly basis since 1904. Commenc-
ing with the fourth quarter of 2003, the Company increased the quarterly dividend paid on
common stock from $.25 per share ($1.00 per year) to $.275 per share ($1.10 per year).
The Company expects to continue to pay the quarterly common stock cash dividend at its
current level.
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