Sunoco 2003 Annual Report Download - page 66

major international financial institutions or corporations
with investment-grade credit ratings. Market and credit
risks associated with all of Sunoco’s derivative contracts
are reviewed regularly by management.
Derivative instruments are used from time to time to
achieve ratable pricing 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 products 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.
At December 31, 2003, the Company had recorded li-
abilities totaling $1 million for hedging losses, which rep-
resented their fair value as determined using various
indices and dealer quotes. The amount of hedge in-
effectiveness on derivative contracts during the 2001-
2003 period was not material. Open contracts as of
December 31, 2003 vary in duration but do not extend
beyond 2004.
17. Business Segment Information
Sunoco is principally a petroleum refiner and marketer
and chemicals manufacturer with interests in logistics and
cokemaking. Sunoco’s operations are organized into five
business segments.
The Refining and Supply segment manufactures petro-
leum products at Sunoco’s Marcus Hook, Philadelphia,
Toledo and Tulsa refineries and commodity petrochem-
icals at Sunoco’s Marcus Hook, Philadelphia and Toledo
refineries and sells these products to other Sunoco busi-
nesses and to wholesale and industrial customers. This
segment also manufactures lubricant products at Sunoco’s
Tulsa refinery which are sold into process oil, wholesale
base oil and wax markets (“Western Lubricants”) and,
prior to the completion of the restructuring of lubricants
operations in December 2001, included Value Added and
Eastern Lubricants (Note 3).
The Retail Marketing segment sells gasoline and middle
distillates at retail and operates convenience stores in 25
states primarily on the East Coast and in the Midwest re-
gion of the United States.
The Chemicals segment manufactures phenol and related
products at chemical plants in Philadelphia, PA and
Haverhill OH; polypropylene at facilities in La Porte, TX,
Neal, WV and Bayport, TX; and cumene at the Phila-
delphia refinery. In addition, propylene and poly-
propylene are produced at its Marcus Hook, PA, Epsilon
joint venture facility and MTBE is produced at its Mont
Belvieu, TX, BEF joint venture facility. This segment also
distributes and markets these products. A facility in Pasa-
dena, TX, which produces plasticizers, was sold to BASF
in January 2004, while a facility in Neville Island, PA
will continue to produce plasticizers exclusively for BASF
under a three-year tolling agreement (Note 3).
The Logistics segment operates refined product and crude
oil pipelines and terminals and conducts crude oil acquis-
ition and marketing activities primarily in the Northeast,
Midwest and South Central regions of the United States.
In addition, the Logistics segment has an ownership
interest in several refined product and crude oil pipeline
joint ventures. Since February 8, 2002, the date of the
initial public offering, logistics operations have been
conducted primarily through Sunoco Logistics Partners
L.P. (Note 13).
The Coke segment makes high-quality, blast-furnace
coke at Sunoco’s Indiana Harbor facility in East Chicago,
IN and Jewell facility in Vansant, VA, and produces
metallurgical coal from mines in Virginia primarily for use
at the Jewell cokemaking facility. Substantially all of the
coke sales are made under long-term contracts with two
steel companies.
Income tax amounts give effect to the tax credits earned
by each segment. Overhead expenses that can be identi-
fied with a segment have been included as deductions in
determining pretax and after-tax segment income. The
remainder are included in Corporate and Other. Also in-
cluded in Corporate and Other are net financing ex-
penses and other, which consist principally of interest
cost, debt and other financing expenses less interest in-
come and interest capitalized, and significant unusual and
infrequently occurring items not allocated to a segment
for purposes of reporting to the chief operating decision
maker. Corporate and Other also includes the prefer-
ential return of third-party investors in the Company’s
cokemaking operations (Note 13). Intersegment revenues
are accounted for based on the prices negotiated by the
segments which approximate market. Identifiable assets
are those assets that are utilized within a specific segment.
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