Sunoco 2004 Annual Report Download - page 37

Conclusion
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.
Quantitative and Qualitative Disclosures about Market Risk
Commodity and Foreign Exchange Price Risks
Sunoco uses swaps, options, futures, forwards and other derivative instruments to hedge a
variety of commodity price risks. 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 addition, 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, 2004, Sunoco had accumulated net derivative deferred gains, before income
taxes, of $3 million on its open derivative contracts. Open contracts as of December 31,
2004 vary in duration but do not extend beyond 2005. The potential 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, 2004 was estimated to be $10 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 deferred gains, before income taxes, of $3 million at December
31, 2004 on closed options and futures contracts, which relate to hedged transactions oc-
curring in 2005.
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.)
Interest Rate Risk
Sunoco has market risk exposure for changes in interest rates relating to its outstanding
borrowings. Sunoco manages this exposure to changing interest rates through the use of a
combination of fixed and floating rate debt. Sunoco also has market risk exposure relating
to its cash and cash equivalents. At December 31, 2004, the Company had $1,088 million
of fixed-rate debt, $394 million of floating-rate debt and $405 million of cash and cash
equivalents. The unfavorable impact of a hypothetical 1 percent increase in interest rates
on the floating-rate debt would be essentially offset by the favorable impact of such an in-
crease on its cash and cash equivalents. Sunoco also has market risk exposure for changes
in interest rates relating to its retirement benefit plans (see “Critical Accounting
Policies—Retirement Benefit Liabilities” below). Sunoco generally does not use de-
rivatives to manage its market risk exposure to changing interest rates.
Cash Dividends and Share Repurchases
The Company has paid cash dividends on a regular quarterly basis since 1904. The Com-
pany increased the quarterly dividend paid on common stock from $.25 per share ($1.00
per year) to $.275 per share ($1.10 per year) for the fourth quarter of 2003 and then to
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