Sunoco 2009 Annual Report Download - page 62

The principal assumptions that impact the determination of both expense and benefit obligations for
Sunoco’s pension plans are the discount rate and the long-term expected rate of return on plan assets. The
discount rate and the health care cost trend are the principal assumptions that impact the determination of
expense and benefit obligations for Sunoco’s postretirement health care benefit plans.
The discount rates used to determine the present value of future pension payments and medical costs are
based on a portfolio of high-quality (AA rated) corporate bonds with maturities that reflect the duration of
Sunoco’s pension and other postretirement benefit obligations. The present values of Sunoco’s future pension
and other postretirement obligations were determined using discount rates of 5.50 and 5.10 percent, respectively,
at December 31, 2009 and 6.00 and 5.95 percent, respectively, at December 31, 2008. Sunoco’s expense under
these plans is determined using the discount rate as of the beginning of the year, which for pension plans was
6.00 percent for 2009, 6.25 percent for 2008, 5.85 percent for 2007, and will be 5.50 percent for 2010, and for
postretirement plans was 5.95 percent for 2009, 6.10 percent for 2008, 5.80 percent for 2007, and will be 5.10
percent for 2010.
The long-term expected rate of return on plan assets was assumed to be 8.25 percent for each of the last
three years. A long-term expected rate of return of 8.25 percent on plan assets is also expected to be used to
determine Sunoco’s pension expense for 2010. The expected rate of return on plan assets is estimated utilizing a
variety of factors including the historical investment return achieved over a long-term period, the targeted
allocation of plan assets and expectations concerning future returns in the marketplace for both equity and fixed
income securities. In determining pension expense, the Company applies the expected rate of return to the
market-related value of plan assets at the beginning of the year, which is determined using a quarterly average of
plan assets from the preceding year. The expected rate of return on plan assets is designed to be a long-term
assumption. It generally will differ from the actual annual return which is subject to considerable year-to-year
variability. For 2009, the pension plan assets generated a positive return of 25.2 percent, compared to a negative
return of 28.8 percent in 2008 and a positive return of 6.3 percent in 2007. For the 15-year period ended
December 31, 2009, the compounded annual investment return on Sunoco’s pension plan assets was a positive
return of 7.9 percent. As permitted by existing accounting rules, the Company does not recognize currently in
pension expense the difference between the expected and actual return on assets. Rather, the difference along
with other actuarial gains or losses resulting from changes in actuarial assumptions used in accounting for the
plans (primarily the discount rate) and differences between actuarial assumptions and actual experience are fully
recognized in the consolidated balance sheets. Except as discussed below, if such actuarial gains and losses on a
cumulative basis exceed 10 percent of the projected benefit obligation, the excess is amortized into net income as
a component of pension or postretirement benefits expense generally over the average remaining service period
of plan participants still employed with the Company, which currently is approximately 10 years for the pension
plans and approximately 7 years for the postretirement benefit plans. At December 31, 2009, the accumulated net
actuarial loss for defined benefit and postretirement benefit plans was $520 and $79 million, respectively. The
accumulated net actuarial loss for the defined benefit plans reflects a $50 million reduction attributable to a
curtailment gain from the freeze in plan benefits described above.
Sunoco is also required to accelerate the recognition of a portion of its cumulative actuarial losses into net
income if the amount of pension liabilities settled in a given year is greater than the service and interest cost
components of its defined benefit plans expense. In 2009, as a result of the workforce reduction, the sale of the
Tulsa refinery and the permanent shutdown of the Eagle Point refinery, the Company incurred noncash
settlement losses totaling $111 million with respect to its defined benefit plans. In addition, as a result of the
above-noted changes, the pretax cost of benefits earned and interest on the existing defined benefit pension plan
obligations are expected to decline approximately $35 million on an annualized basis. This reduction in service
and interest cost will also increase the likelihood that settlement gains or losses will be recognized in the future
as previously earned lump sum payments are made.
Sunoco has unrecognized prior service benefits attributable to its postretirement benefit plans of $48 million
at December 31, 2009, which includes approximately $45 million attributable to the phase down or elimination
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