Sunoco 2011 Annual Report Download - page 62

addition, regulations limiting GHG emissions or carbon content of products, which target specific industries such
as petroleum refining, and proposals to significantly increase automobile fleet efficiency and potentially
eliminate the ethanol tax credit are also under consideration. If enacted, such proposals could adversely affect the
Company’s ability to conduct its business and also may reduce demand for its products.
MTBE Litigation
Information regarding certain MTBE litigation in which Sunoco is a defendant is included in the discussion
under “MTBE Litigation” in Note 13 to the Consolidated Financial Statements (Item 8) and is incorporated
herein by reference.
Conclusion
Management believes that the environmental matters discussed above are potentially significant with respect
to results of operations or cash flows for any future period. However, management 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 Price Risk
Sunoco uses swaps, options, futures, forwards and other derivative instruments to hedge a variety of
commodity price risks. Such derivative instruments are used from time to time to achieve ratable pricing of crude
oil purchases, to convert certain expected 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 the price of a portion of the
Company’s electricity and natural gas purchases or sales and transportation costs. Sunoco does not hold or issue
derivative instruments for speculative 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. Sunoco’s accumulated net derivative
deferred positions, before income taxes, on all of its open derivative contracts amounted to a gain of $1 million at
December 31, 2011. Open contracts as of December 31, 2011 vary in duration but generally do not extend
beyond 2012. The potential decline in the market value of these derivatives 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, 2011 was approximately $95 million. This hypothetical loss was estimated
by multiplying the difference between the hypothetical and the actual year-end market prices of the underlying
commodities by the contract volume amounts which include 9.0 million barrels of crude oil and refined products,
240 thousand pounds of soy beans and 240 thousand MMBTUs of natural gas at December 31, 2011.
Sunoco also is exposed to credit risk in the event of nonperformance by derivative counterparties.
Management believes this risk is not significant as the Company has established credit limits with such
counterparties which require the settlement of net positions when these credit limits are reached. As a result, the
Company had no significant derivative counterparty credit exposure at December 31, 2011 (see Note 17 to the
Consolidated Financial Statements under Item 8).
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 uses interest rate swaps from time to time to manage interest costs and minimize the effects of
54