Sunoco 2006 Annual Report Download - page 34

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any, these issues will have on the Company or the industry in general, they could result in
increases in costs to operate and maintain the Company’s facilities, as well as capital out-
lays for new emission control equipment at these facilities. In addition, regulations limiting
GHG emissions which target specific industries such as petroleum refining or chemical or
coke manufacturing could adversely affect the Company’s ability to conduct its business
and also may reduce demand for its products.
Under a law that was enacted in August 2005, a new renewable fuels mandate for ethanol
use in gasoline was established (immediately in California and on May 5, 2006 for the rest
of the nation). Although the act did not ban MTBE, during the second quarter of 2006,
Sunoco discontinued the use of MTBE and increased its use of ethanol in gasoline. While
management expects ethanol will continue to be adequately supplied, this change by
Sunoco and other refiners in the industry has price and supply implications in the market-
place. Any additional Federal and state legislation could also have a significant impact on
market conditions and the profitability of Sunoco and the industry in general.
MTBE Litigation
Sunoco, along with other refiners, manufacturers and sellers of gasoline, owners and oper-
ators of retail gasoline sites, and manufacturers of MTBE, are defendants in approximately
65 cases in 18 states involving the manufacture and use of MTBE in gasoline and MTBE
contamination in groundwater. Plaintiffs, which include private well owners, water pro-
viders and certain governmental authorities, allege that refiners and suppliers of gasoline
containing MTBE are responsible for manufacturing and distributing a defective product
that contaminates groundwater. Plaintiffs are asserting primarily product liability claims
but additional claims are also being asserted including, nuisance, trespass, negligence,
violation of environmental laws and deceptive business practices. Plaintiffs are seeking
compensatory damages, and in some cases injunctive relief, exemplary and punitive dam-
ages and attorneys’ fees. All of the public water provider cases have been removed to
federal court and consolidated for pretrial purposes in the U.S. District Court for the
Southern District of New York (MDL 1358). Motions to remand these cases to state courts
have been denied. Motions to dismiss were also denied. Discovery is proceeding in four
focus cases. Sunoco is a defendant in three of those cases. In addition, several of the pri-
vate well owner cases are moving forward. Sunoco is a focus defendant in two of those cas-
es. Up to this point, for the group of MTBE cases currently pending, there has been
insufficient information developed about the plaintiffs’ legal theories or the facts that
would be relevant to an analysis of potential exposure. Based on the current law and facts
available at this time, Sunoco believes that these cases will not have a material adverse ef-
fect on its consolidated financial position.
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 the price of a portion of the Company’s electricity
and natural gas purchases or sales. Sunoco does not hold or issue derivative instruments for
trading purposes.
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