Sunoco 2007 Annual Report Download - page 33

Sunoco is at risk for possible changes in the market value of all of its derivative contracts,
including the fixed-price gasoline sales contracts discussed above; however, such risk would
be mitigated by price changes in the underlying hedged items. At December 31, 2007,
Sunoco had accumulated net derivative deferred losses, before income taxes, of $24 million
on all of its open derivative contracts. Open contracts as of December 31, 2007 vary in
duration but generally do not extend beyond 2008. 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 con-
tracts at December 31, 2007 was estimated to be $57 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.
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 securities exchanges or are major international financial institutions or corporations
with investment-grade credit ratings. (See Note 18 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. At December 31, 2007, the Company had
$1,522 million of fixed-rate debt and $206 million of floating-rate debt. A hypothetical
one-percentage point decrease in interest rates would increase the fair value of the
Company’s fixed-rate borrowings at December 31, 2007 by approximately $80 million.
However, such change in interest rates would not have a material impact on income or
cash flows as the majority of the outstanding borrowings consisted of fixed-rate instru-
ments. Sunoco also has market risk exposure for changes in interest rates relating to its re-
tirement benefit plans (see “Critical Accounting Policies—Retirement Benefit Liabilities”
below). Sunoco generally does not use derivatives to manage its market risk exposure to
changing interest rates.
Dividends and Share Repurchases
On July 7, 2005, the Company’s Board of Directors approved a two-for-one split of Suno-
co’s common stock to be effected in the form of a stock dividend. The shares were dis-
tributed on August 1, 2005 to shareholders of record as of July 18, 2005. In connection
with the common stock split, the number of authorized shares of common stock was in-
creased from 200 million to 400 million, and the shares of common stock reserved for issu-
ance pertaining to Sunoco’s 6
3
⁄ 4 percent convertible debentures and various employee
benefit plans were proportionally increased in accordance with the terms of those re-
spective agreements and plans. Share and per-share data (except par value) presented for
all periods reflect the effect of the stock split.
The Company has paid cash dividends regularly on a quarterly basis since 1904. The Com-
pany increased the quarterly cash dividend paid on common stock from $.20 per share
($.80 per year) beginning with the second quarter of 2005, to $.25 per share ($1.00 per
year) beginning with the second quarter of 2006, to $.275 per share ($1.10 per year)
beginning with the second quarter of 2007 and to $.30 per share ($1.20 per year) begin-
ning with the second quarter of 2008.
The Company repurchased in 2007, 2006 and 2005, 4.0, 12.2 and 6.7 million shares, re-
spectively, of its common stock for $300, $871 and $435 million, respectively. In 2006, the
Company announced that its Board of Directors had approved additional share repurchase
authorizations totaling $1.5 billion. At December 31, 2007, the Company had a remaining
authorization from its Board to repurchase up to $649 million of Company common stock
from time to time depending on prevailing market conditions and available cash.
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