Sunoco 2008 Annual Report Download - page 101

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risk created by the purchases utilizing fixed-price contracts, the Company enters into derivative contracts to sell
gasoline at a fixed price to hedge a similar volume of forecasted floating-price gasoline sales over the term of the
ethanol contracts. In effect, these derivative contracts lock in an acceptable differential between the gasoline
price and the cost of the fixed-priced ethanol purchases for gasoline blending.
As a result of changes in the price of gasoline, the fair value of the fixed-price gasoline contracts increased
(decreased) $(3), $(97) and $82 million ($(2), $(58) and $48 million after tax) in 2008, 2007 and 2006,
respectively. As these derivative contracts have been designated as cash flow hedges, these changes in fair value
are not initially included in earnings but rather are reflected in the net hedging losses component of
comprehensive income. The fair value of these contracts at the time the positions are closed is recognized in
earnings when the hedged items are recognized in earnings, with Sunoco’s margin reflecting the differential
between the gasoline sales prices hedged to a fixed price and the cost of fixed-price ethanol purchases. Net gains
(losses) totaling $(35) , $(14) and $11 million ($(21), $(8) and $6 million after tax) were reclassified to earnings
in 2008, 2007 and 2006, respectively, when the hedged items were recognized in earnings.
At December 31, 2008, the Company had recorded assets totaling $77 million for derivative contract gains
and liabilities totaling $94 million for derivative contract losses (including amounts attributable to the fixed-price
gasoline sales contracts discussed above), which represented their fair value as determined using various indices
and dealer quotes. The amount of hedge ineffectiveness on derivative contracts during the 2006-2008 period was
not material. Open contracts as of December 31, 2008 vary in duration but generally do not extend beyond 2009.
Statement of Financial Accounting Standards No. 107, “Disclosures about Fair Value of Financial
Instruments,” requires the disclosure of the estimated fair value of all financial instruments in the balance sheet
(including those recorded on a cost basis) measured utilizing the criteria established in SFAS No. 157. Sunoco’s
current assets (other than inventories and deferred income taxes) and current liabilities (other than the current
portion of retirement benefit liabilities) are financial instruments and most of these items are recorded at cost in
the consolidated balance sheets. The estimated fair values of these financial instruments approximate their
carrying amounts. At December 31, 2008 and 2007, the estimated fair value of Sunoco’s long-term debt was
$1,686 and $1,792 million, respectively, compared to carrying amounts of $1,705 and $1,724 million,
respectively. Long-term debt that is publicly traded was valued based on quoted market prices while the fair
value of other debt issues was estimated by management based upon current interest rates available to Sunoco at
the respective balance sheet dates for similar issues.
19. Business Segment Information
Sunoco is a petroleum refiner and marketer, and chemicals manufacturer with interests in logistics and
cokemaking. Sunoco’s operations are organized into five business segments.
The Refining and Supply segment manufactures petroleum products and commodity petrochemicals at
Sunoco’s Marcus Hook, Philadelphia, Eagle Point and Toledo refineries and petroleum and lubricant products at
Sunoco’s Tulsa refinery and sells these products to other Sunoco businesses and to wholesale and industrial
customers. Refinery operations are comprised of Northeast Refining (the Marcus Hook, Philadelphia and Eagle
Point refineries) and MidContinent Refining (the Toledo and Tulsa refineries). Sunoco intends to sell the Tulsa
refinery or convert it to a terminal by the end of 2009 (Note 2).
The Retail Marketing segment sells gasoline and middle distillates at retail and operates convenience stores
in 26 states primarily on the East Coast and in the Midwest region of the United States.
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