Sunoco 2010 Annual Report Download - page 28

The recent adoption of derivatives legislation by the United States Congress could have an adverse effect on
our ability to hedge risks associated with our business.
We use swaps, options, futures, forwards and other derivative instruments to hedge a variety of commodity
price risks and to achieve ratable pricing of crude oil purchases, to convert certain expected refined product sales
to fixed or floating prices, to lock in what we consider to be acceptable margins for various refined products and
to lock in the price of a portion of our electricity and natural gas purchases or sales and transportation costs. We
do not hold or issue derivative instruments for speculative purposes. The United States Congress recently
adopted comprehensive financial reform legislation that establishes federal oversight and regulation of the
over-the-counter derivatives market and entities, such as us, that participate in that market. The new legislation
was signed into law by the President on July 21, 2010, and requires the Commodities Futures Trading
Commission (the “CFTC”) and the SEC to promulgate rules and regulations implementing the new legislation
within 360 days from the date of enactment. The CFTC also has proposed regulations to set position limits for
certain futures and option contracts in the major energy markets, although it is not possible at this time to predict
whether or when the CFTC will adopt those rules or include comparable provisions in its rulemaking under the
new legislation. The financial reform legislation may also require us to comply with margin requirements in
connection with our derivative activities, although the application of those provisions to us is uncertain at this
time. The financial reform legislation also requires many counterparties to our derivative instruments to spin off
some of their derivatives activities to a separate entity, which may not be as creditworthy as the current
counterparty. The new legislation and any new regulations could significantly increase the cost of derivative
contracts (including requirements to post collateral, which could adversely affect our available liquidity),
materially alter the terms of derivative contracts, reduce the availability of derivatives to protect against risks we
encounter, reduce our ability to monetize or restructure our existing derivative contracts, and increase our
exposure to less creditworthy counterparties. If we reduce our use of derivatives as a result of the legislation and
regulations, our results of operations may become more volatile and our cash flows may be less predictable,
which could adversely affect our ability to plan for and fund capital expenditures. Finally, the legislation was
intended, in part, to reduce the volatility of oil and natural gas prices, which some legislators attributed to
speculative trading in derivatives and commodity instruments related to oil and natural gas. Our revenues could
therefore be adversely affected if a consequence of the legislation and regulations is to lower commodity prices.
Any of these consequences could have a material adverse effect on us, our financial condition, and our results of
operations.
We depend upon Sunoco Logistics Partners, L.P., or the Partnership, for a substantial portion of the logistics
network that serves our refineries and we own a significant equity interest in the Partnership.
We currently own a 31 percent interest in the Partnership. The Partnership owns and operates refined
product and crude oil pipelines and terminals and conducts crude oil acquisition and marketing activities. The
Partnership generates revenues by charging tariffs for transporting petroleum products and crude oil through its
pipelines, by charging fees for terminalling and storing refined products and crude oil and by purchasing and
selling crude oil and refined products. The Partnership serves our refineries under long-term pipelines and
terminals, storage and throughput agreements. Furthermore, our financial statements include the consolidated
results of the Partnership. The Partnership is subject to its own operating and regulatory risks, including, but not
limited to:
• its reliance on its significant customers, including us;
• competition from other pipelines;
• environmental regulations affecting pipeline operations;
• operational hazards and risks;
• pipeline tariff regulations affecting the rates it can charge;
• limitations on additional borrowings and other restrictions due to its debt covenants; and
• other financial, operational and legal risks.
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