Sunoco 2010 Annual Report Download - page 67

SunCoke Energy also amended its postretirement plans during the first quarter of 2010. Postretirement
medical benefits for its future retirees will be phased out or eliminated, effective January 1, 2011, for most
non-mining employees with less than ten years of service on January 1, 2011 and employer costs for all those
still eligible for such benefits have been capped.
The principal assumptions that impact the determination of both expense and benefit obligations for
Sunoco’s pension plans are the discount rate and the long-term expected rate of return on plan assets. The
discount rate and the health care cost trend are the principal assumptions that impact the determination of both
expense and benefit obligations for Sunoco’s postretirement health care benefit plans.
The discount rates used to determine the present value of future pension payments and medical costs are
based on a portfolio of high-quality (AA rated) corporate bonds with maturities that reflect the estimated duration
of Sunoco’s pension and other postretirement benefit obligations. The present values of Sunoco’s future pension
and other postretirement obligations were determined using discount rates of 4.95 and 4.40 percent, respectively,
at December 31, 2010 and 5.50 and 5.10 percent, respectively, at December 31, 2009. Sunoco’s expense under
these plans is generally determined using the discount rate as of the beginning of the year, or using a weighted-
average rate when curtailments, settlements and/or other events require a plan remeasurement. The weighted-
average discount rate for pension plans was 5.20 percent for 2010, 6.00 percent for 2009 and 6.25 percent for
2008, and will be 4.95 percent as of January 1, 2011, and for postretirement plans was 4.90 percent for 2010,
5.95 percent for 2009, 6.10 percent for 2008, and will be 4.40 percent as of January 1, 2011.
The long-term expected rate of return on plan assets was assumed to be 8.25 percent for each of the last
three years. A long-term expected rate of return of 8.25 percent on plan assets is also expected to be used to
determine Sunoco’s pension expense for 2011. The expected rate of return on plan assets is estimated utilizing a
variety of factors including the historical investment return achieved over a long-term period, the targeted
allocation of plan assets and expectations concerning future returns in the marketplace for both equity and fixed
income securities. In determining pension expense, the Company applies the expected rate of return to the
market-related value of plan assets at the beginning of the year, which is determined using a quarterly average of
plan assets from the preceding year. The expected rate of return on plan assets is designed to be a long-term
assumption. It generally will differ from the actual annual return which is subject to considerable year-to-year
variability. For 2010, the pension plan assets generated a positive return of 16.0 percent, compared to a positive
return of 25.2 in 2009 and a negative return of 28.8 percent in 2008. For the 15-year period ended December 31,
2010, the compounded annual investment return on Sunoco’s pension plan assets was a positive return of 7.4
percent. As permitted by existing accounting rules, the Company does not recognize currently in pension expense
the difference between the expected and actual return on assets. Rather, the difference along with other actuarial
gains or losses resulting from changes in actuarial assumptions used in accounting for the plans (primarily the
discount rate) and differences between actuarial assumptions and actual experience are fully recognized in the
consolidated balance sheets. Except as discussed below, if such actuarial gains and losses on a cumulative basis
exceed 10 percent of the projected benefit obligation, the excess is amortized into net income as a component of
pension or postretirement benefits expense generally over the average remaining service period of plan
participants still employed with the Company, which currently is approximately 9 years for the pension plans and
approximately 5 years for the postretirement benefit plans. At December 31, 2010, the accumulated net actuarial
loss for defined benefit and postretirement benefit plans was $389 and $100 million, respectively.
Sunoco is also required to accelerate the recognition of a portion of its cumulative actuarial losses into net
income if the amount of pension liabilities settled in a given year is greater than the service and interest cost
components of its defined benefit plans expense. As a result of the workforce reduction, the sale of the Tulsa
refinery, the permanent shutdown of the Eagle Point refinery and the sale of the polypropylene chemicals
business, the Company incurred noncash settlement losses totaling $56 and $111 million with respect to its
defined benefit plans in 2010 and 2009, respectively. In addition, as a result of the above-noted changes, the
service cost and interest on the existing defined benefit pension plan obligations have declined. This reduction in
service and interest cost will also increase the likelihood that settlement gains or losses, representing the
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