Sunoco 2014 Annual Report Download - page 61

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laws; inflation rates; and the determination of the liability at multi-party sites, if any, in light of the number, participation levels,
and financial viability of other parties. We have agreed to indemnify Sunoco and its affiliates for events and conditions
associated with the operation of the assets that occur on or after the closing of the IPO and for environmental and toxic tort
liabilities to the extent Sunoco is not required to indemnify us.
Sunoco has also agreed to indemnify us for liabilities relating to:
• the assets contributed to SXL, other than environmental and toxic tort liabilities, that arise out of the operation of
the assets prior to the closing of the IPO and that are asserted within ten years after the closing of the IPO;
• certain defects in title to the assets contributed to SXL and failure to obtain certain consents and permits necessary
to conduct the business that arise within ten years after the closing of the IPO;
• legal actions related to the period prior to the IPO currently pending against Sunoco or its affiliates; and
• events and conditions associated with any assets retained by Sunoco or its affiliates.
Treasury Services Agreement
In prior years, we participated in a treasury services agreement for centralized cash management with Sunoco, in which all
of the cash receipts and cash disbursements were processed, together with those of Sunoco and its subsidiaries, through Sunoco’s
cash accounts with a corresponding credit or charge to an affiliated account. In the fourth quarter 2013, we established separate
cash accounts to process our own cash receipts and disbursements. Upon completion of the transition for our customers and
vendors in the third quarter 2014, we ceased participation in Sunoco's cash management program.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to various market risks, including changing interest rates and volatility in market price of commodities
such as crude oil, refined products and NGLs. To manage such exposure, interest rates, inventory levels and expectations of
forward commodity prices are monitored when making decisions with respect to risk management.
Interest Rate Risk
We have interest-rate risk exposure for changes in interest rates relating to our outstanding borrowings. We manage our
exposure to changing interest rates through the use of a combination of fixed- and variable-rate debt. At December 31, 2014,
we had $185 million of variable-rate borrowings under our revolving credit facilities. Outstanding borrowings bear interest cost
of LIBOR plus an applicable margin. An increase in short-term interest rates will have a negative impact on funds borrowed
under variable-rate debt arrangements. The weighted average variable interest rate on our variable-rate borrowings was
approximately 1 percent at December 31, 2014. A one percent change in the weighted average rate would have impacted annual
interest expense by approximately $2 million.
At December 31, 2014, we had $3.98 billion of fixed-rate borrowings which was comprised of our outstanding senior
notes. This amount excludes the $106 million premium resulting from the adjustment of our assets and liabilities to fair value
resulting from the application of push-down accounting in connection with the acquisition of the general partner by ETP. The
estimated fair value of our senior notes was $4.09 billion at December 31, 2014. A hypothetical one percent decrease in interest
rates would increase the fair value of our fixed-rate borrowings at December 31, 2014 by approximately $500 million.
Commodity Market Risk
We are exposed to volatility in crude oil, refined products and NGL commodity prices. To manage such exposures,
inventory levels and expectations of future commodity prices are monitored when making decisions with respect to risk
management. Our policy is to purchase only commodity products for which we have a market and to structure our sales
contracts so that price fluctuations for those products do not materially affect the margins we receive. We also seek to maintain
a position that is substantially balanced within our various commodity purchase and sales activities. We may experience net
unbalanced positions for short periods of time as a result of production, transportation and delivery variances, as well as
logistical issues associated with inclement weather conditions. When unscheduled physical inventory builds or draws do occur,
they are monitored and managed to a balanced position over a reasonable period of time.
We do not use futures or other derivative instruments to speculate on crude oil, refined products or NGL prices, as these
activities could expose us to significant losses. We do use derivative contracts as economic hedges against price changes related
to our forecasted refined products and NGL purchase and sales activities. These derivatives are intended to have equal and
opposite effects of the purchase and sales activities. At December 31, 2014, the fair market value of our open derivative
positions was a net asset of $15 million on 3.6 million barrels of refined products and NGLs. These derivative positions vary in
length but do not extend beyond one year. A hypothetical ten percent adverse change in year-end market prices of the