EX-99.3 4 a2186894zex-99_3.htm EXHIBIT 99.3
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Exhibit 99.3

Interim Unaudited Financial Statements of Suncor Energy Inc. for the six months ended June 30, 2008

Consolidated statements of earnings and comprehensive income
(unaudited)

    Second Quarter   Six months ended June 30    
    2008   2007   2008   2007    
($ millions)       (restated)
(note 2)		       (restated)
(note 2)		    
Revenues (note 3)   7 959   4 413   13 947   8 364    
Expenses                    
  Purchases of crude oil and products (note 2)   1 940   1 456   3 198   2 581    
  Operating, selling and general (notes 2, 3 and 7)   886   816   1 859   1 636    
  Energy marketing and trading activities (note 3)   3 263   665   5 114   1 236    
  Transportation and other costs   62   44   114   88    
  Depreciation, depletion and amortization   252   204   500   394    
  Accretion of asset retirement obligations   16   12   32   24    
  Exploration   31   37   43   69    
  Royalties (note 11)   181   131   503   320    
  Taxes other than income taxes   167   164   317   322    
  Loss (gain) on disposal of assets   (20 ) 1   (18 ) 1    
  Project start-up costs   14   23   21   26    
  Financing expenses (income) (note 5)   6   (74 ) 85   (85 )  
    6 798   3 479   11 768   6 612    
Earnings Before Income Taxes   1 161   934   2 179   1 752    
Provision for Income Taxes (notes 2 and 10)                    
  Current   58   83   214   245    
  Future   274   113   428   193    
    332   196   642   438    
Net Earnings   829   738   1 537   1 314    
  Other comprehensive loss (note 13)   (60 ) (77 ) (13 ) (94 )  
Comprehensive Income   769   661   1 524   1 220    

Net Earnings Per Common Share (dollars), (note 6)
 
 
 
 
 
 
 
 
 
 
  Basic   0.89   0.80   1.66   1.43    
  Diluted   0.87   0.78   1.62   1.40    
Cash dividends   0.05   0.05   0.10   0.09    

See accompanying notes.

Suncor Energy Inc.            
 Inquiries John Rogers (403) 269-8670                                                                                                                                      2008 Second Quarter    019

Consolidated balance sheets
(unaudited)

        June 30 2008       December 31 2007  
($ millions)               (restated)
(note 2)		  
Assets                  
  Current assets                  
    Cash and cash equivalents       2 146       569  
    Accounts receivable (note 3)       1 996       1 438  
    Inventories (note 2)       1 604       1 012  
    Income taxes receivable       59       95  
    Future income taxes       68       46  
  Total current assets       5 873       3 160  
  Property, plant and equipment, net       23 567       20 945  
  Deferred charges and other (note 3)       653       404  
  Total assets       30 093       24 509  
Liabilities and Shareholders' Equity                  
  Current liabilities                  
    Short-term debt       6       6  
    Accounts payable and accrued liabilities (notes 2, 3 and 11)       3 820       2 797  
    Taxes other than income taxes       82       72  
    Income taxes payable       14       244  
    Future income taxes       101       37  
  Total current liabilities       4 023       3 156  
  Long-term debt (note 12)       6 547       3 811  
  Accrued liabilities and other (notes 3 and 8)       1 380       1 434  
  Future income taxes (notes 2, 3 and 10)       4 569       4 212  
  Shareholders' equity (see below)       13 574       11 896  
  Total liabilities and shareholders' equity       30 093       24 509  

Shareholders' Equity

    Number       Number        
    (thousands)       (thousands)        
Share capital   934 097   1 085   925 566   881    
Contributed surplus       236       194    
Accumulated other comprehensive loss (note 13)       (266 )     (253 )  
Retained earnings (note 2)       12 519       11 074    
Total shareholders' equity       13 574       11 896    

See accompanying notes.

             Suncor Energy Inc.
 020    2008 Second Quarter                                                                    For more information about Suncor Energy, visit our website www.suncor.com

Consolidated statements of cash flows
(unaudited)

    Second Quarter   Six months ended June 30    
    2008   2007   2008   2007    
($ millions)       (restated)
(note 2)		       (restated)
(note 2)		    
Operating Activities                    
Cash flow from operations   1 405   1 027   2 566   1 852    
Decrease (increase) in operating working capital                    
  Accounts receivable   (27 ) 67   (458 ) (72 )  
  Inventories   (450 ) (141 ) (592 ) (173 )  
  Accounts payable and accrued liabilities   295   292   682   191    
  Taxes payable/receivable   (63 ) 55   (184 ) 207    
Cash flow from operating activities   1 160   1 300   2 014   2 005    
Cash Used in Investing Activities   (1 778 ) (1 322 ) (3 188 ) (2 422 )  
Net Cash Deficiency Before Financing Activities   (618 ) (22 ) (1 174 ) (417 )  
Financing Activities                    
Decrease in short-term debt   (1 ) —   (1 ) (1 )  
Net proceeds from issuance of long-term debt   2 704   806   2 704   1 407    
Net decrease in long-term debt   (694 ) (256 ) (43 ) (487 )  
Issuance of common shares under stock option plan   145   23   169   28    
Dividends paid on common shares   (45 ) (45 ) (88 ) (78 )  
Deferred revenue   —   —   —   3    
Cash flow provided by financing activities   2 109   528   2 741   872    
Increase in Cash and Cash Equivalents   1 491   506   1 567   455    
Effect of Foreign Exchange on Cash and Cash Equivalents   (2 ) (22 ) 10   (24 )  
Cash and Cash Equivalents at Beginning of Period   657   468   569   521    
Cash and Cash Equivalents at End of Period   2 146   952   2 146   952    

See accompanying notes.

Suncor Energy Inc.            
 Inquiries John Rogers (403) 269-8670                                                                                                                                      2008 Second Quarter    021

Consolidated statements of changes in shareholders' equity
(unaudited)

($ millions)   Share
Capital		   Contributed
Surplus		   Accumulated
Other
Comprehensive
Income (AOCI)		   Retained
Earnings		    
At December 31, 2006, as previously reported   794   100   (71 ) 8 129    
Retroactive adjustment for change
in accounting policy (note 2)		   —   —   —   132    
At December 31, 2006, as restated   794   100   (71 ) 8 261    
Net earnings   —   —   —   1 314    
Dividends paid on common shares   —   —   —   (78 )  
Issued for cash under stock option plan   34   (6 ) —   —    
Issued under dividend reinvestment plan   5   —   —   (5 )  
Stock-based compensation expense   —   38   —   —    
Income tax benefit of stock option deduction in the U.S.   —   2   —   —    
Adjustment to opening retained earnings arising from ineffective portion of cash flow hedges at January 1, 2007   —   —   —   5    
Adjustment to opening AOCI arising from effective portion of cash flow hedges at January 1, 2007   —   —   8   —    
Change in AOCI related to foreign currency translation   —   —   (108 ) —    
Change in AOCI related to derivative hedging activities   —   —   14   —    
At June 30, 2007, as restated   833   134   (157 ) 9 497    
At December 31, 2007, as previously reported   881   194   (253 ) 10 791    
Retroactive adjustment for change
in accounting policy (note 2)		   —   —   —   283    
At December 31, 2007, as restated   881   194   (253 ) 11 074    
Net earnings   —   —   —   1 537    
Dividends paid on common shares   —   —   —   (88 )  
Issued for cash under stock option plan   200   (31 ) —   —    
Issued under dividend reinvestment plan   4   —   —   (4 )  
Stock-based compensation expense   —   69   —   —    
Income tax benefit of stock option deduction in the U.S.       4            
Change in AOCI related to foreign currency translation   —   —   41   —    
Change in AOCI related to derivative hedging activities   —   —   (54 ) —    
At June 30, 2008   1 085   236   (266 ) 12 519    

See accompanying notes.

             Suncor Energy Inc.
 022    2008 Second Quarter                                                                    For more information about Suncor Energy, visit our website www.suncor.com

Schedules of Segmented Data
(unaudited)


Second Quarter		    
   
Oil Sands		  
Natural Gas  		  
Refining and
Marketing  		  
Corporate and
Eliminations		  
Total		    
($ millions)   2008   2007   2008   2007   2008   2007   2008   2007   2008   2007    
EARNINGS                                            
Revenues                                            
Operating revenues   1 738   1 334   209   136   2 779   2 251   5   1   4 731   3 722    
Energy marketing and trading activities   —   —   —   —   3 253   684   (32 ) (1 ) 3 221   683    
Intersegment revenues   429   143   20   8   —   —   (449 ) (151 ) —   —    
Interest   —   —   —   —   —   1   7   7   7   8    
    2 167   1 477   229   144   6 032   2 936   (469 ) (144 ) 7 959   4 413    
Expenses                                            
Purchases of crude oil and products   114   60   —   —   2 242   1 540   (416 ) (144 ) 1 940   1 456    
Operating, selling and general   640   575   39   37   182   176   25   28   886   816    
Energy marketing and trading activities   —   —   —   —   3 265   666   (2 ) (1 ) 3 263   665    
Transportation and other costs   50   32   4   4   8   8   —   —   62   44    
Depreciation, depletion and amortization   132   108   52   44   57   40   11   12   252   204    
Accretion of asset retirement obligations   13   10   2   1   1   1   —   —   16   12    
Exploration   —   —   31   37   —   —   —   —   31   37    
Royalties (note 11)   130   99   51   32   —   —   —   —   181   131    
Taxes other than income taxes   26   20   3   3   137   140   1   1   167   164    
Loss (gain) on disposal of assets   2   —   (24 ) —   2   1   —   —   (20 ) 1    
Project start-up costs   14   21   —   —   —   2   —   —   14   23    
Financing expenses (income)   —   —   —   —   —   —   6   (74 ) 6   (74 )  
    1 121   925   158   158   5 894   2 574   (375 ) (178 ) 6 798   3 479    
Earnings (loss) before income taxes   1 046   552   71   (14 ) 138   362   (94 ) 34   1 161   934    
Income taxes   (295 ) (76 ) (19 ) 10   (47 ) (124 ) 29   (6 ) (332 ) (196 )  
Net earnings (loss)   751   476   52   (4 ) 91   238   (65 ) 28   829   738    

Suncor Energy Inc.            
 Inquiries John Rogers (403) 269-8670                                                                                                                                      2008 Second Quarter    023

Schedules of Segmented Data (continued)
 (unaudited)


Second Quarter		    
   
Oil Sands		  
Natural Gas  		  
Refining and
Marketing  		  
Corporate and
Eliminations		  
Total		    
($ millions)   2008   2007   2008   2007   2008   2007   2008   2007   2008   2007    
CASH FLOW BEFORE FINANCING ACTIVITIES                                            
Cash flow from (used in) operating activities:                                            
  Cash flow from (used in) operations                                            
    Net earnings (loss)   751   476   52   (4 ) 91   238   (65 ) 28   829   738    
    Exploration expenses   —   —   29   37   —   —   —   —   29   37    
    Non-cash items included in earnings                                            
      Depreciation, depletion and amortization   132   108   52   44   57   40   11   12   252   204    
      Future income taxes   231   63   13   (8 ) 49   64   (19 ) (6 ) 274   113    
      Loss (gain) on disposal of assets   2   —   (24 ) —   2   1   —   —   (20 ) 1    
      Stock-based compensation expense   13   10   —   1   4   3   8   6   25   20    
      Other   8   7   (3 ) 1   5   (2 ) (32 ) (82 ) (22 ) (76 )  
    Increase (decrease) in deferred credits and other   37   (7 ) —   (1 ) 2   (2 ) (1 ) —   38   (10 )  
Total cash flow from (used in) operations   1 174   657   119   70   210   342   (98 ) (42 ) 1 405   1 027    
Decrease (increase) in operating working capital   (664 ) 356   (105 ) (2 ) 274   (25 ) 250   (56 ) (245 ) 273    
Total cash flow from (used in) operating activities   510   1 013   14   68   484   317   152   (98 ) 1 160   1 300    
Cash from (used in) investing activities:                                            
  Capital and exploration expenditures   (1 558 ) (1 118 ) (38 ) (83 ) (26 ) (66 ) (5 ) (14 ) (1 627 ) (1 281 )  
  Deferred maintenance shutdown expenditures   (240 ) (56 ) (2 ) —   —   (11 ) —   —   (242 ) (67 )  
  Deferred outlays and other investments   (25 ) 1   —   —   1   (2 ) 2   1   (22 ) —    
  Proceeds from disposals   —   —   25   —   —   1   —   —   25   1    
  Decrease (increase) in investing working capital   89   17   —   —   (1 ) 8   —   —   88   25    
Total cash (used in) investing activities   (1 734 ) (1 156 ) (15 ) (83 ) (26 ) (70 ) (3 ) (13 ) (1 778 ) (1 322 )  
Net cash surplus (deficiency)
before financing activities		   (1 224 ) (143 ) (1 ) (15 ) 458   247   149   (111 ) (618 ) (22 )  

             Suncor Energy Inc.
 024    2008 Second Quarter                                                                    For more information about Suncor Energy, visit our website www.suncor.com

Schedules of Segmented Data (continued)
 (unaudited)


Six months ended June 30		    
   
Oil Sands		  
Natural Gas  		  
Refining and
Marketing  		  
Corporate and
Eliminations		  
Total		    
($ millions)   2008   2007   2008   2007   2008   2007   2008   2007   2008   2007    
EARNINGS                                            
Revenues                                            
Operating revenues   3 683   2 777   371   280   4 801   4 037   10   3   8 865   7 097    
Energy marketing and trading activities   —   —   —   —   5 134   1 255   (65 ) (2 ) 5 069   1 253    
Intersegment revenues   730   294   30   8   —   —   (760 ) (302 ) —   —    
Interest   —   —   —   —   —   4   13   10   13   14    
    4 413   3 071   401   288   9 935   5 296   (802 ) (291 ) 13 947   8 364    
Expenses                                            
Purchases of crude oil and products   161   69   —   —   3 795   2 810   (758 ) (298 ) 3 198   2 581    
Operating, selling and general   1 357   1 165   79   77   357   351   66   43   1 859   1 636    
Energy marketing and trading activities   —   —   —   —   5 117   1 239   (3 ) (3 ) 5 114   1 236    
Transportation and other costs   92   64   7   9   15   15   —   —   114   88    
Depreciation, depletion and amortization   261   208   110   85   108   79   21   22   500   394    
Accretion of asset retirement obligations   27   20   4   3   1   1   —   —   32   24    
Exploration   9   13   34   56   —   —   —   —   43   69    
Royalties (note 11)   412   256   91   64   —   —   —   —   503   320    
Taxes other than income taxes   53   41   3   3   260   277   1   1   317   322    
Loss (gain) on disposal of assets   2   —   (24 ) —   4   1   —   —   (18 ) 1    
Project start-up costs   21   23   —   —   —   3   —   —   21   26    
Financing expenses (income)   —   —   —   —   —   —   85   (85 ) 85   (85 )  
    2 395   1 859   304   297   9 657   4 776   (588 ) (320 ) 11 768   6 612    
Earnings (loss) before income taxes   2 018   1 212   97   (9 ) 278   520   (214 ) 29   2 179   1 752    
Income taxes   (572 ) (268 ) (26 ) 9   (92 ) (176 ) 48   (3 ) (642 ) (438 )  
Net earnings (loss)   1 446   944   71   —   186   344   (166 ) 26   1 537   1 314    

As at June 30
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
TOTAL ASSETS   21 181   15 632   1 939   1 717   5 974   4 194   999   26   30 093   21 569    

Suncor Energy Inc.            
 Inquiries John Rogers (403) 269-8670                                                                                                                                      2008 Second Quarter    025

Schedules of Segmented Data (continued)
 (unaudited)


Six months ended June 30		    
   
Oil Sands		  
Natural Gas  		  
Refining and
Marketing  		  
Corporate and
Eliminations		  
Total		    
($ millions)   2008   2007   2008   2007   2008   2007   2008   2007   2008   2007    
CASH FLOW BEFORE FINANCING ACTIVITIES                                            
Cash flow from (used in) operating activities:                                            
  Cash flow from (used in) operations                                            
    Net earnings (loss)   1 446   944   71   —   186   344   (166 ) 26   1 537   1 314    
    Exploration expenses   —   —   29   52   —   —   —   —   29   52    
    Non-cash items included in earnings                                            
      Depreciation, depletion and amortization   261   208   110   85   108   79   21   22   500   394    
      Future income taxes   366   112   16   (8 ) 80   93   (34 ) (4 ) 428   193    
      Loss (gain) on disposal of assets   2   —   (24 ) —   4   1   —   —   (18 ) 1    
      Stock-based compensation expense   35   18   2   2   11   8   21   10   69   38    
      Other   (16 ) (13 ) (3 ) 4   10   —   40   (115 ) 31   (124 )  
    Increase (decrease) in deferred credits and other   (10 ) (12 ) —   (1 ) 1   (3 ) (1 ) —   (10 ) (16 )  
Total cash flow from (used in) operations   2 084   1 257   201   134   400   522   (119 ) (61 ) 2 566   1 852    
Decrease (increase) in operating working capital   (464 ) 347   (64 ) 11   164   (70 ) (188 ) (135 ) (552 ) 153    
Total cash flow from (used in) operating activities   1 620   1 604   137   145   564   452   (307 ) (196 ) 2 014   2 005    
Cash from (used in) investing activities:                                            
  Capital and exploration expenditures   (2 849 ) (1 911 ) (164 ) (358 ) (54 ) (123 ) (9 ) (20 ) (3 076 ) (2 412 )  
  Deferred maintenance shutdown expenditures   (259 ) (56 ) (2 ) (1 ) (21 ) (12 ) —   —   (282 ) (69 )  
  Deferred outlays and other investments   (31 ) 1   —   —   —   (2 ) (2 ) —   (33 ) (1 )  
  Proceeds from disposals   —   —   25   —   —   1   —   —   25   1    
  Decrease (increase) in investing working capital   191   90   —   —   (13 ) (31 ) —   —   178   59    
Total cash (used in) investing activities   (2 948 ) (1 876 ) (141 ) (359 ) (88 ) (167 ) (11 ) (20 ) (3 188 ) (2 422 )  
Net cash surplus (deficiency)
before financing activities		   (1 328 ) (272 ) (4 ) (214 ) 476   285   (318 ) (216 ) (1 174 ) (417 )  

             Suncor Energy Inc.
 026    2008 Second Quarter                                                                    For more information about Suncor Energy, visit our website www.suncor.com

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1. ACCOUNTING POLICIES

These interim consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles and follow the same accounting policies and methods of computation as, and should be read in conjunction with, the most recent annual financial statements, except for the accounting policy changes as described in note 2, Changes in Accounting Policies. Certain information and disclosures normally required to be included in notes to the annual consolidated financial statements have been condensed or omitted.

In the opinion of management, these interim consolidated financial statements contain all adjustments of a normal and recurring nature necessary to present fairly Suncor Energy Inc.'s (Suncor) financial position at June 30, 2008 and the results of its operations and cash flows for the three and six month periods ended June 30, 2008 and 2007.

Certain prior period comparative figures have been reclassified to conform to the current period presentation.

2. CHANGES IN ACCOUNTING POLICIES

(a) Inventories

On January 1, 2008 the company retroactively adopted the Canadian Institute of Chartered Accountants (CICA) Handbook section 3031 "Inventories". Under the new standard, the use of a LIFO (last-in-first-out) based valuation approach for inventory has been eliminated. The standard also required any impairment to net realizable value of inventory to be written down at each reporting period, with subsequent reversals when applicable. The company transitioned to a FIFO (first-in-first-out) based valuation approach for inventory effective January 1, 2008. The impact of adopting this accounting standard is as follows:

Change in Consolidated Balance Sheets

($ millions, increase/(decrease))   As at
June 30
2008		   As at
December 31
2007		  
Inventories   819   404  
Total assets   819   404  

Accounts payable and accrued liabilities
 
(56
)
—
 
Future income taxes   267   121  
Retained earnings   608   283  
Total liabilities and shareholders' equity   819   404  

Change in Consolidated Statements of Earnings and Comprehensive Income

                     
    Second quarter   Six months ended June 30    
($ millions, increase/(decrease))   2008   2007   2008   2007    
Purchases of crude oil and products   (239 ) (62 ) (335 ) (75 )  
Operating, selling and general   (178 ) (81 ) (136 ) (103 )  
Future income taxes   122   46   146   56    
Net earnings   295   97   325   122    
Per common share – basic (dollars)   0.32   0.11   0.35   0.13    
Per common share – diluted (dollars)   0.31   0.10   0.34   0.13    

Suncor Energy Inc.            
 Inquiries John Rogers (403) 269-8670                                                                                                                                      2008 Second Quarter    027

(b) Capital Disclosure

On January 1, 2008, the company adopted CICA Handbook section 1535 "Capital Disclosures". This section establishes disclosure requirements for management's policies and processes in defining and managing its capital. There was no financial impact to previously reported financial statements as a result of the implementation of this new standard.

(c) Financial Instruments – Disclosures and Presentation

On January 1, 2008, the company adopted CICA Handbook sections 3862 "Financial Instruments – Disclosures" and 3863 "Financial Instruments – Presentation", which enhance existing disclosures for financial instruments. In particular, section 3862 focuses on the identification of risk exposures and the company's approach to management of these risks. There was no financial impact to previously reported financial statements as a result of the implementation of this new standard.

3. FINANCIAL INSTRUMENTS AND FINANCIAL RISK FACTORS

Derivatives are financial instruments that either imitate or counter the price movements of stocks, bonds, currencies, commodities and interest rates. Suncor uses derivatives to reduce (hedge) its exposure to fluctuations in commodity prices and foreign currency exchange rates and to manage interest rate or currency-sensitive assets and liabilities. Suncor also uses derivatives for trading purposes. When used in a trading activity, the company is attempting to realize a gain on the fluctuations in the market value of the derivative.

Forwards and futures are contracts to purchase or sell a specific item at a specified date and price. When used as hedges, forwards and futures help to manage the exposure to losses that could result if commodity prices, foreign currency exchange rates, or interest rates change adversely.

An option is a contract where its holder, for a fee, has purchased the right (but not the obligation) to buy or sell a specified item at a fixed price during a specified period. Options used as hedges help to protect against adverse changes in commodity prices, interest rates, or foreign currency exchange rates.

A costless collar is a combination of two option contracts that limit the holder's exposure to changes in prices to within a specific range. The "costless" nature of this derivative is achieved by buying a put option (the right to sell) for consideration equal to the premium received from selling a call option (the right to purchase).

A swap is a contract where two parties exchange commodity, currency, interest or other payments in order to alter the nature of the payments. For example, fixed interest rate payments on debt may be converted to payments based on a floating interest rate, or vice versa; a domestic currency debt may be converted to a foreign currency debt.

Hedge accounting is a method for recognizing the gains, losses, revenues and expenses associated with the items in a hedging relationship at the time when the underlying transaction impacts earnings. Suncor has elected to use hedge accounting on certain derivatives linked to future commodity and financial transactions.

Financial Instruments

(a) Balance Sheet Financial Instruments

The company's financial instruments in the Consolidated Balance Sheets consist of cash and cash equivalents, accounts receivable, derivative contracts, substantially all current liabilities (except for the current portions of asset retirement and pension obligations), and long-term debt. Unless otherwise noted, carrying values reflect the current fair value of the company's financial instruments.

The estimated fair values of recognized financial instruments have been determined based on the company's assessment of available market information and appropriate valuation methodologies based on industry accepted third-party models; however, these estimates may not necessarily be indicative of the amounts that could be realized or settled in a current market transaction.

The company's fixed-term debt is accounted for under the amortized cost method. Upon initial recognition, the cost of the debt is its fair value, adjusted for any associated transaction costs. We do not recognize gains or losses arising from changes in the fair value of this debt until the gains or losses are realized. Gains or losses on our U.S. dollar denominated long-term debt resulting from changes

             Suncor Energy Inc.
 028    2008 Second Quarter                                                                    For more information about Suncor Energy, visit our website www.suncor.com


in the exchange rate are recognized in the period in which they occur. At June 30, 2008, the carrying value of our fixed-term debt accounted for under the amortized cost method was $5.8 billion (fair value – $5.8 billion).

(b) Hedges – Documented as Part of a Qualifying Hedge Relationship

Fair Value Hedges

Suncor periodically enters into derivative financial instrument contracts such as interest rate swaps as part of its risk management strategy to manage its exposure to benchmark interest rate fluctuations. The interest rate swap contracts involve an exchange of floating rate versus fixed rate interest payments between the company and investment grade counterparties. The differentials on the exchange of periodic interest payments are recognized in the accounts as an adjustment to interest expense. The fair value of the underlying debt is adjusted by the fair value change in the derivative financial instrument with the offset to interest expense. At June 30, 2008, the company had interest rate derivatives classified as fair value hedges outstanding for up to 3 years relating to fixed-rate debt. There was no ineffectiveness recognized on interest rate swaps designated as fair value hedges during the three and six month periods ended June 30, 2008 (no ineffectiveness during the three and six month periods ended June 30, 2007). The fair value of interest rate swap contracts outstanding at June 30, 2008 is detailed in note 12, Long-term debt.

The company periodically enters into derivative contracts to hedge risks specific to individual transactions. The differentials between the fair value of the hedged transactions and the fair value of the derivative contracts are recognized in the accounts as an adjustment to operating revenues. The earnings impact associated with hedge ineffectiveness on derivative contracts to hedge risks specific to individual transactions during the three month period ended June 30, 2008 was a loss of $2 million, net of income taxes of less than $1 million (2007 – nil). During the six month period ended June 30, 2008, the earnings impact was a loss of $3 million, net of income taxes of $1 million (2007 – nil).

Cash Flow Hedges

Suncor operates in a global industry where the market price of its petroleum and natural gas products is largely determined based on floating benchmark indices. The company periodically enters into derivative financial instrument contracts such as forwards, futures, swaps, options and costless collars to hedge against the potential adverse impact of changing market prices due to changes in the underlying indices. Specifically, the company manages crude sales price variability by entering into West Texas Intermediate (WTI) derivative transactions, and manages variability in market interest rates and foreign exchange rates during periods of debt issuance through the use of interest rate locks and foreign exchange forward contracts.

At June 30, 2008, the company had hedged a portion of its forecasted U.S. dollar denominated cash flows subject to U.S. dollar WTI commodity risk for 2008, as well as cash flows related to natural gas production in 2008.

There was no earnings impact associated with realized and unrealized hedge ineffectiveness on derivative contracts designated as cash flow hedges during the three month period ended June 30, 2008 (2007 – loss of $8 million, net of income taxes of $2 million), and there was also no earnings impact during the six month period ended June 30, 2008 (2007 – loss of $6 million, net of income taxes of $2 million).

Certain derivative contracts do not require the payment of premiums or cash margin deposits prior to settlement. On settlement, these contracts result in cash receipts or payments by the company for the difference between the contract and market rates for the applicable dollars and volumes hedged during the contract term. Such cash receipts or payments offset corresponding decreases or increases in the company's sales revenues or crude oil purchase costs. For collars, if market rates are not different than, or are within the range of contract prices, the options contracts making up the collar will expire with no exchange of cash.

Revenue hedge contracts outstanding at June 30, 2008 were as follows:

Crude Oil   Quantity
(bpd)		   Average Price
(US$/bbl)
(a)		 Revenue Hedged
(Cdn$ millions)
(b)		 Hedge
Period (c)		  
Costless collars   10 000   59.85 - 101.06   112 - 189   2008  
Natural Gas   Quantity
(GJ/day)		   Average Price
(Cdn$/GJ)		   Revenue Hedged
(Cdn$ millions)		   Hedge
Period (d)		  
Costless collars   15 000   7.00 - 8.71   13 - 16   2008  

Suncor Energy Inc.            
 Inquiries John Rogers (403) 269-8670                                                                                                                                      2008 Second Quarter    029

(a)
Average price for crude oil costless collars is US$ WTI per barrel at Cushing, Oklahoma.

(b)
The revenue hedged is translated to Cdn$ at the June 30, 2008 exchange rate for convenience purposes.

(c)
Original hedge term is for the full year.

(d)
For the period July to October 2008, inclusive.

Fair Value of Hedging Derivative Financial Instruments

The fair value of hedging derivative financial instruments as recorded, is the estimated amount that the company would receive (pay) to terminate the hedging derivative contracts. Such amounts, which also represent the unrealized gain (loss) on the contracts, were as follows:

($ millions)   June 30
2008		   December 31
2007		    
Revenue hedge collars   (79 ) (11 )  
Fixed to floating interest rate swaps   11   8    
Specific hedges of individual transactions   19   12    
Fair value of outstanding hedging derivative financial instruments   (49 ) 9    

Accumulated Other Comprehensive Income (AOCI)

A reconciliation of changes in AOCI attributable to derivative hedging activities for the six month period ending June 30, 2008 is as follows:

($ millions)   2008    
AOCI attributable to derivatives and hedging activities, at December 31, 2007, net of income taxes of $4   13    
Current year net changes arising from cash flow hedges, net of income taxes of $23   (57 )  
Net unrealized hedging losses at the beginning of the year reclassified to earnings during the period, net of income taxes of $1   3    
AOCI attributable to derivatives and hedging activities, at June 30, 2008, net of income taxes of $18   (41 )  

(c) Hedges – Not Documented as Part of a Qualifying Hedge Relationship

Suncor also periodically enters into derivative financial instruments such as options, basis swaps, and heat rate swaps that either do not qualify for hedge accounting treatment or hedges that Suncor has not elected to document as part of a qualifying hedge relationship. These financial instruments are accounted for using the mark-to-market method and, as such, these derivative instruments are recorded at fair value at each balance sheet date. The earnings impact associated with these contracts for the three month period ended June 30, 2008, was a loss of $50 million, net of income taxes of $20 million (2007 – a gain of $1 million, net of income taxes of less than $1 million). During the six month period ended June 30, 2008, the earnings impact was a loss of $60 million net of income taxes of $24 million (2007 – a loss of $2 million, net of income taxes of $1 million).

Significant contracts outstanding at June 30 were as follows:

Crude Oil (d)   Quantity
(bpd)		   Price
(US$/bbl)
(a)		 Revenue Hedged
(Cdn$ millions)
(b)		 Hedge
Period (c)		  
Purchased puts   55 000   60.00   1 227   2009  
Purchased puts   55 000   60.00   1 227   2010  
(a)
Price for crude puts is US$ WTI per barrel at Cushing, Oklahoma.

(b)
The revenue hedged is translated to Cdn$ at the June 30, 2008 exchange rate for convenience purposes.

(c)
Original hedge term is for the full year.

(d)
Premium paid was US$59 million.

(d) Energy Marketing and Trading Activities

In addition to the financial derivatives used for hedging activities, the company uses physical and financial energy contracts, including swaps, forwards and options to earn trading and marketing revenues. Financial energy trading activities are accounted for using the mark-to-market method. Physical energy marketing contracts involve activities intended to enhance prices and satisfy physical deliveries to customers. The results of these activities are reported as revenue and as energy marketing and trading expenses in the

             Suncor Energy Inc.
 030    2008 Second Quarter                                                                    For more information about Suncor Energy, visit our website www.suncor.com


Consolidated Statements of Earnings and Comprehensive Income. Net pretax earnings (loss) for the three and six month periods ended June 30 for our energy and trading activities in our refining and marketing segment were as follows:

Net Pretax Earnings (Loss)

                     
    Second quarter   Six Months ended June 30    
($ millions)   2008   2007   2008   2007    
Physical energy contracts trading activity   (18 ) 19   12   21    
Financial energy contracts trading activity   8   (1 ) 8   (5 )  
General and administrative costs   (2 ) —   (3 ) (1 )  
Total   (12 ) 18   17   15    

(e) Fair Value of Non-Designated Derivative Financial Instruments

The fair value of unsettled (unrealized) energy derivative assets and liabilities, which includes all financial contracts referenced in section (c) & (d) above are as follows:

($ millions)   June 30
2008		   December 31
2007		    
Energy trading assets   68   18    
Energy trading liabilities   113   21    
Net energy trading liabilities   (45 ) (3 )  

Change in fair value of net assets

($ millions)   2008  
 
Fair value of contracts at December 31, 2007   (3 )
Fair value of contracts realized during the period   61  
Fair value of contracts entered into during the period   (83 )
Changes in values attributable to market price and other market changes during the period   (20 )
 
Fair value of contracts outstanding at June 30, 2008   (45 )
 

Financial Risk Factors

The company is exposed to a number of different financial risks arising from normal course business exposures, as well as the company's use of financial instruments. These risk factors include market risks relating to commodity prices, foreign currency risk and interest rate risk, as well as liquidity risk and credit risk.

The company maintains a formal governance process to manage its financial risks. Our Risk Management Committee (RMC) is charged with the oversight of the company's risk management for trading risk management activities which are defined as strategic hedging, optimization trading, marketing and speculative trading. The RMC, acting under board authority, meets regularly to monitor limits on risk exposures, review policy compliance and validate risk-related methodologies and procedures. All risk management activity is carried out by specialist teams that have the appropriate skills, experience and supervision with the appropriate financial and management controls, and is unchanged from the prior year.

1) Market Risk

Market risk is the risk or uncertainty arising from possible market price movements and their impact on the future performance of the business. The market price movements that could adversely affect the value of the company's financial assets, liabilities and expected future cash flows include commodity price risk (crude oil, natural gas and electricity price), foreign currency exchange risk and interest rate risk.

Suncor Energy Inc.            
 Inquiries John Rogers (403) 269-8670                                                                                                                                      2008 Second Quarter    031

(a) Commodity Price Risk

The company's financial performance is closely linked to crude oil prices (including pricing differentials for various product types), and to a lesser extent, natural gas and electricity prices. The company's policies permit the use of various financial instruments in managing these price exposures. Our strategic crude oil hedging program gives management approval to fix a price or range of prices for approximately 30% of the total crude oil planned production for specified periods of time. Historically, the company has leveraged hedging instruments to stabilize cash flows during periods of growth and expansion. The company will consider additional strategic hedging opportunities as they become available.

A key component of our overall business strategy is to produce sufficient natural gas to meet or exceed internal demands for natural gas purchased for consumption in our oil sands operation, thus creating a price hedge which reduces our exposure to natural gas price volatility. In addition, existing corporate policies also permit the hedging of natural gas exposures to manage regional price differentials and pricing indexes as identified.

Changes in commodity prices on our financial contracts would have the following impact on our net earnings and other comprehensive income for the three months ended June 30, 2008:

Sensitivity Analysis

($ millions)   June 30, 2008 (1) Change   Net
Earnings		   Other
Comprehensive Income		    
Crude Oil   US$138.55/barrel                
  Price increase       US$1.00/barrel   (1 ) (1 )  
  Price decrease       US$1.00/barrel   1   1    

Natural Gas
 
US$10.87/mcf
 
 
 
 
 
 
 
 
  Price increase       US$0.10/mcf   1   —    
  Price decrease       US$0.10/mcf   (1 ) —    
(1)
Prices represent the average of the forward strip prices at June 30, 2008.

(b) Foreign Currency Exchange Risk

The company is exposed to changes in foreign exchange rates as revenues, capital expenditures, or financial instruments may fluctuate due to changing rates. As crude oil, the company's primary product, is priced in U.S. dollars, fluctuations in US$/Cdn$ exchange rates may have a significant impact on revenues. The company's exposure is partially offset through the issuance of U.S. dollar denominated long-term debt (refer to note 12) and by sourcing capital projects in U.S. dollars. The company does not currently hedge foreign currency risk on estimated revenues. The effect of a $0.01 change in the US$/Cdn$ exchange rate on our U.S. dollar denominated long-term debt would change after-tax earnings by approximately $35 million.

Where an operating unit has substantial exposure to capital expenditures in currencies other than the U.S. dollar, the company may hedge these risks through a combination of forward and option instruments. Transactions in the applicable financial market are executed consistent with established risk management policies.

(c) Interest Rate Risk

The company is exposed to interest rate risk as changes in interest rates may affect future cash flows and the fair values of its financial instruments. The primary exposure is related to notes and commercial paper. The company seeks to optimize this risk through the use of interest rate swaps by swapping fixed rates of interest for variable rates (see page 29) and other derivative instruments.

To optimize the company's position with respect to interest expense, the company targets 30% to 50% of interest should be based on floating rates. Over time this floating/fixed rate mix will fluctuate based on prevailing market conditions and management's assessment of overall risk.

The proportion of floating interest rate exposure inclusive of interest rate swaps at June 30, 2008 was 10% of total debt outstanding. The weighted average interest rate on total debt for the quarter ending June 30, 2008 was 5.7%.

The company's cash flows are sensitive to changes in interest rates on the floating rate portion of the company's debt. Given our current growth and expansion plans, all interest is currently being capitalized and therefore there is no earnings impact. If the interest rates applicable to floating rate instruments were to have increased by 1%, it is estimated that the company's cash flow for the

             Suncor Energy Inc.
 032    2008 Second Quarter                                                                    For more information about Suncor Energy, visit our website www.suncor.com


quarter would decrease by approximately $2 million. This assumes that the amount and mix of fixed and floating rate debt remains unchanged from June 30, 2008, and that the change in interest rates is effective from the beginning of the period.

2) Liquidity Risk

Liquidity risk is the risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities. The company believes that it has access to sufficient capital through internally generated cash flows and external sources (bank credit markets and debt capital markets), and to undrawn committed borrowing facilities to meet current spending forecasts.

Surplus cash is invested into a range of short-dated money market securities and the company seeks to ensure the security and liquidity of those investments. Investments are only permitted in high credit quality government or corporate securities. Diversification of these investments is supported through maintaining counterparty credit limits.

The following table shows the timing of cash outflows relating to trade and other payables and finance debt.

    June 30, 2008   December 31, 2007  
($ millions)   Trade and
other payables
(1)		 Finance
debt
(2)		 Trade and
other payables
(1)		 Finance
debt (2)		  
Within one year   3 461   861   2 843   764  
1 to 3 years   329   783   347   427  
3 to 5 years   —   1 211   —   917  
Over 5 years   19   11 735   19   6 985  
    3 809   14 590   3 209   9 093  
(1)
These balances exclude non-financial liabilities (pension liabilities, asset retirement obligation, future income taxes and financial instruments) totaling $1,588 million and $1,375 million at June 30, 2008 and December 31, 2007 respectively.

(2)
Finance debt includes long-term debt, capital leases and interest payments on fixed-term debt and commercial paper.

3) Credit Risk

Credit risk is the risk that a customer or counterparty will fail to perform an obligation or fail to pay amounts due causing a financial loss. We have a credit policy that is designed to ensure there is a standard credit practice throughout the company to measure and monitor credit risk. The policy outlines delegation of authority, the due diligence process required to approve a new customer or counterparty and the maximum amount of credit exposure per single entity. Before transactions begin with a new customer or counterparty, its creditworthiness is assessed, a credit rating is assigned and a maximum credit limit is allocated. The assessment process is outlined in the credit policy and considers both quantitative and qualitative factors. The company constantly monitors the exposure to any single customer or counterparty along with the financial position of the customer or counterparty. If it is deemed that a customer or counterparty has become materially weaker, the company will work to reduce the credit exposure and lower the credit limit allocated. Regular reports are generated to monitor credit risk and the Credit Committee meets quarterly to ensure compliance with the credit policy and review the exposures.

A substantial portion of the company's accounts receivable are with customers in the oil and gas industry and are subject to normal industry credit risk. At June 30, 2008, substantially all of the company's trade receivables were current, and there were no counterparties that individually constituted more than 10% of the outstanding balance.

The company has issued collateral for $4,635 million and holds collateral of $2,059 million at June 30, 2008. Collateral issued and received consists mainly of parental guarantees and letters of credit.

The company may be exposed to certain losses in the event that counterparties to derivative financial instruments are unable to meet the terms of the contracts. The company's exposure is limited to those counterparties holding derivative contracts with positive fair values at the reporting date. At June 30, 2008, the company's exposure was $98 million (December 31, 2007 – $38 million).

4. CAPITAL STRUCTURE FINANCIAL POLICIES

Suncor's primary capital management objective is to maintain a solid investment-grade credit rating profile. This objective affords the company the financial flexibility and access to the capital it requires to execute on its growth objectives.

Suncor Energy Inc.            
 Inquiries John Rogers (403) 269-8670                                                                                                                                      2008 Second Quarter    033

Suncor monitors capital through two key ratios: net debt to cash flow from operations and total debt to total debt plus shareholders' equity.

Net debt to cash flow from operations is calculated as short-term debt plus long-term debt less cash and cash equivalents divided by 12 month trailing cash flow from operations.

Total debt to total debt plus shareholders' equity is calculated as short term-debt plus long-term debt divided by short-term debt plus long-term debt plus shareholders' equity.

Suncor's strategy during Q2 2008, which was unchanged from 2007, was to maintain the measure set out in the following schedule. Suncor believes that maintaining our capital target helps to provide the company access to capital at a reasonable cost by maintaining solid investment-grade credit ratings.

At June 30, ($ millions) Capital Measure
Target		   2008   2007  
Components of ratios            
  Short-term debt     6   6  
  Long-term debt     6 547   3 152  
    Total debt     6 553   3 158  
  Cash and equivalents     2 146   952  
    Net debt     4 407   2 206  
  Shareholders' equity     13 574   10 307  
  Total capitalization (total debt + shareholders' equity)     20 127   13 465  
  Cash flow from operations (trailing 12 months)     4 723   3 695  
Net debt/cash flow from operations <2.0 times   0.9   0.6  
Total debt/total debt plus shareholders' equity     33%   23%  

5. FINANCING EXPENSES (INCOME)

    Second quarter   Six months ended June 30    
($ millions)   2008   2007   2008   2007    
Interest expense on debt   77   42   141   80    
Capitalized interest   (77 ) (42 ) (141 ) (80 )  
  Net interest expense   —   —   —   —    
Foreign exchange (gain) loss on long-term debt   (21 ) (95 ) 65   (107 )  
Other foreign exchange loss   27   21   20   22    
Total financing expenses (income)   6   (74 ) 85   (85 )  

6. RECONCILIATION OF BASIC AND DILUTED EARNINGS PER COMMON SHARE

    Second quarter   Six months ended June 30  
($ millions)   2008   2007
(restated)		   2008   2007
(restated)		  
Net earnings   829   738   1 537   1 314  
(millions of common shares)                  
Weighted-average number of common shares   931   921   929   921  
Dilutive securities:                  
  Options issued under stock-based compensation plans   22   21   19   21  
Weighted-average number of diluted common shares   953   942   948   942  
(dollars per common share)                  
Basic earnings per share (a)   0.89   0.80   1.66   1.43  
Diluted earnings per share (b)   0.87   0.78   1.62   1.40  
Note:
An option will have a dilutive effect under the treasury stock method only when the average market price of the common stock during the period exceeds the exercise price of the option.

(a)
Basic earnings per share is net earnings divided by the weighted-average number of common shares.

(b)
Diluted earnings per share is net earnings, divided by the weighted-average number of diluted common shares.

             Suncor Energy Inc.
 034    2008 Second Quarter                                                                    For more information about Suncor Energy, visit our website www.suncor.com

7. SHARE CAPITAL AND STOCK-BASED COMPENSATION

A common share option gives the holder the right, but not the obligation, to purchase common shares at a predetermined price over a specified period of time.

After the date of grant, employees and non-employee directors that hold options must earn the right to exercise them. This is done by the holder fulfilling a time requirement for service to the company, and with respect to certain options, is subject to accelerated vesting should the company meet predetermined performance criteria. Once this right has been earned, these options are considered vested.

The predetermined price at which an option can be exercised is equal to or greater than the market price of the common shares on the date the option is granted.

A performance vesting share unit is an award entitling employees to receive cash to varying degrees contingent upon Suncor's shareholder return relative to a peer group of companies.

A restricted share unit is a time-vested award with a three-year term entitling employees to receive cash.

(a) Stock Split

In May 2008, the Company implemented a two-for-one stock split of its issued and outstanding common shares. Information related to common shares, stock-based compensation, and earnings per share has been restated to reflect the impact of the Company's two-for-one stock split.

(b) Stock Option Plans:

(i) SunShare 2012 Performance Stock Option Plan

The company granted 826,000 options in the second quarter of 2008 under its new employee stock-based compensation plan ("SunShare 2012"), for a total of 1,056,000 options granted in the six months ended June 30, 2008. During the second quarter, in connection with the achievement of a predetermined performance criterion, 25% of the outstanding options vested under the SunShare 2012 plan and will become exercisable on January 1, 2010. The remaining 75% of outstanding options may vest on January 1, 2013 if further specified performance targets are met. All unvested options at January 1, 2013, which have not previously expired or been cancelled, will automatically expire.

(ii) SunShare Performance Stock Option Plan

Granting of options under the company's previous employee stock option incentive plan ("SunShare") ended in December 2007. During the second quarter of 2007, 896,000 options were granted to eligible full-time and part-time employees under the SunShare plan (1,520,000 options granted in the first six months of 2007). Final vesting of all unvested SunShare options occurred on April 30, 2008.

(iii) Executive Stock Option Plan

Under this plan, the company granted 26,000 common share options in the second quarter of 2008, for a total of 828,000 options granted in the six months ended June 30, 2008 (no options granted during the second quarter of 2007; 914,000 granted in the six months ended June 30, 2007) to non-employee directors and certain executives and other senior members of the company. Options granted have a ten-year life and vest annually over a three year period.

(iv) Key Contributor Stock Option Plan

Under this plan, the company granted 22,000 common share options in the second quarter of 2008, for a total of 2,362,000 options granted in the six months ended June 30, 2008 (36,000 options granted during the second quarter of 2007; 2,352,000 granted in the six months ended June 30, 2007) to non-insider senior managers and key employees. Options granted have a ten-year life and vest annually over a three-year period.

Suncor Energy Inc.           
 Inquiries John Rogers (403) 269-8670                                                                                                                                      2008 Second Quarter    035

Fair Value of Options Granted

The fair values of all common share options granted during the period are estimated as at the grant date using the Monte Carlo simulation approach for the SunShare 2012 option plan and the Black-Scholes option-pricing model for all other option plans. The weighted-average fair values of the options granted during the various periods and the weighted-average assumptions used in their determination are as noted below:

    Second quarter   Six months ended June 30  
    2008   2007   2008   2007  
Quarterly dividend per share   $0.05   $0.05   $0.05   $0.05 *  
Risk-free interest rate   3.06%   4.18%   3.51%   4.10%  
Expected life   5 years   3 years   6 years   5 years  
Expected volatility   30%   31%   28%   29%  
Weighted-average fair value per option   $12.80   $11.46   $15.07   $13.87  
*
In 2007, quarterly dividends of $0.04 per share were paid in the first quarter, and $0.05 per share were paid in the second quarter.

Stock-based compensation expense recognized in the second quarter of 2008 related to stock option plans was $25 million (2007 – $20 million). For the six months ended June 30, 2008 stock-based compensation expense recognized was $69 million (2007 – $38 million).

Common share options granted prior to January 1, 2003 are not recognized as compensation expense in the Consolidated Statements of Earnings. The company's reported net earnings attributable to common shareholders and earnings per share prepared in accordance with the fair value method of accounting for stock-based compensation would have been reduced for all common share options granted prior to 2003 to the pro forma amounts stated below:

    Second quarter   Six months ended June 30  
($ millions, except per share amounts)   2008   2007 (restated)   2008   2007 (restated)  
Net earnings – as reported   829   738   1 537   1 314  
Less: compensation cost under the fair value method for pre-2003 options   1   2   4   5  
Pro forma net earnings   828   736   1 533   1 309  

Basic earnings per share
 
 
 
 
 
 
 
 
 
  As reported   0.89   0.80   1.66   1.43  
  Pro forma   0.89   0.80   1.65   1.42  
Diluted earnings per share                  
  As reported   0.87   0.78   1.62   1.40  
  Pro forma   0.87   0.78   1.62   1.39  

(c) Performance Share Units (PSUs)

In the second quarter of 2008 the company issued 18,000 PSUs (2007 – 30,000). For the six months ended June 30, 2008, the company issued 780,000 PSUs (2007 – 828,000). Expense recognized in the second quarter of 2008 was $15 million (2007 – $17 million in expense). Expense recognized for the six months ended June 30, 2008 was $10 million (2007 – $36 million).

(d) SunShare 2012 Restricted Share Units (RSUs)

In the second quarter of 2008 the company issued 46,000 RSUs under its new employee stock-based compensation plan. For the six months ended June 30, 2008, the company issued 976,000 RSUs. Expense recognized in the second quarter of 2008 was $5 million and expense recognized for the six months ended June 30, 2008 was $9 million.

             Suncor Energy Inc.
 036    2008 Second Quarter                                                                    For more information about Suncor Energy, visit our website www.suncor.com

8. EMPLOYEE FUTURE BENEFITS LIABILITY

The company's pension plans and other post-retirement benefits programs are described in note 9 of the company's 2007 Annual Report. The following is the status of the net periodic benefit cost for the three and six months ended June 30.

    Pension Benefits    
    Second Quarter   Six months ended June 30    
    2008   2007   2008   2007    
Current service costs   14   13   28   26    
Interest costs   12   11   24   22    
Expected return on plan assets   (11 ) (10 ) (22 ) (21 )  
Amortization of net actuarial loss   5   6   11   12    
Net periodic benefit cost   20   20   41   39    
    Other Post-Retirement Benefits  
    Second Quarter   Six months ended June 30  
    2008   2007   2008   2007  
Current service costs   1   1   2   2  
Interest costs   3   2   5   4  
Amortization of net actuarial loss   —   1   1   1  
Net periodic benefit cost   4   4   8   7  

9. SUPPLEMENTAL INFORMATION

    Second quarter   Six months ended June 30  
($ millions)   2008   2007   2008   2007  
Interest paid   58   22   124   77  
Income taxes paid   131   38   404   55  

10. INCOME TAXES

During the fourth quarter of 2007 the federal government substantively enacted a 3.5% reduction to its federal corporate tax rates. Accordingly, the company recognized a reduction in future income tax expense of $360 million related to the revaluation of its opening future income tax balances.

During the second quarter of 2007 the federal government substantively enacted a 0.5% reduction to its federal corporate tax rates. Accordingly, the company recognized a reduction in future income tax expense of $67 million related to the revaluation of its opening future income tax balances.

11. ROYALTY ESTIMATE MEASUREMENT UNCERTAINTY

Our current estimation of Alberta Crown royalties is based on regulations currently in effect. Alberta Crown royalties in effect for each oil sands project require payments to the Government of Alberta based on annual gross revenues less related transportation costs (R) less allowable costs (C), including the deduction of certain capital expenditures (the 25% R-C royalty), subject to a minimum payment of 1% of R.

Oil Sands royalties payable in 2008 are highly sensitive to, among other factors, changes in crude oil and natural gas pricing, foreign exchange rates and total capital and operating costs for each project. The oil sands pretax royalty estimate was $412 million for the first six months of 2008 compared to $256 million for the first six months of 2007. The balance of the consolidated royalty expense is in respect of natural gas royalties of $91 million (2007 – $64 million).

In 2008, the estimation process for calculating the quarterly royalty provision was changed from being based on an annual estimate to being based on the actual eligible revenues and costs recorded in the period. If the annualized approach was used for 2008, pretax royalties would have been $85 million higher for the first six months of 2008.

12. LONG-TERM DEBT AND CREDIT FACILITIES

In May 2008, the company issued 5.80% Medium Term Notes with a principal amount of $700 million under an outstanding $2 billion debt shelf prospectus. These notes bear interest, which is paid semi-annually, and mature on May 22, 2018. The net

Suncor Energy Inc.            
 Inquiries John Rogers (403) 269-8670                                                                                                                                      2008 Second Quarter    037


proceeds received were added to our general funds to repay outstanding commercial paper, which originally funded our working capital needs, sustaining capital expenditures and growth capital expenditures.

In June 2008, the company issued 6.10% Notes with a principal amount of US$1.25 billion and 6.85% Notes with a principal amount of US$750 million under an amended US$3.65 billion debt shelf prospectus. These notes bear interest, which is paid semi-annually, and mature on June 1, 2018, and June 1, 2039, respectively. The net proceeds received were added to our general funds, which are used for our working capital needs, sustaining capital expenditures, growth capital expenditures and to repay outstanding commercial paper borrowings.

Also during the second quarter, Suncor's $3.5 billion syndicated credit facility was increased to $3.75 billion, while our $410 million bilateral credit facility was reduced to $370 million and had its term extended to 2009.

($ millions)   June 30
2008		   December 31
2007		    
Fixed-term debt, redeemable at the option of the Company            
6.85% Notes, denominated in U.S. dollars, due in 2039 (US$750)   764   —    
6.50% Notes, denominated in U.S. dollars, due in 2038 (US$1150)   1 171   1 137    
5.95% Notes, denominated in U.S. dollars, due in 2034 (US$500)   509   494    
7.15% Notes, denominated in U.S. dollars, due in 2032 (US$500)   509   494    
6.10% Notes, denominated in U.S. dollars, due in 2018 (US$1250)   1 273   —    
5.39% Series 4 Medium Term Notes, due in 2037   600   600    
5.80% Series 4 Medium Term Notes, due in 2018   700   —    
6.70% Series 2 Medium Term Notes, due in 2011   500   500    
    6 026   3 225    

Revolving-term debt, with interest at variable rates
 
 
 
 
 
 
Commercial Paper   470   522    
Total unsecured long-term debt   6 496   3 747    
Secured long-term debt   14   1    
Capital Leases   102   102    
Fair value of interest rate swaps   8   6    
Deferred financing costs   (73 ) (45 )  
Total long-term debt   6 547   3 811    

At June 30, 2008, undrawn lines of credit were approximately $3,391 million, as follows:

($ millions)   2008  
Facility that is fully revolving for 364 days, has a term period of one year and expires in 2009   370  
Facility that is fully revolving for a period of five years and expires in 2013   3 750  
Facilities that can be terminated at any time at the option of the lenders   45  
Total available credit facilities   4 165  
Credit facilities supporting outstanding commercial paper   470  
Credit facilities supporting standby letters of credit   304  
Total undrawn credit facilities   3 391  

13. ACCUMULATED OTHER COMPREHENSIVE INCOME

The components of accumulated other comprehensive loss, net of income taxes, are as follows:

($ millions)   June 30
2008		   December 31
2007		    
Unrealized foreign currency translation adjustments   (225 ) (266 )  
Unrealized gains and losses on derivative hedging activities   (41 ) 13    
Total   (266 ) (253 )  

             Suncor Energy Inc.
 038    2008 Second Quarter                                                                    For more information about Suncor Energy, visit our website www.suncor.com

Highlights
(unaudited)

    2008   2007
(restated)		  
Cash Flow from Operations          

(dollars per common share – basic)
 
 
 
 
 

For the three months ended June 30
 
 
 
 
 

Cash flow from operations (1)
 
1.51
 
1.11
 

For the six months ended June 30
 
 
 
 
 

Cash flow from operations (1)
 
2.76
 
2.01
 

Ratios
 
 
 
 
 

For the twelve months ended June 30
 
 
 
 
 

Return on capital employed (%) (2)
 
28.8
 
27.2
 
Return on capital employed (%) (3)   20.7   20.1  
Net debt to cash flow from operations (times) (4)   0.9   0.6  
Interest coverage on long-term debt (times)          
  Net earnings (5)   15.9   21.1  
  Cash flow from operations (6)   20.3   26.0  

As at June 30
 
 
 
 
 

Debt to debt plus shareholders' equity (%) (7)
 
32.6
 
23.5
 

Common Share Information (8)
 
 
 
 
 

As at June 30
 
 
 
 
 

Share price at end of trading
 
 
 
 
 
  Toronto Stock Exchange – Cdn$   59.20   47.80  
  New York Stock Exchange – US$   58.12   44.79  
Common share options outstanding (thousands)   48 000   41 261  

For the six months ended June 30
 
 
 
 
 

Average number outstanding, weighted monthly (thousands)
 
928 572
 
920 844
 

Refer to the Quarterly Operating Summary for a discussion of financial measures not prepared in accordance with Canadian generally accepted accounting principles (GAAP).

(1)
Cash flow from operations for the period; divided by the weighted average number of common shares outstanding during the period.

(2)
For the twelve month period ended; net earnings (2008 – $3,156 million; 2007 – $2,317 million) adjusted for after-tax financing income (2008 – $49 million; 2007 – $31 million) divided by average capital employed (2008 – $10,967 million; 2007 – $8,410 million). Average capital employed is the sum of shareholders' equity and short-term debt plus long-term debt less cash and cash equivalents, at the beginning and end of the year, divided by two, less capitalized costs related to major projects in progress (as applicable). Return on capital employed (ROCE) for Suncor operating segments as presented in the Quarterly Operating Summary is calculated in a manner consistent with consolidated ROCE. For a detailed reconciliation of ROCE prepared on an annual basis, see page 46 of Suncor's 2007 Annual Report to Shareholders.

(3)
If capital employed were to include capitalized costs related to major projects in progress (average capital employed including major projects in progress: 2008 – $15,246 million; 2007 – $11,369 million), the return on capital employed would be as stated on this line.

(4)
Short-term debt plus long-term debt less cash and cash equivalents, divided by cash flow from operations for the twelve month period then ended.

(5)
Net earnings plus income taxes and interest expense, divided by the sum of interest expense and capitalized interest.

(6)
Cash flow from operations plus current income taxes and interest expense; divided by the sum of interest expense and capitalized interest.

(7)
Short-term debt plus long-term debt; divided by the sum of short-term debt, long-term debt and shareholders' equity.

(8)
In May 2008, Suncor's common shares were split on a two-for-one basis. Prior periods have been restated to reflect the split.

Suncor Energy Inc.            
 Inquiries John Rogers (403) 269-8670                                                                                                                                      2008 Second Quarter    039

Quarterly operating summary
(unaudited)

       
For the quarter ended		   Six months ended   Total year  
        June 30
2008		   Mar 31
2008		   Dec 31
2007		   Sept 30
2007		   June 30
2007		   June 30
2008		   June 30
2007		   Dec 31
2007		  
OIL SANDS                                  
Production (1),(a)                                  
Total production   174.6   248.0   252.5   239.1   202.3   211.0   225.1   235.6  
Firebag   34.7   34.6   40.4   35.8   36.2   34.7   35.8   36.9  
Sales (a)                                  
Light sweet crude oil   68.2   96.2   102.2   99.3   100.0   82.2   102.8   101.7  
Diesel   21.2   28.0   26.0   23.9   20.3   24.6   24.9   25.0  
Light sour crude oil   91.8   120.8   118.2   94.1   84.2   106.3   98.4   102.3  
Bitumen   0.3   0.1   5.4   6.6   3.8   0.2   5.3   5.7  
Total sales   181.5   245.1   251.8   223.9   208.3   213.3   231.4   234.7  
Average sales price (2),(b)                                  
Light sweet crude oil   122.12   100.93   87.34   81.00   75.64   109.72   72.07   78.03  
Other (diesel, light sour crude oil and bitumen)   120.52   93.09   78.48   73.76   66.74   104.94   64.93   70.86  
Total   121.12   96.16   82.07   76.97   71.01   106.47   68.10   74.01  
Total *   122.39   96.22   82.36   76.97   71.01   107.36   68.06   74.07  

Cash operating costs and Total operating costs – Total operations (c)
 
Cash costs   40.10   25.10   24.10   23.00   28.40   31.30   24.75   24.15  
Natural gas   8.75   5.00   3.60   2.10   4.20   6.50   4.35   3.55  
Imported bitumen   2.00   1.45   0.20   —   0.10   1.70   0.10   0.10  
Cash operating costs (3)   50.85   31.55   27.90   25.10   32.70   39.50   29.20   27.80  
Project start-up costs   0.90   0.30   0.55   1.10   1.15   0.55   0.55   0.95  
Total cash operating costs (4)   51.75   31.85   28.45   26.20   33.85   40.05   29.75   28.75  
Depreciation, depletion and amortization   8.30   5.75   5.60   5.70   5.85   6.80   5.10   5.40  
Total operating costs (5)   60.05   37.60   34.05   31.90   39.70   46.85   34.85   34.15  

Cash operating costs and Total operating costs – In-situ bitumen production only (c)
 
Cash costs   10.10   14.60   9.95   11.85   10.60   12.35   10.80   10.85  
Natural gas   14.55   14.10   9.15   9.10   10.60   14.40   10.80   9.90  
Cash operating costs (6)   24.65   28.70   19.10   20.95   21.20   26.75   21.60   20.75  
Firebag start-up costs   1.65   0.35   —   —   —   0.95   —   —  
Total cash operating costs (7)   26.30   29.05   19.10   20.95   21.20   27.70   21.60   20.75  
Depreciation, depletion and amortization   6.70   6.75   6.80   6.70   5.75   6.70   5.55   6.20  
Total operating costs (8)   33.00   35.80   25.90   27.65   26.95   34.40   27.15   26.95  

(for the period ended)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Capital employed (i)   7 716   6 837   6 605   6 071   5 112              

(for the twelve months ended)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Return on capital employed (j)   43.6   44.3   43.0   32.3   35.3              
Return on capital employed (j)****   27.3   28.0   27.9   21.7   24.4              

             Suncor Energy Inc.
 040    2008 Second Quarter                                                                    For more information about Suncor Energy, visit our website www.suncor.com

Quarterly operating summary (continued)
 (unaudited)

       
For the quarter ended		   Six months ended   Total year  
        June 30
2008		   Mar 31
2008		   Dec 31
2007		   Sept 30
2007		   June 30
2007		   June 30
2008		   June 30
2007		   Dec 31
2007		  
NATURAL GAS                                  
Gross production **                                  
Natural gas (d)   205   209   210   193   191   207   191   196  
Natural gas liquids and crude oil (a)   3.4   3.3   3.2   3.1   3.0   3.4   3.1   3.1  
Total gross production (e)   37.7   38.2   38.2   35.2   34.9   37.9   34.9   35.8  
Total gross production (f)   226   229   229   211   209   228   209   215  
Average sales price (2)                                  
Natural gas (g)   9.62   7.30   6.08   5.39   6.85   8.45   6.93   6.32  
Natural gas (g) *   9.68   7.31   6.02   5.14   6.83   8.48   6.98   6.27  
Natural gas liquids and crude oil (b)   86.14   64.14   60.31   58.11   51.21   75.39   53.96   56.64  
Net wells drilled                                  
Conventional   – exploratory ***   2   2   6   1   3   4   7   14  
    – development   6   7   6   2   1   13   9   17  
        8   9   12   3   4   17   16   31  

(for the period ended)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Capital employed (i)   1 226   1 175   1 153   1 090   1 079              

(for the twelve months ended)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Return on capital employed (j)   8.3   3.5   2.5   (0.6 ) 0.6              

REFINING AND MARKETING
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Refined product sales (h)                                  
Transportation fuels                                  
Gasoline   – retail   4.5   4.6   4.9   5.1   5.2   4.6   5.3   5.2  
    – other   11.8   10.8   11.0   12.0   11.7   11.3   11.8   11.6  
Distillate   11.5   10.4   11.0   10.8   10.5   11.0   10.3   10.6  
Total transportation fuel sales   27.8   25.8   26.9   27.9   27.4   26.9   27.4   27.4  
Petrochemicals   0.9   0.6   0.7   0.9   1.3   0.8   1.1   0.9  
Asphalt   1.7   2.2   1.4   2.1   1.8   1.8   1.6   1.7  
Other   2.7   1.9   3.8   4.2   4.1   2.3   3.1   3.5  
Total refined product sales   33.1   30.5   32.8   35.1   34.6   31.8   33.2   33.5  
Crude oil supply and refining                                  
Processed at refineries (h)   26.0   23.0   22.1   25.9   27.6   24.5   26.1   25.1  
Utilization of refining capacity (j)   102   90   87   102   108   96   103   98  

(for the period ended)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Capital employed (i)   2 534   2 837   2 489   2 332   2 011              

(for the twelve months ended)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Return on capital employed (j)   12.6   18.3   20.0   20.9   22.4              
Return on capital employed (j) ****   11.6   16.5   17.4   17.9   17.2              

Suncor Energy Inc.            
 Inquiries John Rogers (403) 269-8670                                                                                                                                      2008 Second Quarter    041

Quarterly operating summary (continued)

Non-GAAP Financial Measures

Certain financial measures referred to in the Highlights and Quarterly Operating Summary are not prescribed by Canadian generally accepted accounting principles (GAAP). Suncor includes cash flow from operations, return on capital employed and cash and total operating costs per barrel data because investors may use this information to analyze operating performance, leverage and liquidity. The additional information should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP.

Definitions

(1) Total operations production –   Total operations production includes total production from both mining and in-situ operations.

(2) Average sales price
–
 
This operating statistic is calculated before royalties and net of related transportation costs (including or excluding the impact of hedging activities as noted).

(3) Cash operating costs – Total operations
–
 
Include cash costs that are defined as operating, selling and general expenses (excluding inventory changes), accretion expense, taxes other than income taxes and the cost of bitumen imported from third parties. Per barrel amounts are based on total production volumes. For a reconciliation of this non-GAAP financial measure see Management's Discussion and Analysis.

(4) Total cash operating costs – Total operations
–
 
Include cash operating costs – Total operations as defined above and cash start-up costs. Per barrel amounts are based on total production volumes.

(5) Total operating costs – Total operations
–
 
Include total cash operating costs – Total operations as defined above and non-cash operating costs. Per barrel amounts are based on total production volumes.

(6) Cash operating costs – In-situ bitumen production
–
 
Include cash costs that are defined as operating, selling and general expenses (excluding inventory changes), accretion expense and taxes other than income taxes. Per barrel amounts are based on in-situ production volumes only.

(7) Total cash operating costs – In-situ bitumen production
–
 
Include cash operating costs – In-situ bitumen production as defined above and cash start-up operating costs. Per barrel amounts are based on in-situ production volumes only.

(8) Total operating costs – In-situ bitumen production
–
 
Include total cash operating costs – In-situ bitumen production as defined above and non-cash operating costs. Per barrel amounts are based on in-situ production volumes only.
 

Explanatory Notes

* Excludes the impact of hedging activities.

**
Currently production is located in the Western Canada Sedimentary Basin.

***
Excludes exploratory wells in progress.

****
If capital employed were to include capitalized costs related to major projects in progress, the return on capital employed would be as stated on this line.
 
(a)   thousands of barrels per day   (d)   millions of cubic feet per day   (g)   dollars per thousand cubic feet

(b)
 
dollars per barrel
 
(e)
 
thousands of barrels of oil equivalent per day
 
(h)
 
thousands of cubic metres per day

(c)
 
dollars per barrel rounded to the nearest $0.05
 
(f)
 
millions of cubic feet equivalent per day
 
(i)
 
$ millions

 
 
 
 
 
 
 
 
(j)
 
percentage
 

Metric Conversion

Crude oil, refined products, etc.   1m 3 (cubic metre) = approx. 6.29 barrels    
         
         
         

             Suncor Energy Inc.
 042    2008 Second Quarter                                                                    For more information about Suncor Energy, visit our website www.suncor.com



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