<PAGE>
<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
----------------- ----------------
Commission file number 1-6841
SUN COMPANY, INC.
------------------------------------------------------------
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-1743282
- --------------------------------------------- -------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
TEN PENN CENTER, 1801 MARKET STREET, PHILADELPHIA, PA 19103-1699
----------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(215) 977-3000
----------------------------------------------------------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
- --------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
------ ------
At September 30, 1997, there were 71,547,334 shares of Common Stock, $1 par
value and 12,165,300 shares of Cumulative Preference Stock--Series A, no
par value, outstanding.
<PAGE>
<PAGE> 2
SUN COMPANY, INC.
-----------------
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Income
for the Nine Months Ended September 30, 1997
and 1996 3
Condensed Consolidated Statements of Income
for the Three Months Ended September 30, 1997
and 1996 4
Condensed Consolidated Balance Sheets at
September 30, 1997 and December 31, 1996 5
Condensed Consolidated Statements of Cash
Flows for the Nine Months Ended September 30,
1997 and 1996 6
Notes to Condensed Consolidated Financial
Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURE 25
<PAGE>
<PAGE> 3
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Sun Company, Inc. and Subsidiaries
(Millions of Dollars Except Per Share Amounts)
- --------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30
------------------
1997 1996
---- ----
(UNAUDITED)
<S> <C> <C>
REVENUES
Sales and other operating revenue (including
consumer excise taxes) $7,944 $8,220
Interest income 6 12
Other income 36 41
------ ------
7,986 8,273
------ ------
COSTS AND EXPENSES
Cost of products sold and operating expenses 5,737 6,323
Selling, general and administrative expenses 392 440
Consumer excise taxes 1,167 1,203
Payroll, property and other taxes 63 64
Depreciation, depletion and amortization 195 197
Provision for write-down of assets and other
matters (Note 4) 32 85
Interest cost and debt expense 58 59
Interest capitalized (4) (1)
------ ------
7,640 8,370
------ ------
Income (loss) from continuing operations before
income tax expense (benefit) 346 (97)
Income tax expense (benefit) 112 (40)
------ ------
Income (loss) from continuing operations 234 (57)
Income from discontinued operations (Note 2) -- 166
------ ------
NET INCOME 234 109
Dividends on preference stock (33) (34)
------ ------
Net income attributable to common shareholders $ 201 $ 75
====== ======
Earnings per share of common stock (Note 5):
Primary:
Income (loss) from continuing operations $2.76 $(1.23)
Net income $2.76 $1.02
Fully diluted:
Income (loss) from continuing operations $2.39 $(1.23)
Net income $2.39 $1.02
Cash dividends paid per share:
Preference stock* $2.70 $2.70
Common stock $.75 $.75
</TABLE>
- -------------
*Each share of preference stock is represented by two depositary shares.
Each depositary share accrues dividends quarterly at a rate of $.45 per
share, or one-half the rate paid on the preference stock.
(See Accompanying Notes)
<PAGE>
<PAGE> 4
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Sun Company, Inc. and Subsidiaries
(Millions of Dollars Except Per Share Amounts)
- --------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Three Months
Ended September 30
--------------------
1997 1996
------ -----
(UNAUDITED)
<S> <C> <C>
REVENUES
Sales and other operating revenue (including
consumer excise taxes) $2,634 $2,874
Interest income 2 4
Other income 13 20
------ ------
2,649 2,898
------ ------
COSTS AND EXPENSES
Cost of products sold and operating expenses 1,844 2,240
Selling, general and administrative expenses 125 155
Consumer excise taxes 414 416
Payroll, property and other taxes 22 19
Depreciation, depletion and amortization 65 65
Interest cost and debt expense 20 19
Interest capitalized (3) --
------ ------
2,487 2,914
------ ------
Income (loss) from continuing operations before
income tax expense (benefit) 162 (16)
Income tax expense (benefit) 51 (5)
------ ------
Income (loss) from continuing operations 111 (11)
Income from discontinued operations (Note 2) -- 128
------ ------
NET INCOME 111 117
Dividends on preference stock (11) (11)
------ ------
Net income attributable to common shareholders $ 100 $ 106
====== ======
Earnings per share of common stock (Note 5):
Primary:
Income (loss) from continuing operations $1.38 $(.30)
Net income $1.38 $1.44
Fully diluted:
Income (loss) from continuing operations $1.14 $(.11)
Net income $1.14 $1.19
<PAGE>
Cash dividends paid per share:
Preference stock* $.90 $.90
Common stock $.25 $.25
</TABLE>
- -------------
*Each share of preference stock is represented by two depositary shares.
Each depositary share accrues dividends quarterly at a rate of $.45 per
share, or one-half the rate paid on the preference stock.
(See Accompanying Notes)
<PAGE>
<PAGE> 5
CONDENSED CONSOLIDATED BALANCE SHEETS
Sun Company, Inc. and Subsidiaries
<TABLE>
<CAPTION>
At At
September 30 December 31
1997 1996
(Millions of Dollars) (UNAUDITED)
- --------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 66 $ 67
Accounts and notes receivable, net 698 864
Inventories:
Crude oil 170 157
Refined products 314 252
Materials, supplies and other 70 67
Deferred income taxes 120 128
------ ------
Total Current Assets 1,438 1,535
Investment in Real Estate Operations Held
for Sale (Note 3) 73 79
Investments and Long-Term Receivables 87 91
Properties, Plants and Equipment 5,913 5,829
Less Accumulated Depreciation, Depletion
and Amortization 2,891 2,785
------ ------
Properties, Plants and Equipment, net 3,022 3,044
Deferred Income Taxes -- 24
Deferred Charges and Other Assets 212 252
------ ------
Total Assets $4,832 $5,025
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 885 $1,081
Accrued liabilities 532 573
Current portion of long-term debt 58 54
Taxes payable 74 109
------ ------
Total Current Liabilities 1,549 1,817
Long-Term Debt 830 835
Retirement Benefit Liabilities 484 489
Deferred Income Taxes 67 --
Other Deferred Credits and Liabilities 404 446
Commitments and Contingent Liabilities (Note 6)
Shareholders' Equity (Note 7) 1,498 1,438
------ ------
Total Liabilities and Shareholders' Equity $4,832 $5,025
====== ======
</TABLE>
(See Accompanying Notes)
<PAGE>
<PAGE> 6
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Sun Company, Inc. and Subsidiaries
(Millions of Dollars)
- -------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30
-------------------
1997 1996
----- -----
(UNAUDITED)
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 234 $ 109
Adjustments to reconcile net income to net
cash provided by operating activities:
Income from discontinued operations -- (166)
Provision for write-down of assets and other
matters 32 85
Depreciation, depletion and amortization 195 197
Deferred income tax expense (benefit) 92 (39)
Changes in working capital pertaining to
operating activities:
Accounts and notes receivable 166 (156)
Inventories (78) (2)
Accounts payable and accrued liabilities (295) 183
Taxes payable (35) (5)
Other (18) (20)
----- -----
Net cash provided by continuing operating
activities 293 186
Net cash flows from discontinued operating
activities -- 17
----- -----
Net cash provided by operating activities 293 203
----- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (242) (207)
Proceeds from divestments:
International Production operations -- 278
Suncor common stock -- 135
Other 110 21
Investing activities of discontinued operations -- (13)
Other 16 2
----- -----
Net cash provided by (used in) investing activities (116) 216
----- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments of short-term borrowings -- (54)
Repayments of long-term debt (1) (2)
Cash dividend payments (88) (89)
Purchases of preference stock for retirement (19) (2)
Purchases of common stock for treasury (103) (31)<PAGE>
Proceeds from issuance of common stock
under management incentive and employee
option plans 36 4
Other (3) (21)
----- -----
Net cash used in financing activities (178) (195)
----- -----
Net increase (decrease) in cash and cash equivalents (1) 224
Cash and cash equivalents at beginning of period 67 11
----- -----
Cash and cash equivalents at end of period $ 66 $ 235
===== =====
</TABLE>
(See Accompanying Notes)
<PAGE>
<PAGE> 7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
1. General.
The accompanying condensed consolidated financial statements are
presented in accordance with the requirements of Form 10-Q and
generally accepted accounting principles for interim financial
reporting. They do not include all disclosures normally made in
financial statements contained in Form 10-K. In management's opinion
all adjustments necessary for a fair presentation of the results of
operations, financial position and cash flows for the periods shown
have been made. All such adjustments are of a normal recurring nature
except for the provisions for write-down of assets and other matters
(Note 4). Results for the three and nine months ended September 30,
1997 are not necessarily indicative of results for the full year 1997.
2. Discontinued Operations.
On September 30, 1996, Sun completed the sale of its international oil
and gas production business for $278 million in cash. The sale of
this business represents the completion of the Company's withdrawal
from oil and gas exploration and production activities. The Company
withdrew from international exploration activities in 1992 and
divested its remaining 55-percent interest in Suncor Inc., a Canadian
integrated oil company, on June 8, 1995. Sun received $770 million in
cash from the sale of Suncor, after commissions and discounts, of
which $635 million was received in June 1995 and $135 million was
received in June 1996.
As a result of its sale, the international oil and gas production
business has been classified as a discontinued operation for the nine
months ended September 30, 1996. The following is a summary of the
results of this business during that period (in millions of dollars):
Sales and other operating revenue $187
====
Income before income tax benefit $152
Income tax benefit 14
----
Income from discontinued operations $166
====
Income from discontinued International Production operations includes
a $125 million gain on divestment of this business (comprised of a
pretax gain of $93 million and an income tax benefit of $32 million).
3. Investment in Real Estate Operations Held for Sale.
Sun has been pursuing the disposition of its investment in Radnor
Corporation ("Radnor"), its wholly owned real estate development
subsidiary, since October 1991. Radnor is accounted for as an
investment held for sale. As a result, pretax income from real estate
operations, which was breakeven for both the nine months ended
September 30, 1997 and 1996, has been included as a single amount in
other income in the condensed consolidated statements of income.
<PAGE>
<PAGE> 8
The assets and liabilities relating to real estate operations have
been segregated in the condensed consolidated balance sheets and
separately reflected as an investment in operations held for sale.
Such amounts are detailed as follows (in millions of dollars):
<TABLE>
<CAPTION>
At At
September 30 December 31
1997 1996
-------- -----------
<S> <C> <C>
Inventories $ 74 $ 78
Properties, plants and equipment 57 119
Other assets 18 18
Debt (Note 6) (51) (109)
Other liabilities (25) (27)
---- -----
Investment in real estate operations
held for sale $ 73 $ 79
==== =====
</TABLE>
4. Write-downs of Assets and Other Matters.
During the first quarter of 1997, Sun established a $32 million pretax
accrual ($21 million after tax) for employee terminations and related
costs. The termination benefits are for approximately 320 employees
to be involuntarily terminated, of which approximately 200 were
terminated during the first nine months of 1997. The employee
reductions are throughout the organization and include senior
management, support staff and operations personnel. As of September
30, 1997, the amount of actual termination benefits paid and charged
against the accrual totalled $16 million.
During the second quarter of 1996, Sun recorded an $85 million ($53
million after tax) provision for write-down of assets and other
matters related to the Company's Philadelphia refinery reconfiguration
project, which was completed during the fourth quarter of 1996. This
reconfiguration continues the integration of the two adjacent but
separate facilities (Point Breeze and Girard Point) at the
Philadelphia, PA refinery. The provision is comprised principally of
the write-off of redundant processing units and also includes an
accrual for environmental remediation activities associated with the
reconfiguration.
<PAGE>
<PAGE> 9
5. Earnings Per Share.
The following table sets forth the computation of earnings per share
for the nine-month and three-month periods ended September 30, 1997
and 1996 (in millions except per share amounts):
<TABLE>
<CAPTION>
Nine Months Three Months
Ended Ended
September 30 September 30
-------------- --------------
1997 1996* 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income attributable to
common shareholders:
Primary (after deduction of
dividends on preference stock) $201 $75 $100 $106
==== === ==== ====
Fully diluted $234 $75 $111 $117
==== === ==== ====
Weighted average number of shares
outstanding:
Primary 72.9 73.8 72.7 73.6
Fully diluted 97.8 73.8 97.5 98.6
Earnings per share of common stock:
Primary:
Income (loss) from continuing
operations $2.76 $(1.23) $1.38 $(.30)
Income from discontinued operations -- 2.25 -- 1.74
----- ------ ----- -----
Net income $2.76 $ 1.02 $1.38 $1.44
===== ====== ===== =====
Fully diluted:
Income (loss) from continuing
operations $2.39 $(1.23) $1.14 $(.11)
Income from discontinued operations -- 2.25 -- 1.30
----- ------ ----- -----
Net income $2.39 $ 1.02 $1.14 $1.19
===== ====== ===== =====
</TABLE>
- -------------
*Since the assumed redemption of preference shares would have resulted in
an increase in earnings per share during the nine months ended September
30, 1996, fully diluted amounts are equal to those reported on a primary
basis for that period.
<PAGE>
<PAGE> 10
In February 1997, Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS No. 128") was issued, which is required to
be adopted in the fourth quarter of 1997. Under SFAS No. 128, the
dilutive effect of stock options are excluded from the primary
earnings per share calculation. Had SFAS No. 128 been followed, the
impact on Sun's primary and fully diluted earnings per share amounts
for the nine months ended September 30, 1997 and 1996 and for the
three months ended September 30, 1997 would not have been material.
In addition, the new standard would not have affected the primary
earnings per share amounts for the three months ended September 30,
1996. However, since the assumed redemption of preference shares
would have resulted in a reduction in the loss per share from
continuing operations for the three months ended September 30, 1996,
the diluted per share amounts for that period under the new standard
would have equalled those reported on a primary basis.
6. Commitments and Contingent Liabilities.
A wholly owned subsidiary of the Company is a one-third partner in
Belvieu Environmental Fuels ("BEF"), a joint venture formed for the
purpose of constructing, owning and operating a $225 million methyl
tertiary butyl ether ("MTBE") production facility in Mont Belvieu,
Texas. The facility was completed during 1995.
In order to obtain a secure supply of oxygenates for the manufacture
of reformulated gasoline, Sun entered into an off-take agreement with
BEF whereby Sun agreed to purchase all of the MTBE production from the
plant. For the first 14,000 barrels daily of production, Sun agreed
to pay BEF prices through May 1997 based on the market value of MTBE
feedstocks (methanol and butane) plus a fixed amount per gallon (the
"formula price"), and thereafter through May 2000 based on the then-
existing MTBE prices per gallon in the contract market (the "contract
market price"). However, the price to be paid by Sun for the first
12,600 barrels daily of MTBE production through May 2000, at a
minimum, will equal the sum of BEF's annual raw material and operating
costs associated with this production plus BEF's debt service payments
(collectively, the "minimum price") if the minimum price per gallon
exceeds the applicable formula or contract market price. After May
2000, Sun and BEF will negotiate a new price for the last four years
of the agreement based upon the market conditions existing at that
time.
The amounts paid by Sun for MTBE under this agreement were based upon
the formula price through May 1997 and the minimum price from June
through September 1997. The formula prices paid by Sun during most of
1996 were believed to have approximated prices of other MTBE long-term
sales agreements in the marketplace. However, management believes
that the contract market changed in the latter part of 1996 as
feedstock-plus-fixed-priced contracts expired and were replaced by
spot-market-price-based contracts, which have been more favorable to
the purchaser. Management also believes that the spot market for MTBE
had developed by the latter part of 1996. During the fourth quarter
of 1996, spot market prices for MTBE were less than the prices paid by
Sun under the off-take agreement with BEF. At that time, the Company
expected this adverse relationship to continue into the future.
Accordingly, a $130 million accrual ($85 million after tax) was<PAGE>
<PAGE> 11
established at December 31, 1996 for the estimated losses expected to
be realized with respect to this agreement. During the first nine
months of 1997, actual MTBE purchase costs in excess of market prices
were charged against the accrual.
The Company guarantees the $51 million of outstanding debt of Radnor,
which is due no later than February 2001. This debt is expected to be
repaid by the end of 1998 with proceeds from the disposal of Radnor's
remaining real estate portfolio (Note 3).
Sun is subject to numerous federal, state and local laws regulating
the discharge of materials into, or otherwise relating to the
protection of, the environment. The Comprehensive Environmental
Response Compensation and Liability Act ("CERCLA") and the Solid Waste
Disposal Act as amended by the Resource Conservation and Recovery Act
("RCRA"), and related federal and state laws subject Sun to the
potential obligation to remove or mitigate the environmental effects
of the disposal or release of certain pollutants at Sun's facilities
and at third-party or formerly-owned sites.
Under CERCLA, Sun is subject to potential joint and several liability
for the costs of remediation at sites at which it has been identified
as a "potentially responsible party" ("PRP"). As of September 30,
1997, Sun had been named as a PRP at 44 sites identified or
potentially identifiable as "Superfund" sites under CERCLA. Sun has
reviewed the nature and extent of its involvement at each site and
other relevant circumstances and, based upon the other parties
involved or Sun's negligible participation therein, believes that its
potential liability associated with such sites will not be
significant.
Under various environmental laws, including RCRA, Sun has initiated
corrective remedial action at Sun's facilities, formerly-owned
facilities and third-party sites and could be required to undertake
similar actions at various other sites. The cost of such remedial
actions could be significant but is expected to be incurred over an
extended period of time.
<PAGE>
<PAGE> 12
Sun establishes accruals related to environmental remediation
activities for work at identified sites where an assessment has
indicated that cleanup costs are probable and reasonably estimable.
The accrued liability for environmental remediation is classified in
the condensed consolidated balance sheets as follows (in millions of
dollars):
<TABLE>
<CAPTION>
At At
September 30 December 31
1997 1996
------------ -----------
<S> <C> <C>
Accrued liabilities $ 54 $ 77
Other deferred credits and
liabilities 160 150
---- ----
$214 $227
==== ====
</TABLE>
Pretax charges against income for environmental remediation amounted
to $3 and $23 million for the nine months ended September 30, 1997 and
1996, respectively. This $20 million decrease was largely
attributable to the absence of an accrual for remediation activities
associated with the reconfiguration of the Philadelphia refinery,
which was recorded in the second quarter of 1996 (Note 4). Claims for
recovery of environmental liabilities that are probable of realization
totalled $4 million at September 30, 1997 and are included in deferred
charges and other assets in the condensed consolidated balance sheets.
On October 4, 1996, Sun filed a complaint in Los Angeles County
Superior Court, Jalisco Corporation, Inc., et al. v. Argonaut
Insurance Company, et al. (Case No. BC 158441), naming more than 45
insurance companies as defendants and seeking recovery under numerous
insurance policies for certain environmental expenditures of Sun,
including its predecessor companies and subsidiaries, arising from the
ownership and operation of its business and properties. The Company
cannot quantify the outcome of this litigation, which may be
protracted.
Total future costs for environmental remediation activities will
depend upon, among other things, the identification of any additional
sites, the determination of the extent of contamination at each site,
the timing and nature of required remedial actions, the technology
available and needed to meet the various existing legal requirements,
the nature and extent of future environmental laws, inflation rates
and the determination of Sun's liability at multi-party sites, if any,
in light of the number, participation levels and financial viability
of other parties.
Many other legal and administrative proceedings are pending against
Sun. The ultimate outcome of these proceedings and the matters
discussed above cannot be ascertained at this time; however, it is
reasonably possible that some of them could be resolved unfavorably to
<PAGE>
<PAGE> 13
Sun. Management believes that any expenditures attributable to these
matters will be incurred over an extended period of time and will be
funded from Sun's net cash flows from operating activities. Although
the ultimate impact of these matters could have a significant impact
on results of operations or cash flows for any future quarter or year,
management believes that any additional liabilities which may arise
pertaining to such matters would not be material in relation to the
consolidated financial position of Sun at September 30, 1997.
Furthermore, management believes that the overall costs for
environmental activities will not have a material impact, over an
extended period of time, on Sun's cash flows or liquidity.
7. Shareholders' Equity.
<TABLE>
<CAPTION>
At At
September 30 December 31
1997 1996
------------ -----------
(Millions of Dollars)
<S> <C> <C>
Cumulative preference stock - Series A,
no par value $ 730 $ 748
Common stock, par value $1 per share 131 130
Capital in excess of par value 1,350 1,316
Earnings employed in the business 1,430 1,284
------ ------
3,641 3,478
Less common stock held in treasury,
at cost 2,143 2,040
------ ------
Total $1,498 $1,438
====== ======
</TABLE>
<PAGE>
<PAGE> 14
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS - NINE MONTHS
Earnings Profile of Sun Businesses (after tax)
- ----------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended
September 30
------------------
1997 1996 Variance
---- ---- --------
(Millions of Dollars)
<S> <C> <C> <C>
Sun Northeast Refining $ 81 $(44) $125
Sunoco Northeast Marketing 50 9 41
Sunoco Chemicals 62 30 32
Sun Lubricants 3 (7) 10
Sunoco MidAmerica Marketing &
Refining 43 (4) 47
Sunoco Logistics 39 39 --
Sun Coal & Coke 29 25 4
Corporate expenses (16) (17) 1
Net financing expenses (36) (35) (1)
Real estate operations held
for sale -- -- --
Sun International Production* -- 41 (41)
---- ---- ----
255 37 218
Special Items:
Gain on divestment of International
Production business* -- 125 (125)
Provision for write-down of assets
and other matters (21) (53) 32
---- ---- ----
Consolidated net income $234 $109 $125
==== ==== ====
</TABLE>
- ----------------
*Sun completed the sale of its International Production business on
September 30, 1996.
<PAGE>
<PAGE> 15
Analysis of Earnings Profile of Sun Businesses
- ----------------------------------------------
In the nine-month period ended September 30, 1997, Sun had net income of
$234 million compared with net income of $109 million for the first nine
months of 1996. Primary earnings per share were $2.76 in the first nine
months of 1997 versus $1.02 per share in the nine months of 1996. On a
fully diluted basis, which assumes the redemption of the preference shares
for common stock during the first nine months of 1997, Sun earned $2.39 per
share in the current nine-month period versus $1.02 per share in the year-
ago period (see Note 5 to the condensed consolidated financial statements).
Excluding the special items shown separately in the Earnings Profile of Sun
Businesses, Sun earned $255 million in the first nine months of 1997
compared to income of $37 million in the first nine months of 1996.
Sun Northeast Refining -- The Sun Northeast Refining business earned $81
million in the first nine months of 1997 compared to a loss of $44 million
in the first nine months of 1996. The improvement in operating results was
due primarily to a decline in operating expenses ($44 million) and higher
realized margins ($60 million) and sales volumes ($13 million) for
wholesale fuel products. Wholesale gasoline margins were adversely
impacted in the first nine months of 1996 by the Company's high cost of
MTBE (a component of reformulated gasoline) relating to an existing off-
take agreement (see Note 6 to the condensed consolidated financial
statements). The increase in sales volumes reflects a significant
improvement in production levels, particularly for high-value gasoline and
distillate products, in part due to the successful turnaround and
modernization of the 86,000 barrels-per-day fluid catalytic cracking unit
at the Marcus Hook refinery completed in the latter part of 1996.
During the fourth quarter of 1996, Sun reconfigured its Philadelphia
refinery to process only light, sweet crude oil and to cease asphalt
production. Several redundant and/or unprofitable units were shut down as
part of a continuing process to integrate the Point Breeze and Girard Point
segments of the refinery. The reconfiguration to date has resulted in a
substantial improvement in operating reliability and a reduction in the
cost structure of the Philadelphia refinery.
Sunoco Northeast Marketing -- The Sunoco Northeast Marketing business
earned $50 million in the current nine-month period versus $9 million in
the first nine months of 1996. The increase in earnings was due to
significantly higher average retail gasoline margins ($24 million) and
lower expenses ($21 million), partially offset by the impact of 4 percent
lower retail gasoline sales volumes ($5 million). Retail gasoline margins
were adversely impacted in the first nine months of 1996 by the Company's
high cost of MTBE.
Sunoco Chemicals -- Sunoco Chemicals earned $62 million in the first nine
months of 1997 versus $30 million in the first nine months of 1996. The
increase in earnings was primarily due to higher margins ($18 million) and
sales volumes ($17 million), reflecting record production levels.
<PAGE>
<PAGE> 16
Sun Lubricants -- The Sun Lubricants business earned $3 million in the 1997
first nine months, compared to a loss of $7 million in the first nine
months of 1996. The improved results were largely attributable to income
from the Kendall/Amalie lubricants business acquired by Sun in November
1996 and the impact of improved operations at the Puerto Rico refinery as a
result of the reconfiguration initiated in the first quarter of 1997.
Partially offsetting these positive factors were lower base oil margins.
The Puerto Rico refinery is now processing approximately 30,000 barrels per
day of purchased intermediate feedstocks in lieu of crude oil. Prior to the
reconfiguration, this facility had a crude oil processing capacity of
85,000 barrels per day. The changes made in the first quarter have
significantly reduced fuels production at this refinery and are expected to
reduce operating expenses by approximately $35 million pretax on an
annualized basis while fully maintaining the lubricants manufacturing
capabilities of the facility.
Sunoco MidAmerica Marketing & Refining -- Sunoco MidAmerica Marketing &
Refining earned $43 million during the first nine months of 1997, compared
to a loss of $4 million in the 1996 first nine months. The improved
results were largely attributable to higher wholesale fuel ($26 million)
and chemical ($7 million) margins, lower operating and administrative
expenses ($10 million) and higher wholesale fuel sales volumes ($8
million), reflecting significantly higher refinery production. Partially
offsetting these positive factors were lower retail gasoline margins ($6
million).
Sunoco Logistics -- Sunoco Logistics earned $39 million in the first nine
months of 1997, the same as in the year-ago period. The favorable impact
of higher throughput at the Nederland, Texas, crude oil terminal was offset
by lower earnings from joint venture pipeline operations.
Sun Coal & Coke -- Sun Coal & Coke earned $29 million in the first nine
months of 1997 versus $25 million in the first nine months of 1996. The
increase in earnings was primarily due to higher margins for coke ($2
million) and improved results from Sun's steam coal operations in Kentucky
($1 million). Coal and cokemaking results included gains from divestments
and insurance recoveries totalling approximately $2 million after tax in
each nine-month period.
Sun International Production -- In the third quarter of 1996, Sun completed
the sale of its International Production business for $278 million in cash
which resulted in a $125 million after-tax gain. Operating income for this
business unit totalled $41 million in the first nine months of 1996.
Provision for Write-Down of Assets and Other Matters -- During the first
quarter of 1997, Sun established a $32 million pretax accrual ($21 million
after tax) for employee termination benefits and related costs. The
termination benefits are for approximately 320 employees to be
involuntarily terminated. This complement reduction is expected to provide
approximately $25 million of annualized pretax expense savings.
During the second quarter of 1996, Sun recorded an $85 million ($53 million
after-tax) provision for write-down of assets and other matters related to
the Company's Philadelphia refinery reconfiguration project, which was
<PAGE>
<PAGE> 17
completed during the fourth quarter of 1996. This reconfiguration
continues the integration of the two adjacent but separate facilities
(Point Breeze and Girard Point) at the Philadelphia, PA refinery. The
provision is comprised principally of the write-off of redundant processing
units and also includes an accrual for environmental remediation activities
associated with the reconfiguration.
Analysis of Consolidated Statements of Income
- ---------------------------------------------
Sales and other operating revenue decreased $276 million, or 3 percent,
principally due to lower revenues from resales of purchased crude oil ($504
million) and lower consumer excise taxes ($36 million), partially offset by
higher refined product sales prices ($98 million) and volumes ($173
million). Cost of products sold and operating expenses decreased $586
million, or 9 percent, primarily due to lower resales of purchased crude
oil ($504 million) and lower refinery operating expenses ($101 million),
partially offset by higher crude oil and refined product costs ($45
million). Selling, general and administrative expenses decreased $48
million, or 11 percent, primarily due to lower expenses in Sun's refining
and marketing operations, despite the inclusion in the first nine months of
1997 of expenses attributable to the Kendall/Amalie lubricants business
acquired in November 1996. Consumer excise taxes decreased $36 million, or
3 percent, principally due to a decline in retail gasoline sales volumes.
<PAGE>
<PAGE> 18
RESULTS OF OPERATIONS - THREE MONTHS
Earnings Profile of Sun Businesses (after tax)
- ----------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
September 30
------------------
1997 1996 Variance
---- ---- --------
(Millions of Dollars)
<S> <C> <C> <C>
Sun Northeast Refining $ 40 $(20) $ 60
Sunoco Northeast Marketing 13 3 10
Sunoco Chemicals 21 12 9
Sun Lubricants 9 (6) 15
Sunoco MidAmerica Marketing &
Refining 23 (5) 28
Sunoco Logistics 12 13 (1)
Sun Coal & Coke 11 10 1
Corporate expenses (6) (6) --
Net financing expenses (12) (11) (1)
Real estate operations held
for sale -- (1) 1
Sun International Production* -- 3 (3)
---- ---- ----
111 (8) 119
Special Item:
Gain on divestment of International
Production business* -- 125 (125)
---- ---- ----
Consolidated net income $111 $117 $ (6)
==== ==== ====
</TABLE>
- ----------------
*Sun completed the sale of its International Production business on
September 30, 1996.
<PAGE>
<PAGE> 19
Analysis of Earnings Profile of Sun Businesses
- ----------------------------------------------
In the three-month period ended September 30, 1997, Sun had net income of
$111 million compared with net income of $117 million for the third quarter
of 1996. Primary earnings per share were $1.38 in the third quarter of
1997 versus $1.44 per share in the third quarter of 1996. On a fully
diluted basis, Sun earned $1.14 per share in the third quarter of 1997
versus $1.19 per share in the year-ago period. There were no special items
recorded in the third quarter of 1997. Excluding the gain on divestment of
the International Production business recorded in the third quarter of
1996, which is shown separately in the Earnings Profile of Sun Businesses,
Sun had a loss of $8 million in the third quarter of 1996.
Sun Northeast Refining -- The Sun Northeast Refining business earned $40
million in the third quarter of 1997 versus a loss of $20 million in the
third quarter of 1996. The increase in earnings was due primarily to a
decline in operating expenses ($17 million) and higher realized margins
($41 million) and sales volumes ($5 million) for wholesale fuels products.
The higher realized margins and sales volumes reflect an increase of almost
3 million barrels of high-value gasoline and distillate production at the
Company's Northeast refineries, primarily in lieu of low-value asphalt
production.
Sunoco Northeast Marketing -- The Sunoco Northeast Marketing business
earned $13 million in the current quarter versus income of $3 million in
the third quarter of 1996. The increase in earnings was primarily due to a
decline in marketing and administrative expenses ($9 million).
Sunoco Chemicals -- Sunoco Chemicals earned $21 million in the third
quarter of 1997 versus $12 million in the third quarter of 1996. The
increase in earnings was due to higher margins ($4 million) resulting from
product upgrades and to an increase in sales volumes ($5 million)
reflecting continued excellent operations. Total petrochemical production
for the third quarter of 1997 was approximately 2.3 million barrels (24,700
barrels per day), an increase of 22 percent from the third quarter of 1996.
Production of higher-valued polymer-grade propylene exceeded 1.0 million
barrels for the quarter, almost double third-quarter 1996 levels.
Sun Lubricants -- The Sun Lubricants business earned $9 million in the 1997
third quarter, compared to a loss of $6 million in the 1996 third quarter.
The improvement in operating results was due, in part, to the positive
impact of the reconfiguration initiated at the Puerto Rico refinery in the
first quarter of 1997. Also contributing to the improvement were higher
margins for value-added Sunoco and Kendall branded lubricants and higher
wholesale gasoline margins. Partially offsetting these positive factors
were lower base oil margins.
Sunoco MidAmerica Marketing & Refining -- Sunoco MidAmerica Marketing &
Refining earned $23 million during the 1997 third quarter, compared to a
loss of $5 million in the 1996 third quarter. The improved results were
largely attributable to higher wholesale fuel ($18 million) and chemical
<PAGE>
<PAGE> 20
($3 million) margins, lower operating and administrative expenses ($6
million) and higher wholesale fuel sales volumes ($3 million), reflecting
significantly higher production. Input to the crude units at the Toledo
refinery averaged 133,800 barrels per day, or 107 percent of rated
capacity, in the current quarter versus 131,100 barrels per day in the
third quarter of 1996. Partially offsetting these positive factors were
lower retail gasoline margins ($2 million).
Sun Coal & Coke -- Sun Coal & Coke earned $11 million in the third quarter
of 1997 versus $10 million in the third quarter of 1996. The increase in
earnings was largely due to lower operating costs and improved yields from
Sun's cokemaking operations. Coal and cokemaking results include gains
from divestments and insurance recoveries totalling approximately $2
million after tax in each third quarter.
Sun International Production -- In the third quarter of 1996, Sun completed
the sale of its International Production business for $278 million in cash
which resulted in a $125 million after-tax gain. Operating income for this
business unit totalled $3 million for the third quarter of 1996.
Analysis of Consolidated Statements of Income
- ---------------------------------------------
Sales and other operating revenue decreased $240 million, or 8 percent,
principally due to lower revenues from resales of purchased crude oil ($262
million) and lower refined product sales prices ($32 million), partially
offset by higher refined product sales volumes ($59 million). Cost of
products sold and operating expenses decreased $396 million, or 18 percent,
primarily due to lower resales of purchased crude oil ($262 million), lower
crude oil and refined product costs ($91 million) and lower refinery
operating expenses ($32 million). Selling, general and administrative
expenses decreased $30 million, or 19 percent, primarily due to lower
expenses in Sun's refining and marketing operations despite the inclusion
in the third quarter of 1997 of expenses attributable to the Kendall/Amalie
lubricants business acquired in November 1996.
<PAGE>
<PAGE> 21
FINANCIAL CONDITION
Cash and Working Capital
- ------------------------
At September 30, 1997, Sun had cash and cash equivalents of $66 million
compared to $67 million at December 31, 1996, and had a working capital
deficit of $111 million compared to a working capital deficit of $282
million at December 31, 1996. Sun's working capital position is
considerably stronger than indicated because of the relatively low
historical costs assigned under the LIFO method of accounting for most of
the inventories reflected in the condensed consolidated balance sheets.
The current replacement cost of all such inventories exceeds the carrying
value at September 30, 1997 by approximately $555 million. Inventories
valued at LIFO, which consist of crude oil and refined products, are
readily marketable at their current replacement values. Management
believes that the current levels of Sun's cash and working capital provide
adequate support for ongoing operations.
Cash Flows and Financial Capacity
- ---------------------------------
In the first nine months of 1997, Sun's net cash provided by operating
activities ("cash generation") was $293 million compared to $203 million in
the first nine months of 1996. The $90 million increase in cash generation
was largely due to an increase in income before special items, partially
offset by an increase in working capital uses pertaining to operating
activities and a reduction in net cash flows from discontinued operating
activities.
Management believes that future cash generation will be sufficient to
satisfy Sun's capital requirements and to pay the current level of cash
dividends on common and preference stock. However, from time to time, the
Company's short-term cash requirements may exceed its cash generation due
to various factors including volatility in crude oil and refined product
markets and increases in capital spending and working capital levels.
During those periods, the Company may supplement its cash generation with
proceeds from financing activities.
The Company has a $500 million revolving credit agreement ("Agreement")
with commercial banks that provides access to short-term financing through
September 2002. The Company can borrow directly from the participating
banks under this Agreement or use it to support commercial paper issued by
Sun. Under the terms of the Agreement, Sun is required, among other
things, to maintain consolidated net worth of at least $1.0 billion. The
Company also has access to short-term financing under non-committed money
market facilities.
<PAGE>
<PAGE> 22
At September 30, 1997 and December 31, 1996, there were no amounts
outstanding related to the above short-term borrowing arrangements. The
following table sets forth amounts outstanding related to Sun's other
borrowings as of these dates (in millions of dollars):
<TABLE>
<CAPTION>
At At
September 30 December 31
1997 1996
------------ -----------
<S> <C> <C>
Current portion of long-term debt $ 58 $ 54
Long-term debt 830 835
---- ----
Total borrowings $888 $889
==== ====
</TABLE>
Sun's debt-to-capital ratio was 37.2 percent at September 30, 1997 compared
to 38.2 percent at December 31, 1996. Management believes there is
sufficient borrowing capacity available to provide for Sun's future cash
requirements. In addition, the Company has the option of issuing additional
common or preference stock as a means of increasing its equity base;
however, there are no current plans to do so. No commitments have been
made with respect to any investment opportunity which would require the use
of a significant portion of Sun's unused financial capacity.
SHARE REDEMPTION AND REPURCHASES
During the third quarter of 1995, Sun exchanged 25 million "depositary
shares" for an equal number of shares of its common stock in a tax-free
transaction. Each depositary share represents ownership of one-half share
of the Company's Series A cumulative preference stock. The outstanding
depositary shares are redeemable at any time by the Company, in whole or in
part, for common stock at a value initially equal to $42.39976 per
depositary share at June 12, 1995, declining ratably to $40.13332 on April
12, 1998 and equal to $40.00 thereafter through June 11, 1998. As of
November 5, 1997, the Call Price was $40.48217 per depositary share. After
June 11, 1998, the Company can redeem the depositary shares with common
shares on a one-for-one basis. The closing price for Sun common stock was
$40.00 on November 5, 1997. If Sun were to do a partial redemption of
depositary shares, it would be done on a pro rata basis. The Company
currently intends to redeem all of the outstanding depositary shares no
later than June 12, 1998.
During the second quarter of 1997, the Company repurchased 498,881 shares
of its common stock and 273,300 of its depositary shares on the open market
for $21 million. These purchases completed a program begun in the third
quarter of 1995 to purchase $100 million of Company stock in the open
market or through privately negotiated transactions. On July 3, 1997, the
Company's Board of Directors ("Board") approved a successor program
authorizing the repurchase of an additional $150 million of Company stock.
Pursuant to this program, during the third quarter of 1997, the Company
<PAGE>
<PAGE> 23
repurchased 2,308,547 shares of common stock and 317,200 depositary shares
on the open market for $101 million. In the fourth quarter of 1997, the
remaining $49 million available under this program was utilized to
repurchase an additional 1,056,781 shares of common stock and 216,300
depositary shares on the open market. On November 6, 1997, the Board
approved a new $150 million share repurchase program, which will enable the
Company to purchase its stock from time to time in the open market or
through privately negotiated transactions, subject to prevailing market
conditions.
FORWARD-LOOKING STATEMENTS
Those statements in the foregoing report that are not historical in nature
should be deemed forward-looking statements within the meaning of, and are
intended to be covered by, the safe harbor provisions of Section 21E of the
Securities Exchange Act of 1934. Although Sun believes that the
assumptions underlying these statements are reasonable, investors are
cautioned that such forward-looking statements are inherently uncertain and
deal with risks that may affect Sun's business prospects and performance,
causing actual results to differ materially from those discussed in the
foregoing report.
Such risks and uncertainties include, by way of example and not of
limitation: changes in industry-wide refining margins, changes in crude oil
and other raw material costs, and world and regional events that could
significantly increase volatility in the marketplace. Sun's crude oil
supply could be affected by factors beyond its control, such as embargoes,
the continued discovery and production of light sweet crude oil, or
military conflicts between (or internal instability in) one or more
oil-producing countries. Sun's business is also affected by the continued
availability of debt and equity financing, changes in labor relations,
general economic conditions (including recessionary trends, inflation and
interest rates), market supply and demand for Sun's products, the
reliability and efficiency of Sun's operating facilities, the level of
operating expenses and hazards common to operating facilities (including
equipment malfunction; plant construction/repair delays, explosions, fires,
oil spills and severe weather effects), actions taken by competitors,
(including both pricing and expansion and retirement of refinery capacity
in response to market conditions), and civil, criminal, regulatory or
administrative actions, claims or proceedings (including domestic and
international political, legislative, regulatory and legal actions, such as
restrictions on production, restrictions on imports and exports, price
controls, tax increases and retroactive tax claims, expropriation of
property, cancellation of contract rights and regulations dealing with
protection of the environment including gasoline composition and
characteristics). Unpredictable or unknown factors not discussed herein
could also have material adverse effects on forward-looking statements.
<PAGE>
<PAGE> 24
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
Many legal and administrative proceedings are pending against Sun.
Although the ultimate outcome of these proceedings cannot be
ascertained at this time, it is reasonably possible that some of them
could be resolved unfavorably to Sun. Management of Sun believes that
any liabilities which may arise from such proceedings would not be
material in relation to the consolidated financial position of Sun at
September 30, 1997.
Item 6. Exhibits and Reports on Form 8-K
Exhibits:
12 - Statement re Sun Company, Inc. and Subsidiaries Computation of
Ratio of Earnings to Fixed Charges for the Nine-Month Period
Ended September 30, 1997.
27 - Article 5 of Regulation S-X, Financial Data Schedule.
Reports on Form 8-K:
On July 8, 1997, a report on Form 8-K was filed to disclose under Item
5 -- "Other Events" and Item 7 -- "Financial Statements and Exhibits,"
an amendment to the shareholder rights agreement between Sun Company,
Inc. and First Chicago Trust Company of New York dated as of February
1, 1996.
On October 15, 1997, a report on Form 8-K was filed to disclose under
Item 5 -- "Other Events" and Item 7 -- "Financial Statements and
Exhibits," a press release issued by the Company on October 14, 1997
projecting an increase in third quarter 1997 operating income and
reporting the results of a previously announced share repurchase
program.
**************
We are pleased to furnish this report to shareholders who request it by
writing to:
Sun Company, Inc.
Investor Relations
Ten Penn Center
1801 Market Street
Philadelphia, PA 19103-1699
<PAGE>
<PAGE> 25
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
SUN COMPANY, INC.
BY s/ THOMAS W. HOFMANN
-----------------------
Thomas W. Hofmann
Comptroller
(Principal Accounting Officer)
DATE November 6, 1997
<PAGE>
<PAGE> 1
EXHIBIT INDEX
Exhibit
Number Exhibit
- ------- -----------------------------------------
12 Statement re Sun Company, Inc. and Subsidiaries Computation
of Ratio of Earnings to Fixed Charges for the Nine-Month
Period Ended September 30, 1997.
27 Article 5 of Regulation S-X, Financial Data Schedule.
<PAGE>
<PAGE> 1
<TABLE>
<CAPTION>
EXHIBIT 12
STATEMENT RE COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES(a)
Sun Company, Inc. and Subsidiaries
(Millions of Dollars Except Ratio)
- --------------------------------------------------------------------------
For the Nine Months
Ended September 30, 1997
------------------------
(UNAUDITED)
<S> <C>
Fixed Charges:
Consolidated interest cost and debt expense $ 58
Interest cost and debt expense of real estate
operations held for sale 3
Interest allocable to rental expense(b) 26
----
Total $ 87
====
Earnings:
Consolidated income before income tax expense $346
Proportionate share of income tax expense
of 50 percent owned but not controlled
affiliated companies 4
Equity in income of less than 50 percent owned
affiliated companies (11)
Dividends received from less than 50 percent
owned affiliated companies 4
Fixed charges 87
Interest capitalized (4)
Amortization of previously capitalized interest 6
----
Total $432
====
Ratio of Earnings to Fixed Charges 4.97
====
</TABLE>
- ----------------
(a) The consolidated financial statements of Sun Company, Inc. and
subsidiaries contain the accounts of all subsidiaries that are
controlled (generally more than 50 percent owned) except for Radnor
Corporation, the Company's wholly owned real estate development
subsidiary, which is accounted for as an investment held for sale.
(See Note 3 to the condensed consolidated financial statements.)
Affiliated companies over which the Company has the ability to exercise
significant influence but that are not controlled (generally 20 to 50
percent owned) are accounted for by the equity method.
(b) Represents one-third of total operating lease rental expense which is
that portion deemed to be interest.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 66
<SECURITIES> 0
<RECEIVABLES> 705
<ALLOWANCES> 7
<INVENTORY> 554
<CURRENT-ASSETS> 1,438
<PP&E> 5,913
<DEPRECIATION> 2,891
<TOTAL-ASSETS> 4,832
<CURRENT-LIABILITIES> 1,549
<BONDS> 830
<COMMON> 131
0
730
<OTHER-SE> 637
<TOTAL-LIABILITY-AND-EQUITY> 4,832
<SALES> 7,944
<TOTAL-REVENUES> 7,986
<CGS> 5,737
<TOTAL-COSTS> 5,737
<OTHER-EXPENSES> 1,841
<LOSS-PROVISION> 4
<INTEREST-EXPENSE> 58
<INCOME-PRETAX> 346
<INCOME-TAX> 112
<INCOME-CONTINUING> 234
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 234
<EPS-PRIMARY> 2.76
<EPS-DILUTED> 2.39
</TABLE>
