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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 March 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-6841
SUN COMPANY, INC.
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(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-1743282
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
TEN PENN CENTER, 1801 MARKET STREET, PHILADELPHIA, PA 19103-1699
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(Address of principal executive offices)
(Zip Code)
(215) 977-3000
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(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
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At March 31, 1998, there were 70,809,968 shares of Common Stock, $1 par
value and 12,033,760 shares of Cumulative Preference Stock--Series A, no
par value, outstanding.
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SUN COMPANY, INC.
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INDEX
Page No.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Income
for the Three Months Ended March 31, 1998
and 1997 3
Condensed Consolidated Balance Sheets at
March 31, 1998 and December 31, 1997 4
Condensed Consolidated Statements of Cash
Flows for the Three Months Ended March 31,
1998 and 1997 5
Notes to Condensed Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURE 19
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PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Sun Company, Inc. and Subsidiaries
(Millions of Dollars and Shares Except Per Share Amounts)
- --------------------------------------------------------------------------
For the Three Months
Ended March 31
--------------------
1998 1997
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(UNAUDITED)
REVENUES
Sales and other operating revenue (including
consumer excise taxes) $2,086 $2,733
Interest income (Note 2) 12 2
Other income (Note 3) 20 9
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2,118 2,744
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COSTS AND EXPENSES
Cost of products sold and operating expenses 1,455 2,088
Selling, general and administrative expenses 119 127
Consumer excise taxes 358 361
Payroll, property and other taxes 24 24
Depreciation, depletion and amortization 62 66
Provision for employee terminations (Note 4) -- 32
Interest cost and debt expense 21 19
Interest capitalized (3) --
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2,036 2,717
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Income before income tax expense 82 27
Income tax expense 26 9
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NET INCOME 56 18
Dividends on preference stock (11) (11)
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Net income attributable to common shareholders $ 45 $ 7
====== ======
Net income per share of common stock (Note 5):
Basic $.64 $.10
Diluted $.58 $.10
Weighted average number of shares outstanding:
Basic 70.8 73.0
Diluted 96.1 73.0
Cash dividends paid per share:
Preference stock* $.90 $.90
Common stock $.25 $.25
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*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 preference stock.
(See Accompanying Notes)
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CONDENSED CONSOLIDATED BALANCE SHEETS
Sun Company, Inc. and Subsidiaries
At At
March 31 December 31
1998 1997*
(Millions of Dollars) (UNAUDITED)
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ASSETS
Current Assets
Cash and cash equivalents $ 93 $ 33
Accounts and notes receivable, net 572 671
Inventories:
Crude oil 216 150
Refined products 217 214
Materials, supplies and other 69 67
Deferred income taxes 109 113
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Total Current Assets 1,276 1,248
Investments and long-term receivables 135 137
Properties, plants and equipment 5,915 5,838
Less accumulated depreciation, depletion
and amortization 2,817 2,774
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Properties, plants and equipment, net 3,098 3,064
Deferred charges and other assets 224 218
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Total Assets $4,733 $4,667
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 719 $ 830
Accrued liabilities 462 534
Current portion of long-term debt 6 12
Taxes payable 118 88
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Total Current Liabilities 1,305 1,464
Long-term debt 824 824
Retirement benefit liabilities 480 477
Deferred income taxes 84 73
Other deferred credits and liabilities (Note 6) 550 367
Commitments and contingent liabilities (Note 7)
Shareholders' equity (Note 8) 1,490 1,462
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Total Liabilities and Shareholders' Equity $4,733 $4,667
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*Reclassified to conform to the 1998 presentation.
(See Accompanying Notes)
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Sun Company, Inc. and Subsidiaries
(Millions of Dollars)
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For the Three Months
Ended March 31
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1998 1997
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(UNAUDITED)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 56 $ 18
Adjustments to reconcile net income to net
cash used in operating activities:
Provision for employee terminations -- 32
Depreciation, depletion and amortization 62 66
Deferred income tax expense 20 9
Changes in working capital pertaining to
operating activities:
Accounts and notes receivable 99 144
Inventories (71) 46
Accounts payable and accrued liabilities (178) (332)
Taxes payable 15 (14)
Other (11) 1
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Net cash used in operating activities (8) (30)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (104) (59)
Proceeds from divestments 13 73
Other -- 8
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Net cash provided by (used in) investing activities (91) 22
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CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (6) (1)
Proceeds from transferred interest in coke-
making operations 200 --
Cash dividend payments (29) (29)
Purchases of preference stock for retirement (2) --
Purchases of common stock for treasury (8) --
Proceeds from issuance of common stock under
management incentive and employee option plans 6 --
Other (2) (2)
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Net cash provided by (used in) financing activities 159 (32)
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Net increase (decrease) in cash and cash equivalents 60 (40)
Cash and cash equivalents at beginning of period 33 67
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Cash and cash equivalents at end of period $ 93 $ 27
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(See Accompanying Notes)<PAGE>
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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 provision for employee terminations (Note 4). Results
for the three months ended March 31, 1998 are not necessarily
indicative of results for the full year 1998.
2. Settlement of Income Tax Dispute.
In March 1998, Sun settled an income tax dispute with the Internal
Revenue Service related to certain deductions claimed in prior years.
The settlement, which includes the recognition of $11 million of
interest income, increased results of operations by $9 million after
tax in the first quarter of 1998.
3. Other Income.
During the first quarter of 1998, Oil Insurance Limited, a petroleum
industry insurance consortium in which the Company is a member,
declared a dividend to its shareholders. Sun's share of this dividend
amounted to $8 million and is included in other income in the
condensed consolidated statement of income. The dividend increased
Sun's results of operations by $5 million after tax in the first
quarter of 1998.
4. Employee Terminations.
During the first quarter of 1997, Sun established a $32 million pretax
accrual ($21 million after tax) for approximately 320 involuntary
employee terminations and related costs. The employee reductions were
throughout the organization and included senior management, support
staff and operations personnel.
5. Earnings Per Share.
Basic earnings per share ("EPS") is computed by dividing earnings
after deducting dividends on preference stock by the weighted average
number of common shares outstanding. Diluted EPS generally is
determined by dividing earnings by the weighted average number of
shares outstanding after giving effect to the assumed issuance of
common stock under stock incentive awards and the assumed redemption
of preference shares for common stock utilizing a ratio of two shares
of common stock for each outstanding preference share. However, in
the first quarter of 1997, since both the assumed issuance of common
stock under stock incentive awards and the assumed redemption of
preference shares would not have been dilutive, diluted per share
amounts are equal to basic per share amounts.
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The following table sets forth the computation of basic and diluted
EPS for the first quarter of 1998 (in millions, except per share
amounts):
Net income after dividends on preference
stock (basic EPS numerator) $45
Add: Dividends on preference stock 11
---
Net income (diluted EPS numerator) $56
===
Weighted average number of common shares
outstanding (basic EPS denominator) 70.8
Add effect of dilutive securities:
Redeemable preference shares 24.1
Stock incentive awards 1.2
----
Weighted average number of shares
(diluted EPS denominator) 96.1
====
Basic EPS $.64
Diluted EPS $.58
6. Transferred Interests in Cokemaking Operations.
In the first quarter of 1998, Sun transferred an interest in its
cokemaking operations in East Chicago, IN, to a third party for $200
million in cash and, in 1995, transferred an interest in its Jewell
cokemaking operations to another third party for $95 million in cash.
The transferees are entitled to preferential returns from these
respective cokemaking operations until certain cumulative return
targets have been met. Sun did not recognize a gain or loss on these
transactions. The outstanding balance attributable to the transferred
interests in these operations totalled $265 million at March 31, 1998
and is reflected in other deferred credits and liabilities in the
condensed consolidated balance sheet.
7. 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
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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.
Sun's MTBE purchases under this agreement were based upon the formula
price through May 1997 and the minimum price thereafter. 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 established at December
31, 1996 for the estimated losses expected to be realized with respect
to this agreement. During 1997 and the first quarter of 1998, actual
MTBE purchase costs in excess of market prices totalling $65 and $11
million, respectively, were charged against the accrual.
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 March 31, 1998, Sun had been named
as a PRP at 46 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.
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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):
At At
March 31 December 31
1998 1997
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Accrued liabilities $ 57 $ 59
Other deferred credits and
liabilities 137 145
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$194 $204
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Pretax charges against income for environmental remediation amounted
to less than $1 million for both the first quarter of 1998 and 1997.
Claims for recovery of environmental liabilities that are probable of
realization, which totalled $4 million at March 31, 1998, 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 ultimate 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 the 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 level
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
Sun. Management believes that any expenditures attributable to these
matters will be incurred over an extended period of time and will be
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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 of Sun 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 March 31, 1998.
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.
8. Shareholders' Equity.
At At
March 31 December 31
1998 1997
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(Millions of Dollars)
Cumulative preference stock - Series A,
no par value $ 722 $ 723
Common stock, par value $1 per share 132 132
Capital in excess of par value 1,372 1,361
Earnings employed in the business 1,457 1,430
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3,683 3,646
Less common stock held in treasury,
at cost 2,193 2,184
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Total $1,490 $1,462
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On April 28, 1998, the Company announced that it will redeem all
outstanding Sun depositary shares on May 28, 1998. Each depositary
share represents ownership of one-half share of the Company's Series A
cumulative preference stock. Under the terms of redemption,
established when the depositary shares were issued in August 1995,
each depositary share will be redeemed in exchange for 0.949837 share
of Sun's common stock plus $.3758 per share in cash equal to accrued
and unpaid dividends. The depositary-to-common exchange rate
represents the call price of $40 per depositary share payable in Sun
common stock at $42.1125 per common share -- the average of the
closing prices for Sun common stock on the New York Stock Exchange, as
reported on the consolidated tape, for the five consecutive trading
days from April 20 to April 24, 1998, inclusive. As of April 24,
there were 24.1 million depositary shares and 70.9 million common
shares outstanding. At the exchange rate of 0.949837 share of common
stock for each depositary share, approximately 22.9 million shares of
Sun common stock will be reissued, bringing total common shares
outstanding to an estimated 93.8 million following the redemption.
Pursuant to the Statement of Designation governing the preference
stock, as a result of this redemption the dividend previously
announced to be payable on June 12, 1998, to holders of record on May
8, 1998, will not be paid, and the May 8, 1998 record date will be
null and void. Cash dividends unpaid and accrued to and including the
redemption date will be paid only to holders of redeemed shares upon
surrender of their depositary shares. Dividends will cease to accrue
as of the redemption date.
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In January, 1998, the Company repurchased 216,700 shares of its common
stock and 46,780 of its depositary shares on the open market for $10
million. At March 31, 1998, the Company had a remaining authorization
from its Board of Directors to purchase up to $140 million of Company
stock in the open market or through privately negotiated transactions
from time to time depending on prevailing market conditions.
9. Acquisition of AlliedSignal Inc.'s Phenol Facility.
On March 27, 1998, the Company signed a letter of intent with
AlliedSignal Inc ("Allied") to acquire Allied's phenol facility in
Philadelphia and related working capital for approximately $185
million to be paid in installments over four years. This facility
currently has the capacity to produce annually more than one billion
pounds of phenol, 620 million pounds of acetone and 70 million pounds
of alphamethylstyrene. In connection with this acquisition, Sun has
agreed to supply Allied with approximately 750 million pounds of
phenol annually at a price based on the market value of cumene
feedstock plus an amount approximating its other phenol production
costs. The acquisition, which is subject to the negotiation of a
definitive agreement, the completion of due diligence, and regulatory
and board approvals, is expected to be completed by mid-1998.
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
Earnings Profile of Sun Businesses (after tax)
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Three Months Ended
March 31
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1998 1997 Variance
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(Millions of Dollars)
Sun Northeast Refining $15 $ 4 $11
Sunoco Northeast Marketing 15 20 (5)
Sunoco Chemicals 10 19 (9)
Sun Lubricants (3) (8) 5
Sunoco MidAmerica Marketing &
Refining 2 -- 2
Sunoco Logistics 11 12 (1)
Sun Coke 11 9 2
Corporate expenses (6) (5) (1)
Net financing expenses 1 (12) 13
--- ---- ---
56 39 17
Special Item:
Provision for employee terminations -- (21) 21
--- ---- ---
Consolidated net income $56 $ 18 $38
=== ==== ===
Analysis of Earnings Profile of Sun Businesses
- ----------------------------------------------
In the three-month period ended March 31, 1998, Sun earned $56 million, or
$.58 per share of common stock on a diluted basis, compared to net income
of $18 million, or $.10 per share, for the first quarter of 1997.
Excluding the $21 million after-tax provision for employee termination
benefits shown separately in the Earnings Profile of Sun Businesses, Sun
had income of $39 million in the first quarter of 1997.
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Sun Northeast Refining -- The Sun Northeast Refining business had income of
$15 million in the first quarter of 1998 versus income of $4 million in the
first quarter of 1997. The improved results were attributable to higher
realized refining margins resulting largely from favorable foreign sweet
crude oil economics. Crude unit utilization was at 100 percent of rated
capacity for the quarter. Total production levels were flat compared with
prior year levels, although gasoline and distillate production was down
modestly due to a high level of conversion unit maintenance during the
quarter. Higher refinery fuel costs due to increased natural gas prices
were essentially offset by a decline in other operating expenses.
Sunoco Northeast Marketing -- The Sunoco Northeast Marketing business
earned $15 million in the current quarter versus income of $20 million in
the first quarter of 1997. Significantly lower retail gasoline margins,
which were down over three cents per gallon versus the first quarter of
1997, were partially offset by lower expenses ($6 million) and higher non-
gasoline income, particularly at company-operated sites. Overall gasoline
sales volumes increased by one percent compared to the first quarter of
1997.
Sunoco Chemicals -- Sunoco Chemicals earned $10 million in the first
quarter of 1998 versus $19 million in the first quarter of 1997. The
decline in earnings was due to lower margins, particularly for polymer-
grade propylene (down 47 percent) and cumene. Five percent higher
chemicals production volumes partially offset the margin decline, as
chemicals units ran at higher average rates despite substantially greater
maintenance activity at the Marcus Hook and Philadelphia refineries'
catalytic cracking units.
Sun Lubricants -- The Sun Lubricants business recorded a loss of $3 million
in the 1998 first quarter, compared to a loss of $8 million in the 1997
first quarter. The improved results were due largely to higher margins for
lubricant base oils, waxes and residual fuels. Production volumes and
results during the quarter were limited by scheduled maintenance
turnarounds at the Company's Puerto Rico and Tulsa refineries.
Sunoco MidAmerica Marketing & Refining -- Sunoco MidAmerica Marketing &
Refining earned $2 million during the current quarter, compared to
breakeven results in the 1997 first quarter. The increase in earnings was
largely due to improved results from MidAmerica's retail marketing and
petrochemical operations, due in part to higher volumes. Retail gasoline
sales volumes were up ten percent versus first quarter 1997 levels, while
petrochemical production volumes increased nine percent versus the prior
year first quarter. Results from refining operations were essentially flat
versus the prior year quarter as lower wholesale fuels margins were offset
by four percent higher production volumes.
Sun Coke -- Sun Coke earned $11 million in the first quarter of 1998 versus
$9 million in the first quarter of 1997. The first quarter 1998 results
included a $2 million tax benefit related to settlement of an income tax
dispute with the Internal Revenue Service.
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Start-up of Sun's Indiana Harbor cokemaking operation in East Chicago, IN,
commenced in the first quarter of 1998. The first battery of 67 new coke
ovens at this facility began production in late March with the second and
third 67-oven batteries commencing production in mid-April and early May,
respectively. All four batteries, totalling 268 ovens, are expected to be
in full production by the end of May, producing approximately 1.3 million
tons of coke on an annualized basis.
Provision for Employee Terminations -- During the first quarter of 1997,
Sun established a $32 million pretax accrual ($21 million after tax) for
approximately 320 involuntary employee terminations and related costs. The
employee reductions were throughout the organization and included senior
management, support staff and operations personnel.
Net Financing Expenses -- Net financing activities totalled $1 million of
income for the 1998 first quarter. This amount included $5 million of
after-tax earnings from a dividend declared in March by Oil Insurance
Limited, a petroleum industry insurance consortium in which Sun is a
member, and $7 million of after-tax interest income related to the federal
income tax settlement discussed above (see Notes 2 and 3 to the condensed
consolidated financial statements). Excluding these items, net financing
expenses were $11 million for the current quarter versus $13 million for
the first quarter of 1997. This $2 million decline was primarily
attributable to higher capitalized interest.
Analysis of Consolidated Statements of Operations
- -------------------------------------------------
Revenues -- Total revenues were $2.1 billion in the first quarter of 1998
compared to $2.7 billion in the first quarter of 1997. The 22 percent
decrease in 1998 was primarily due to lower refined product prices and
lower revenues from resales of purchased crude oil.
Costs and Expenses -- Total pretax costs and expenses were $2.0 billion in
the first quarter of 1998 compared to $2.7 billion in the first quarter of
1997. The 26 percent decrease in 1998 was primarily due to lower crude oil
and refined product acquisition costs largely as a result of a decline in
crude oil prices, and lower resales of purchased crude oil. Also
contributing to the decrease was the absence of a provision for employee
termination benefits and related costs.
FINANCIAL CONDITION
Cash and Working Capital
- ------------------------
At March 31, 1998, Sun had cash and cash equivalents of $93 million
compared to $33 million at December 31, 1997, and had a working capital
deficit of $29 million compared to a working capital deficit of $216
million at December 31, 1997. 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
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the inventories reflected in the condensed consolidated balance sheets.
The current replacement cost of all such inventories exceeds the carrying
value at March 31, 1998 by $338 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 are adequate to support Sun's ongoing
operations.
Cash Flows and Financial Capacity
- ---------------------------------
In the first quarter of 1998, Sun's net cash used in operating activities
was $8 million compared to $30 million of net cash used in operating
activities in the first quarter of 1997. This $22 million improvement was
primarily due to a decrease in working capital uses pertaining to operating
activities.
Management believes that future cash provided by operating activities will
be sufficient to satisfy Sun's capital requirements and to pay the current
level of cash dividends on Sun's 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. The Company also has access to short-term financing under non-
committed money market facilities. At March 31, 1998 and December 31,
1997, 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 (in millions of dollars):
At At
March 31 December 31
1998 1997
-------- -----------
Current portion of long-term debt $ 6 $ 12
Long-term debt 824 824
---- ----
Total borrowings $830 $836
==== ====
Sun's debt-to-capital ratio was 35.8 percent at March 31, 1998 compared to
36.4 percent at December 31, 1997. Management believes there is sufficient
borrowing capacity available to pursue strategic investment opportunities
as they arise. Sun intends to utilize a portion of this borrowing capacity
to finance its mid-1998 acquisition of AlliedSignal Inc.'s phenol facility
in Philadelphia and related working capital. The approximately $185
million purchase price will be paid in installments over four years (see
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Note 9 to the condensed consolidated financial statements). No commitments
have been made with respect to any other investment opportunity which would
require the use of a significant portion of Sun's remaining unused
financial capacity. 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.
In the first quarter of 1998, Sun transferred an interest in its cokemaking
operations in East Chicago, IN, to a third party in exchange for $200
million in cash. The transferee is entitled to a preferential return from
this cokemaking operation until certain cumulative return targets have been
met.
DEPOSITARY SHARE REDEMPTION
On April 28, 1998, the Company announced that it will redeem all
outstanding Sun depositary shares on May 28, 1998. Each depositary share
represents ownership of one-half share of the Company's Series A cumulative
preference stock. For a further discussion of this share redemption, see
Note 8 to the condensed consolidated financial statements.
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 Section
21E of the Securities Exchange Act of 1934. Such statements generally will
be accompanied by words such as "anticipate," "believe," "estimate,"
"expect," "forecast," "intend," "possible," "potential," "predict,"
"project," or other similar words that convey the uncertainty of future
events or outcomes. Although Sun believes these forward-looking statements
are reasonable, they are based upon a number of assumptions concerning
future conditions, any or all of which may ultimately prove to be
inaccurate. Such forward-looking statements involve risks and are
inherently uncertain. Important factors that could cause actual results to
differ materially from those projected in such statements are discussed
below.
Sun's operating results are dependent upon the reliability and efficiency
of the Company's operating facilities, the level of operating expenses and
hazards common to operating facilities (including equipment malfunction,
explosions, fires, oil spills and the effects of severe weather
conditions). Plans for the construction, modernization or debottlenecking
of refineries, chemical plants and/or cokemaking facilities, and the
utilization and timing of production from these facilities are subject to
many factors, including unplanned delays, and the issuance of applicable
building, environmental and other permits. Sun's income and revenues are
affected by market supply and demand for Sun's products and actions taken
by competitors (including both pricing and expansion and retirement of
refinery capacity in response to market conditions), as well as changes in
industry-wide refining margins, market forces affecting the availability
and pricing of oxygenates such as MTBE, changes in crude oil and other raw
material costs, and world and regional events that could significantly
increase volatility in the marketplace.
<PAGE>
<PAGE> 17
The ability to meet liquidity requirements, including the funding of the
Company's capital program from operations, is subject to changes in
commodity prices and crude oil supply that could be affected by factors
beyond Sun's control, such as embargoes, the continued discovery and
production of light sweet crude oil, or military conflicts involving (or
internal instability in) one or more oil-producing countries. Other
factors that could affect Sun's business include the continued availability
of debt and equity financing, changes in labor relations, general economic
conditions (including recessionary trends, inflation and interest and
currency exchange rates), and civil, criminal, regulatory or administrative
actions, claims or proceedings. Sun's operations could also be affected by
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 and cancellation of contract rights. Sun is
impacted by laws pertaining to workers' health and safety, and current or
amended state and federal environmental and other similar regulations
(including, particularly, regulations dealing with gasoline composition and
characteristics) or the judicial interpretation of such regulations.
The factors identified above are believed to be important factors (but not
necessarily all of the important factors) that could cause actual results
to differ materially from those expressed in any forward-looking statement
made by Sun. Unpredictable or unknown factors not discussed herein could
also have material adverse effects on forward-looking statements. All
forward-looking statements included in this Form 10-Q are expressly
qualified in their entirety by the foregoing cautionary statements. The
Company undertakes no obligation to update publicly any forward-looking
statement (or its associated cautionary language) whether as a result of
new information or future events.
<PAGE>
<PAGE> 18
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 March 31, 1998.
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 Three-Month
Period Ended March 31, 1998.
27.1 - Article 5 of Regulation S-X, Financial Data Schedule.
27.2 - Restatement of Article 5 of Regulation S-X, Financial Data
Schedule for the Six-Month Period Ended June 30, 1997 and
Nine-Month Period Ended September 30, 1997.
Reports on Form 8-K:
On March 27, 1998, 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 announcing that Sun
has signed a letter of intent to acquire AlliedSignal Inc.'s Phenol
Facility in Philadelphia and related working capital.
On April 28, 1998, 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 announcing that it
will redeem all of its outstanding depositary shares on May 28, 1998.
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> 19
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 May 11, 1998
<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 Three-Month
Period Ended March 31, 1998.
27.1 Article 5 of Regulation S-X, Financial Data Schedule.
27.2 Restatement of Article 5 of Regulation S-X, Financial Data
Schedule for the Six-Month Period Ended June 30, 1997 and
Nine-Month Period Ended September 30, 1997.
<PAGE>
<PAGE> 1
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 Three Months
Ended March 31, 1998
--------------------
(UNAUDITED)
Fixed Charges:
Consolidated interest cost and debt expense $ 21
Interest allocable to rental expense(b) 9
----
Total $ 30
====
Earnings:
Consolidated income before income tax expense $ 82
Proportionate share of income tax expense of
50 percent owned but not controlled
affiliated companies 2
Equity in income of less than 50 percent owned
affiliated companies (2)
Dividends received from less than 50 percent
owned affiliated companies 2
Fixed charges 30
Interest capitalized (3)
Amortization of previously capitalized interest 1
----
Total $112
====
Ratio of Earnings to Fixed Charges 3.73
====
- ----------------
(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.
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.
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<F1>RESTATED TO REFLECT THE ADOPTION OF STATEMENT OF FINANCIAL ACCOUNTING
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