<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10Q
(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, 1998
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
SUNOCO, 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)
SUN COMPANY, INC.
- --------------------------------------------------------------------------
(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, 1998, there were 93,536,686 shares of Common Stock, $1 par
value outstanding.
<PAGE> 2
SUNOCO, INC.
------------
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Income
for the Nine Months Ended September 30, 1998
and 1997 3
Condensed Consolidated Statements of Income
for the Three Months Ended September 30, 1998
and 1997 4
Condensed Consolidated Balance Sheets at
September 30, 1998 and December 31, 1997 5
Condensed Consolidated Statements of Cash
Flows for the Nine Months Ended September 30,
1998 and 1997 6
Notes to Condensed Consolidated Financial
Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 6. Exhibits and Reports on Form 8-K 26
SIGNATURE 27
<PAGE> 3
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Sunoco, Inc. and Subsidiaries
(Millions of Dollars and Shares Except Per Share Amounts)
- --------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30
- --------------------
1998
- -----
1997
- ------
(UNAUDITED)
<S>
<C>
<C>
REVENUES
Sales and other operating revenue (including
consumer excise taxes)
$6,359
$7,944
Interest income (Note 2)
18
6
Other income (Note 3)
62
- ------
36
- ------
6,439
- ------
7,986
- ------
COSTS AND EXPENSES
Cost of products sold and operating expenses
4,272
5,737
Selling, general and administrative expenses
382
392
Consumer excise taxes
1,168
1,167
Payroll, property and other taxes
66
63
Depreciation, depletion and amortization
189
195
Provision for employee terminations (Note 4)
- --
32
Interest cost and debt expense
58
58
Interest capitalized
(6)
- ------
(4)
- ------
6,129
- ------
7,640
- ------
Income before income tax expense
310
346
Income tax expense (Note 5)
82
- ------
112
- ------
NET INCOME
228
234
Dividends on preference stock (Note 9)
(20)
- ------
(33)
- ------
Net income applicable to common shareholders
$ 208
======
$ 201
======
Net income per share of common stock (Note 6):
Basic
$2.56
$2.77
Diluted
$2.39
$2.40
Weighted average number of shares outstanding:
Basic
81.1
72.6
Diluted
95.3
97.7
Cash dividends paid per share:
Preference stock (Note 9)
$1.6516
$2.70
Common stock
$.75
$.75
</TABLE>
(See Accompanying Notes)
<PAGE> 4
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Sunoco, Inc. and Subsidiaries
(Millions of Dollars and Shares Except Per Share Amounts)
- --------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Three Months
Ended September 30
- ---------------------
1998
- -----
1997
- ------
(UNAUDITED)
<S>
<C>
<C>
REVENUES
Sales and other operating revenue (including
consumer excise taxes)
$2,107
$2,634
Interest income
1
2
Other income
23
- ------
13
- ------
2,131
- ------
2,649
- ------
COSTS AND EXPENSES
Cost of products sold and operating expenses
1,386
1,844
Selling, general and administrative expenses
135
125
Consumer excise taxes
412
414
Payroll, property and other taxes
22
22
Depreciation, depletion and amortization
65
65
Interest cost and debt expense
20
20
Interest capitalized
(1)
- ------
(3)
- ------
2,039
- ------
2,487
- ------
Income before income tax expense
92
162
Income tax expense (Note 5)
12
- ------
51
- ------
NET INCOME
80
111
Dividends on preference stock (Note 9)
- --
- ------
(11)
- ------
Net income applicable to common shareholders
$ 80
======
$ 100
======
Net income per share of common stock (Note 6):
Basic
$.86
$1.39
Diluted
$.85
$1.14
Weighted average number of shares outstanding:
Basic
93.5
72.1
Diluted
94.5
97.2
Cash dividends paid per share:
Preference stock (Note 9)
$--
$.90
Common stock
$.25
$.25
</TABLE>
(See Accompanying Notes)
<PAGE> 5
CONDENSED CONSOLIDATED BALANCE SHEETS
Sunoco, Inc. and Subsidiaries
<TABLE>
<CAPTION>
At
September 30
1998
At
December 31
1997*
(Millions of Dollars) (UNAUDITED)
- -------------------------------------------------------------------------
<S>
<C>
<C>
ASSETS
Current Assets
Cash and cash equivalents
$ 81
$ 33
Accounts and notes receivable, net
608
671
Inventories:
Crude oil
149
150
Refined products
289
214
Materials, supplies and other
74
67
Deferred income taxes
92
- ------
113
- ------
Total Current Assets
1,293
1,248
Investments and long-term receivables
125
137
Properties, plants and equipment
6,170
5,838
Less accumulated depreciation, depletion
and amortization
2,877
- ------
2,774
- ------
Properties, plants and equipment, net
3,293
3,064
Deferred charges and other assets
216
- ------
218
- ------
Total Assets
$4,927
======
$4,667
======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable
$ 609
$ 830
Accrued liabilities
454
534
Current portion of long-term debt (Note 10)
72
12
Taxes payable
237
- ------
88
- ------
Total Current Liabilities
1,372
1,464
Long-term debt (Note 10)
840
824
Retirement benefit liabilities
459
477
Deferred income taxes
132
73
Other deferred credits and liabilities (Note 7)
520
367
Commitments and contingent liabilities (Note 8)
Shareholders' equity (Note 9)
1,604
- ------
1,462
- ------
Total Liabilities and Shareholders' Equity
$4,927
======
$4,667
======
</TABLE>
- ----------
*Reclassified to conform to the 1998 presentation.
(See Accompanying Notes)
<PAGE> 6
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Sunoco, Inc. and Subsidiaries
(Millions of Dollars)
- -------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30
- --------------------
1998
- -----
1997
- -----
(UNAUDITED)
<S>
<C>
<C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
$ 228
$ 234
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for employee terminations
- --
32
Depreciation, depletion and amortization
189
195
Deferred income tax expense
79
92
Changes in working capital pertaining to
operating activities:
Accounts and notes receivable
60
166
Inventories
(61)
(78)
Accounts payable and accrued liabilities
(320)
(295)
Taxes payable
134
(35)
Other
(56)
- -----
(18)
- -----
Net cash provided by operating activities
253
- -----
293
- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures
(325)
(242)
Acquisition of Philadelphia phenol facility,
net of $109 seller financing
(48)
- --
Proceeds from divestments
108
110
Other
(2)
- -----
16
- -----
Net cash used in investing activities
(267)
- -----
(116)
- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments of short-term borrowings
(12)
- --
Repayments of long-term debt
(20)
(1)
Proceeds from transferred interest in coke-
making operations
200
- --
Cash dividend payments
(79)
(88)
Purchases of preference stock for retirement
(2)
(19)
Purchases of common stock for treasury
(23)
(103)
Proceeds from issuance of common stock under
management incentive and employee option plans
12
36
Other
(14)
- -----
(3)
- -----
Net cash provided by (used in) financing activities
62
- -----
(178)
- -----
Net increase (decrease) in cash and cash equivalents
48
(1)
Cash and cash equivalents at beginning of period
33
- -----
67
- -----
Cash and cash equivalents at end of period
$ 81
=====
$ 66
=====
</TABLE>
(See Accompanying Notes)
<PAGE> 7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
1. General.
The registrant (formerly Sun Company, Inc.) changed its name to
Sunoco, Inc. ("Sunoco") effective November 6, 1998. 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 1998 benefit from change in tax election (Note 5) and the 1997
provision for employee terminations (Note 4). Results for the three
and nine months ended September 30, 1998 are not necessarily
indicative of results for the full year 1998.
2. Settlement of Income Tax Dispute.
In March 1998, Sunoco 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 nine months of 1998, Oil Insurance Limited, a
petroleum industry insurance consortium in which the Company is a
member, paid a dividend to its shareholders. Sunoco's share of this
dividend amounted to $8 million and is included in other income in the
condensed consolidated statement of income for the nine months ended
September 30, 1998. The dividend increased Sunoco's results of
operations by $5 million after tax in the first quarter of 1998.
4. Employee Terminations.
During the first quarter of 1997, Sunoco 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. Change in Tax Election.
During the third quarter of 1998, Sunoco revoked its election under
the Internal Revenue Code concerning the Puerto Rico possession tax
credit. The revocation resulted in the recognition of a tax benefit
which increased Sunoco's net income by $13 million in the third
quarter of 1998. The increase in net income resulted primarily from
recognition of additional tax benefits associated with a write-down of
assets recorded in 1996 in connection with a project to reconfigure
the Company's Puerto Rico refinery.
<PAGE> 8
6. Earnings Per Share.
In the fourth quarter of 1997, Sunoco adopted Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128")
which replaced the disclosure of earnings per share ("EPS") on a
primary and fully diluted basis with basic and diluted EPS. Unlike
primary EPS, basic EPS excludes any dilutive effect of stock incentive
awards. Diluted EPS is very similar to fully diluted EPS. All EPS
amounts in the accompanying consolidated statements of income have
been presented in accordance with SFAS No. 128. Basic and diluted EPS
for the nine months ended September 30, 1997 and basic EPS for the
three months ended September 30, 1997 were $.01 per share higher than
the corresponding primary and fully diluted EPS amounts previously
reported for these periods. Diluted EPS is the same as the previously
reported fully diluted EPS for the three months ended September 30,
1997.
Basic EPS was computed by dividing earnings after deducting dividends
on preference stock by the weighted average number of common shares
outstanding. Diluted EPS was 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
to the assumed redemption of preference shares for common stock prior
to the actual redemption of the preference shares on May 28, 1998
(Note 9).
<PAGE> 9
The following table sets forth the computation of basic and diluted
EPS for the nine-month and three-month periods ended September 30,
1998 and 1997 (in millions, except per share amounts):
<TABLE>
<CAPTION>
Nine Months
Ended
September 30
- --------------
Three Months
Ended
September 30
- -------------
1998
- ----
1997
- ----
1998
- ----
1997
- ----
<S>
<C>
<C>
<C>
<C>
Net income after dividends on
preference stock (basic EPS
numerator)
$208
$201
$80
$ 100
Add: Dividends on preference stock
20
- ----
33
- ----
- --
- ---
11
- ----
Net income (diluted EPS numerator)
$228
====
$234
====
$80
===
$111
====
Weighted average number of common
shares outstanding (basic EPS
denominator)
81.1
72.6
93.5
72.1
Add effect of dilutive securities:
Redeemable preference shares
13.0
24.8
- --
24.5
Stock incentive awards
1.2
- ----
.3
- ----
1.0
- ----
.6
- ----
Weighted average number of shares
(diluted EPS denominator)
95.3
====
97.7
====
94.5
====
97.2
====
Basic EPS
$2.56
$2.77
$.86
$1.39
Diluted EPS
$2.39
$2.40
$.85
$1.14
</TABLE>
7. Transferred Interests in Cokemaking Operations.
In the first quarter of 1998, Sunoco transferred an interest in its
Indiana Harbor cokemaking operations in East Chicago, IN, to a third
party for $200 million in cash. In 1995, Sunoco transferred an
interest in its Jewell cokemaking operations in Vansant, VA, 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.
Sunoco did not recognize a gain or loss on these transactions. The
outstanding balance attributable to the transferred interests in these
operations totalled $237 and $69 million at September 30, 1998 and
December 31, 1997, respectively, and is reflected in other deferred
credits and liabilities in the condensed consolidated balance sheets.
8. 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.
<PAGE> 10
In order to obtain a secure supply of oxygenates for the manufacture
of reformulated gasoline, Sunoco entered into an off-take agreement
with BEF whereby Sunoco agreed to purchase all of the MTBE production
from the plant. For the first 14,000 barrels daily of production,
Sunoco 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 Sunoco 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, Sunoco and BEF will negotiate a new price for
the last four years of the agreement based upon the market conditions
existing at that time.
Sunoco's MTBE purchases under this agreement for the first 14,000
barrels daily of MTBE production were based upon the formula price
through May 1997. Thereafter, the first 12,600 barrels daily of MTBE
purchases under the agreement have been based upon the minimum price.
The formula prices paid by Sunoco during most of 1996 were believed to
have approximated prices of other MTBE long-term sales agreements in
the marketplace. However, management determined 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 determined 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 Sunoco 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 the first nine months of 1998
and the full year 1997, actual MTBE purchase costs in excess of spot
market prices totalling $32 and $65 million, respectively, were
charged against the accrual. The accrual has a remaining balance of
$33 million as of September 30, 1998.
The $130 million loss accrual was primarily based on the Company's
marketplace assumptions concerning the worldwide supply and demand for
MTBE through May 2000. At December 31, 1996, the Company believed that
MTBE demand would increase in 1999 largely as a result of various
jurisdictions electing to voluntarily comply with (or opt into) the
reformulated gasoline requirements of the Clean Air Act by the end of
1998. To date, the number of "opt ins" has been lower than what the
Company had originally anticipated and certain other jurisdictions are
considering "opting out" of the voluntary reformulated fuel
requirements. If these or other market factors prevent MTBE demand
from increasing in the future, an additional loss accrual may be
necessary.
<PAGE> 11
On June 30, 1998, Sunoco completed the sale of the wastewater
treatment facility at its Toledo, Ohio refinery for $47 million in
cash. No gain or loss was recognized on this transaction. In
connection with the sale, the Company entered into a twenty-year
service agreement with the purchaser of the facility to treat the
Toledo refinery's wastewater.
Sunoco 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 Sunoco to the
potential obligation to remove or mitigate the environmental effects
of the disposal or release of certain pollutants at Sunoco's
facilities and at third-party or formerly-owned sites. Under CERCLA,
Sunoco 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, 1998,
Sunoco had been named as a PRP at 50 sites identified or potentially
identifiable as "Superfund" sites under CERCLA. Sunoco has reviewed
the nature and extent of its involvement at each site and other
relevant circumstances and, based upon the other parties involved or
Sunoco's negligible participation therein, believes that its potential
liability associated with such sites will not be significant.
Under various environmental laws, including RCRA, Sunoco has initiated
corrective remedial action at its 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.
Sunoco 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
September 30
1998
- ------------
At
December 31
1997
- -----------
Accrued liabilities
$ 48
$ 59
Other deferred credits and
liabilities
133
- ----
145
- ----
$181
====
$204
====
<PAGE> 12
Pretax charges against income for environmental remediation amounted
to $4 and $3 million for the nine months ended September 30, 1998 and
1997, respectively. Claims for recovery of environmental liabilities
that are probable of realization, which totalled $4 million at
September 30, 1998, are included in deferred charges and other assets
in the condensed consolidated balance sheets.
On October 4, 1996, Sunoco 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 Sunoco,
including its predecessor companies and subsidiaries, arising from the
ownership and operation of its businesses. While negotiations are
currently underway with certain of the insurance companies to resolve
a portion of this litigation, complete resolution could be protracted.
Accordingly, the Company cannot quantify the ultimate outcome of this
matter.
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 Sunoco'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
Sunoco. 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
Sunoco. Management believes that any expenditures attributable to
these matters will be incurred over an extended period of time and
will be funded from Sunoco'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 Sunoco believes that any additional liabilities
which may arise pertaining to such matters would not be material in
relation to the consolidated financial position of Sunoco at September
30, 1998. Furthermore, management believes that the overall costs for
environmental activities will not have a material impact, over an
extended period of time, on Sunoco's cash flows or liquidity.
<PAGE> 13
9. Shareholders' Equity.
<TABLE>
<CAPTION>
At
September 30
1998
- ------------
At
December 31
1997
- -----------
(Millions of Dollars)
<S>
<C>
<C>
Cumulative preference stock - Series A,
no par value
$ --
$ 723
Common stock, par value $1 per share
132
132
Capital in excess of par value
1,391
1,361
Earnings employed in the business
1,579
- ------
1,430
- ------
3,102
3,646
Less common stock held in treasury,
at cost
1,498
- ------
2,184
- ------
Total
$1,604
======
$1,462
======
</TABLE>
On May 28, 1998, the Company redeemed all of its 24,067,520 then
outstanding depositary shares. Each depositary share represented
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
was redeemed in exchange for 0.949837 share of Sunoco's common stock
plus accrued and unpaid dividends of $.3758 (or $.7516 per share of
underlying preference stock). The depositary-to-common exchange ratio
represented the call price of $40 per depositary share payable in
Sunoco common stock valued at $42.1125 per common share -- the average
of the closing prices for Sunoco 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.
At the exchange ratio of 0.949837 share of common stock for each
depositary share, 22,859,633 shares of Sunoco common stock held in
treasury were reissued.
In the first nine months of 1998, the Company repurchased 573,500
shares of its common stock and 46,780 of its depositary shares on the
open market for $25 million. These purchases were made under a $150
million authorization from the Company's Board of Directors to
purchase Sunoco stock in the open market or through privately
negotiated transactions from time to time depending on prevailing
market conditions.
In August 1998, Sunoco entered into a forward purchase contract with a
third party that provides the Company with an option to acquire up to
3.15 million shares of its common stock. These shares were purchased
by the third party at an average cost of $37.65 per share and will be
held by the third party until settlement of the forward purchase
contract. The contract matures in February 2000 and provides for
settlement at that time (or earlier, at the Company's option) at
$37.65 per share plus a financing charge which is net of the dividends
paid on the shares (the "forward price"). Sunoco can settle the
<PAGE> 14
forward purchase contract by electing either to purchase the shares
for cash at the forward price or to settle on a net basis whereby
Sunoco would receive (pay) cash or shares of common stock, at its
election, based on the excess (deficiency) of the aggregate market
value of the 3.15 million shares of common stock over (under) the
aggregate forward price at the settlement date. The Company intends
to acquire the shares for cash. Purchase of the shares under the
forward purchase contract would cause the Company to exhaust the
remaining authorization under its $150 million share repurchase
program. The Company does not intend to purchase any additional Sunoco
stock prior to settlement of this contract.
10. Acquisition of Phenol Facility.
On June 30, 1998, Sunoco acquired the Philadelphia phenol facility of
AlliedSignal Inc. ("Allied") and related working capital for $157
million. Of this amount, $48 million was paid on the acquisition
date, $26 million was paid in the third quarter of 1998 and $83
million will be paid in installments over the next fifteen months.
The acquisition has been accounted for as a purchase. The results of
operations of this facility have been included in the condensed
consolidated statements of income subsequent to the date of
acquisition. The purchase price has been allocated to the assets
acquired and liabilities assumed based on their relative fair market
values. The following is a summary of the effects of this transaction
on Sunoco's consolidated financial position as of the acquisition date
(in millions of dollars):
Allocation of purchase price:
Inventories $ 20
Properties, plants and equipment 155
Other assets 4
Accounts payable and accrued liabilities (1)
Retirement benefit liabilities (5)
Other liabilities (16)
-----
157
-----
Seller financing:
Short-term borrowings and current
portion of long-term debt (74)
Long-term debt (35)
-----
(109)
-----
Cash paid on acquisition date $ 48
=====
The phenol 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, Sunoco has agreed to supply Allied with approximately 735
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.
<PAGE> 15
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS - NINE MONTHS
Earnings Profile of Sunoco Businesses (after tax)
- -------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended
September 30
- -----------------
1998
- ----
1997
- ----
Variance
- --------
(Millions of Dollars)
<S>
<C>
<C>
<C>
Sun Northeast Refining
$ 53
$ 81
$(28)
Sunoco Northeast Marketing
43
50
(7)
Sunoco Chemicals
28
62
(34)
Sun Lubricants
13
3
10
Sunoco MidAmerica Marketing & Refining
38
43
(5)
Sunoco Logistics
42
39
3
Sun Coke
41
29
12
Corporate expenses
(17)
(16)
(1)
Net financing expenses and other
(26)
- ----
(36)
- ----
10
- ----
215
255
(40)
Special Items:
Benefit from change in tax election
13
- --
13
Provision for employee terminations
--
- ----
(21)
- ----
21
- ----
Consolidated net income
$228
====
$234
====
$ (6)
====
</TABLE>
Analysis of Earnings Profile of Sunoco Businesses
- -------------------------------------------------
In the nine-month period ended September 30, 1998, Sunoco earned $228
million, or $2.39 per share of common stock on a diluted basis, compared to
net income of $234 million, or $2.40 per share, for the first nine months
of 1997. Excluding the special items shown separately in the Earnings
Profile of Sunoco Businesses, Sunoco earned $215 million in the first nine
months of 1998 compared to $255 million in the first nine months of 1997.
Sun Northeast Refining -- The Sun Northeast Refining business had income of
$53 million in the first nine months of 1998 versus income of $81 million
in the first nine months of 1997. The decrease in earnings was primarily
due to significantly lower refining margins. Also contributing to the
decline was the impact of a 5.5 million barrel decline in gasoline and
<PAGE> 16
distillate production caused by a substantial increase in the amount of
scheduled and unscheduled refinery conversion unit downtime. The increased
downtime includes a 29-day shutdown of the 68,000 barrel-per-day catalytic
cracking unit at the Girard Point facility due to an emergency power
interruption by the local utility and related start-up problems. A
subsequent scheduled six-week modernization of this unit also contributed
to the increased downtime. Partially offsetting these negative factors was
the effect of a favorable foreign sweet crude oil market.
Sunoco Northeast Marketing -- The Sunoco Northeast Marketing business
earned $43 million in the current nine-month period versus income of $50
million in the first nine months of 1997. Lower retail gasoline margins,
which were down almost two cents per gallon versus the first nine months of
1997, were partially offset by lower expenses ($5 million) and higher non-
gasoline income. Compared to the first nine months of 1997, total gasoline
sales volumes increased two percent; average throughput at the Company's
direct sites improved four percent; and average merchandise sales per
convenience store increased eleven percent.
Sunoco Chemicals -- Sunoco Chemicals earned $28 million in the first nine
months of 1998 versus $62 million in the first nine months of 1997. The
decline in earnings was due to lower margins, particularly for polymer-
grade propylene (down over 50 percent) and cumene. Partially offsetting
these negative factors was the income contribution ($6 million after tax)
from Sunoco's phenol facility acquired on June 30, 1998 (see Note 10 to the
condensed consolidated financial statements).
Sun Lubricants -- The Sun Lubricants business earned $13 million in the
first nine months of 1998, compared to $3 million in the 1997 nine-month
period. The improved results were due largely to higher margins for
lubricants, waxes and residual fuels. Production volumes and earnings
during the first nine months of 1998 were limited by scheduled maintenance
turnarounds at the Puerto Rico and Tulsa refineries as well as by a two-
week shutdown of the Puerto Rico refinery commencing on September 21 due to
Hurricane Georges. A $1 million after-tax provision for repairs due to
damage caused by the hurricane was recorded during the third quarter.
Sunoco MidAmerica Marketing & Refining -- Sunoco MidAmerica Marketing &
Refining earned $38 million during the current nine-month period versus $43
million in the first nine months of 1997. The decrease in earnings was
largely due to lower wholesale gasoline and petrochemicals margins.
Partially offsetting these negative factors were seven percent higher
retail gasoline volumes and slightly higher retail gasoline margins.
Production levels increased one percent during the first nine months of
1998 despite crude unit maintenance and expansion work at the Toledo
refinery during the second half of September 1998 and a one-week shutdown
in June 1998 caused by a regional electricity emergency.
Sunoco Logistics -- Sunoco Logistics earned $42 million in the first nine
months of 1998 versus $39 million in the first nine months of 1997. The
increase in income was primarily due to improved results from Sunoco's
Southwestern logistics operations. Higher throughput in the Eastern
pipeline system also contributed to the improvement.
<PAGE> 17
Sun Coke -- Sun Coke earned $41 million in the first nine months of 1998
versus $29 million in the 1997 nine-month period. The increase in earnings
was primarily due to the income contribution of the Indiana Harbor
cokemaking facility. Sun Coke results included benefits from the settlement
of an income tax dispute with the Internal Revenue Service in 1998 and from
insurance recoveries in 1997 each totalling approximately $2 million after
tax.
Start-up of Sunoco's Indiana Harbor cokemaking operation in East Chicago,
IN, commenced in the first quarter of 1998. The first battery of 67 new
coke ovens began production in late March with the second, third and fourth
67-oven batteries commencing production in the April-May period. All four
batteries, totalling 268 ovens, are now producing at close to the full
rated capacity of 1.3 million tons of coke annually.
Net Financing Expenses and Other -- Net financing expenses and other
totalled $26 million for the 1998 nine-month period versus $36 million in
the first nine months of 1997. The $10 million decrease was primarily due
to the recognition in the first quarter of 1998 of $5 million of after-tax
earnings from a dividend paid to Sunoco by Oil Insurance Limited, a
petroleum industry insurance consortium in which Sunoco is a member, and $7
million of after-tax interest income related to the federal income tax
settlement discussed under Sun Coke above (see Notes 2 and 3 to the
condensed consolidated financial statements).
Benefit from Change in Tax Election --During the third quarter of 1998,
Sunoco revoked its election under the Internal Revenue Code concerning the
Puerto Rico possession tax credit. The revocation resulted in the
recognition of a tax benefit which increased Sunoco's net income by $13
million in the third quarter of 1998. The increase in net income results
primarily from recognition of additional tax benefits associated with a
write-down of assets recorded in 1996 in connection with the
reconfiguration of the Company's Puerto Rico refinery.
Provision for Employee Terminations -- During the first quarter of 1997,
Sunoco 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.
Analysis of Consolidated Statements of Income
- ---------------------------------------------
Revenues -- Total revenues were $6.4 billion in the first nine months of
1998 compared to $8.0 billion in the first nine months of 1997. The 20
percent decrease was primarily due to lower refined product prices.
Costs and Expenses -- Total pretax costs and expenses were $6.1 billion in
the first nine months of 1998 compared to $7.6 billion in the 1997 nine-
month period. The 20 percent decrease was primarily due to lower crude oil
and refined product acquisition costs largely as a result of a decline in
crude oil prices.
<PAGE> 18
RESULTS OF OPERATIONS - THREE MONTHS
Earnings Profile of Sunoco Businesses (after tax)
- -------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
September 30
- ------------------
1998
- ----
1997
- ----
Variance
- --------
(Millions of Dollars)
<S>
<C>
<C>
<C>
Sun Northeast Refining
$ 13
$ 40
$(27)
Sunoco Northeast Marketing
17
13
4
Sunoco Chemicals
11
21
(10)
Sun Lubricants
5
9
(4)
Sunoco MidAmerica Marketing & Refining
11
23
(12)
Sunoco Logistics
16
12
4
Sun Coke
15
11
4
Corporate expenses
(6)
(6)
- --
Net financing expenses and other
(15)
- ----
(12)
- ----
(3)
- ----
67
111
(44)
Special Item:
Benefit from change in tax election
13
- ----
- --
- ----
13
- ----
Consolidated net income
$ 80
====
$111
====
$(31)
====
</TABLE>
Analysis of Earnings Profile of Sunoco Businesses
- -------------------------------------------------
In the three-month period ended September 30, 1998, Sunoco earned $80
million, or $.85 per share of common stock on a diluted basis, compared to
net income of $111 million, or $1.14 per share, for the third quarter of
1997. Excluding the $13 million benefit from the change in tax election
shown separately in the Earnings Profile of Sunoco Businesses, Sunoco had
income of $67 million in the third quarter of 1998.
Sun Northeast Refining -- The Sun Northeast Refining business earned $13
million in the third quarter of 1998 versus $40 million in the third
quarter of 1997. The decrease in earnings was primarily due to signifi-
cantly lower refining margins compared to last year's strong third quarter
margins. Inputs to crude units averaged over 475,000 barrels daily (99
percent of rated capacity) during the third quarter of 1998. Production
was limited, however, during most of July 1998 while modernization work on
<PAGE> 19
the Philadelphia refinery's Girard Point catalytic cracker was being
completed. For the months of August and September 1998, the Northeast
Refining system averaged close to 490,000 barrels daily of crude oil inputs
and over 200,000 barrels daily of catalytic cracking throughput.
Sunoco Northeast Marketing -- The Sunoco Northeast Marketing business
earned $17 million in the current quarter versus $13 million in the third
quarter of 1997. The increase in earnings was due to slightly higher retail
gasoline margins, which were up approximately one cent per gallon versus
last year's low levels, a three percent increase in retail gasoline sales
volumes and higher non-gasoline income. Partially offsetting these positive
factors was a $4 million increase in expenses.
Sunoco Chemicals -- Sunoco Chemicals earned $11 million in the third
quarter of 1998 versus $21 million in the third quarter of 1997. The
decline in earnings was due to continued lower margins across most
chemicals products, particularly polymer-grade propylene for which margins
were less than half of third quarter 1997 levels. Chemicals production was
also limited throughout most of July 1998 while the cumene unit was idled
during completion of expansion work. Partially offsetting these negative
factors was the income contribution ($6 million after tax) from Sunoco's
phenol plant acquired on June 30, 1998.
Sun Lubricants -- The Sun Lubricants business earned $5 million in the 1998
third quarter versus $9 million in the 1997 third quarter. The decrease in
earnings was primarily due to lower fuels margins, primarily for gasoline
and distillates produced at Sunoco's Tulsa refinery. Hurricane Georges,
which struck the island of Puerto Rico on September 21, 1998, resulted in a
two-week shutdown of Sunoco's Puerto Rico refinery. A $1 million after-tax
provision for repairs due to damage caused by the hurricane was recorded
during the 1998 third quarter. These negative factors were partially offset
by increased lubricants production and margins.
Sunoco MidAmerica Marketing & Refining -- Sunoco MidAmerica Marketing &
Refining earned $11 million during the current quarter compared to $23
million in the 1997 third quarter. The decrease in earnings was largely due
to significantly lower wholesale gasoline and chemical margins in the
MidAmerica region compared to the very strong 1997 third quarter.
Production levels were comparable to last year's third quarter despite
crude unit maintenance and expansion work at the Toledo refinery during the
second half of September 1998. Partially offsetting these negative factors
were four percent higher sales volumes and slightly higher retail gasoline
margins.
Sunoco Logistics --Sunoco Logistics earned $16 million in the third quarter
of 1998 versus $12 million in the third quarter of 1997. The increase in
income was primarily due to improved results from Sunoco's Southwestern
logistics operations. Higher throughput in the Eastern pipeline system also
contributed to the improvement.
Sun Coke -- Sun Coke earned $15 million in the third quarter of 1998 versus
$11 million in the third quarter of 1997. The increase in earnings was due
largely to the income contribution from the Indiana Harbor cokemaking
facility, which produced 298,000 tons of coke during the third quarter of
1998. Third quarter 1997 results included approximately $2 million of
after-tax gains from insurance recoveries.
<PAGE> 20
Net Financing Expenses and Other -- Net financing expenses and other
activities totalled $15 million for the third quarter of 1998 versus $12
million for the 1997 third quarter. The increase was primarily due to lower
capitalized interest and the incremental interest expense attributable to
the acquisition of the phenol facility on June 30, 1998.
Benefit from Change in Tax Election -- For a discussion of the $13 million
tax benefit recognized in the third quarter of 1998, see Note 5 to the
condensed consolidated financial statements.
Analysis of Consolidated Statements of Income
- ---------------------------------------------
Revenues -- Total revenues were $2.1 billion in the third quarter of 1998
compared to $2.6 billion in the third quarter of 1997. The 19 percent
decrease was primarily due to lower refined product prices.
Costs and Expenses -- Total pretax costs and expenses were $2.0 billion in
the third quarter of 1998 compared to $2.5 billion in the third quarter of
1997. The 20 percent decrease was primarily due to lower crude oil and
refined product acquisition costs largely as a result of a decline in crude
oil prices.
FINANCIAL CONDITION
Cash and Working Capital
- ------------------------
At September 30, 1998, Sunoco had cash and cash equivalents of $81 million
compared to $33 million at December 31, 1997, and had a working capital
deficit of $79 million compared to a working capital deficit of $216
million at December 31, 1997. Sunoco'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, 1998 by $336 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 Sunoco's cash and working capital are adequate to support
Sunoco's ongoing operations.
Cash Flows and Financial Capacity
- ---------------------------------
In the first nine months of 1998, Sunoco's net cash provided by operating
activities ("cash generation") was $253 million compared to $293 million in
the first nine months of 1997. This $40 million decrease in cash
generation was primarily due to a decline in income before special items
and a reduction in noncash charges, partially offset by a decrease in
working capital uses pertaining to operating activities.
<PAGE> 21
Management believes that future cash generation generally will be
sufficient to satisfy Sunoco's capital requirements and to pay the current
level of cash dividends on Sunoco's common 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
Sunoco. The Company also has access to short-term financing under a non-
committed money market facility. At September 30, 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 Sunoco's
borrowings (in millions of dollars):
At
September 30
1998
- -----------
At
December 31
1997
- -----------
Current portion of long-term debt
$ 72
$ 12
Long-term debt
840
- ----
824
- ----
Total borrowings
$912
====
$836
====
Sunoco's debt-to-capital ratio was 36.2 percent at September 30, 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. No commitments have been made with respect to
any investment opportunity which would require the use of a significant
portion of Sunoco's 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, Sunoco 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.
NEW ACCOUNTING STANDARD
In June 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS
No. 133") was issued. Sunoco expects to adopt SFAS No. 133 effective
January 1, 2000 when adoption is mandatory. It will require the Company
to recognize all derivative contracts on the balance sheet at their fair
<PAGE> 22
value. Derivative contracts that are not hedges will be recognized on the
balance sheet at fair value with gains or losses being reflected in net
income. If the derivative contracts are hedges, depending on their nature,
changes in their fair values will either be offset in net income against
the changes in the fair values of the underlying items being hedged or
reflected initially as a separate component of shareholders' equity and
subsequently recognized in net income when the related hedged items are
recognized in income. The ineffective portions of changes in the fair
values of derivative contracts designated as hedges will be immediately
recognized in net income. The Company has not yet determined the impact
that SFAS No. 133 will have on its results of operations and financial
position.
SHARE REDEMPTION AND REPURCHASES
On May 28, 1998, the Company redeemed all of its outstanding depositary
shares. Each depositary share represented ownership of one-half share of
the Company's Series A cumulative preference stock. During the first nine
months of 1998, the Company also repurchased 573,500 shares of its common
stock and 46,780 of its depositary shares on the open market for $25
million.
In August 1998, Sunoco entered into a forward purchase contract with a
third party that provides the Company with an option to acquire up to 3.15
million shares of its common stock at a contract price of $37.65 per share
plus a financing charge which is net of the dividends paid on the shares
(the "forward price"). These shares were purchased by the third party at an
average cost of $37.65 per share and will be held by the third party until
settlement of the forward purchase contract. The contract, which matures in
February 2000, allows for earlier settlement by Sunoco and provides Sunoco
with the option of purchasing the shares at the forward price or settling
by receiving (paying) in cash or shares of common stock any excess
(deficiency) of the aggregate market value of the 3.15 million shares of
common stock over (under) the aggregate forward price. The Company intends
to acquire the shares for cash. Purchase of the shares under the forward
purchase contract would cause the Company to exhaust the authorization from
its Board of Directors to purchase up to $150 million of Sunoco stock in
the open market or through privately negotiated transactions. The Company
does not intend to purchase any additional Sunoco stock prior to settlement
of this contract.
For a further discussion of the share redemption and the forward purchase
contract, see Note 9 to the condensed consolidated financial statements.
YEAR 2000 INFORMATION PROCESSING
Sunoco, like most companies, is faced with the Year 2000 Issue as a result
of its use of computer systems that were designed to use two digits rather
than four to define a year. For example, some computer software may
interpret a date using the two digit representation "00" as the year 1900
instead of the year 2000. If not corrected, such misinterpretations could
result in outright system failures or in miscalculations causing
operational or financial processing disruptions.
<PAGE> 23
Sunoco began significant efforts to address its exposures related to the
Year 2000 Issue in 1997. A project team was put in place to assess,
remediate or replace, test and implement Year 2000 compliant computer
systems and applications (which consist of internally developed and
purchased computer applications, hardware, systems software and embedded
chip systems) so that such systems and related processes will continue to
operate and properly process information dated after December 31, 1999.
The initial phase of these plans, an inventory and assessment of potential
problem areas, is essentially complete. The remediation/replacement phase
for the Company's key computer applications is substantially on schedule,
and the Company estimates that as of September 30, 1998 it has completed
approximately 65 percent of the activities in this phase. The Company
anticipates that by December 31, 1998, this remediation/replacement phase
will be approximately 90 percent complete. Testing is an ongoing process as
software and hardware are remediated, upgraded or replaced. Additionally,
from February 1999 through July 1999, the Company has planned a complete
Year 2000 compliance readiness test and a full systems integration test in
an environment that simulates the processing conditions that will exist
after December 31, 1999. The Company anticipates that the
remediation/replacement and testing phases for all of its computer
applications will be completed by July 31, 1999. Notwithstanding this
belief, the Company will develop contingency plans for these systems as
well as the business processes and operations that they support. Such
plans are expected to be complete by September 30, 1999.
With regard to third-party system interfaces, Sunoco's computer systems
have been remediated to correctly interpret dates as they are currently
supplied and to have the capability to both send and receive expanded dates
if necessary. Third parties with whom the Company has interfaces have been
contacted, advised of Sunoco's plans for such interfaces and asked to
promptly notify the Company should their own remediation plans result in a
change to their current system interface with the Company. To date, the
Company has not been notified by any third party that an interface change
will be required.
The total cost to Sunoco of achieving Year 2000 compliant systems is
currently estimated to be $36 million. Such amount, which includes both
expense and capital spending, will be funded from Sunoco's net cash flows
from operating activities. It will be spent over the 1997-99 period and
represents approximately 20 percent of the information technology budget
during that period. Of the $36 million, it is estimated that there will be
$20 million of expense incurred modifying or repairing existing software
and hardware and $16 million of capital expenditures replacing two key non-
compliant systems with newly purchased systems that, in addition to being
compliant, provide enhanced business functionality. Through September 30,
1998, $18 million has been spent, of which $13 million relating to the
modification or repair of existing software and hardware has been expensed
and $5 million relating to the replacement of the two non-compliant systems
has been capitalized.
The Company is contacting its key customers and suppliers in writing in an
attempt to ascertain their ability to continue to meet their obligations to
the Company due to the Year 2000 Issue. The responses received are being
evaluated, and the Company may choose to develop alternative sources of
supply, markets or other contingency plans.
<PAGE> 24
The failure to correct a material Year 2000 problem or the inability of any
key customer, key supplier or a governmental agency to make the necessary
computer system changes on a timely basis, could result in interruptions to
Company operations or business activities. Such interruptions could have a
material adverse impact on the Company's results of operations, liquidity
or financial condition. Due to the general uncertainty inherent in the
Year 2000 Issue, particularly as it relates to the readiness of the
Company's key customers and suppliers, and of governmental agencies, the
Company cannot ascertain at this time whether the consequences of Year 2000
failures will have a material impact on the Company's results of
operations, liquidity or financial condition.
The foregoing Year 2000 discussion constitutes a "forward-looking"
statement within the meaning of Section 21E of the Securities Exchange Act
of 1934. It is based on management's current expectations, estimates and
projections, which could ultimately prove to be inaccurate. Factors which
could affect the Company's ability to be Year 2000 compliant by the end of
1999 include the failure of customers, suppliers and governmental agencies
to achieve compliance, the inaccuracy of certifications received from them,
and a shortage of necessary programmers to modify or repair existing
software.
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 Sunoco 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.
Sunoco'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. Sunoco's
income and revenues are affected by market supply and demand for Sunoco'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> 25
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 Sunoco'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 Sunoco'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. Sunoco'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. Sunoco 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 Sunoco. 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> 26
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
On September 29, 1998, the United States Department of Justice, acting
on behalf of the United States Environmental Protection Agency,
Region V (the "EPA"), filed an action against Sunoco, Inc. (R&M). The
action seeks civil penalties in excess of $100,000 for alleged past
violations of the Clean Air Act during the years 1993 and 1994
relating to excess sulfur dioxide emissions from the Toledo refinery,
and for alleged failure to comply with benzene waste NESHAPS rules at
the Toledo refinery's wastewater treatment facility.
Many other legal and administrative proceedings are pending against
Sunoco. 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 Sunoco. Management of Sunoco
believes that any liabilities which may arise from such proceedings
would not be material in relation to the consolidated financial
position of Sunoco at September 30, 1998.
Item 6. Exhibits and Reports on Form 8-K
Exhibits:
12 - Statement re Sunoco, Inc. and Subsidiaries Computation of
Ratio of Earnings to Fixed Charges for the Nine-Month Period
Ended September 30, 1998.
27 - Article 5 of Regulation S-X, Financial Data Schedule.
Reports on Form 8-K:
The Company has not filed any reports on Form 8-K during the quarter
ended September 30, 1998. On November 5, 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 has changed its corporate name, and will
conduct its business as "Sunoco, Inc." The press release also
announced that the Company is updating its logo and service station
design and has established an internet website.
**********
We are pleased to furnish this Form 10-Q to shareholders who request it by
writing to:
Sunoco, Inc.
Investor Relations
Ten Penn Center
1801 Market Street
Philadelphia, PA 19103-1699
<PAGE> 27
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.
SUNOCO, INC.
BY s/ JOSEPH P. KROTT
-----------------------
Joseph P. Krott
Comptroller
(Principal Accounting Officer)
DATE November 9, 1998
<PAGE> 1
EXHIBIT INDEX
Exhibit
Number Exhibit
- ------- -----------------------------------------
12 Statement re Sunoco, Inc. and Subsidiaries Computation of
Ratio of Earnings to Fixed Charges for the Nine-Month Period
Ended September 30, 1998.
27 Article 5 of Regulation S-X, Financial Data Schedule.
<PAGE> 1
<TABLE>
<CAPTION>
EXHIBIT 12
STATEMENT RE COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES(a)
Sunoco, Inc. and Subsidiaries
(Millions of Dollars Except Ratio)
- --------------------------------------------------------------------------
For the Nine
Months Ended
September 30, 1998
- -------------------
(UNAUDITED)
<S>
<C>
Fixed Charges:
Consolidated interest cost and debt expense
$ 58
Interest allocable to rental expense(b)
28
- ----
Total
$ 86
====
Earnings:
Consolidated income before income tax expense
$310
Proportionate share of income tax expense of
50 percent owned but not controlled affiliated
companies
6
Equity in income of less than 50 percent owned
affiliated companies
(11)
Dividends received from less than 50 percent
owned affiliated companies
7
Fixed charges
86
Interest capitalized
(6)
Amortization of previously capitalized interest
3
- ----
Total
$395
====
Ratio of Earnings to Fixed Charges
4.59
====
</TABLE>
- ----------------
(a) The consolidated financial statements of Sunoco, 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.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S>
<C>
<PERIOD-TYPE>
9-MOS
<FISCAL-YEAR-END>
DEC-31-1998
<PERIOD-START>
JAN-01-1998
<PERIOD-END>
SEP-30-1998
<CASH>
81
<SECURITIES>
0
<RECEIVABLES>
615
<ALLOWANCES>
7
<INVENTORY>
512
<CURRENT-ASSETS>
1,293
<PP&E>
6,170
<DEPRECIATION>
2,877
<TOTAL-ASSETS>
4,927
<CURRENT-LIABILITIES>
1,372
<BONDS>
840
<COMMON>
132
0
0
<OTHER-SE>
1,472
<TOTAL-LIABILITY-AND-EQUITY>
4,927
<SALES>
6,359
<TOTAL-REVENUES>
6,439
<CGS>
4,272
<TOTAL-COSTS>
4,272
<OTHER-EXPENSES>
1,795
<LOSS-PROVISION>
4
<INTEREST-EXPENSE>
58
<INCOME-PRETAX>
310
<INCOME-TAX>
82
<INCOME-CONTINUING>
228
<DISCONTINUED>
0
<EXTRAORDINARY>
0
<CHANGES>
0
<NET-INCOME>
228
<EPS-PRIMARY>
2.56
<EPS-DILUTED>
2.39
</TABLE>
