<PAGE>
(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 March 31, 1999
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)
NOT APPLICABLE
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
------- -------
At March 31, 1999, there were 90,441,662 shares of Common Stock, $1 par value
outstanding.
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(PAGE) 2
SUNOCO, INC.
------------
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Income
for the Three Months Ended March 31, 1999
and 1998 3
Condensed Consolidated Balance Sheets at
March 31, 1999 and December 31, 1998 4
Condensed Consolidated Statements of Cash
Flows for the Three Months Ended March 31,
1999 and 1998 5
Notes to Condensed Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURE 23
</TABLE>
<PAGE>
(PAGE) 3
PART I
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item 1. Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Sunoco, Inc. and Subsidiaries
(Millions of Dollars and Shares Except Per Share Amounts)
- --------------------------------------------------------------------------
For the Three Months
Ended March 31
--------------------
1999 1998
------ ------
<S> <C> <C>
(UNAUDITED)
REVENUES
Sales and other operating revenue (including
consumer excise taxes) $1,882 $2,086
Interest income (Note 2) 1 12
Other income (Note 3) 50 20
------ ------
1,933 2,118
------ ------
COSTS AND EXPENSES
Cost of products sold and operating expenses 1,306 1,455
Selling, general and administrative expenses 133 119
Consumer excise taxes 356 358
Payroll, property and other taxes 23 24
Depreciation, depletion and amortization 66 62
Interest cost and debt expense 21 21
Interest capitalized -- (3)
------ ------
1,905 2,036
------ ------
Income before income tax expense 28 82
Income tax expense 9 26
------ ------
NET INCOME 19 56
Dividends on preference stock -- (11)
------ ------
Net income applicable to common shareholders $ 19 $ 45
====== ======
Net income per share of common stock (Note 4):
Basic $ .21 $ .64
Diluted $ .21 $ .58
Weighted average number of shares outstanding:
Basic 90.4 70.8
Diluted 91.2 96.1
Cash dividends paid per share:
Preference stock (Note 7) $ -- $ .90
Common stock $ .25 $ .25
</TABLE>
(See Accompanying Notes)
<PAGE>
(PAGE) 4
CONDENSED CONSOLIDATED BALANCE SHEETS
Sunoco, Inc. and Subsidiaries
<TABLE>
<CAPTION>
At At
March 31 December 31
1999 1998
(Millions of Dollars) (UNAUDITED)
- --------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 4 $ 38
Accounts and notes receivable, net 545 537
Inventories:
Crude oil 174 184
Refined products 175 219
Materials, supplies and other 79 80
Deferred income taxes 118 122
------ ------
Total Current Assets 1,095 1,180
Investments and long-term receivables 109 108
Properties, plants and equipment 6,204 6,248
Less accumulated depreciation, depletion 2,888 2,902
and amortization ------ ------
Properties, plants and equipment, net 3,316 3,346
Deferred charges and other assets 213 215
------ ------
Total Assets $4,733 $4,849
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 587 $ 589
Accrued liabilities 434 488
Short-term borrowings 123 120
Current portion of long-term debt 52 69
Taxes payable 109 118
------ ------
Total Current Liabilities 1,305 1,384
Long-term debt 823 823
Retirement benefit liabilities 446 449
Deferred income taxes 183 175
Other deferred credits and liabilities (Note 5) 464 504
Commitments and contingent liabilities (Note 6)
Shareholders' equity (Note 7) 1,512 1,514
------ ------
Total Liabilities and Shareholders' Equity $4,733 $4,849
====== ======
</TABLE>
(See Accompanying Notes)
<PAGE>
(PAGE) 5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Sunoco, Inc. and Subsidiaries
(Millions of Dollars)
- --------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Three Months
Ended March 31
--------------------
1999 1998
----- -----
<S> <C> <C>
(UNAUDITED)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 19 $ 56
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Gain on divestments (13) (2)
Depreciation, depletion and amortization 66 62
Deferred income tax expense 13 20
Changes in working capital pertaining to
operating activities:
Accounts and notes receivable (11) 99
Inventories 53 (71)
Accounts payable and accrued liabilities (66) (178)
Taxes payable (9) 15
Other (13) (9)
---- -----
Net cash provided by (used in) operating activities 39 (8)
---- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (56) (104)
Proceeds from divestments 20 13
---- -----
Net cash used in investing activities (36) (91)
---- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from short-term borrowings 3 --
Repayments of long-term debt (17) (6)
Proceeds from transferred interest in coke-
making operations -- 200
Cash dividend payments (23) (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 1 6
Other (1) (2)
---- -----
Net cash provided by (used in) financing activities (37) 159
---- -----
Net increase (decrease) in cash and cash equivalents (34) 60
Cash and cash equivalents at beginning of period 38 33
---- -----
Cash and cash equivalents at end of period $ 4 $ 93
==== =====
</TABLE>
(See Accompanying Notes)
<PAGE>
(PAGE) 6
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. Results for the three months ended March 31, 1999
are not necessarily indicative of results for the full year 1999.
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 1998 first quarter net income by $9 million.
3. Other Income.
In February 1999, Sunoco divested its Shamrock steam coal mining operation
located in Kentucky for $13 million in cash. The divestment resulted in the
recognition of an $11 million pretax gain ($7 million after tax) in the
1999 first quarter. The Shamrock operation earned $5 million for the full
year 1998. With this divestment, the Company ceased steam coal mining
activities.
In the first quarter of 1999, Sunoco recognized an $11 million pretax gain
($7 million after tax) in connection with the settlement of certain
insurance claims. The claims related to certain environmental matters of
Sunoco, including its predecessor companies and subsidiaries, arising from
ownership and operation of its businesses (Note 6).
<PAGE>
(PAGE) 7
4. Earnings Per Share.
The following table sets forth the computation of basic and diluted
earnings per share ("EPS") for the three months ended March 31, 1999 and
1998 (in millions, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended
March 31
------------------
1999 1998
---- ----
<S> <C> <C>
Net income after dividends on
preference stock (basic EPS
numerator) $ 19 $ 45
Add: Dividends on preference stock -- 11
---- ----
Net income (diluted EPS numerator) $ 19 $ 56
==== ====
Weighted average number of common
shares outstanding (basic EPS
denominator) 90.4 70.8
Add effect of dilutive securities:
Redeemable preference shares
(Note 7) -- 24.1
Stock incentive awards .8 1.2
---- ----
Weighted average number of shares
(diluted EPS denominator) 91.2 96.1
==== ====
Basic EPS $ .21 $ .64
Diluted EPS $ .21 $ .58
</TABLE>
5. Transferred Interests in Cokemaking Operations.
In the first quarter of 1998, Sunoco transferred an interest in its Indiana
Harbor cokemaking operation in East Chicago, IN, to a third party for $200
million in cash. In 1995, Sunoco transferred an interest in its Jewell
cokemaking operation in Vansant, VA, to another third party for $95 million
in cash. The investors are entitled to 95 percent of the cash flows and tax
benefits from the respective cokemaking operations until certain cumulative
return targets have been met. After these preferential return periods,
which are expected to end in 2002 and 2000, respectively, the third parties
will be entitled to variable minority interests in the cash flows and tax
benefits from the respective operations ranging from 5 to 25 percent.
Sunoco did not recognize any gain or loss on these transactions. The
outstanding balance attributable to the transferred interests in these
operations totalled $215 and $226 million at March 31, 1999 and December
31, 1998, respectively, and is reflected in other deferred credits and
liabilities in the condensed consolidated balance sheets.
<PAGE>
(PAGE) 8
6. Commitments and Contingent Liabilities.
A wholly owned subsidiary of the Company is a one-third partner in Belvieu
Environmental Fuels ("BEF"), a joint venture formed for the purpose of
constructing, owning and operating a 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, 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 from May 1997 through May 2000 based on the then-existing
MTBE prices per gallon in the contract market (the "contract market
price"). Sunoco also agreed to pay BEF the current spot market price for
production above 14,000 barrels daily. In addition, the price to be paid by
Sunoco for the first 12,600 barrels daily of MTBE production from May 1997
through May 2000, at a minimum, generally will equal the sum of BEF's
annual raw material and cash operating costs associated with this
production plus BEF's debt service payments (collectively, the "minimum
price") if the minimum price per gallon exceeds the contract market price.
Sunoco has been paying the minimum price under this agreement since May
1997. 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.
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.
The $130 million loss accrual was based primarily 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. At December 31, 1998,
the number of "opt ins" was lower than what the Company had originally
anticipated and certain other jurisdictions were considering "opting out"
of the voluntary reformulated fuel requirements. As a result of these and
other market factors, management believed that MTBE demand would not
increase as previously anticipated. Accordingly, an additional $40 million
provision ($26 million after tax) was added to the accrual in December 1998
for incremental losses expected to be realized with respect to this
agreement. During the first quarter of 1999 and the full years 1998 and
1997, actual MTBE purchase costs in excess of spot market prices totalling
$13, $47 and $65 million, respectively, were charged against the accrual.
The accrual has a remaining balance of $45 million as of March 31, 1999.
<PAGE>
(PAGE) 9
Sunoco is subject to numerous federal, state and local laws which regulate
the discharge of materials into the environment or that otherwise relate 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 March
31, 1999, Sunoco had been named as a PRP at 54 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):
<TABLE>
<CAPTION>
At At
March 31 December 31
1999 1998
-------- -----------
<S> <C> <C>
Accrued liabilities $ 49 $ 56
Other deferred credits and
liabilities 130 126
---- ----
$ 179 $ 182
==== ====
</TABLE>
Pretax charges against income for environmental remediation amounted to $3
million for the first quarter of 1999 and less than $1 million for the
first quarter of 1998. Claims for recovery of environmental liabilities
that are probable of realization totalled $4 million at March 31, 1999 and
are included in deferred charges and other assets in the condensed
consolidated balance sheets.
<PAGE>
(PAGE) 10
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 matters of Sunoco, including its predecessor
companies and subsidiaries, arising from the ownership and operation of its
businesses. In the first quarter of 1999 and fourth quarter of 1998, the
Company entered into several settlements which resolved a portion of these
claims. As a result, the Company received net cash proceeds totalling $4
million in 1998 and $55 million in the first quarter of 1999 and will
receive an additional $10 million primarily during the remainder of 1999.
Pretax gains of $11 million ($7 million after tax) and $58 million ($38
million after tax) were recognized in other income in the first quarter of
1999 and fourth quarter of 1998, respectively, in connection with these
settlements. While negotiations are currently ongoing with certain of the
other insurance companies to resolve the remaining litigation, 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 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
March 31, 1999. 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>
(PAGE) 11
7. Shareholders' Equity.
<TABLE>
<CAPTION>
At At
March 31 December 31
1999 1998
------------ -----------
(Millions of Dollars)
<S> <C> <C>
Common stock, par value $1 per share $ 132 $ 132
Capital in excess of par value 1,395 1,393
Earnings employed in the business 1,604 1,608
------ ------
3,131 3,133
Less common stock held in treasury,
at cost 1,619 1,619
------ ------
Total $1,512 $1,514
====== ======
</TABLE>
On August 3, 1995, the Company issued 12,500,000 shares of Series A
cumulative preference stock in exchange for 25,000,000 shares of Company
common stock in a tax-free transaction. Each share of preference stock was
evidenced by two "depositary shares", which were entitled, proportionally,
to all the rights, preferences and privileges of the underlying preference
stock. On May 28, 1998, the Company redeemed all of its 12,033,760 then
outstanding shares of preference stock. Under the terms of redemption,
established when the shares of preference stock were issued, each
preference share was redeemed in exchange for 1.899674 shares of Sunoco's
common stock plus accrued and unpaid dividends of $.7516. The preference-
to-common stock exchange ratio represented the call price of $80 per
preference 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 1.899674 shares of common stock for each share of
preference stock, 22,859,633 shares of Sunoco common stock held in treasury
were reissued. In connection with this redemption, a lawsuit has been filed
alleging that Sunoco incorrectly calculated the exchange ratio and should
have issued an additional 1.36 million shares of Sunoco common stock. The
Company believes the exchange ratio was correctly calculated and is
vigorously defending its position.
<PAGE>
(PAGE) 12
8. Business Segment Information.
The following table sets forth information concerning Sunoco's business
segments (in millions of dollars):
<TABLE>
<CAPTION>
Sales and Other
Operating Revenue
---------------------------- Profit Contri-
Three Months Ended Unaffiliated Inter- bution (Loss)
March 31, 1999 Customers segment (after tax)
- ------------------ ------------ ------- --------------
<S> <C> <C> <C>
Northeast Refining $ 558 $277 $(16)
Northeast Marketing 636 -- 13
Chemicals 117 -- 10
Lubricants 214 7 5
MidAmerica Marketing &
Refining 292 -- (12)
Logistics 14 28 13
Coke 51 -- 20
------ ---- ----
Consolidated $1,882 $ -- 33
====== ====
Gain on settlement of
insurance litigation 7
Corporate expenses (6)
Net financing expenses
and other (15)
----
Net income $ 19
====
Three Months Ended
March 31, 1998
- ------------------
Northeast Refining $ 677 $325 $ 15
Northeast Marketing 669 -- 15
Chemicals 89 -- 10
Lubricants 251 21 (3)
MidAmerica Marketing &
Refining 351 -- 2
Logistics 13 28 11
Coke 36 -- 11
------ ---- ----
Consolidated $2,086 $ -- 61
====== ====
Corporate expenses (6)
Net financing expenses
and other 1
----
Net income $ 56
====
</TABLE>
<PAGE>
(PAGE) 13
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
Earnings Profile of Sunoco Businesses (after tax)
- -------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
March 31
------------------
1999 1998 Variance
---- ---- --------
<S> <C> <C> <C>
(Millions of Dollars)
Sun Northeast Refining $ (16) $ 15 $(31)
Sunoco Northeast Marketing 13 15 (2)
Sunoco Chemicals 10 10 --
Sun Lubricants 5 (3) 8
Sunoco MidAmerica Marketing & Refining (12) 2 (14)
Sunoco Logistics 13 11 2
Sun Coke 20 11 9
Corporate expenses (6) (6) --
Net financing expenses and other (15) 1 (16)
---- --- ----
12 56 (44)
Special item:
Gain on settlement of insurance
litigation 7 -- 7
---- --- ----
Consolidated net income $ 19 $ 56 $(37)
==== === ====
</TABLE>
Analysis of Earnings Profile of Sunoco Businesses
- -------------------------------------------------
In the three-month period ended March 31, 1999, Sunoco earned $19 million, or
$.21 per share of common stock on a diluted basis, compared to net income of $56
million, or $.58 per share, for the first quarter of 1998. Excluding the $7
million after-tax gain on settlement of insurance litigation shown separately in
the Earnings Profile of Sunoco Businesses, Sunoco had income of $12 million in
the first quarter of 1999.
<PAGE>
(PAGE) 14
Sunoco's 1999 first quarter results benefited from several previously announced
self-help initiatives, including higher chemicals and lubricants production,
higher retail gasoline sales volumes and added income from the Company's Indiana
Harbor cokemaking facility which commenced operations in March 1998. However,
the Company did not realize the full benefit of its self-help initiatives
related to production of high-value refined products during the current quarter
because of a low refining margin environment. Sunoco will aggressively pursue
its identified self-help targets during the remainder of the year and look for
other ways to mitigate the difficult start to 1999.
Sun Northeast Refining -- The Sun Northeast Refining business recorded a loss of
$16 million in the first quarter of 1999 versus income of $15 million in the
first quarter of 1998. The decrease in results was due to significantly lower
refining margins, as realized refining margins were down $1.16 per barrel versus
the 1998 first quarter. Partially offsetting the lower margins were higher
production levels (up 1.7 million barrels, or 4 percent). Despite some refinery
run cutbacks due to the low margin environment during the first two months of
1999, inputs to the crude units in the Northeast averaged almost 485,000 barrels
daily (96 percent utilization) and catalytic cracking throughput averaged over
195,000 barrels per day (93 percent utilization) during the current quarter.
Sunoco Northeast Marketing -- The Sunoco Northeast Marketing business earned $13
million in the current quarter versus $15 million in the first quarter of 1998.
A four percent increase in retail gasoline sales volumes and an $8 million
pretax increase in non-gasoline income, particularly from company operated sites
and retail heating oil operations, were more than offset by a 1.4-cent-per-
gallon decline in gasoline margins and a $6 million increase in expenses. The
margin decline was concentrated in the latter part of the quarter as retail
margins were squeezed by rising crude oil prices. The increase in expenses was
largely attributable to the higher sales volumes and expenditures supporting a
retail site reimaging program.
Sunoco Chemicals -- Sunoco Chemicals earned $10 million in the first quarter of
1999, unchanged compared with last year's first quarter. Lower average chemical
margins were offset by higher production volumes in Sunoco's expanded chemicals
business. Margins for polymer-grade propylene were down more than 50 percent
and average aromatics margins were also down slightly versus the prior year
quarter. Offsetting the margin declines were additional earnings from the
phenol facility acquired on June 30, 1998 and from a cumene plant expansion
completed in the third quarter of 1998.
Sun Lubricants -- The Sun Lubricants business earned $5 million in the 1999
first quarter versus a loss of $3 million in the 1998 first quarter. The
improvement was primarily due to higher production volumes and lower expenses
versus the first quarter of 1998 when significant scheduled maintenance occurred
at the Company's Puerto Rico and Tulsa refineries. Total production increased
by more than 1.1 million barrels versus last year's first quarter, with base oil
production up approximately 300,000 barrels. Higher margins for specialty oils
were largely offset by lower base oil margins.
<PAGE>
(PAGE) 15
Sunoco MidAmerica Marketing & Refining -- Sunoco MidAmerica Marketing & Refining
recorded a loss of $12 million during the current quarter versus earnings of $2
million in the 1998 first quarter. The decrease in results was primarily due to
lower wholesale fuels margins. Production levels were also down versus the
first quarter of 1998, due to both planned and unplanned refinery maintenance
activities and voluntary production cuts during the quarter. Also contributing
to the decline in operating results were lower chemicals volumes and margins.
Sunoco Logistics -- Sunoco Logistics earned $13 million in the first quarter of
1999 versus $11 million in the first quarter of 1998. The increase in income was
primarily due to improved results from Sunoco's Southwestern logistics
operations.
Sun Coke -- Sun Coke earned $20 million in the first quarter of 1999 versus $11
million in the first quarter of 1998. The increase in earnings was due to a $7
million increase in income from the Indiana Harbor cokemaking facility, which
commenced operations in late March 1998, and to a $7 million after-tax gain from
the divestment of Shamrock Coal Company ("Shamrock"), Sun Coke's steam coal
mining operation located in Kentucky. Cash proceeds from the sale of this
business, which earned $5 million for the full year 1998, amounted to $13
million. With this divestment, Sun Coke ceased steam coal mining activities.
Partially offsetting these positive factors were lower earnings at the Jewell
cokemaking operation due to temporary coke stockpiling resulting from reduced
sales to its major customer and the absence of a $2 million tax benefit recorded
in the first quarter of 1998 related to the settlement of an income tax dispute
with the Internal Revenue Service.
Net Financing Expenses and Other -- Net financing expenses and other activities
totalled $15 million of expense for the first quarter of 1999 versus income of
$1 million for the 1998 first quarter. The 1998 amount includes $5 million in
after-tax earnings from a dividend from a petroleum industry insurance
consortium in which Sunoco participates and $7 million of after-tax interest
income related to the federal income tax settlement discussed above. Excluding
these items, net financing expenses and other were $15 million for the current
quarter versus $11 million for the first quarter of 1998. This $4 million
increase was primarily attributable to lower capitalized interest and higher
interest expense due to higher average debt levels.
Gain on Settlement of Insurance Litigation -- In the first quarter of 1999,
Sunoco recognized a $7 million after-tax gain in connection with the settlement
of certain insurance claims. The claims relate to certain environmental matters
of Sunoco, including its predecessor companies and subsidiaries, arising from
ownership and operation of its businesses (see Note 6 to the condensed
consolidated financial statements).
<PAGE>
(PAGE) 16
Analysis of Consolidated Statements of Income
- ---------------------------------------------
Revenues -- Total revenues were $1.9 billion in the first quarter of 1999
compared to $2.1 billion in the first quarter of 1998. The 10 percent decrease
in 1999 was primarily due to lower refined product sales prices, partially
offset by higher refined products sales volumes.
Costs and Expenses -- Total pretax costs and expenses were $1.9 billion in the
first quarter of 1999 compared to $2.0 billion in the first quarter of 1998.
The 5 percent decrease in 1999 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 March 31, 1999, Sunoco had cash and cash equivalents of $4 million compared
to $38 million at December 31, 1998, and had a working capital deficit of $210
million compared to a working capital deficit of $204 million at December 31,
1998. 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
their carrying value at March 31, 1999 by $345 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 cash and working capital are adequate to support Sunoco's ongoing operations.
Cash Flows and Financial Capacity
- ---------------------------------
In the first quarter of 1999, Sunoco's net cash provided by operating activities
was $39 million compared to $8 million of net cash used in operating activities
in the first quarter of 1998. This $47 million improvement was primarily due to
a decrease in working capital uses pertaining to operating activities, partially
offset by a decline in income before special items. The decrease in working
capital uses was in part due to the collection of approximately $40 million of
net cash proceeds related to several insurance claims settled in the fourth
quarter of 1998 (see Note 6 to the condensed consolidated financial statements).
<PAGE>
(PAGE) 17
In the first quarter of 1998, Sunoco transferred an interest in its Indiana
Harbor cokemaking operation in East Chicago, IN, to a third party in exchange
for $200 million in cash. The investor is entitled to 95 percent of the cash
flows and tax benefits from this cokemaking operation until certain cumulative
return targets have been met. After this preferential return period, which is
expected to end in 2002, the third party will be entitled to a variable minority
interest in the cash flows and tax benefits from the Indiana Harbor cokemaking
operation ranging from 5 to 23 percent. Sunoco did not recognize any gain or
loss on this transaction.
Management believes that future cash provided by operating activities 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 the issuance of commercial paper. The Company
also has access to short-term financing under a non-committed money market
facility. The following table sets forth amounts outstanding related to Sunoco's
borrowings (in millions of dollars):
<TABLE>
<CAPTION>
At At
March 31 December 31
1999 1998
----------- -----------
<S> <C> <C>
Short-term borrowings:
Commercial paper $ 120 $ --
Bank borrowings under revolving
credit agreement -- 120
Other bank borrowings 3 --
Current portion of long-term debt 52 69
Long-term debt 823 823
---- ------
Total borrowings $ 998 $1,012
==== ======
</TABLE>
Sunoco's debt-to-capital ratio was 39.8 percent at March 31, 1999 compared to
40.1 percent at December 31, 1998. 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.
<PAGE>
(PAGE) 18
ENVIRONMENTAL MATTERS
Pursuant to the Clean Air Act, the U.S. Environmental Protection Agency ("EPA")
has under review whether it is appropriate to require more stringent emissions
standards ("Tier 2 Standards") for new passenger cars and light duty trucks. In
connection with these potential Tier 2 Standards, the EPA issued proposed
regulations in early May 1999, which would mandate significant reductions in the
sulfur levels in reformulated and conventional gasoline commencing in 2004. The
proposal is subject to a 90-day public comment period and it is anticipated that
the EPA will issue final rules by the end of 1999. While it is likely that the
EPA will require significant gasoline sulfur reductions, there are a number of
uncertainties about the final regulations and how they would be implemented,
including the allowable sulfur levels, the timing of any requirements, the
impact of any banking and trading system, the areas of the country that would be
subject to any such requirements and the technology available to meet the
requirements. While some of the alternatives would be potentially significant to
Sunoco and its operations, the ultimate impact of the Tier 2 Standards cannot be
determined until the EPA issues the finalized rules.
The EPA has convened an advisory Panel on Oxygenate Use in Gasoline (the
"Panel"). The purpose of the Panel is to review public health and environmental
issues that have been raised by the use of MTBE in gasoline, and specifically
the discovery of MTBE in water supplies. The Panel is expected to make
recommendations to the EPA in mid-1999. California has acted to ban MTBE use by
December 31, 2002. In connection with the MTBE ban, California has requested a
waiver from the EPA of the oxygenate requirements for reformulated gasoline
under the Clean Air Act. Other states are also reviewing the use of MTBE in
gasoline. MTBE is the primary oxygenate used by Sunoco and throughout the
industry to meet the reformulated gasoline requirements under the Clean Air Act.
While additional phase-outs or restrictions on the use of MTBE could have a
significant impact on Sunoco and its operations, it is not possible to reach any
conclusions until federal or further state actions, if any, are taken.
SHARE REPURCHASES
During 1998, the Company repurchased 3,727,850 shares of its common stock and
46,780 of its depositary shares for $145 million. On December 28, 1998, the
Board of Directors authorized a new program to purchase up to an additional $150
million of Company stock in the open market or through privately negotiated
transactions from time to time depending on prevailing market conditions. As of
April 30, 1999, $155 million remained available under the share repurchase
programs.
YEAR 2000 READINESS DISCLOSURE
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>
(PAGE) 19
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 computer systems and applications (which consist of
internally developed and purchased computer applications, hardware, systems
software and embedded chip and manufacturing process control 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 complete. The remediation/replacement phase for the Company's
key computer applications is substantially on schedule, and the Company
estimates that as of March 31, 1999 it has completed approximately 95 percent of
the activities in this phase. Testing is an ongoing process and from March 1999
through July 1999, the Company is conducting a complete Year 2000 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
key computer applications will be completed by July 31, 1999.
The Company has contacted its key customers and suppliers and is examining their
Year 2000 public disclosures in an attempt to ascertain their ability to
continue to meet their obligations to the Company. While some of these third
parties are more prepared than others, the Company has no reason to believe that
its key customers and suppliers will not be Year 2000 compliant. This readiness
assessment will continue throughout 1999.
Additionally, the Company is developing contingency plans for its key operations
and business processes. These plans will attempt to mitigate the potential
impacts of any failures of either Company or third-party systems and processes.
In developing such plans, Sunoco's primary consideration is to continue to
operate the Company's facilities without compromising the health or safety of
its employees, agents or neighboring communities. Plans may include, but are not
limited to, scheduling and timing of operations, minimizing certain
discretionary activities, and ensuring that adequate staff is available to
handle any unforeseen disruptions. The Company may also choose to develop
alternative sources of supply, markets or other contingencies in response to the
potential failures of customers and suppliers to meet their obligations to the
Company. Contingency 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. The Company has been notified by several third
parties that minor interface changes are required. Such changes are currently in
the process of being made and tested.
<PAGE>
(PAGE) 20
The total cost to Sunoco during the 1997-99 period of achieving Year 2000
compliant systems is currently estimated to be $37 million, which represents
approximately 20 percent of the information technology budget during that
period. Such amount, which includes both expense and capital spending, is being
funded from Sunoco's net cash flows from operating activities. It consists of
$20 million of expense incurred remediating and testing existing software and
hardware and $17 million of capital expenditures to replace two key non-
compliant systems with newly purchased systems that, in addition to being
compliant, provide enhanced business functionality. Through March 31, 1999, $29
million has been spent, of which $16 million relating to the remediation and
testing of existing software and hardware has been expensed and $13 million
relating to the replacement of the two non-compliant systems has been
capitalized.
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
personnel 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.
<PAGE>
(PAGE) 21
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), 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.
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, nonperformance by major customers, 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>
(PAGE) 22
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
Many 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 March 31, 1999.
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 Three-Month Period
Ended March 31, 1999.
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 Three-Month Period Ended March 31, 1998, Six-Month Period
Ended June 30, 1998 and Nine-Month Period Ended September 30, 1998.
Reports on Form 8-K:
The Company has not filed any reports on Form 8-K during the quarter ended
March 31, 1999.
**********
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>
(PAGE) 23
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 May 4, 1999
<PAGE>
(PAGE) 1
EXHIBIT INDEX
Exhibit
Number Exhibit
- -------- ----------------------------------------
12 Statement re Sunoco, Inc. and Subsidiaries Computation of Ratio
of Earnings to Fixed Charges for the Three-Month Period Ended
March 31, 1999.
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 Three-Month Period Ended March 31, 1998, Six-
Month Period Ended June 30, 1998 and Nine-Month Period Ended
September 30, 1998.
<PAGE>
(PAGE) 1
EXHIBIT 12
STATEMENT RE COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES(a)
Sunoco, Inc. and Subsidiaries
(Millions of Dollars Except Ratio)
- ----------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Three
Months Ended
March 31, 1999
----------------
(UNAUDITED)
<S> <C>
Fixed Charges:
Consolidated interest cost and debt expense $ 21
Interest allocable to rental expense(b) 10
---
Total $ 31
===
Earnings:
Consolidated income before income tax expense $ 28
Proportionate share of income tax expense of
50 percent owned but not controlled affiliated
companies 1
Equity in income of less than 50 percent owned
affiliated companies (3)
Dividends received from less than 50 percent
owned affiliated companies 2
Fixed charges 31
Interest capitalized --
Amortization of previously capitalized interest 1
---
Total $ 60
===
Ratio of Earnings to Fixed Charges 1.94
====
</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>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 4
<SECURITIES> 0
<RECEIVABLES> 553
<ALLOWANCES> 8
<INVENTORY> 428
<CURRENT-ASSETS> 1,095
<PP&E> 6,204
<DEPRECIATION> 2,888
<TOTAL-ASSETS> 4,733
<CURRENT-LIABILITIES> 1,305
<BONDS> 823
132
0
<COMMON> 0
<OTHER-SE> 1,380
<TOTAL-LIABILITY-AND-EQUITY> 4,733
<SALES> 1,882
<TOTAL-REVENUES> 1,933
<CGS> 1,662
<TOTAL-COSTS> 1,662
<OTHER-EXPENSES> 88
<LOSS-PROVISION> 1
<INTEREST-EXPENSE> 21
<INCOME-PRETAX> 28
<INCOME-TAX> 9
<INCOME-CONTINUING> 19
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19
<EPS-PRIMARY> .21
<EPS-DILUTED> .21
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998 DEC-31-1998
<PERIOD-START> JAN-01-1998 JAN-01-1998 JAN-01-1998
<PERIOD-END> MAR-31-1998 JUN-30-1998 SEP-30-1998
<CASH> 93 11 81
<SECURITIES> 0 0 0
<RECEIVABLES> 578 548 615
<ALLOWANCES> 6 6 7
<INVENTORY> 502 522 512
<CURRENT-ASSETS> 1,276 1,180 1,293
<PP&E> 5,915 6,097 6,170
<DEPRECIATION> 2,817 2,837 2,877
<TOTAL-ASSETS> 4,733 4,781 4,927
<CURRENT-LIABILITIES> 1,305 1,236 1,372
<BONDS> 824 859 840
132 132 132
0 0 0
<COMMON> 722 0 0
<OTHER-SE> 636 1,413 1,472
<TOTAL-LIABILITY-AND-EQUITY> 4,733 4,781 4,927
<SALES> 2,086 4,252 6,359
<TOTAL-REVENUES> 2,118 4,308 6,439
<CGS> 1,813<F1> 3,642<F1> 5,440<F1>
<TOTAL-COSTS> 1,813<F1> 3,642<F1> 5,440<F1>
<OTHER-EXPENSES> 84<F1> 166<F1> 251<F1>
<LOSS-PROVISION> 2 2 4
<INTEREST-EXPENSE> 21 38 58
<INCOME-PRETAX> 82 218 310
<INCOME-TAX> 26 70 82
<INCOME-CONTINUING> 56 148 228
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 56 148 228
<EPS-PRIMARY> .64 1.71 2.56
<EPS-DILUTED> .58 1.55 2.39
<FN>
<F1>RESTATED TO CONFORM TO THE 1999 PRESENTATION.
</FN>
</TABLE>
