<PAGE>
PAGE 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 September 30, 1999, there were 90,227,001 shares of Common Stock, $1 par
value outstanding.
<PAGE>
PAGE 2
SUNOCO, INC.
------------
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Income
for the Nine months Ended September 30, 1999
and 1998 3
Condensed Consolidated Statements of Income
for the Three Months Ended September 30, 1999
and 1998 4
Condensed Consolidated Balance Sheets at
September 30, 1999 and December 31, 1998 5
Condensed Consolidated Statements of Cash
Flows for the Nine Months Ended September 30,
1999 and 1998 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
</TABLE>
<PAGE>
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)
- ------------------------------------------------------------------------------
For the Nine Months
Ended September 30
---------------------
1999 1998
------ -------
(UNAUDITED)
REVENUES
Sales and other operating revenue (including
consumer excise taxes) $ 6,838 $ 6,359
Interest income (Note 2) 3 18
Other income (Note 3) 116 62
------- -------
6,957 6,439
------- -------
COSTS AND EXPENSES
Cost of products sold and operating expenses 4,965 4,272
Selling, general and administrative expenses 402 382
Consumer excise taxes 1,175 1,168
Payroll, property and other taxes 61 66
Depreciation, depletion and amortization 204 189
Interest cost and debt expense 61 58
Interest capitalized (1) (6)
------- -------
6,867 6,129
------- -------
Income before income tax expense 90 310
Income tax expense (Note 4) 31 82
------- -------
NET INCOME 59 228
Dividends on preference stock -- (20)
------- -------
Net income applicable to common shareholders $ 59 $ 208
======= =======
Net income per share of common stock (Note 5):
Basic $ .65 $ 2.56
Diluted $ .65 $ 2.39
Weighted average number of shares outstanding:
Basic 90.4 81.1
Diluted 91.2 95.3
Cash dividends paid per share:
Preference stock (Note 9) $ -- $1.6516
Common stock $ .75 $ .75
(See Accompanying Notes)
<PAGE>
PAGE 4
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Sunoco, Inc. and Subsidiaries
(Millions of Dollars and Shares Except Per Share Amounts)
- -------------------------------------------------------------------------------
For the Three Months
Ended September 30
----------------------
1999 1998
------ ------
(UNAUDITED)
REVENUES
Sales and other operating revenue (including
consumer excise taxes) $2,628 $2,107
Interest income 1 1
Other income (Note 3) 22 23
------ ------
2,651 2,131
------ ------
COSTS AND EXPENSES
Cost of products sold and operating expenses 1,964 1,386
Selling, general and administrative expenses 135 135
Consumer excise taxes 418 412
Payroll, property and other taxes 21 22
Depreciation, depletion and amortization 70 65
Interest cost and debt expense 21 20
Interest capitalized -- (1)
------ ------
2,629 2,039
------ ------
Income before income tax expense 22 92
Income tax expense (Note 4) 8 12
------ ------
NET INCOME $ 14 $ 80
====== ======
Net income per share of common stock (Note 5):
Basic $ .15 $ .86
Diluted $ .15 $ .85
Weighted average number of shares outstanding:
Basic 90.4 93.5
Diluted 91.1 94.5
Cash dividends paid per share of common stock $ .25 $ .25
(See Accompanying Notes)
<PAGE>
PAGE 5
CONDENSED CONSOLIDATED BALANCE SHEETS
Sunoco, Inc. and Subsidiaries
At At
September 30 December 31
1999 1998
(Millions of Dollars) (UNAUDITED)
- ----------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 84 $ 38
Accounts and notes receivable, net 721 537
Inventories:
Crude oil 183 184
Refined products 240 219
Materials, supplies and other 83 80
Deferred income taxes 113 122
------ ------
Total Current Assets 1,424 1,180
Investments and long-term receivables 105 108
Properties, plants and equipment 6,296 6,248
Less accumulated depreciation, depletion
and amortization 2,974 2,902
------ ------
Properties, plants and equipment, net 3,322 3,346
Deferred charges and other assets 218 215
------ ------
Total Assets $5,069 $4,849
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 920 $ 589
Accrued liabilities 436 488
Short-term borrowings -- 120
Current portion of long-term debt (Note 6) 168 69
Taxes payable 118 118
------ ------
Total Current Liabilities 1,642 1,384
Long-term debt (Note 6) 872 823
Retirement benefit liabilities 437 449
Deferred income taxes 194 175
Other deferred credits and liabilities (Note 7) 424 504
Commitments and contingent liabilities (Note 8)
Shareholders' equity (Note 9) 1,500 1,514
------ ------
Total Liabilities and Shareholders' Equity $5,069 $4,849
====== ======
(See Accompanying Notes)
<PAGE>
PAGE 6
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Sunoco, Inc. and Subsidiaries
(Millions of Dollars)
- -------------------------------------------------------------------------------
For the Nine Months
Ended September 30
--------------------
1999 1998
---- -----
(UNAUDITED)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 59 $ 228
Adjustments to reconcile net income to net
cash provided by operating activities:
Gain on divestments (15) (7)
Depreciation, depletion and amortization 204 189
Deferred income tax expense 29 79
Changes in working capital pertaining to
operating activities:
Accounts and notes receivable (186) 60
Inventories (25) (61)
Accounts payable and accrued liabilities 259 (320)
Taxes payable 2 134
Other (60) (49)
----- -----
Net cash provided by operating activities 267 253
----- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (222) (325)
Acquisition of Philadelphia phenol facility,
net of $109 seller financing -- (48)
Proceeds from divestments 60 108
Other (12) (2)
----- -----
Net cash used in investing activities (174) (267)
----- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments of short-term borrowings (120) (12)
Proceeds from issuance of long-term debt 200 --
Repayments of long-term debt (52) (20)
Proceeds from transferred interest in coke-
making operations -- 200
Cash dividend payments (68) (79)
Purchases of preference stock for retirement -- (2)
Purchases of common stock for treasury (10) (23)
Proceeds from issuance of common stock under
management incentive and employee option plans 3 12
Other -- (14)
----- -----
Net cash provided by (used in) financing activities (47) 62
----- -----
Net increase in cash and cash equivalents 46 48
Cash and cash equivalents at beginning of period 38 33
----- -----
Cash and cash equivalents at end of period $ 84 $ 81
===== =====
(See Accompanying Notes)
<PAGE>
PAGE 7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
1. General.
The accompanying condensed consolidated financial statements are presented
in accordance with the requirements of Form 10-Q and generally accepted
accounting principles for interim financial reporting. They do not include
all disclosures normally made in financial statements contained in Form
10-K. In management's opinion all adjustments necessary for a fair
presentation of the results of operations, financial position and cash
flows for the periods shown have been made. All such adjustments are of a
normal recurring nature. Results for the three and nine months ended
September 30, 1999 are not necessarily indicative of results for the full
year 1999.
2. Settlement of Income Tax Issue.
In March 1998, Sunoco settled an income tax issue 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.
During the first nine months of 1999, Sunoco entered into several
settlements which resolved 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 8). The following is a summary of the gains recognized in
1999 by quarter from these settlements (in millions of dollars):
Pretax After-Tax
1999 Gain Gain
---- ------ ---------
First Quarter $11 $ 7
Second Quarter 25 16
Third Quarter 2 1
--- ---
Total Nine Months $38 $24
=== ===
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.
<PAGE>
PAGE 8
4. 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 $13 million tax benefit in the
third quarter of 1998. The benefit resulted primarily from recognition of
additional deferred 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.
5. Earnings Per Share.
The following table sets forth the computation of basic and diluted
earnings per share ("EPS") for the nine-month and three-month periods ended
September 30, 1999 and 1998 (in millions, except per share amounts):
<TABLE>
<CAPTION>
Nine Months Three Months
Ended Ended
September 30 September 30
------------- --------------
1999 1998 1999 1998
----- ------ ----- -----
<S> <C> <C> <C> <C>
Net income after dividends on
preference stock (basic EPS
numerator) $ 59 $ 208 $ 14 $ 80
Add: Dividends on preference stock -- 20 -- --
----- ----- ----- -----
Net income (diluted EPS numerator) $ 59 $ 228 $ 14 $ 80
===== ===== ===== =====
Weighted average number of common
shares outstanding (basic EPS
denominator) 90.4 81.1 90.4 93.5
Add effect of dilutive securities:
Redeemable preference shares
(Note 9) -- 13.0 -- --
Stock incentive awards .8 1.2 .7 1.0
----- ----- ----- -----
Weighted average number of shares
(diluted EPS denominator) 91.2 95.3 91.1 94.5
===== ===== ===== =====
Basic EPS $ .65 $2.56 $ .15 $ .86
Diluted EPS $ .65 $2.39 $ .15 $ .85
</TABLE>
6. Long-Term Debt.
On August 20, 1999, the Company issued $200 million of 7-3/4 percent 10-
year notes. In the fourth quarter of 1999, the Company also repaid at
maturity its $150 million of 8-1/8 percent notes.
<PAGE>
PAGE 9
7. 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 in each operation 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 $191 and $226 million at September
30, 1999 and December 31, 1998, 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 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. From May 1997 through May 2000, for the first 14,000 barrels daily
of production, Sunoco agreed to pay BEF a price based on then-existing MTBE
prices 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 purchase commitment loss
expected to be realized with respect to this agreement.
<PAGE>
PAGE 10
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 nine months of 1999 and the full years 1998 and
1997, actual MTBE purchase costs in excess of spot market prices totalling
$26, $47 and $65 million, respectively, were charged against the accrual.
The accrual has a remaining balance of $32 million as of September 30,
1999.
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
September 30, 1999, Sunoco had been named as a PRP at 55 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.
<PAGE>
PAGE 11
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 At
September 30 December 31
1999 1998
------------ -----------
Accrued liabilities $ 48 $ 56
Other deferred credits and
liabilities 120 126
----- -----
$ 168 $ 182
===== =====
Pretax charges against income for environmental remediation amounted to $8
and $4 million for the nine months ended September 30, 1999 and 1998,
respectively. Claims for recovery of environmental liabilities that are
probable of realization totalled $4 million at September 30, 1999 and 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 matters of Sunoco, including its predecessor
companies and subsidiaries, arising from the ownership and operation of its
businesses. In the first nine months 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 $82 million in the first nine months of 1999 and
will receive an additional $10 million primarily during the remainder of
1999. Pretax gains of $38 million ($24 million after tax) and $58 million
($38 million after tax) were recognized in other income in the first nine
months 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 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.
<PAGE>
PAGE 12
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, 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.
9. Shareholders' Equity.
<TABLE>
<CAPTION>
At At
September 30 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 1,398 1,393
Earnings employed in the business 1,599 1,608
------ ------
3,129 3,133
Less common stock held in treasury,
at cost 1,629 1,619
------ ------
Total $1,500 $1,514
====== ======
</TABLE>
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 13
10. Business Segment Information.
The following tables set forth information concerning Sunoco's business
segments for the nine-month and three-month periods ended September 30,
1999 and 1998 (in millions of dollars):
<TABLE>
<CAPTION>
Sales and Other
Operating Revenue
------------------------------- Profit Contri-
Nine Months Ended Unaffiliated Inter- bution (Loss)
September 30, 1999 Customers segment (after tax)
- ------------------ ------------ ------- --------------
<S> <C> <C> <C>
Northeast Refining $2,038 $1,165 $(26)
Northeast Marketing 2,337 -- 36
Chemicals 368 -- 23
Lubricants 758 27 (12)
MidAmerica Marketing & 1,136 -- (9)
Refining
Logistics 41 85 40
Coke 160 -- 47
------ ------ ----
Consolidated $6,838 $ -- 99
====== ======
Gain on settlement of 24
insurance litigation
Corporate expenses (18)
Net financing expenses
and other (46)
----
Net income $ 59
====
Nine Months Ended
September 30, 1998
- ------------------
Northeast Refining $1,894 $1,007 $ 53
Northeast Marketing 2,132 -- 43
Chemicals 289 -- 28
Lubricants 763 38 13
MidAmerica Marketing & 1,075 --
Refining 38
Logistics 42 86 42
Coke 164 -- 41
------ ------ ----
Consolidated $6,359 $ -- 258
====== ======
Benefit from change in
tax election 13
Corporate expenses (17)
Net financing expenses
and other (26)
----
Net income $228
====
</TABLE>
<PAGE>
PAGE 14
<TABLE>
<CAPTION>
Sales and Other
Operating Revenue
--------------------------- Profit Contri-
Three Months Ended Unaffiliated Inter- bution (Loss)
September 30, 1999 Customers segment (after tax)
- ------------------ ------------ ------- -------------
<S> <C> <C> <C>
Northeast Refining $ 760 $501 $ 1
Northeast Marketing 909 -- 5
Chemicals 129 -- 6
Lubricants 296 11 (8)
MidAmerica Marketing & 463 -- 4
Refining
Logistics 14 29 13
Coke 57 -- 13
------ ---- ----
Consolidated $2,628 $ -- 34
====== ====
Gain on settlement of 1
insurance litigation
Corporate expenses (6)
Net financing expenses
and other (15)
----
Net income $ 14
====
Three Months Ended
September 30, 1998
- ------------------
Northeast Refining $ 568 $333 $ 13
Northeast Marketing 740 -- 17
Chemicals 124 -- 11
Lubricants 244 9 5
MidAmerica Marketing & 347 --
Refining 11
Logistics 15 29 16
Coke 69 -- 15
------ ---- ----
Consolidated $2,107 $ -- 88
====== ====
Benefit from change in
tax election 13
Corporate expenses (6)
Net financing expenses
and other (15)
----
Net income $ 80
====
</TABLE>
<PAGE>
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
-----------------
1999 1998 Variance
---- ---- --------
(Millions of Dollars)
<S> <C> <C> <C>
Sun Northeast Refining $ (26) $ 53 $ (79)
Sunoco Northeast Marketing 36 43 (7)
Sunoco Chemicals 23 28 (5)
Sun Lubricants (12) 13 (25)
Sunoco MidAmerica Marketing & Refining (9) 38 (47)
Sunoco Logistics 40 42 (2)
Sun Coke 47 41 6
Corporate expenses (18) (17) (1)
Net financing expenses and other (46) (26) (20)
---- ---- -----
35 215 (180)
Special items:
Gain on settlement of insurance 24 -- 24
litigation
Benefit from change in tax election -- 13 (13)
---- ---- -----
Consolidated net income $ 59 $ 228 $(169)
==== ==== =====
</TABLE>
Analysis of Earnings Profile of Sunoco Businesses
- -------------------------------------------------
In the nine-month period ended September 30, 1999, Sunoco earned $59 million, or
$.65 per share of common stock on a diluted basis, compared to net income of
$228 million, or $2.39 per share, for the first nine months of 1998. Excluding
the special items shown separately in the Earnings Profile of Sunoco Businesses,
Sunoco earned $35 million in the first nine months of 1999 compared to $215
million in the first nine months of 1998.
<PAGE>
PAGE 16
During the first nine months of 1999, Sunoco benefited from several previously
announced self-help initiatives including higher production of fuels, chemicals
and lubricants, higher retail gasoline sales volumes and added income from the
Company's Indiana Harbor cokemaking facility which commenced operations in March
1998. In the aggregate, these initiatives contributed approximately $37 million
after tax to 1999 first nine months results. However, because of a low refining
margin environment, an increase in operating and administrative expenses and the
impact of both voluntary refinery run reductions and some unscheduled operating
downtime, the Company will realize significantly less than its goal of $116
million of additional after-tax income during 1999 from these self-help
initiatives. This goal assumed that refined product margins for the full year
1999 would equal the levels experienced in 1998.
Sun Northeast Refining -- The Sun Northeast Refining business recorded a loss of
$26 million in the first nine months of 1999 versus income of $53 million in the
first nine months of 1998. The decrease in earnings was primarily due to
significantly lower realized refining margins, which were down $.90 per barrel
versus the 1998 first nine months. Partially offsetting the lower margins were
higher production levels (up 4.9 million barrels, or 4 percent). Despite a week-
long shutdown of a 200,000 barrel-per-day crude unit at the Philadelphia
refinery due to flooding caused by Hurricane Floyd and some refinery run
cutbacks due to the low margin environment, during the first nine months of
1999, inputs to the crude units in the Northeast averaged 477,100 barrels daily
(94 percent utilization), and catalytic cracking throughput averaged 198,300
barrels per day (94 percent utilization).
Sunoco Northeast Marketing -- The Sunoco Northeast Marketing business earned $36
million in the current nine-month period versus income of $43 million in the
first nine months of 1998. A four-percent increase in retail gasoline sales
volumes and higher non-gasoline income were more than offset by lower retail
gasoline margins, which were down approximately 1 cent per gallon versus the
first nine months of 1998, and higher expenses. 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 $23 million in the first nine months
of 1999, compared with $28 million for the first nine months of 1998. The
decrease in earnings was primarily due to higher expenses largely as a result of
operating issues. Lower margins for aromatics and propylene were offset by
additional earnings from a cumene plant expansion completed in the third quarter
of 1998 and from the phenol facility acquired on June 30, 1998.
Sun Lubricants -- The Sun Lubricants business recorded a loss of $12 million in
the first nine months of 1999 compared to income of $13 million in the 1998
first nine months. The decrease was primarily due to margin declines for all
products manufactured by Sun Lubricants. Base oil and specialty oil margins were
down significantly, as wholesale and retail lubricant prices have not kept pace
with the rapid run-up in crude oil prices during the period, and margins for
wholesale fuels produced at Sun Lubricants' two refineries declined by $1.26 per
barrel. Partially offsetting the margin declines were lower operating and
administrative expenses and higher base oil lubricants sales and production
volumes.
Sunoco MidAmerica Marketing & Refining -- Sunoco MidAmerica Marketing & Refining
recorded a loss of $9 million during the current nine-month period versus
earnings of $38 million in the first nine months of 1998. The
<PAGE>
PAGE 17
decrease in results was primarily due to a decline of $1.82 per barrel in
realized wholesale fuels margins. Production levels also declined due to both
planned and unplanned refinery maintenance activities and voluntary production
cuts due to the low margins.
Sunoco Logistics -- Sunoco Logistics earned $40 million in the first nine months
of 1999 versus $42 million in the first nine months of 1998. The decrease in
income was largely the result of lower throughputs in both Sunoco's Eastern
refined products system and Western crude system due to production cutbacks by
refiners.
Sun Coke -- Sun Coke earned $47 million in the first nine months of 1999 versus
$41 million in the 1998 first nine months. The improvement in earnings was due
to an 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 in February 1999 of Shamrock Coal Company ("Shamrock"), Sun
Coke's steam coal mining operation located in Kentucky. Earnings from Shamrock
were $5 million for the full year 1998. With this divestment, Sun Coke ceased
steam coal mining activities. Partially offsetting these positive factors were
lower earnings at the Jewell cokemaking operation, lower earnings from Shamrock
and the absence of a $2 million tax benefit recorded in the first quarter of
1998 related to the settlement of an income tax issue with the Internal Revenue
Service.
Net Financing Expenses and Other -- Net financing expenses and other activities
totalled $46 million for the first nine months of 1999 versus $26 million for
the 1998 first nine months. 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 $46 million for the current nine month period
versus $38 million for the first nine months of 1998. This $8 million increase
was primarily attributable to lower capitalized interest and higher interest
expense due to a higher average debt level.
Gain on Settlement of Insurance Litigation -- In the first nine months of 1999,
Sunoco recognized a $24 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 8 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. This change resulted in a $13 million tax benefit, which
is attributable to Sun Lubricants (see Note 4 to the condensed consolidated
financial statements).
Analysis of Consolidated Statements of Income
- ---------------------------------------------
Revenues -- Total revenues were $7.0 billion in the first nine months of 1999
compared to $6.4 billion in the first nine months of 1998. The 9 percent
increase in the first nine months of 1999 was primarily due to higher refined
product sales prices and volumes.
<PAGE>
PAGE 18
Costs and Expenses -- Total pretax costs and expenses were $6.9 billion in the
first nine months of 1999 compared to $6.1 billion in the 1998 nine-month
period. The 13 percent increase in the first nine months of 1999 was primarily
due to higher crude oil and refined product acquisition costs largely as a
result of an increase in crude oil prices.
RESULTS OF OPERATIONS - THREE MONTHS
Earnings Profile of Sunoco Businesses (after tax)
- -------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
September 30
------------------
1999 1998 Variance
---- ---- --------
(Millions of Dollars)
<S> <C> <C> <C>
Sun Northeast Refining $ 1 $ 13 $(12)
Sunoco Northeast Marketing 5 17 (12)
Sunoco Chemicals 6 11 (5)
Sun Lubricants (8) 5 (13)
Sunoco MidAmerica Marketing & Refining 4 11 (7)
Sunoco Logistics 13 16 (3)
Sun Coke 13 15 (2)
Corporate expenses (6) (6) --
Net financing expenses and other (15) (15) --
----- ----- ----
13 67 (54)
Special items:
Gain on settlement of insurance
litigation 1 -- 1
Benefit from change in tax election -- 13 (13)
----- ----- ----
Consolidated net income $ 14 $ 80 $(66)
===== ===== ====
</TABLE>
Analysis of Earnings Profile of Sunoco Businesses
- -------------------------------------------------
In the three-month period ended September 30, 1999, Sunoco earned $14 million,
or $.15 per share of common stock on a diluted basis, compared to net income of
$80 million, or $.85 per share, for the third quarter of 1998. Excluding the
special items shown separately in the Earnings Profile of Sunoco Businesses,
Sunoco earned $13 million in the third quarter of 1999 compared to $67 million
in the third quarter of 1998.
<PAGE>
PAGE 19
Sun Northeast Refining -- The Sun Northeast Refining business earned $1 million
in the third quarter of 1999 versus $13 million in the third quarter of 1998.
The decrease was due largely to lower realized margins (down $.22 per barrel) as
higher wholesale gasoline margins were more than offset by the impact of lower
margins for distillates, residual fuel and chemical feedstocks. Also
contributing to the decline in earnings was a $9 million pretax increase in
expenses due primarily to higher electricity costs. Voluntary production
cutbacks due to the low distillate margin environment and the week-long shutdown
of a 200,000 barrel-per-day crude unit at the Philadelphia refinery limited
crude runs to 455,000 barrels daily, or approximately 90 percent of Northeast
Refining's total crude capacity. The shutdown was due to flooding caused by
Hurricane Floyd.
Sunoco Northeast Marketing -- The Sunoco Northeast Marketing business earned $5
million in the current quarter versus $17 million in the third quarter of 1998.
The decline was due to lower retail gasoline margins, which were down
approximately 3 cents per gallon, as retail price increases lagged the rapid
run-up in crude oil and wholesale gasoline prices. Slightly higher expenses
offset the positive impact of a 3 percent improvement in retail gasoline volumes
and a 12 percent increase in merchandise sales.
Sunoco Chemicals -- Sunoco Chemicals earned $6 million in the third quarter of
1999 versus $11 million in last year's third quarter period. The decrease in
earnings was primarily due to a $7 million pretax increase in expenses largely
as a result of operating issues. Margins, on average, were flat versus the prior
year as improved margins for propylene and cumene were offset by lower margins
on phenol.
Sun Lubricants -- The Sun Lubricants business recorded a loss of $8 million in
the 1999 third quarter versus income of $5 million in the 1998 third quarter.
The decrease was due to lower margins as significant increases in crude oil
prices continued to depress results in this business. Base oil margins were down
over $8 per barrel and margins for specialty oils were down almost $6 per barrel
as wholesale and retail lubricant prices have not kept pace with recent crude
oil price increases. Also contributing to the decline in earnings were lower
margins on waxes and residual fuels.
Sunoco MidAmerica Marketing & Refining -- Sunoco MidAmerica Marketing & Refining
earned $4 million during the current quarter, versus $11 million in the 1998
third quarter. The decrease was primarily due to significantly lower realized
wholesale fuels margins and slightly higher expenses. Production levels were
curtailed by approximately 10,000 barrels per day during the third quarter of
1999 due to plant upsets at the Toledo refinery's two crude units.
Sunoco Logistics -- Net income was $13 million in the 1999 third quarter versus
$16 million in the year-ago period. The decline was largely the result of lower
throughputs in both Sunoco's Eastern refined products system and Western crude
system due to production cutbacks by refiners.
Sun Coke -- Sun Coke earned $13 million in the third quarter of 1999 versus $15
million in the third quarter of 1998. The decline was due largely to the absence
of earnings from Shamrock Coal Company, which was sold in February 1999.
<PAGE>
PAGE 20
Gain on Settlement of Insurance Litigation -- In the third quarter of 1999,
Sunoco recognized a $1 million after-tax gain associated with the settlement of
insurance claims related to certain environmental matters (see Note 8 to the
condensed consolidated financial statements).
Benefit from Change in Tax Election -- For a discussion of the $13 million tax
benefit recognized in the third quarter of 1998, see Note 4 to the condensed
consolidated financial statements.
Analysis of Consolidated Statements of Income
- ---------------------------------------------
Revenues -- Total revenues were $2.7 billion in the third quarter of 1999
compared to $2.1 billion in the third quarter of 1998. The 29 percent increase
in the third quarter of 1999 was primarily due to higher refined product sales
prices. Also contributing to the increase were higher refined product sales
volumes.
Costs and Expenses -- Total pretax costs and expenses were $2.6 billion in the
third quarter of 1999 compared to $2.0 billion in the third quarter of 1998. The
30 percent increase in the third quarter of 1999 was primarily due to higher
crude oil and refined product acquisition costs largely as a result of an
increase in crude oil prices.
FINANCIAL CONDITION
Cash and Working Capital
- ------------------------
At September 30, 1999, Sunoco had cash and cash equivalents of $84 million
compared to $38 million at December 31, 1998, and had a working capital deficit
of $218 million compared to $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 September 30, 1999 by approximately $740 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 nine months of 1999, Sunoco's net cash provided by operating
activities ("cash generation") was $267 million compared to $253 million in the
first nine months of 1998. This $14 million increase in cash generation was
primarily due to a decrease in working capital uses pertaining to operating
activities, partially offset by a decline in income before special items and a
reduction in noncash charges.
<PAGE>
PAGE 21
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 generation 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. At December 31, 1998, $120 million was borrowed from the participating
banks under the Agreement. There were no amounts outstanding related to the
above short-term borrowing arrangements at September 30, 1999.
On August 20, 1999, the Company issued $200 million of 7-3/4 percent 10-year
notes. The primary purpose of this borrowing was the repayment of the Company's
$150 million of 8-1/8 percent notes which were repaid at maturity on November 1,
1999.
The following table sets forth amounts outstanding related to Sunoco's
borrowings (in millions of dollars):
At At
September 30 December 31
1999 1998
------------ -----------
Short-term borrowings $ -- $ 120
Current portion of long-term debt 168 69
Long-term debt 872 823
------ ------
Total borrowings $1,040 $1,012
====== ======
Sunoco's debt-to-capital ratio was 40.9 percent at September 30, 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 22
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 was 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.
In November 1998, the EPA convened an advisory Panel on Oxygenate Use in
Gasoline (the "Panel"). The purpose of the Panel was to review public health and
environmental issues that have been raised by the use of MTBE in gasoline, and
specifically by the discovery of MTBE in water supplies. The Panel made its
recommendations to the EPA on July 27, 1999. The recommendations call for the
improved protection of drinking water from MTBE contamination, a substantial
reduction in the use of MTBE, and action by Congress to remove the oxygenate
requirements for reformulated gasoline under the Clean Air Act. State and
federal environmental agencies could implement the majority of the
recommendations, and some would require Congressional legislative action.
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 its oxygenate
requirements. 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 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 the first nine months of 1999, the Company repurchased 294,000 shares of
common stock for $10 million. At September 30, 1999, the Company had a remaining
authorization from its Board of Directors to purchase up to $145 million of
Company stock in the open market or through privately negotiated transactions
from time to time depending on prevailing market conditions.
<PAGE>
PAGE 23
DERIVATIVE INSTRUMENTS
Sunoco uses futures and forward contracts to achieve ratable pricing of its
crude oil purchases and to convert certain refined product sales from fixed to
floating price. In addition, price collars, swaps and option contracts are used
to lock in a portion of the Company's electricity and natural gas refinery fuel
costs. Sunoco also uses swaps, price collars and other contracts from time to
time to hedge the unfavorable impact of significant increases in crude oil
prices and to lock in what Sunoco considers to be acceptable margins for various
refined products.
At September 30, 1999, Sunoco had locked in margins for 4.3 million barrels
(approximately 7 percent) of its anticipated 1999 fourth quarter wholesale fuel
sales and 26.4 million barrels (approximately 11 percent) of its anticipated
2000 full year wholesale fuel sales. In connection with this margin management
program, Sunoco had a net deferred gain of $5 million pretax at September 30,
1999, of which $1 million relates to the fourth quarter 1999 hedging activity
and $4 million relates to the full year 2000. An additional $4 million pretax
gain related to similar positions closed out as of September 30, 1999 has been
deferred and will be recognized in the fourth quarter when the underlying
physical transactions occur.
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.
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.
As of September 30, 1999, the remediation and/or replacement and testing of the
Company's key computer applications is essentially complete. Testing included a
complete Year 2000 readiness test and a full systems integration test in an
environment that simulated the processing conditions that will exist after
December 31, 1999.
The Company has contacted its key customers and suppliers and has examined 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 able to meet their obligations to
the Company due to the Year 2000 Issue. This readiness assessment will continue
throughout the balance of 1999.
<PAGE>
PAGE 24
Additionally, the Company has developed contingency plans for its key operations
and business processes. These plans 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. The plans include, among other
things, scheduling and timing of operations, minimizing certain discretionary
activities, and ensuring that adequate staff is available to handle any
unforeseen disruptions. In many cases, the plans also set forth alternative
sources of supply, markets and other options that the Company may employ in
response to failures of customers and suppliers to meet their obligations to the
Company if they should occur.
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 being made
and tested as they are received.
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
$21 million of expense incurred remediating and testing existing software and
hardware and $16 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. As of September 30, 1999,
approximately 98 percent of the $37 million had been spent.
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.
<PAGE>
PAGE 25
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), 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 business
and 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.
<PAGE>
PAGE 26
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.
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 September 30, 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 Nine-Month Period Ended September
30, 1999.
27 - Article 5 of Regulation S-X, Financial Data Schedule.
Reports on Form 8-K:
On August 18, 1999, the Company filed certain exhibits on Form 8-K under
Item 7 - "Financial Statements and Exhibits", which were incorporated by
reference into the Company's Registration Statement on Form S-3
(Registration No. 33-53717).
**********
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 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 2, 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 Nine-Month Period Ended
September 30, 1999.
27 Article 5 of Regulation S-X, Financial Data Schedule.
<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)
- --------------------------------------------------------------------------------
For the Nine
Months Ended
September 30, 1999
--------------------
(UNAUDITED)
Fixed Charges:
Consolidated interest cost and debt expense $ 61
Interest allocable to rental expense(b) 29
-----
Total $ 90
=====
Earnings:
Consolidated income before income tax expense $ 90
Proportionate share of income tax expense of
50 percent owned but not controlled affiliated
companies 3
Equity in income of less than 50 percent owned
affiliated companies (9)
Dividends received from less than 50 percent
owned affiliated companies 4
Fixed charges 90
Interest capitalized (1)
Amortization of previously capitalized interest 9
-----
Total $ 186
=====
Ratio of Earnings to Fixed Charges 2.07
=====
- ----------------
(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
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 84
<SECURITIES> 0
<RECEIVABLES> 730
<ALLOWANCES> 9
<INVENTORY> 506
<CURRENT-ASSETS> 1,424
<PP&E> 6,296
<DEPRECIATION> 2,974
<TOTAL-ASSETS> 5,069
<CURRENT-LIABILITIES> 1,642
<BONDS> 872
0
0
<COMMON> 132
<OTHER-SE> 1,368
<TOTAL-LIABILITY-AND-EQUITY> 5,069
<SALES> 6,838
<TOTAL-REVENUES> 6,957
<CGS> 6,140
<TOTAL-COSTS> 6,140
<OTHER-EXPENSES> 263
<LOSS-PROVISION> 2
<INTEREST-EXPENSE> 61
<INCOME-PRETAX> 90
<INCOME-TAX> 31
<INCOME-CONTINUING> 59
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 59
<EPS-BASIC> .65
<EPS-DILUTED> .65
</TABLE>
