FINANCIAL SECTION CONTENTS
Selected Financial Data 22
Management's Discussion and Analysis 23
Consolidated Statements of Operations 33
Consolidated Balance Sheets 34
Consolidated Statements of Cash Flows 35
Consolidated Statements of Changes in Shareholders' Equity 36
Notes to Consolidated Financial Statements 37
Reports of Management and of Independent Auditors 51
Supplemental Financial and Operating Information 52
Quarterly Financial and Stock Market Information 54
21
SELECTED FINANCIAL DATA*
(Millions of Dollars Except Per Share Amounts)
1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA:
Sales and other operating revenue
(including
consumer excise taxes) $11,233 $9,834 $9,513 $8,889 $10,049
Income (loss) from continuing
operations before cumulative effect
of change in accounting principle** $(281) $(8) $(19) $87 $(99)
Income (loss) from discontinued
operations*** $166 $235 $116 $196 $(199)+
Cumulative effect of change in
accounting principle++ $-- $(87) $(7) $5 $(261)
Net income (loss) $(115) $140 $90 $288 $(559)
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PER SHARE DATA:
Income (loss) from continuing
operations before cumulative effect
of change in accounting
principle+++ $(4.43) $(.33) $(.18) $.82 $(.93)
Net income (loss)+++ $(2.17) $1.29 $.84 $2.70 $(5.26)
Cash dividends on preference stock# $3.60 $1.80 $-- $-- $--
Cash dividends on common stock# $1.00 $1.40 $1.80 $1.80 $1.80
Shareholders' equity## $14.69 $17.16 $17.42 $18.60 $17.82
- -------------------------------------------------------------------------------
BALANCE SHEET DATA:
Total assets $5,025 $5,085 $5,646 $5,145 $5,263
Long-term debt $835 $888 $936 $582 $661
Shareholders' equity $1,438 $1,699 $1,863 $1,984 $1,896
- -------------------------------------------------------------------------------
* Prior period amounts have been restated to present international production
and Canadian upstream petroleum operations as discontinued operations. (See
Note 2 to the consolidated financial statements.)
** Includes after-tax provision for write-down of assets and other matters to-
talling $254, $61, $32, $12 and $108 million for 1996, 1995, 1994, 1993 and
1992, respectively. (See Notes 2 and 12 to the consolidated financial
statements.)
*** Includes after-tax gain (loss) on divestment of discontinued operations and
disposal of exploration and production properties totalling $125, $157,
$28, $99 and $(8) million for 1996, 1995, 1994, 1993 and 1992, respective-
ly. (See Note 2 to the consolidated financial statements.)
+ Includes a $348 million after-tax provision for write-down of assets and
other matters and a $117 million after-tax gain on Iranian litigation
settlement.
++ Consists of impact of the cumulative effect of a change in the method of
accounting for impairment of long-lived assets in 1995, postemployment
benefits in 1994, income taxes in 1993 and postretirement health care and
life insurance benefits in 1992. (See Note 3 to the consolidated financial
statements.)
+++ Represents both primary and fully diluted earnings per share. (See Note 1
to the consolidated financial statements.)
# Effective in the third quarter of 1995, Sun began paying quarterly
dividends on preference stock at a rate of $.90 per share and reduced its
quarterly common stock dividend from $.45 to $.25 per share. (See Note 13
to the consolidated financial statements.)
## Assumes redemption of preference shares for common stock. (See Note 13 to
the consolidated financial statements.)
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Those statements in the Management's Discussion and Analysis that are not his-
torical in nature should be deemed forward-looking statements that are inher-
ently uncertain. See "Forward-Looking Statements" on page 32 for a discussion
of the factors which could cause actual results to differ materially from
those projected in such statements.
OUTLOOK
The refining and marketing industry is a highly competitive global business
subject to significant volatility. Sun's planning assumptions, including an-
ticipated near-term market trends, are enumerated below:
. Sun's operating results will continue to be highly leveraged to historically
unpredictable refining and marketing margins. Significantly higher crude oil
prices during 1996 had a particularly adverse affect on average margins and
refinery fuel costs as Sun must purchase all of its crude oil feedstocks.
Because margins will continue to be driven by competitive pressures, Sun's
business plan is focused on improving operating results by increasing the
production of high-value products, improving reliability and efficiency of
production facilities and reducing operating and administrative costs
through complement reductions and other cost-saving initiatives. With the
completion in 1996 of extensive planned refinery maintenance turnaround ac-
tivity, Sun expects to operate its refining units near full capacity in
1997.
. Ample supplies of light sweet crude oil will continue to be available. With
the reconfigurations of the Philadelphia and Puerto Rico refineries, virtu-
ally all of the crude oil processed in Sun's refining system is light sweet
crude oil. Therefore, the availability of this type of crude oil and its
price relative to alternative heavy sour crude oil will continue to have a
significant impact on Sun's profitability and competitive position.
. Sun's retail gasoline marketing margins in the northeastern U.S. will ap-
proach the higher levels experienced in the 1994-95 period. The Company's
strategy is to generate attractive investment returns and improve profit-
ability by increasing throughput per outlet and reducing marketing and ad-
ministrative costs. As a result of its logistically advantaged refining and
distribution assets and its strong branded marketing presence in this re-
gion, Sun believes that it is well positioned to compete effectively.
. Margins for base oil lubricant products declined in 1996 and will continue
to be adversely affected in the near term as new lubricants supply comes
onstream. In order to reduce the impact of unfavorable base oil market con-
ditions, Sun acquired the Kendall/Amalie lubricants business in November
1996 which will enable Sun to significantly increase the amount of base oil
it upgrades into higher-value transportation lubricants.
. Overall margins for petrochemicals will improve slightly in 1997 but will
not return to the very strong margins experienced during 1995. Petrochemi-
cals production will increase significantly as a result of capital invest-
ments made in 1996, including outlays at the Marcus Hook refinery to com-
plete the expansion of the propylene unit and to turnaround and modernize
the refinery's fluid catalytic cracking unit.
. Operating income in Sun's logistics and coal and cokemaking businesses in
1997 will approximate the amounts earned during 1996.
FINANCIAL AND OPERATIONAL RESTRUCTURING
During the 1995-96 period, the Company implemented a series of financial and
operational restructuring initiatives designed to improve its competitive po-
sition.
The major initiatives in 1996:
. Reconfigured the Philadelphia refinery to process only light sweet crude oil
and to cease asphalt production. This reconfiguration continues the integra-
tion of the two adjacent but separate facilities (Point Breeze and Girard
Point) within the refinery. Announced that the Puerto Rico refinery will be
reconfigured in the first quarter of 1997 to significantly reduce unprofit-
able fuels production while maintaining the current volume and quality of
lubricants production. These combined actions will result in the shutdown or
mothballing of redundant and/or unprofitable processing units and the elimi-
nation of approximately 225 positions (both employees and independent con-
tractors). The reconfigurations are expected to improve operating efficien-
cies, lower fixed costs and reduce ongoing capital spending and working cap-
ital requirements. If sufficient improvements in operating results are not
realized at these facilities, the Company will consider shutting down addi-
tional units during 1997.
. Announced a comprehensive competitive improvement plan at the Marcus Hook
refinery that will be implemented during 1997. This plan is focused on im-
proving reliability and reducing cash operating costs through a reduction of
approximately 200 positions (both employees and independent contractors),
improved operating and maintenance procedures and energy conservation mea-
sures.
. Strengthened the Company's position in the transportation lubricants market
with the acquisition of the Kendall/Amalie lubricants business.
. Commenced construction of a $187 million cokemaking facility in East Chica-
go, IN, which will significantly increase the Company's cokemaking capacity.
An agreement with Inland Steel Company will require Inland to buy 1.2 mil-
lion tons of coke annually on a take-or-pay basis for a period of 15 years
commencing after the scheduled mid-1998 start-up date. Additional production
of up to 100,000 tons per year will be sold either to Inland or to other
steel producers.
. Completed the withdrawal from oil and gas exploration and production activi-
ties with the divestment of the Company's international production business.
23
The major actions taken in 1995:
. Restructured the Company into eight business units (including the now di-
vested international production business) plus a holding company and a
shared services organization.
. Divested the Company's remaining 55-percent interest in Suncor Inc., a Cana-
dian integrated oil company. The proceeds from the sale were used to signif-
icantly reduce the Company's indebtedness and to repurchase over 8 million
shares of common stock.
. Reduced the quarterly dividend on common stock from $.45 per share to $.25
per share.
. Issued 25 million "depositary shares", each accruing dividends quarterly at
a rate of $.45 per share, in exchange for an equal number of shares of com-
mon stock.
For additional information regarding the financial and operational restructur-
ing initiatives implemented in the 1995-96 period, see Notes 2 and 13 to the
consolidated financial statements.
RESULTS OF OPERATIONS
EARNINGS PROFILE OF SUN BUSINESSES (after tax)
(Millions of Dollars)
1996 1995 1994
- ----------------------------------------------------------------------------
Sun Northeast Refining $ (60) $(37) $(77)
Sunoco Northeast Marketing 1 45 59
Sunoco Chemicals 40 68 25
Sun Lubricants (14) (15) (2)
Sunoco MidAmerica Marketing & Refining (3) (8) (8)
Sunoco Logistics 48 53 45
Sun Coal & Coke 31 25 15
Corporate expenses (23) (24) (23)
Net financing expenses (47) (55) (32)
Real estate operations held for sale -- (1) 2
Sun International Production* 41 57 60
Canada (Suncor)* -- 23 37
- ----------------------------------------------------------------------------
14 131 101
Special items:**
Gain on divestment of International Production business* 125 -- --
Gain on divestment of Suncor common stock* -- 157 --
Gain on divestment of exploration and production
properties* -- -- 28
Provision for write-down of assets and other matters (254) (61) (32)
Cumulative effect of change in accounting principle -- (87) (7)
- ----------------------------------------------------------------------------
Consolidated net income (loss) $(115) $140 $ 90
- ----------------------------------------------------------------------------
*Sun completed the sale of its International Production business on September
30, 1996 and divested its remaining 55-percent interest in Suncor on June 8,
1995. Sun's international oil and gas production business and Canadian up-
stream petroleum operations have been classified as discontinued operations
in the consolidated financial statements.
** For a discussion of special items, see Notes 2, 3 and 12 to the consoli-
dated financial statements.
ANALYSIS OF EARNINGS PROFILE OF SUN BUSINESSES
In 1996, Sun Company, Inc. and its subsidiaries had a net loss of $115 mil-
lion, or $2.17 per share of common stock compared to net income of $140 mil-
lion, or $1.29 per share in 1995 and net income of $90 million, or $.84 per
share in 1994. Excluding the special items shown separately in the Earnings
Profile of Sun Businesses, Sun had income of $14 million in 1996, compared to
$131 million in 1995 and $101 million in 1994.
The $117 million decrease in earnings before special items in 1996 was primar-
ily due to the impact of significantly higher crude oil costs on gasoline, as-
phalt, petrochemical and base oil lubricant margins and on refinery fuel
costs. Also contributing to the decline were higher marketing expenses, in-
creased planned refinery maintenance activity and the absence of earnings from
Suncor and International Production after their divestments in June 1995 and
September 1996, respectively. Partially offsetting these negative factors were
significantly improved middle distillate margins, higher lubricant sales vol-
umes and lower net financing expenses.
In 1995, the $30 million increase in earnings before special items was primar-
ily due to higher petrochemical, wholesale gasoline and asphalt margins, im-
proved refinery operations and reduced expenses resulting from cost contain-
ment efforts. Partially offsetting these positive factors were record low mid-
dle distillate margins experienced in the first half of 1995, lower retail
gasoline and lubricant sales volumes, higher net financing expenses and the
absence of earnings from Suncor following its divestment.
For a more detailed discussion of the key factors that affected Sun's income
during the 1994-96 period, see the individual business unit discussions below.
SUN NORTHEAST REFINING--The Sun Northeast Refining business consists of the
manufacturing and wholesale marketing of fuels produced at Sun's Marcus Hook,
PA and Philadelphia, PA refineries.
1996 1995 1994
- -----------------------------------------------------------------------------
Loss (millions of dollars) $(60) $(37) $(77)
Wholesale margin* (per barrel) $2.76 $2.73 $2.38
Wholesale sales** (thousands of barrels daily):
To unaffiliated customers:
Gasoline 93.8 98.2 41.3
Middle distillates 133.6 133.8 104.3
Residual fuel 47.7 50.6 34.1
Asphalt 15.8 24.1 26.5
Other 31.3 39.7 38.6
- -----------------------------------------------------------------------------
322.2 346.4 244.8
To affiliates (primarily gasoline) 188.3 184.3 197.4
- -----------------------------------------------------------------------------
510.5 530.7 442.2
- -----------------------------------------------------------------------------
Crude unit capacity (thousands of barrels daily) at De-
cember 31 482.0 482.0 482.0
Crude unit capacity utilized 93% 93% 86%
- -----------------------------------------------------------------------------
*Wholesale sales price less cost of crude oil, other feedstocks and purchased
refined products.
**The increase in sales volume in 1995 reflects the acquisition of the
Philadelphia refinery's Girard Point facilities on August 4, 1994.
24
Sun Northeast Refining's operating results for 1996 exclude a $53 million af-
ter-tax provision primarily to write-off redundant and/or unprofitable process-
ing units in connection with the Philadelphia refinery reconfiguration project.
This provision is reported as part of the Provision for Write-Down of Assets
and Other Matters shown separately in the Earnings Profile of Sun Businesses.
See "Financial and Operational Restructuring" above and Note 2 to the consoli-
dated financial statements for a further discussion of this provision.
Sun Northeast Refining operating results decreased $23 million in 1996 primar-
ily due to higher refinery operating expenses ($12 million) and lower sales
volumes ($12 million), partially offset by higher average wholesale fuels prod-
uct margins ($4 million). The higher operating expenses were due largely to
higher refinery fuel costs resulting from higher crude oil and natural gas
prices. The lower sales volumes were due largely to increased planned refinery
maintenance activity. The increase in wholesale fuels margins reflects signifi-
cantly higher margins for middle distillates, largely offset by the adverse im-
pact of higher crude oil prices on wholesale gasoline and asphalt margins.
Wholesale gasoline margins were adversely impacted in both 1996 and 1995 by the
inability to fully recover the higher cost of making reformulated gasoline. Sun
Northeast Refining withdrew from its unprofitable asphalt business in December
1996 as part of the Philadelphia refinery reconfiguration project.
Sun Northeast Refining results increased $40 million during 1995 primarily due
to higher average wholesale fuels product margins ($36 million) and higher
earnings from wholesale fuels operations at the Philadelphia refinery's Girard
Point facilities acquired on August 4, 1994 ($16 million), partially offset by
lower sales volumes, excluding activity from the Girard Point facilities ($15
million). The improvement in wholesale fuels margins reflected the favorable
impact of stronger market conditions for wholesale gasoline and asphalt, par-
tially offset by the record low margins for middle distillates experienced in
the first half of 1995.
SUNOCO NORTHEAST MARKETING--The Sunoco Northeast Marketing business consists of
the retail sale of gasoline and middle distillates in New England and the Mid-
Atlantic states and convenience-store operations in these regions.
1996 1995 1994
- ------------------------------------------------------
Income (millions of dollars) $1 $45 $59
Gasoline margin* (per barrel) $4.02 $4.88 $4.86
Sales (thousands of barrels daily):
Gasoline 159.5 158.0 168.5
Middle distillates 15.7 14.7 16.2
- ------------------------------------------------------
175.2 172.7 184.7
- ------------------------------------------------------
Retail gasoline outlets 2,880 2,944 3,186
- ------------------------------------------------------
*Retail sales price less wholesale sales price. The retail sales price is the
weighted average price received through the various branded marketing
distribution channels.
The $44 million decrease in Sunoco Northeast Marketing operating results in
1996 was primarily due to lower retail gasoline margins ($30 million) and an
increase in marketing and administrative expenses ($12 million). The increase
in expenses was due largely to the impact of a major advertising campaign and
higher expenses associated with volume increases in company-operated outlets.
Partially offsetting these negative factors was a 2 percent increase in sales
volumes ($3 million). Retail gasoline margins were adversely impacted in both
1996 and 1995 by the inability to fully recover the higher cost of reformulated
gasoline.
Sunoco Northeast Marketing income declined $14 million in 1995 primarily due to
a 6 percent decline in sales volumes ($14 million) and higher depreciation ex-
pense ($6 million), partially offset by lower marketing and administrative ex-
penses ($10 million). The volume decline was due largely to the elimination of
marginal accounts and the further rationalization of Sun's service station
portfolio in connection with a program to modernize its retail gasoline outlets
and convert them to a single brand.
SUNOCO CHEMICALS--The Sunoco Chemicals business consists of the manufacturing
and marketing of commodity and intermediate petrochemicals produced at the Mar-
cus Hook and Philadelphia refineries, at an ethylene oxide plant in Branden-
burg, KY and at a joint venture mtbe facility in Mont Belvieu, TX.
1996 1995 1994
- ---------------------------------------------------------
Income (millions of dollars) $40 $68 $25
Petrochemicals margin* (per barrel) $21.46 $25.58 $17.63
Petrochemical sales (thousands
of barrels daily):
Aromatics 9.6 8.5 5.2
Propylene 6.4 8.1 8.4
Ethylene/ethylene oxide 2.4 2.3 2.3
Other 1.8 2.0 2.6
- ---------------------------------------------------------
20.2 20.9 18.5
- ---------------------------------------------------------
*Wholesale sales price less the cost of feedstocks and product purchases.
Income from Sunoco Chemicals decreased $28 million in 1996 primarily due to
significantly lower margins ($21 million) for most petrochemicals products com-
pared to the strong margins experienced during 1995. Production shortfalls due
to maintenance activities at the Company's operating facilities also negatively
impacted Sunoco Chemicals results.
Sunoco Chemicals income increased $43 million in 1995 due to significantly
higher margins ($32 million), higher sales volumes ($2 million) and higher
aromatics production from the Girard Point facilities acquired from Chevron in
August 1994 ($11 million). The addition of cyclohexane production from a plant
completed at the Marcus Hook refinery in the first quarter of 1995 contributed
to the higher margins and volumes.
SUN LUBRICANTS--The Sun Lubricants business is comprised of the manufacturing,
blending, packaging and marketing of a broad line of lubricants produced at
Sun's Tulsa, OK and Puerto Rico refineries as well as the related manufacturing
and wholesale marketing of fuels produced at these facilities.
25
1996 1995 1994
- ----------------------------------------------------------------------
Loss (millions of dollars) $(14) $(15) $(2)
Wholesale margin* (per barrel):
Lubricants $20.90 $25.03 $24.77
Fuels $1.52 $.87 $1.23
Wholesale sales (thousands of barrels daily):
To unaffiliated customers:
Specialty oils** 9.3 8.6 9.8
Base oils 8.7 6.9 8.9
Waxes and other lubricants 5.9 4.5 3.6
- ----------------------------------------------------------------------
23.9 20.0 22.3
Gasoline 36.4 25.9 31.2
Middle distillates 49.8 44.9 47.4
Residual fuel 30.8 19.5 13.3
Other 7.3 11.1 6.1
- ----------------------------------------------------------------------
148.2 121.4 120.3
To affiliates*** 21.1 27.0 33.9
- ----------------------------------------------------------------------
169.3 148.4 154.2
- ----------------------------------------------------------------------
*Wholesale sales price of lubricants and fuels less cost of crude oil, other
feedstocks and purchased refined products.
** Comprised principally of transportation and industrial lubricants.
*** Primarily "lubes-extracted" feedstocks which are transported to the Toledo
refinery for further processing.
Sun Lubricants operating results for 1996 exclude an $80 million after-tax pro-
vision to reconfigure the Puerto Rico refinery to significantly reduce fuels
production. This provision is reported as part of the Provision for Write-down
of Assets and Other Matters shown separately in the Earnings Profile of Sun
Businesses. See "Financial and Operational Restructuring" above and Note 2 to
the consolidated financial statements for a further discussion of this
reconfiguration.
The $1 million improvement in Sun Lubricants operating results in 1996 was pri-
marily due to higher lubricants sales volumes ($20 million), higher wholesale
fuels sales volumes ($6 million), and higher margins on wholesale fuels prod-
ucts ($20 million), primarily as a result of a stronger market for middle dis-
tillate products. These positive factors were essentially offset by the impact
of lower lubricant margins ($20 million), principally base oils, and higher op-
erating and administrative expenses ($29 million). The increase in expenses was
largely attributable to an increase in refinery fuel costs and production lev-
els as well as expenses related to volume increases associated with the re-
cently acquired Kendall/Amalie lubricants business. The increase in specialty
oil lubricants sales volumes reflects an expansion in Sun Lubricants' contract
customer base and the acquisition of the Kendall/Amalie lubricants business.
This acquisition increased the amount of existing base oil production upgraded
into transportation lubricants at Sun facilities and has enabled Sun Lubricants
to increase its specialty oil lubricants sales. The purchase was completed on
November 1, 1996 for $74 million, including $46 million for working capital.
Sun Lubricants results declined $13 million in 1995 due primarily to lower mar-
gins on wholesale fuels products ($13 million), principally middle distillates,
and lower lubricants sales volumes ($15 million), partially offset by higher
average lubricants margins ($2 million) and lower operating and administrative
expenses ($9 million). The lower level of sales volumes and operating expenses
in 1995 was in part due to a major planned maintenance turnaround at the Tulsa
refinery during that year.
SUNOCO MIDAMERICA MARKETING & REFINING--The Sunoco MidAmerica Marketing & Re-
fining business consists of the retail sale of gasoline and middle distillates
and convenience-store operations in the midwestern U.S. (primarily Ohio and
Michigan) as well as the manufacturing and wholesale marketing of fuels and
petrochemicals produced at Sun's Toledo, OH refinery.
1996 1995 1994
- ---------------------------------------------------------------------------
Loss (millions of dollars) $(3) $(8) $(8)
- ---------------------------------------------------------------------------
Retail Marketing:
Gasoline margin* (per barrel) $3.86 $3.86 $3.83
Sales (thousands of barrels daily):
Gasoline 46.2 46.6 46.4
Middle distillates 4.8 4.2 4.3
- ---------------------------------------------------------------------------
51.0 50.8 50.7
- ---------------------------------------------------------------------------
Retail gasoline outlets 926 917 929
- ---------------------------------------------------------------------------
Refining and Wholesale Marketing:
Wholesale margin** (per barrel):
Fuels $3.55 $2.98 $3.75
Petrochemicals $3.76 $9.06 $9.88
Wholesale sales (thousands of
barrels daily):
To unaffiliated customers:
Gasoline 36.8 29.9 22.6
Middle distillates 16.0 13.3 14.4
Residual fuel 3.9 3.8 4.1
Petrochemicals 11.3 10.2 9.0
Other 10.0 8.4 8.4
- ---------------------------------------------------------------------------
78.0 65.6 58.5
To affiliates and Sunoco MidAmerica Retail Marketing 52.6 54.8 53.8
- ---------------------------------------------------------------------------
130.6 120.4 112.3
- ---------------------------------------------------------------------------
Crude unit capacity (thousands of
barrels daily) at December 31 125.0 125.0 125.0
Crude unit capacity utilized 100% 89% 90%
- ---------------------------------------------------------------------------
*Retail sales price less wholesale sales price. The retail sales price is the
weighted average price received through the various branded marketing
distribution channels.
** Wholesale sales price of fuels or petrochemicals less cost of crude oil,
other feedstocks and purchased refined products.
Sunoco MidAmerica Marketing & Refining results improved $5 million in 1996 due
to higher wholesale fuel margins ($16 million) and sales volumes ($8 million)
and lower retail marketing expenses ($6 million). Partially offsetting these
positive factors were a decline in margins on petrochemicals, largely xylene
($13 million) and an increase in refinery expenses ($14 million) resulting from
higher refinery fuel costs and production volumes.
26
Sunoco MidAmerica Marketing & Refining results were unchanged in 1995 as lower
average wholesale fuels product margins ($21 million) were essentially offset
by higher wholesale fuels ($6 million) and petrochemicals ($3 million) sales
volumes and lower refinery operating expenses ($10 million). The lower level
of operating expenses in 1995 was largely attributable to lower volumes re-
sulting from a major planned maintenance turnaround at the Toledo refinery.
SUNOCO LOGISTICS--The Sunoco Logistics business consists of pipeline
transportation of crude oil and refined petroleum products, domestic crude oil
acquisition from third-party leases, crude oil trucking and the Nederland, TX
crude oil terminalling operation.
1996 1995 1994
- --------------------------------------------------------------------
Income (millions of dollars) $48 $53 $45
Pipeline throughput (thousands of barrels daily):
Unaffiliated customers 627 557 565
Affiliated customers 819 776 715
- --------------------------------------------------------------------
1,446 1,333 1,280
- --------------------------------------------------------------------
Sunoco Logistics results decreased $5 million in 1996 primarily due to lower
throughput in the eastern product pipeline system and a loss associated with a
pipeline leak, partially offset by higher earnings from joint venture pipeline
operations. During 1995, Sunoco Logistics income increased $8 million in part
due to higher earnings from joint venture pipeline operations, the Marysville,
MI crude oil pipeline system and expanded crude oil pipeline operations in
Texas. Income from Sun's inter-refinery pipeline connecting the Philadelphia
and Marcus Hook refineries and a pipeline delivering jet fuel to the Philadel-
phia airport, which were both completed in 1995, also contributed to the im-
provement in earnings.
SUN COAL & COKE--The Sun Coal & Coke business consists of coal production from
mines in Virginia and Kentucky and coke manufacturing at the Company's facil-
ity in Vansant, VA.
1996 1995 1994
- --------------------------------------------------------------------------
Income (millions of dollars) $31 $25 $15
Average sales price of coal and coke (per ton) $40.03 $37.65 $34.00
Proven and probable coal reserves (millions of tons) 132 139 187
Production (thousands of tons):
Coal 4,416 5,121 6,595
Coke 648 638 678
- --------------------------------------------------------------------------
Income from Sun Coal & Coke increased $6 million during 1996 after increasing
$10 million in 1995. The increases in earnings during the 1994-96 period were
primarily due to higher margins for coke and improved mining operations. In-
come during 1996 also benefitted from a gain recognized on the sale of a coal
mining operation in Kentucky, which had been inactive since March 1995.
In November 1996, Sun Coal & Coke entered into an agreement to construct, own
and operate a $187 million cokemaking facility in East Chicago, IN, which will
produce coke for Inland Steel Company's Indiana Harbor Works steel plant lo-
cated adjacent to the new facility. The agreement requires Inland to buy 1.2
million tons annually on a take-or-pay basis for a period of 15 years commenc-
ing after the scheduled mid-1998 start-up date. Additional production of up to
100,000 tons per year will be sold either to Inland or other steel producers.
The plant's coke ovens will utilize Sun Coal & Coke's proprietary cokemaking
technology. This technology is environmentally superior to the by-product
technology currently used by most coke producers.
NET FINANCING EXPENSES--Net financing expenses decreased $8 million in 1996
primarily due to lower average total borrowings as the Company substantially
reduced its debt level in the second half of 1995 in connection with its fi-
nancial restructuring. Net financing expenses increased $23 million in 1995
primarily due to higher interest expense on long-term debt ($13 million) and
lower capitalized interest ($6 million). The increase in interest expense was
due largely to an increase in debt related to the high level of growth capital
expenditures in 1994 which was partially offset by the substantial reduction
in Company debt that occurred in the second half of 1995.
REAL ESTATE OPERATIONS HELD FOR SALE--For a discussion of Sun's real estate
operations held for sale, see Note 2 to the consolidated financial statements.
SUN INTERNATIONAL PRODUCTION--On September 30, 1996, Sun completed the sale of
its International Production business for $278 million in cash resulting in a
$125 million after-tax gain. This gain is shown separately in the Earnings
Profile of Sun Businesses. Sun International Production operating earnings de-
creased $16 million in 1996 primarily due to the absence of operating earnings
subsequent to July 24, 1996, the date the agreement of sale was signed. Earn-
ings after this date and prior to completion of the sale were included in the
gain on divestment. In 1995, operating income decreased $3 million primarily
due to lower crude oil and natural gas production volumes and higher operating
and administrative expenses, partially offset by higher crude oil prices and a
decrease in foreign exchange translation losses.
CANADA (SUNCOR)--On June 8, 1995, Sun divested its remaining 55-percent inter-
est in Suncor Inc., a Canadian integrated oil company, for $770 million in
cash, of which $635 million was received in June 1995 and $135 million was re-
ceived in June 1996. This divestment resulted in a $157 million after-tax
gain, which is shown separately in the Earnings Profile of Sun Businesses. The
decline in Suncor's operating income in both 1996 and 1995 is primarily a re-
sult of the absence of earnings subsequent to the June 8, 1995 divestment.
27
ANALYSIS OF CONSOLIDATED STATEMENTS OF OPERATIONS
Sun's consolidated statements of operations for all prior periods have been
restated to present International Production and Canadian Upstream Petroleum
operations as discontinued operations. The following analysis of consolidated
statements of operations reflects this presentation.
1996 VS. 1995--Sales and other operating revenue increased $1,399 million, or
14 percent, principally due to higher domestic refined product sales prices
($908 million) and volumes ($260 million), higher revenues from resales of
purchased crude oil ($635 million), higher domestic consumer excise taxes ($68
million) and higher sales and other operating revenue attributable to Sun's
coal and cokemaking business ($78 million) due to the presentation of this
business as an operation held for sale during the first half of 1995 (see Note
2 to the consolidated financial statements). Partially offsetting these posi-
tive factors were lower sales and other operating revenue attributable to Ca-
nadian refining and marketing operations ($558 million, including Canadian
consumer excise taxes of $207 million) as a result of the divestment of Suncor
on June 8, 1995. Other income increased $22 million primarily due to higher
gains on divestments ($13 million) and higher equity in earnings of affiliated
companies ($7 million).
Cost of products sold and operating expenses increased $1,707 million, or 24
percent, primarily due to higher crude oil and refined product costs ($1,168
million) largely as a result of an increase in crude oil prices, higher re-
sales of purchased crude oil ($635 million), higher domestic refinery operat-
ing expenses attributable principally to higher refinery fuel costs ($67 mil-
lion) and higher costs attributable to Sun's coal and cokemaking business ($58
million). These increases were partially offset by lower costs and operating
expenses attributable to the divestment of Canadian refining and marketing op-
erations ($281 million). Selling, general and administrative expenses de-
creased $27 million, or 4 percent, as a result of the Suncor divestment ($51
million), partially offset by higher domestic marketing expenses. Consumer ex-
cise taxes decreased $139 million, or 8 percent, largely attributable to the
divestment of Canadian refining and marketing operations ($207 million), par-
tially offset by increases in the domestic marketing business ($68 million)
resulting from higher retail and wholesale gasoline volumes. Payroll, property
and other taxes decreased $5 million, or 5 percent, primarily due to the di-
vestment of Canadian refining and marketing operations and to a decline in
taxes in domestic refining and marketing operations. Depreciation, depletion
and amortization increased $4 million, or 2 percent, primarily as a result of
higher depreciation at the Company's domestic refining and marketing and coal
and cokemaking operations, partially offset by a decline in Canadian refining
and marketing operations resulting from the Suncor divestment. For a discus-
sion of the $356 and $93 million pretax provisions for write-down of assets
and other matters recorded in 1996 and 1995, respectively, see Note 2 to the
consolidated financial statements. Interest cost and debt expense decreased
$19 million, or 19 percent, due to lower average borrowings. For a discussion
of the income from discontinued operations and the cumulative effect of change
in accounting principle, see Notes 2 and 3 to the consolidated financial
statements.
1995 VS. 1994--Sales and other operating revenue increased $321 million, or 3
percent, principally due to higher domestic refined product sales prices ($442
million) and volumes ($677 million), partially offset by lower domestic con-
sumer excise taxes ($57 million) and lower sales and other operating revenue
attributable to Canadian refining and marketing operations ($775 million, in-
cluding Canadian consumer excise taxes of $308 million) as a result of the
Suncor divestment. The higher domestic refined product sales volumes were
largely attributable to the Girard Point refining facilities acquired on Au-
gust 4, 1994. Other income decreased $5 million principally due to lower gains
on asset divestments ($8 million).
Cost of products sold and operating expenses increased $669 million, or 11
percent, primarily due to higher crude oil and refined product costs ($907
million) and higher domestic refinery operating expenses ($72 million), par-
tially offset by lower cost and operating expenses attributable to the divest-
ment of Canadian refining and marketing operations ($365 million). The in-
crease in crude oil and refined product costs and refinery operating expenses
was largely attributable to the Girard Point refining facilities acquisition.
Selling, general and administrative expenses decreased $80 million, or 11 per-
cent, primarily as a result of the Suncor divestment and to cost containment
efforts implemented during 1995. Consumer excise taxes decreased $365 million,
or 17 percent, due to the divestment of Canadian refining and marketing opera-
tions ($308 million) and a decline in the domestic marketing business ($57
million) resulting from lower retail gasoline volumes. Payroll, property and
other taxes decreased $10 million, or 10 percent, primarily due to the divest-
ment of Canadian refining and marketing operations and to a decline in taxes
in domestic refining and marketing operations. Depreciation, depletion and am-
ortization increased $17 million, or 7 percent, primarily due to an increased
depreciable asset base in Sun's domestic refining and marketing operations re-
sulting from the high level of 1994 capital spending, partially offset by
lower Canadian refining and marketing depreciation and amortization due to the
Suncor divestment. For a discussion of the $93 and $54 million pretax provi-
sions for write-down of assets and other matters recorded in 1995 and 1994,
respectively, see Note 2 to the consolidated financial statements. Interest
cost and debt expense increased $15 million, or 18 percent, due principally to
an increase in long-term debt associated with the high level of 1994 growth
capital expenditures, partially offset by the substantial reduction in Company
debt that occurred in the second half of 1995 in connection with its financial
restructuring. For a discussion of the income from discontinued operations and
the cumulative effect of the changes in accounting principles, see Notes 2 and
3 to the consolidated financial statements.
28
FINANCIAL CONDITION
CAPITAL RESOURCES AND LIQUIDITY
CASH AND WORKING CAPITAL--At December 31, 1996, Sun had cash and cash equiva-
lents of $67 million compared to $11 million at December 31, 1995 and had a
working capital deficit of $282 million compared to working capital of $109
million at December 31, 1995. Sun's working capital position is considerably
stronger than indicated because of the relatively low historical costs as-
signed under the lifo method of accounting for most of the inventories re-
flected in the consolidated balance sheet. The current replacement cost of all
such inventories exceeds the carrying value at December 31, 1996 by $780 mil-
lion. Inventories valued at lifo, which consist of crude oil and refined prod-
ucts, are readily marketable at their current replacement values. Management
believes that the current levels of Sun's cash and working capital provide ad-
equate support for its ongoing operations.
CASH FLOWS AND FINANCIAL CAPACITY--In 1996, Sun's net cash provided by operat-
ing activities ("cash generation") was $332 million compared to $352 million
in 1995 and $481 million in 1994. The $20 million decrease in cash generation
in 1996 was largely due to declines in income before special items and net
cash provided by operating activities of discontinued operations, essentially
offset by a reduction in working capital uses pertaining to operating activi-
ties. The $129 million decrease in cash generation in 1995 was primarily at-
tributable to an increase in working capital uses pertaining to operating ac-
tivities and a reduction in net cash provided by operating activities of dis-
continued operations, partially offset by an increase in income before special
items.
Divestment activities have also been a source of cash and have enhanced li-
quidity. During the 1994-96 period, proceeds from divestments totalled $1,224
million, including $278 million received in 1996 from the sale of the Interna-
tional Production business and $770 million received in the 1995-96 period
from the sale of Suncor common stock.
Management believes that future cash generation will be sufficient to satisfy
Sun's capital requirements and to pay the current cash dividends on common and
preference stock. However, from time to time, the Company's short-term cash
requirements may exceed its cash generation due to various factors including
volatility in crude oil and refined product markets and increases in capital
spending and working capital levels. During those periods, the Company may
supplement its cash generation with proceeds from financing activities.
The Company has access to $600 million of short-term financing in the form of
borrowings from commercial banks under a revolving credit agreement or commer-
cial paper issued by Sun supported by this agreement. Under the terms of the
revolving credit agreement, Sun is required, among other things, to maintain
Consolidated Tangible Net Worth (as defined) of at least $1,100 million. At
December 31, 1996, the Consolidated Tangible Net Worth was $1,345 million. The
Company also has access to short-term financing under non-committed money mar-
ket facilities.
The following table sets forth amounts outstanding related to the above short-
term borrowing arrangements as well as to Sun's other borrowings at:
December 31
-----------
(Millions of Dollars) 1996 1995
- --------------------------------------------------
Short-term borrowings:
Commercial paper $ -- $ 4
Non-committed money market facilities -- 50
- --------------------------------------------------
-- 54
Current portion of long-term debt 54 3
Long-term debt 835 888
- --------------------------------------------------
Total borrowings $ 889 $ 945
- --------------------------------------------------
Sun's debt-to-capital ratio was 38.2 percent at December 31, 1996 compared to
35.7 percent at December 31, 1995. Management believes there is sufficient
borrowing capacity available to provide for Sun's future cash requirements. In
addition, the Company has the option of issuing additional common or prefer-
ence stock as a means of increasing its equity base; however, there are no
current plans to do so. No commitments have been made with respect to any in-
vestment opportunity which would require the use of a significant portion of
Sun's unused financial capacity.
CAPITAL EXPENDITURES
(Millions of Dollars) 1996 1995* 1994*
- --------------------------------------------------------
Sun Northeast Refining $148 $103 $163
Sunoco Northeast Marketing 81 102 146
Sunoco Chemicals 57 55 61
Sun Lubricants 30 52 25
Sunoco MidAmerica Marketing & Refining 36 48 52
Sunoco Logistics 22 42 81
Sun Coal & Coke** 34 7 --
Canadian Refining and Marketing -- 8 22
- --------------------------------------------------------
Consolidated capital expenditures*** $408 $417 $550
- --------------------------------------------------------
* Restated to exclude discontinued International Production and Canadian Up-
stream Petroleum operations.
** Excludes capital expenditures of Sun Coal & Coke prior to June 30, 1995
while such operations were accounted for as an investment held for sale.
*** Excludes $74 million attributable to the purchase of the Kendall/Amalie
lubricants business and related working capital in 1996 and $164 million
attributable to the purchase of the Girard Point refining facilities, and
related inventory and pipeline interests in 1994.
In 1996, in addition to the $74 million spent to acquire the Kendall/Amalie
lubricants business (of which $46 million related to working capital), major
capital outlays included: $81 million for branded marketing activities in the
Northeast largely concentrated on ongoing upgrades of service stations; $76
million for the six-week scheduled turnaround and modernization of the 86,000
barrel-per-day catalytic cracking unit, gas plant and ethylene complex at the
Marcus Hook refinery; $37 million to complete the expansion
29
of a propylene unit at the Marcus Hook refinery; and $19 million to begin con-
struction of the $187 million cokemaking facility in East Chicago, IN scheduled
to commence operations in mid-1998.
In 1995, major capital expenditures included: $61 million related to service
station conversion and modernization activities; $26 million at the Marcus Hook
refinery to begin the expansion of the propylene unit and to complete expansion
of an ethylene oxide unit; $18 million to complete a cyclohexane plant and ex-
pand benzene extraction capacity at the Marcus Hook refinery ("Northeast
Aromatics and Cyclohexane Project") and $13 million to complete the construc-
tion of a pipeline connecting the Philadelphia and Marcus Hook refineries.
In 1994, in addition to the $164 million spent to acquire the Girard Point re-
fining facilities and related assets, major capital expenditures included: $64
million related to service station conversion and modernization activities; $58
million related to the Northeast Aromatics and Cyclohexane Project; $43 million
related to the inter-refinery pipeline construction; and $58 million to sub-
stantially complete a $110 million project to upgrade the wastewater treatment
processing facilities at the Marcus Hook refinery.
Planned capital expenditures for 1997 are expected to approximate $410 million,
of which $282 million will be spent in refining and marketing operations and
$128 million in the coal and cokemaking business. These planned outlays include
$112 million for the ongoing construction of cokemaking facilities in East Chi-
cago, IN and $35 million for the expansion of the Philadelphia refinery's
cumene production capacity. In addition to these major growth projects, $263
million is designated for base infrastructure and legally required spending, a
significant portion of which relates to projects that will enhance the relia-
bility of the Company's operations or maintain the high quality image of
Sunoco(R) retail outlets.
See "Environmental Matters" below for further discussion of Sun's capital ex-
penditures in connection with pollution abatement activities.
ENVIRONMENTAL MATTERS
Sun is subject to numerous federal, state and local laws which regulate the
discharge of materials into, or otherwise relate to the protection of, the en-
vironment. These laws have required, and are expected to continue to require,
Sun to make significant expenditures of both a capital and expense nature. Sev-
eral of the more significant federal laws applicable to the Company's opera-
tions include the Clean Air Act, the Clean Water Act, the Comprehensive Envi-
ronmental Response, Compensation and Liability Act ("cercla") and the Solid
Waste Disposal Act, as amended by the Resource Conservation and Recovery Act
("rcra").
The following table summarizes Sun's expenditures for environmental projects
and compliance activities:
(Millions of Dollars) 1996 1995* 1994*
- ------------------------------------------------------------
Pollution abatement capital** $ 29 $ 60 $203
Remediation 37 48 57
Operations, maintenance and administration 185 238 214
- ------------------------------------------------------------
$251 $346 $474
- ------------------------------------------------------------
* Restated to exclude expenditures attributable to discontinued International
Production and Canadian Upstream Petroleum operations.
** Capital expenditures for pollution abatement are expected to approximate $25
and $55 million in 1997 and 1998, respectively.
The high level of pollution abatement capital expenditures during 1994 was pri-
marily due to outlays relating to the wastewater treatment and Northeast
Aromatics and Cyclohexane projects at the Marcus Hook refinery.
The Clean Air Act establishes stringent criteria for regulating air toxics at
operating facilities by mandating major reductions in allowable emissions and
establishing a more comprehensive list of substances deemed to be air toxics.
The Clean Air Act also requires refiners to market cleaner-burning gasoline
that reduces emissions of certain toxic and conventional pollutants. The Com-
pany has implemented the first phase of the reformulated gasoline regulations
which requires an increase in the minimum quantity of oxygen for certain non-
attainment areas, a reduction in benzene content, and a reduction in summertime
Reid Vapor Pressure ("rvp"). Sun expects to implement the next more stringent
phase of these regulations in 1998 with minimal capital investment. Management
believes the Company will be able to continue to meet these regulations even
though they will become even more stringent in 2000 when the phase-in of the
Clean Air Act is completed. However, the Company cannot ascertain at this time
the extent of the capital outlays that will be required to comply with this fi-
nal phase of the regulations.
In order to obtain a secure supply of oxygenates, Sun entered into an off-take
agreement with Belvieu Environmental Fuels ("bef"), a joint venture in which
Sun is a one-third partner, whereby Sun agreed to purchase all of the mtbe from
bef's 14,000 barrel-per-day facility. At December 31, 1996, Sun established a
$130 million accrual ($85 million after tax) for estimated losses expected to
be realized with respect to the off-take agreement. (See Note 12 to the consol-
idated financial statements.)
cercla and rcra, and related state laws subject Sun to the potential obligation
to remove or mitigate the environmental effects of the disposal or release of
certain pollutants at Sun's facilities and at third-party or formerly-owned
sites at which contaminants generated by Sun may be located. Under cercla, Sun
is subject to potential joint and several liability for the costs of
remediation at sites at which it has been identified as a "potentially respon-
sible party" ("prp"). As of December 31, 1996, Sun had been named as a prp at
46 sites identified or potentially identifiable as "Superfund" sites under
cercla. Sun has reviewed the nature and extent of its involvement at each site
and other relevant circumstances and, based upon the other parties involved or
Sun's
30
negligible participation therein, believes that its potential liability associ-
ated with such sites will not be significant. Under rcra and related state
laws, corrective remedial action has been initiated at some of Sun's facilities
and will be required to be undertaken by Sun at various of its other facili-
ties. The cost of such remedial actions could be significant but is expected to
be incurred over an extended period of time.
Sun establishes accruals related to environmental remediation activities for
work at identified sites where an assessment has indicated that cleanup costs
are probable and reasonably estimable. For a discussion of the accrued liabili-
ties and charges against income related to these activities, see Note 12 to the
consolidated financial statements.
Total future costs for environmental remediation activities will depend upon,
among other things, the identification of additional sites, the determination
of the extent of the contamination of each site, the timing and nature of re-
quired remedial actions, the technology available and needed to meet the vari-
ous existing legal requirements, the nature and extent of future environmental
laws, inflation rates and the determination of Sun's liability at multi-party
sites, if any, in light of the number, participation level and financial via-
bility of other parties.
Management believes that the overall expenditures for the matters discussed
above are likely to be significant but are expected to be incurred over an ex-
tended period of time and to be funded from Sun's net cash provided by operat-
ing activities. Although potentially significant with respect to results of op-
erations or cash flows for any one year, management believes that such costs
will not have a material impact on Sun's consolidated financial position or,
over an extended period of time, on Sun's cash flows or liquidity.
DEFERRED INCOME TAXES
Sun has deferred tax assets principally related to the alternative minimum tax,
certain liabilities and loss carryforwards. A valuation allowance was previ-
ously established to reduce certain state net operating loss carryforwards to
the amount that will more likely than not be realized. Management expects that
Sun will generate sufficient future taxable income to realize the benefit of
its net deferred tax asset. Uncertainties that may affect its realization in-
clude tax law changes and the future level of product prices, costs and tax
rates. The Federal net operating loss carryforward of $211 million at December
31, 1996 expires in 2011. It was generated in 1996 in part due to tax losses on
the sales of Sun's international production business and certain coal opera-
tions. The alternative minimum tax credit can be carried forward indefinitely
to reduce the Company's future regular tax liability.
DERIVATIVE INSTRUMENTS
Sun uses swaps, options, futures, forwards and other similar derivative con-
tracts to hedge the impact of fluctuations in crude oil, natural gas and re-
fined product prices. At December 31, 1996, Sun had swaps and options outstand-
ing to hedge against significant increases in crude oil prices on approximately
13 million barrels of its expected 1997 crude oil purchases and had locked in
what it considers to be acceptable margins for approximately 20 million barrels
of its anticipated 1997 wholesale fuel sales.
Sun is at risk for possible changes in the market value for all of its deriva-
tive contracts. However, it is anticipated that such risk would be mitigated by
price changes in the underlying hedged transactions. In addition, Sun is ex-
posed to credit risk in the event of nonperformance by counterparties. Manage-
ment believes this risk is negligible as its counterparties are regulated by
exchanges or they are major international financial institutions with high
credit ratings. Although most of these derivative contracts are intended to
limit the Company's exposure to declining margins and/or rising crude oil pric-
es, they could limit the Company's participation in rising margins and/or fall-
ing crude oil prices.
For a further discussion of Sun's hedging activities, see Note 15 to the con-
solidated financial statements.
CASH DIVIDENDS AND SHARE REPURCHASES
The Company has paid cash dividends on a regular quarterly basis since 1904.
During 1994, annual cash dividends of $1.80 per share ($.45 per share each
quarter) were paid on the Company's common stock. Effective with the third
quarter of 1995, Sun reduced its quarterly common stock dividend to $.25 per
share. As a result, the cash dividends paid on common stock totalled $1.40 per
share in 1995 and $1.00 per share in 1996. The Company expects to continue to
sustain the quarterly common stock cash dividend at its current level.
During the third quarter of 1995, Sun exchanged 25 million "depositary shares"
for an equal number of shares of its common stock in a tax free transaction.
Each depositary share represents ownership of one-half share of the Company's
Series A cumulative preference stock. The depositary shares accrue dividends
quarterly at a rate of $.45 per share, or one-half the rate paid on the prefer-
ence stock. Cash dividends paid on the depositary shares totalled $.90 per
share in 1995 and $1.80 per share in 1996. (See Note 13 to the consolidated fi-
nancial statements.)
The outstanding depositary shares are redeemable at any time by the Company, in
whole or in part, for common stock at a value initially equal to approximately
$42.40 per depositary share at June 12, 1995, decreasing ratably to $40.00 per
depositary share at June 11, 1998. After June 11, 1998, the Company may elect
to redeem each outstanding depositary share for one share of common stock, sub-
ject to adjustment in certain events. The Company currently intends to redeem
all of the outstanding depositary shares no later than June 12, 1998.
The Company repurchased 6,400,000 shares of its common stock in 1995 for $192
million through a tender offer and 2,910,300 shares of common stock and 78,900
depositary shares during the 1995-96 period subsequent to the exchange and ten-
der offers on
31
the open market for approximately $79 million. The open market purchases were
made under a program authorized by the Company's Board of Directors to pur-
chase up to $100 million of stock in the open market from time to time depend-
ing on prevailing market conditions.
FORWARD-LOOKING STATEMENTS
Those statements in the Management's Discussion and Analysis that are not his-
torical in nature should be deemed forward-looking statements (including, by
way of example only and not of limitation, certain statements contained in
"Outlook", "Financial and Operational Restructuring", "Cash Flows and Finan-
cial Capacity", "Deferred Income Taxes" and "Cash Dividends and Share Repur-
chases" above) within the meaning of Section 21E of the Securities Exchange
Act of 1934. Although Sun believes these forward-looking statements are rea-
sonable, they are based upon a number of assumptions concerning future condi-
tions, any or all of which may ultimately prove to be inaccurate. Such for-
ward-looking statements involve risks and are inherently uncertain. Important
factors that could cause actual results to differ materially from those pro-
jected in such statements are discussed below.
Sun is affected by changes in industry-wide refining margins, changes in crude
oil and other raw material costs, and world and regional events that could
significantly increase volatility in the marketplace. Sun's crude oil supply
could be affected by factors beyond its control, such as embargoes, the con-
tinued discovery and production of light sweet crude oil, or military con-
flicts between (or internal instability in) one or more oil-producing coun-
tries. Other factors that could affect Sun's business include: the continued
availability of debt and equity financing, changes in labor relations, general
economic conditions (including recessionary trends, inflation and interest and
currency exchange rates), market supply and demand for Sun's products, the re-
liability and efficiency of Sun's operating facilities, the level of operating
expenses and hazards common to operating facilities (including explosions,
fires, oil spills and the effects of severe weather conditions), actions taken
by competitors (including both pricing and expansion and retirement of refin-
ery capacity in response to market conditions), and civil, criminal, regula-
tory or administrative actions, claims or proceedings.
Sun's operations could also be affected by domestic and international politi-
cal, legislative, regulatory and legal actions, such as restrictions on pro-
duction, restrictions on imports and exports, price controls, tax increases
and retroactive tax claims, expropriation of property and cancellation of con-
tract rights. In addition, Sun is impacted by laws pertaining to workers'
health and safety, and current or amended state and federal environmental and
other similar regulations (including, particularly, regulations dealing with
gasoline composition and characteristics) or the judicial interpretation of
such regulations.
The factors identified above are believed to be important factors (but not
necessarily all of the important factors) that could cause actual results to
differ materially from those expressed in any forward-looking statement made
by Sun. Unpredictable or unknown factors not discussed herein could also have
material adverse effects on forward-looking statements.
32
CONSOLIDATED STATEMENTS OF OPERATIONS Sun Company, Inc. and Subsidiaries
(Millions of Dollars Except Per Share Amounts)
For the Years Ended December 31 1996 1995* 1994*
- --------------------------------------------------------------------------------
REVENUES
Sales and other operating revenue (including consumer
excise taxes) $11,233 $9,834 $9,513
Interest income 15 13 14
Other income (Note 4) 52 30 35
- --------------------------------------------------------------------------------
11,300 9,877 9,562
COSTS AND EXPENSES
Cost of products sold and operating expenses 8,718 7,011 6,342
Selling, general and administrative expenses 589 616 696
Consumer excise taxes 1,612 1,751 2,116
Payroll, property and other taxes 89 94 104
Depreciation, depletion and amortization 267 263 246
Provision for write-down of assets and other matters
(Note 2) 356 93 54
Interest cost and debt expense 79 98 83
Interest capitalized (2) (2) (10)
- --------------------------------------------------------------------------------
11,708 9,924 9,631
Loss from continuing operations before income tax ben-
efit and cumulative effect of change
in accounting principle (408) (47) (69)
Income tax benefit (Note 5) (127) (39) (50)
- --------------------------------------------------------------------------------
Loss from continuing operations before cumulative ef-
fect of change in accounting principle (281) (8) (19)
Income from discontinued operations (Note 2) 166 235 116
Cumulative effect of change in accounting principle
(Note 3) -- (87) (7)
- --------------------------------------------------------------------------------
NET INCOME (LOSS) (115) 140 90
Dividends on preference stock (45) (22) --
- --------------------------------------------------------------------------------
Net income (loss) attributable to common shareholders $ (160) $ 118 $ 90
- --------------------------------------------------------------------------------
Earnings per share of common stock:**
Loss from continuing operations before cumulative ef-
fect of change in accounting principle $(4.43) $ (.33) $ (.18)
Income from discontinued operations 2.26 2.57 1.09
Cumulative effect of change in accounting principle -- (.95) (.07)
- --------------------------------------------------------------------------------
NET INCOME (LOSS) $(2.17) $1.29 $ .84
- --------------------------------------------------------------------------------
Cash dividends paid per share (Note 13):
Preference stock*** $3.60 $1.80 $--
Common stock $1.00 $1.40 $1.80
- --------------------------------------------------------------------------------
* Restated to present International Production and Canadian Upstream Petroleum
operations as discontinued operations (Note 2).
** Represents both primary and fully diluted earnings per share (Note 1). Based
on the weighted average number of common shares outstanding (in millions) of
73.6 in 1996, 91.3 in 1995 and 107.0 in 1994.
*** Each share of preference stock is represented by two depositary shares.
Each depositary share accrues dividends quarterly at a rate of $.45 per
share, or one-half the rate paid on preference stock.
(See Accompanying Notes)
33
CONSOLIDATED BALANCE SHEETS Sun Company, Inc. and Subsidiaries
(Millions of Dollars)
At December 31 1996 1995*
- -------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 67 $ 11
Note receivable from divestment of Suncor common stock (Note 2) -- 130
Accounts and other notes receivable, net 864 637
Inventories (Note 6) 476 522
Deferred income taxes (Note 5) 128 132
Investment in discontinued operations (Note 2) -- 143
- -------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 1,535 1,575
- -------------------------------------------------------------------------------
INVESTMENT IN REAL ESTATE OPERATIONS HELD FOR SALE (Note 2) 79 87
INVESTMENTS AND LONG-TERM RECEIVABLES (Note 7) 91 104
PROPERTIES, PLANTS AND EQUIPMENT, NET (Note 8) 3,044 3,048
DEFERRED CHARGES AND OTHER ASSETS 276 271
- -------------------------------------------------------------------------------
TOTAL ASSETS $5,025 $5,085
- -------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $1,081 $ 776
Accrued liabilities 573 502
Short-term borrowings (Note 9) -- 54
Current portion of long-term debt (Note 10) 54 3
Taxes payable 109 131
- -------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 1,817 1,466
- -------------------------------------------------------------------------------
LONG-TERM DEBT (Note 10) 835 888
RETIREMENT BENEFIT LIABILITIES (Note 11) 489 506
DEFERRED INCOME TAXES (Note 5) -- 94
OTHER DEFERRED CREDITS AND LIABILITIES 446 432
COMMITMENTS AND CONTINGENT LIABILITIES (Note 12)
SHAREHOLDERS' EQUITY (Notes 13 and 14)
Cumulative preference stock - Series A, no par value
Authorized - 12,500,000 shares; Outstanding, 1996 - 12,460,550
shares;
Outstanding, 1995 - 12,500,000 shares 748 750
Common stock, par value $1 per share
Authorized - 200,000,000 shares; Issued, 1996 - 129,871,604
shares;
Issued, 1995 - 129,709,084 shares 130 130
Capital in excess of par value 1,316 1,310
Earnings employed in the business 1,284 1,518
- -------------------------------------------------------------------------------
3,478 3,708
Less common stock held in treasury, at cost
1996 - 56,880,126 shares; 1995 - 55,699,366 shares 2,040 2,009
- -------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 1,438 1,699
- -------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $5,025 $5,085
- -------------------------------------------------------------------------------
*Restated to conform to the 1996 presentation (Note 2).
(See Accompanying Notes)
34
CONSOLIDATED STATEMENTS OF CASH FLOWS Sun Company, Inc. and Subsidiaries
(Millions of Dollars)
For the Years Ended December 31 1996 1995* 1994*
- ---------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(115) $ 140 $ 90
Adjustments to reconcile net income (loss) to net cash pro-
vided by operating activities:
Income from discontinued operations (166) (235) (116)
Cumulative effect of change in accounting principle -- 87 7
Provision for write-down of assets and other matters 356 93 54
Depreciation, depletion and amortization 267 263 246
Deferred income tax expense (benefit) (129) 11 (93)
Changes in working capital pertaining to operating activi-
ties:
Accounts and notes receivable (198) (143) (70)
Inventories 57 (28) (44)
Accounts payable and accrued liabilities 257 66 98
Taxes payable 7 (101) 24
Other (21) (13) 5
- ---------------------------------------------------------------------------------
Net cash flows from continuing operating activities 315 140 201
Net cash flows from discontinued operating activities 17 212 280
- ---------------------------------------------------------------------------------
Net cash provided by operating activities 332 352 481
- ---------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (408) (417) (550)
Acquisition of Kendall/Amalie lubricants business and re-
lated working capital (Notes 2 and 16) (74) -- --
Acquisition of Girard Point refinery and related assets
(Notes 2 and 16) -- -- (164)
Proceeds from divestments:
International Production operations (Note 2) 278 -- --
Suncor common stock (Note 2) 135 635 --
Other 32 64 80
Investing activities of discontinued operations (13) (99) (257)
Other -- (18) 47
- ---------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (50) 165 (844)
- ---------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from (repayments of) short-term borrowings (54) (167) 111
Proceeds from issuance of long-term debt -- -- 450
Repayments of long-term debt (2) (142) (23)
Cash dividend payments (119) (156) (192)
Purchases of preference stock for retirement (2) -- --
Purchases of common stock for treasury (31) (238) --
Financing activities of discontinued operations -- 15 --
Other (18) 96 8
- ---------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (226) (592) 354
- ---------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 56 (75) (9)
Cash and cash equivalents at beginning of year 11 86 95
- ---------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 67 $ 11 $ 86
- ---------------------------------------------------------------------------------
* Restated to conform to the 1996 presentation (Note 2).
(See Accompanying Notes)
35
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Sun Company, Inc. and
Subsidiaries
(Dollars in Millions, Shares in Thousands)
Cumulative Common Stock
Preference Stock Common Stock Earnings Held in Treasury
---------------------- --------------- Capital in Employed ------------------
Number of Liquidation Number of Par Excess of Translation in the
Shares Value Shares Value Par Value Adjustment Business Shares Cost
- ------------------------------------------------------------------------------------------------------------------------
AT DECEMBER 31, 1993 -- $ -- 129,313 $129 $1,303 $(62) $1,636 22,630 $1,022
Net income -- -- -- -- -- -- 90 -- --
Cash dividend payments -- -- -- -- -- -- (192) -- --
Issued under management
incentive plans -- -- 208 1 6 -- -- -- --
Sales to dividend rein-
vestment plan -- -- -- -- -- -- -- (46) (1)
Foreign currency trans-
lation adjustment -- -- -- -- -- (27) -- -- --
- ------------------------------------------------------------------------------------------------------------------------
AT DECEMBER 31, 1994 -- $ -- 129,521 $130 $1,309 $(89) $1,534 22,584 $ 1,021
Net income -- -- -- -- -- -- 140 -- --
Cash dividend payments -- -- -- -- -- -- (156) -- --
Exchange of preference
stock for common
stock (Note 13) 12,500 750 -- -- -- -- -- 25,000 750
Purchases for treasury -- -- -- -- -- -- -- 8,125 238
Issued under management
incentive plans -- -- 56 -- 2 -- -- -- --
Issued under employee
option plan -- -- 132 -- 4 -- -- (4) --
Foreign currency trans-
lation adjustment -- -- -- -- -- 89 -- -- --
Other -- -- -- -- (5) -- -- (6) --
- ------------------------------------------------------------------------------------------------------------------------
AT DECEMBER 31, 1995 12,500 $750 129,709 $130 $1,310 $ -- $1,518 55,699 $2,009
Net loss -- -- -- -- -- -- (115) -- --
Cash dividend payments -- -- -- -- -- -- (119) -- --
Purchases for retirement (39) (2) -- -- -- -- -- -- --
Purchases for treasury -- -- -- -- -- -- -- 1,185 31
Issued under management
incentive plans -- -- 74 -- 2 -- -- -- --
Issued under employee
option plan -- -- 88 -- 2 -- -- -- --
Other -- -- 1 -- 2 -- -- (4) --
- ------------------------------------------------------------------------------------------------------------------------
AT DECEMBER 31, 1996 12,461 $748 129,872 $130 $1,316 $ -- $1,284 56,880 $ 2,040
- ------------------------------------------------------------------------------------------------------------------------
(See Accompanying Notes)
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Sun Company, Inc. and Subsidiaries
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
Sun Company, Inc. and all operations that are controlled (generally more than
50 percent owned) except those accounted for as investments in operations held
for sale and discontinued operations (collectively, "Sun" or the "Company") are
consolidated. 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.
USE OF ESTIMATES
Certain amounts included in the accompanying consolidated financial statements
and related footnotes reflect the use of estimates based on assumptions made by
management. Actual amounts could differ from these estimates.
CASH EQUIVALENTS
Sun considers all highly liquid investments with a remaining maturity of three
months or less at the time of purchase to be cash equivalents. Sun's cash
equivalents consist principally of time deposits and certificates of deposit.
INVENTORIES
Inventories are valued at the lower of cost or market. The cost of crude oil
and refined product inventories is determined principally using the last-in,
first-out method ("lifo"). The cost of materials, supplies and other invento-
ries is determined using principally the average cost method.
DEPRECIATION AND RETIREMENTS
Plants and equipment are generally depreciated on a straight-line basis over
their estimated useful lives. Coal property acquisition costs and capitalized
development costs are depleted by the unit of production method based on proved
reserves. Gains and losses on the disposals of fixed assets are generally re-
flected in income.
ENVIRONMENTAL REMEDIATION
Sun accrues environmental remediation costs for work at identified sites where
an assessment has indicated that cleanup costs are probable and reasonably es-
timable. Such accruals are undiscounted and are based on currently available
facts, estimated timing of remedial actions and related inflation assumptions,
existing technology and presently enacted laws and regulations.
REFINERY MAINTENANCE SHUTDOWNS
Maintenance and repair costs in excess of $500 thousand incurred in connection
with major refinery maintenance shutdowns are capitalized when incurred and
then amortized over the period benefitted by the maintenance activities.
FOREIGN CURRENCY TRANSLATION
Prior to the divestment of Suncor Inc., the functional currency for Canadian
operations was the Canadian dollar. Foreign exchange gains and losses resulting
from translating Suncor's balance sheet from Canadian dollars into U.S. dollars
were included as a separate component of shareholders' equity. The functional
currency for International Production operations was the U.S. dollar.
DERIVATIVE INSTRUMENTS
Sun uses swaps, options, futures, forwards and other similar derivative con-
tracts to hedge the impact of fluctuations in crude oil, natural gas and re-
fined product prices. Gains and losses on these contracts are generally de-
ferred and recognized as a component of the underlying hedged transactions. The
cash flows from hedge contracts are included in operating activities in the
consolidated statements of cash flows.
STOCK-BASED COMPENSATION
The Company follows the method of accounting for employee stock compensation
plans prescribed by Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("apb no. 25") (Note 14).
EARNINGS PER SHARE
Primary earnings per share was computed by dividing earnings (losses), after
deducting dividends on the preference stock issued in August 1995 (Note 13), by
the weighted average number of common shares outstanding. Fully diluted earn-
ings per share generally is determined by dividing earnings (losses) by the
weighted average number of shares outstanding assuming redemption of the pref-
erence shares for common stock utilizing a ratio of two shares of common stock
for each outstanding preference share. However, since the assumed redemption of
preference shares would have resulted in either an increase in earnings per
share or a reduction in the loss per share, fully diluted per share amounts are
equal to those reported on a primary basis.
37
2. CHANGES IN BUSINESS
The following is a summary of Sun's significant changes in business during the
three-year period ended December 31, 1996:
DISCONTINUED OPERATIONS
On September 30, 1996, Sun completed the sale of its international oil and gas
production business for $278 million in cash. The sale of this business repre-
sents the completion of the Company's withdrawal from oil and gas exploration
and production activities. The Company withdrew from international exploration
activities in 1992 and divested its remaining 55-percent interest in Suncor
Inc., a Canadian integrated oil company, on June 8, 1995. Sun received $770
million in cash from the sale of Suncor, after commissions and discounts, of
which $635 million was received in June 1995 and $135 million was received in
June 1996.
As a result of the sale of the international oil and gas production business,
this business and the previously divested Canadian synthetic oil production and
conventional oil and gas exploration and production operations (collectively,
"Canadian Upstream Petroleum operations") have been classified as discontinued
operations for all periods presented. The following is a summary of income from
discontinued operations:
Canadian
International Upstream
Production Petroleum
(Millions of Dollars) Operations Operations Total
- -------------------------------------------------------------------
1996
Income before income tax benefit $152 $ -- $152
Income tax benefit 14 -- 14
- -------------------------------------------------------------------
Income from discontinued operations $166 $ -- $166
- -------------------------------------------------------------------
1995
Income before income tax expense $ 80 $286 $366
Income tax expense 23 108 131
- -------------------------------------------------------------------
Income from discontinued operations $ 57 $178 $235
- -------------------------------------------------------------------
1994
Income before income tax expense $126 $ 63 $189
Income tax expense 38 35 73
- -------------------------------------------------------------------
Income from discontinued operations $ 88 $ 28 $116
- -------------------------------------------------------------------
Income from discontinued International Production operations in 1996 includes a
$125 million gain on divestment of this business (comprised of a pretax gain of
$93 million and an income tax benefit of $32 million). Income from discontinued
Canadian Upstream Petroleum operations in 1995 includes a $157 million gain on
divestment of Suncor (comprised of a pretax gain of $242 million and income tax
expense of $85 million).
Prior to their divestment, sales and other operating revenue from discontinued
International Production operations totalled $187, $236 and $245 million for
1996, 1995 and 1994, respectively, while sales and other operating revenue from
discontinued Canadian Upstream Petroleum operations totalled $271 and $533 mil-
lion for 1995 and 1994, respectively.
INVESTMENTS IN OPERATIONS HELD FOR SALE
REAL ESTATE OPERATIONS--Sun has been disposing of its investment in Radnor Cor-
poration, its wholly owned real estate development subsidiary, since October
1991 and subsequent to that date has divested approximately 80 percent of its
real estate portfolio. This business is accounted for as an investment held for
sale. As a result, pretax income (loss) from real estate operations has been
included as a single amount in other income in the consolidated statements of
operations (Note 4).
The assets and liabilities relating to real estate operations, which have been
segregated in the consolidated balance sheets and separately reflected as an
investment in real estate operations held for sale, are as follows:
December 31
------------
(Millions of Dollars) 1996 1995
- -----------------------------------------------------------------
Inventories $ 78 $ 83
Properties, plants and equipment 119 144
Other assets 18 20
Debt (Note 12) (109) (132)
Other liabilities (27) (28)
- -----------------------------------------------------------------
Investment in real estate operations held for sale $ 79 $ 87
- -----------------------------------------------------------------
COAL AND COKEMAKING OPERATIONS--In January 1993, Sun decided to sell its coal
and cokemaking operations. In connection with this decision, Sun sold its west-
ern U.S. coal operations during 1993 and certain of its eastern U.S. coal oper-
ations during 1994. Prior to June 30, 1995, Sun's coal and cokemaking opera-
tions had been accounted for as an investment held for sale. However, effective
June 30, 1995, the remaining coal and cokemaking business became one of the
Company's ongoing business units and is no longer held for sale. Accordingly,
the consolidated balance sheets of Sun as of December 31, 1996 and 1995 contain
the accounts of its coal and cokemaking operations on a fully consolidated ba-
sis. The accompanying consolidated statements of operations and cash flows re-
flect coal and cokemaking operations on a fully consolidated basis after June
30, 1995 and as an operation held for sale prior to that date. The prior period
consolidated statements of operations and cash flows were not restated to give
effect to this change in presentation because the impact of such a restatement
would not have been material.
38
WRITE-DOWNS OF ASSETS AND OTHER MATTERS
The following table sets forth summary information regarding the provisions for
write-down of assets and other matters:
Pretax After-Tax
(Millions of Dollars) Provisions Provisions
- --------------------------------------------------------------
1996
Reconfiguration projects:
Philadelphia refinery $ 85 $ 53
Puerto Rico refinery 85 80
mtbe purchase commitment 130 85
Other 56 36
- --------------------------------------------------------------
$356 $254
- --------------------------------------------------------------
1995
Refining and marketing assets $ 43 $ 28
Employee terminations and related costs 50 33
- --------------------------------------------------------------
$ 93 $ 61
- --------------------------------------------------------------
1994
Coal investment $ 36 $ 20
Other 18 12
- --------------------------------------------------------------
$ 54 $ 32
- --------------------------------------------------------------
During the fourth quarter of 1996, Sun reconfigured the Philadelphia refinery
to process only light sweet crude oil and to cease asphalt production. This
reconfiguration continues the integration of the two adjacent but separate fa-
cilities (Point Breeze and Girard Point) at the Philadelphia, PA refinery. In
1996, Sun also announced that it will reconfigure the Puerto Rico refinery in
the first quarter of 1997 to significantly reduce fuels production while main-
taining the current volume and quality of lubricants production. In connection
with these reconfigurations, Sun recorded provisions to write off redundant
and/or unprofitable processing units and established accruals for environmental
remediation activities, employee terminations and related costs. In addition,
at December 31, 1996, Sun established accruals for estimated losses expected to
be realized with respect to an off-take agreement to purchase mtbe (Note 12)
and for other environmental remediation activities and recorded a provision to
write down to fair value certain assets in its refining and marketing business.
During 1995, Sun recorded a provision to write down to fair value certain as-
sets in the refining and marketing business and to establish accruals for em-
ployee terminations and related costs. The $50 million accrual for employee
terminations and related costs included $38 million attributable to termination
benefits and $12 million related to future rental payments for vacated office
space.
During 1994, Sun recorded a provision primarily attributable to a write down to
estimated net realizable value of its investment in coal operations and estab-
lished accruals related to certain litigation and other matters.
ACQUISITIONS
KENDALL/AMALIE LUBRICANTS BUSINESS AND RELATED WORKING CAPITAL--On November 1,
1996, Sun acquired the Kendall/Amalie lubricants blending, packaging and mar-
keting business for $74 million in cash, including $46 million for working cap-
ital. The acquisition has been accounted for as a purchase and, accordingly,
the results of operations of this business have been included in the consoli-
dated statement of operations since the date of acquisition. The purchase price
has been allocated to the assets acquired and liabilities assumed based on
their relative fair market values (Note 16). The results of operations of the
Kendall/Amalie lubricants business in 1996 and 1995 were not material in rela-
tion to Sun's consolidated results of operations.
GIRARD POINT REFINERY AND RELATED ASSETS--Sun acquired for $164 million the
Chevron U.S.A. Inc. 177,000 barrel-per-day Girard Point refining facility and
related inventory located in Philadelphia, PA on August 4, 1994 and its inter-
est in the Woodbury and Harbor Pipelines, which connect the refinery to the New
York Harbor, on October 26, 1994. As part of the acquisition, Sun assumed cer-
tain liabilities. The acquisition has been accounted for as a purchase. The un-
audited pro forma sales and other operating revenue (excluding consumer excise
taxes), net income and net income per share of common stock of Sun for the year
ended December 31, 1994, assuming the acquisitions had occurred on January 1,
1994, were $8,112 million, $102 million and $.95 per share of common stock, re-
spectively. The pro forma information does not purport to be indicative of the
results that would have been obtained if the operations actually had been com-
bined throughout 1994.
3. CHANGES IN ACCOUNTING PRINCIPLES
Effective January 1, 1995, Sun adopted the provisions of Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived As-
sets and for Long-Lived Assets to be Disposed Of." This statement requires com-
panies to write down to estimated fair value long-lived assets that are im-
paired. The write-downs recognized in 1995 are reflected as a cumulative effect
of a change in accounting principle in the consolidated statement of operations
and related to properties to be disposed of in the Company's coal, real estate
and refining and marketing operations. The following table sets forth summary
information concerning these write-downs:
Pretax After-tax
(Millions of Dollars) Provisions Provisions
- ----------------------------------------------
Coal $ 45 $29
Real estate 33 15
Refining and marketing* 67 43
- ----------------------------------------------
$145 $87
- ----------------------------------------------
* Primarily service stations and terminals.
39
The impaired coal assets were sold during 1996. The disposal of the Company's
remaining real estate portfolio and refining and marketing assets held for
sale is expected to be substantially completed by the end of 1998. Other than
the cumulative effect, this change did not have a significant impact on Sun's
results of operations during 1995. The results of operations during 1996 and
1995 for the properties to be disposed of were not significant.
Effective January 1, 1994, Sun adopted the provisions of Statement of Finan-
cial Accounting Standards No. 112 "Employers' Accounting for Postemployment
Benefits." It requires companies to recognize the obligation to provide bene-
fits to their former or inactive employees after employment but before retire-
ment. The cumulative effect of this accounting change for years prior to 1994
decreased net income for 1994 by $7 million (after related income tax benefit
of $4 million). Other than the cumulative effect, this change did not have a
significant impact on Sun's net income.
4. OTHER INCOME
(Millions of Dollars) 1996 1995 1994
- ----------------------------------------------------------------------------
Equity in earnings of affiliated companies $24 $17 $13
Gain on divestments 14 1 9
Pretax income (loss) from investments in operations held for
sale (Note 2) -- 5 (1)
Other 14 7 14
- ----------------------------------------------------------------------------
$52 $30 $35
- ----------------------------------------------------------------------------
5. INCOME TAXES
The components of the loss from continuing operations before income tax bene-
fit and cumulative effect of the change in accounting principle are as fol-
lows:
(Millions of Dollars) 1996 1995 1994
- -----------------------------------------
U.S. $(408) $(52) $(94)
Foreign* -- 5 25
- -----------------------------------------
$(408) $(47) $(69)
- -----------------------------------------
* Attributable to Canadian refining and marketing operations.
The components of the income tax benefit from continuing operations before cu-
mulative effect of the change in accounting principle are as follows:
(Millions of Dollars) 1996 1995 1994
- ---------------------------------------------------
Income taxes currently payable:
U.S. federal $ -- $(59) $ 13
Foreign -- 4 19
State and other 2 5 11
- ---------------------------------------------------
2 (50) 43
- ---------------------------------------------------
Deferred taxes:
U.S. federal (118) 22 (84)
Foreign -- (1) (3)
State and other (11) (10) (6)
- ---------------------------------------------------
(129) 11 (93)
- ---------------------------------------------------
$(127) $(39) $(50)
- ---------------------------------------------------
The reconciliation of the income tax benefit at the U.S. statutory rate to the
income tax benefit from continuing operations before cumulative effect of the
change in accounting principle is as follows:
(Millions of Dollars) 1996 1995 1994
- ------------------------------------------------------------------------------
Income tax benefit at U.S. statutory rate $(143) $(16) $(24)
(Increase) reduction in income tax benefit resulting from:
Nonconventional fuel credit -- (8) (18)
Puerto Rico tax exemption (expires
in 2007) 25 (5) (6)
State income taxes after Federal income tax effects (2) (4) 2
Dividend exclusion for affiliated companies (4) (3) (3)
Other (3) (3) (1)
- ------------------------------------------------------------------------------
$(127) $(39) $(50)
- ------------------------------------------------------------------------------
The tax effects of temporary differences which comprise the net deferred in-
come tax asset are as follows:
December 31
------------
(Millions of Dollars) 1996 1995
- ------------------------------------------------------------
Deferred tax assets:
Retirement benefit liabilities $ 157 $ 160
Environmental remediation liabilities 78 67
Other liabilities not yet deductible 211 238
Federal net operating loss carryforward* 74 --
Alternative minimum tax credit carryforward** 68 29
Investment in real estate operations held
for sale 31 37
Other 51 58
Valuation allowance (32) (32)
- ------------------------------------------------------------
638 557
- ------------------------------------------------------------
Deferred tax liabilities:
Properties, plants and equipment (438) (453)
Other (48) (66)
- ------------------------------------------------------------
(486) (519)
- ------------------------------------------------------------
Net deferred income tax asset $ 152 $ 38
- ------------------------------------------------------------
* The Federal net operating loss carryforward of $211 million at December 31,
1996 expires in 2011. It was generated in 1996 in part due to tax losses on
the sales of Sun's international production business and certain coal opera-
tions.
** Alternative minimum tax credit carryforwards may be carried forward indefi-
nitely.
The valuation allowance was previously established to reduce certain state net
operating loss carryforwards to the amount that will more likely than not be
realized. Management expects that Sun will generate sufficient future taxable
income to realize the benefit of its net deferred income tax asset. Uncertain-
ties that may affect its realization include tax law changes and the future
level of product prices, costs and tax rates.
40
The following table sets forth the net deferred income tax asset in the consol-
idated balance sheets at:
December 31
------------
(Millions of Dollars) 1996 1995
- -------------------------------------------
Current asset $128 $132
Noncurrent asset (liability) 24* (94)
- -------------------------------------------
$152 $ 38
- -------------------------------------------
* Included in deferred charges and other assets in the consolidated balance
sheet.
6. INVENTORIES
December 31
-----------
(Millions of Dollars) 1996 1995
- ------------------------------------------
Crude oil $ 157 $184
Refined products 252 272
Materials, supplies and other 67 66
- ------------------------------------------
$ 476 $522
- ------------------------------------------
The current replacement cost of all inventories valued at lifo exceeded their
carrying value by $780 and $528 million at December 31, 1996 and 1995, respec-
tively. During 1996, Sun reduced certain inventory quantities which were valued
at lower lifo costs prevailing in prior years. The effect of this reduction was
to decrease the 1996 net loss by $8 million.
7. INVESTMENTS AND LONG-TERM RECEIVABLES
December 31
-------------
(Millions of Dollars) 1996 1995
- ------------------------------------------------------------------
Investments in and advances to affiliated companies $ 72 $ 80
Accounts and notes receivable 14 13
Other investments 5 11
- ------------------------------------------------------------------
$ 91 $104
- ------------------------------------------------------------------
Dividends received from affiliated companies amounted to $15, $11 and $10 mil-
lion in 1996, 1995 and 1994, respectively. Earnings employed in the business at
December 31, 1996 include $30 million of undistributed earnings of affiliated
companies.
8. PROPERTIES, PLANTS AND EQUIPMENT
Accumulated
Gross Depreciation,
(Millions of Dollars) Investment Depletion and Net
December 31 at Cost Amortization Investment
- ---------------------------------------------------------------
1996
Refining and marketing* $5,537 $2,599 $2,938
Coal mining and cokemaking 291 186 105
Corporate 1 -- 1
- ---------------------------------------------------------------
$5,829 $2,785 $3,044
- ---------------------------------------------------------------
1995
Refining and marketing* $5,418 $2,463 $2,955
Coal mining and cokemaking 375 283 92
Corporate 1 -- 1
- ---------------------------------------------------------------
$5,794 $2,746 $3,048
- ---------------------------------------------------------------
* Includes gross amounts leased to third parties totalling $588 and $624 mil-
lion at December 31, 1996 and 1995, respectively. Related accumulated depre-
ciation totalled $206 and $203 million at December 31, 1996 and 1995, respec-
tively.
Annual future minimum rentals due Sun, as lessor, on noncancelable operating
leases at December 31, 1996 are as follows (in millions of dollars):
- -----------------------------
Year ending December 31:
1997 $46
1998 31
1999 12
2000 2
2001 1
Thereafter --
- -----------------------------
$92
- -----------------------------
9. SHORT-TERM BORROWINGS AND CREDIT FACILITIES
The Company has a $600 million revolving credit agreement ("Agreement") with
commercial banks that provides access to short-term financing through September
2000. The Company can borrow directly from the participating banks under this
Agreement or use it to support commercial paper issued by Sun. The Agreement is
subject to commitment fees, the amounts of which are not material. Under the
terms of the Agreement, Sun is required, among other things, to maintain Con-
solidated Tangible Net Worth (as defined) of at least $1,100 million. At Decem-
ber 31, 1996, the Consolidated Tangible Net Worth was $1,345 million. The Com-
pany also has access to short-term financing under non-committed money market
facilities. The following table sets forth amounts outstanding related to the
above short-term borrowing arrangements at:
December 31
------------
(Millions of Dollars) 1996 1995
- ----------------------------------------------------
Commercial paper $ -- $ 4
Non-committed money market facilities -- 50
- ----------------------------------------------------
$ -- $ 54
- ----------------------------------------------------
41
10. LONG-TERM DEBT
December 31
-----------
(Millions of Dollars) 1996 1995
- ---------------------------------------------------
SUN COMPANY, INC.
9 3/8% debentures due 2016 $ 200 $200
9% debentures due 2024 100 100
8 1/8% notes due 1999 150 150
7.95% notes due 2001 150 150
7 1/8% notes due 2004 100 100
7.03% - 7.10% notes due 1997 50 50
6 3/4% convertible debentures due 2012
(Note 13) 10 10
- ---------------------------------------------------
760 760
- ---------------------------------------------------
SUBSIDIARIES OF SUN COMPANY, INC.
7.60% environmental industrial revenue
bonds due 2024 100 100
Other 33 35
- ---------------------------------------------------
133 135
- ---------------------------------------------------
893 895
Less: unamortized discount 4 4
current portion 54 3
- ---------------------------------------------------
$ 835 $888
- ---------------------------------------------------
The aggregate amount of long-term debt maturing and sinking fund requirements
in the years 1997 through 2001 is as follows (in millions of dollars):
- -------------------------------------------------------------------------------
1997 $ 54
1998 $ 11
1999 $151
2000 $ 2
2001 $151
- -------------------------------------------------------------------------------
11. RETIREMENT BENEFIT PLANS
DEFINED BENEFIT PENSION PLANS
Sun has noncontributory defined benefit pension plans which provide retirement
benefits for most of its employees. Plan benefits are generally based on years
of service, age at retirement and employees' compensation. For Sun's principal
defined benefit pension plans, the benefit for employees hired prior to Janu-
ary 1, 1987 is determined based on either final or total career average com-
pensation, whichever produces the greater benefit. For employees hired on or
after January 1, 1987, the benefit is determined based on total career average
compensation. It is Sun's policy to fund defined benefit pension contribu-
tions, at a minimum, in accordance with the requirements of the Internal Reve-
nue Code. Pension expense consisted of the following components:
(Millions of Dollars) 1996 1995 1994
- ----------------------------------------------------------------------------
Service cost (cost of benefits earned during the year) $ 29 $ 26 $ 27
Interest cost on projected benefit obligation 91 97 89
Actual return on plan assets* (132) (241) (9)
Net amortization and deferral* 26 134 (95)
- ----------------------------------------------------------------------------
$ 14 $ 16** $ 12
- ----------------------------------------------------------------------------
*Estimated returns on assets are used in determining net periodic pension
cost. Differences between estimated and actual returns are included in net
amortization and deferral. Also included in net amortization and deferral are
amortization of the unrecognized net asset or obligation at January 1, 1986
and amortization of the unrecognized prior service cost and unrecognized net
gain or loss as of the beginning of each year.
**Excludes a $1 million curtailment gain recognized in connection with the em-
ployee termination program implemented during 1995 (Note 2).
The following table sets forth the funded status of the plans and amounts rec-
ognized in the balance sheets at:
DECEMBER 31, 1996 December 31, 1995
------------------------------ ------------------------------
Plans in Which Plans in Which Plans in Which Plans in Which
Assets Exceed Accumulated Assets Exceed Accumulated
Accumulated Benefits Accumulated Benefits
(Millions of Dollars) Benefits Exceed Assets Benefits Exceed Assets
- -----------------------------------------------------------------------------------------
Actuarial present value
of benefit obligation:
Vested $ 861 $212 $ 867 $253
Nonvested 40 18 36 21
- -----------------------------------------------------------------------------------------
Accumulated benefit ob-
ligation 901 230 903 274
Effect of projected fu-
ture salary increases 89 22 107 25
- -----------------------------------------------------------------------------------------
Projected benefit obli-
gation 990 252 1,010 299
Less plan assets at fair
value* 1,137 105 1,080 132
- -----------------------------------------------------------------------------------------
Projected benefit obli-
gation in excess of
(less than) plan assets (147) 147 (70) 167
Unrecognized net asset
(obligation) at January
1, 1986 43 (14) 56 (17)
Unrecognized prior serv-
ice cost (15) -- (15) --
Unrecognized net gain
(loss) 76 (27) (8) (46)
Additional minimum lia-
bility** -- 40 -- 50
- -----------------------------------------------------------------------------------------
Pension liability (as-
set) $ (43) $146 $ (37) $154
- -----------------------------------------------------------------------------------------
*Plan assets consist principally of commingled trust funds, marketable equity
securities, corporate and government debt securities and real estate. Less
than 1 percent of plan assets was invested in Company common and preference
stock at both December 31, 1996 and 1995.
**An equivalent intangible asset is included in deferred charges and other as-
sets in the consolidated balance sheets.
42
As of December 31, 1996 and 1995, the projected benefit obligations were de-
termined using weighted average assumed discount rates of 7.5 and 7.0 percent,
respectively, and a rate of compensation increase of 4.0 percent. The weighted
average expected long-term rate of return on plan assets was 9.0 percent in
1996 and 9.25 percent in 1995. All of these rates are subject to change in the
future as economic conditions change.
DEFINED CONTRIBUTION PENSION PLANS
Sun has defined contribution pension plans which provide retirement benefits
for most of its employees. Sun's contributions, which are principally based on
a percentage of employees' annual compensation and are charged against income
as incurred, amounted to $18, $18 and $14 million in 1996, 1995 and 1994, re-
spectively.
Sun's principal defined contribution plan is the Sun Company, Inc. Capital Ac-
cumulation Plan ("Suncap"). Sun matches 100 percent of employee contributions
to the plan up to 5 percent of an employee's base compensation. Suncap is a
combined profit sharing and employee stock ownership plan which contains a
provision designed to permit Suncap, only upon approval by the Company's Board
of Directors, to borrow in order to purchase shares of Company common stock.
As of December 31, 1996, no such borrowings had been approved.
POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS
Sun has plans which provide health care and life insurance benefits for sub-
stantially all retirees. Such benefits are provided through insurance policies
which have premiums based on benefits paid during the year. The plans are un-
funded and the costs are shared by Sun and its retirees. Postretirement bene-
fits expense consisted of the following components:
(Millions of Dollars) 1996 1995 1994
- -------------------------------------------------------------------------------
Service cost (cost of benefits earned
during the year) $ 5 $ 5 $ 4
Interest cost on accumulated postretirement benefit obliga-
tion 23 23 18
Net amortization* (9) (10) (8)
- -------------------------------------------------------------------------------
$19 $ 18** $14
- -------------------------------------------------------------------------------
*Consists of amortization of the unrecognized prior service benefit and the
unrecognized net gain or loss.
**Excludes a $4 million curtailment gain recognized in connection with the
employee termination program implemented during 1995 (Note 2).
The following table sets forth the funded status of the plans and amounts rec-
ognized in the balance sheets at:
December 31
------------
(Millions of Dollars) 1996 1995
- --------------------------------------------------------
Accumulated postretirement benefit
obligation ("apbo"):
Retirees $ 223 $220
Fully eligible active participants 27 26
Other active participants 82 93
- --------------------------------------------------------
332 339
Unrecognized prior service benefit 63 60
Unrecognized net loss (9) (10)
- --------------------------------------------------------
Accrued postretirement benefit obligation $ 386 $389
- --------------------------------------------------------
As of December 31, 1996 and 1995, the apbo was determined using weighted aver-
age assumed discount rates of 7.5 and 7.0 percent, respectively. The health
care cost trend assumptions used at December 31, 1996 and 1995 were 7.3 and
9.0 percent, respectively, which are assumed to decline gradually to 5.5 per-
cent in 2001 and to remain at that level thereafter. All of these rates are
subject to change in the future as economic conditions change. An increase in
the assumed health care cost trend rate by one percentage point in each year
would have increased the apbo by $6 million at December 31, 1996 and would
have increased the service and interest components of postretirement benefits
expense in the aggregate by $1 million for each of the three years in the pe-
riod ending December 31, 1996.
12. COMMITMENTS AND CONTINGENT LIABILITIES
Sun, as lessee, has noncancelable operating leases for marine transportation
time charters and for service stations, office space and other property and
equipment. Total rental expense for such leases for the years 1996, 1995 and
1994 amounted to $97, $102 and $103 million, respectively. Approximately 10
percent of total rental expense was recovered through related rental income
from subleases during 1996. Under contracts existing as of December 31, 1996,
future minimum annual rentals applicable to noncancelable operating leases are
as follows (in millions of dollars):
- ------------------------------
Year ending December 31:
1997 $ 70
1998 51
1999 41
2000 34
2001 31
Thereafter 233
- ------------------------------
$460
- ------------------------------
A wholly owned subsidiary of the Company is a one-third partner in Belvieu En-
vironmental Fuels ("bef"), a joint venture formed
43
for the purpose of constructing, owning and operating a $225 million methyl
tertiary butyl ether ("mtbe") production facility in Mont Belvieu, Texas. The
facility was completed in 1995.
In order to obtain a secure supply of oxygenates for the manufacture of refor-
mulated gasoline, Sun entered into an off-take agreement with bef whereby Sun
agreed to purchase all of the mtbe production from the plant. For the first
14,000 barrels daily of production, Sun has agreed to pay bef prices through
May 1997 based on the market value of mtbe feedstocks (methanol and butane)
plus a fixed amount per gallon (the "formula price"), and thereafter through
May 2000 based on the then-existing mtbe prices per gallon in the contract
market (the "contract market price"). However, the price to be paid by Sun for
the first 12,600 barrels daily of mtbe production through May 2000, at a mini-
mum, will equal the sum of bef's annual raw material and operating costs asso-
ciated with this production plus bef's debt service payments (collectively,
the "minimum price") if the minimum price per gallon exceeds the formula price
or contract market price. After May 2000, Sun and bef will negotiate a new
price for the last four years of the agreement based upon the market condi-
tions existing at that time.
Historically, the formula prices paid by Sun under this agreement are believed
to have approximated those of other mtbe long-term sales agreements in the
marketplace. Management now believes that the contract market has changed as
feedstock-plus-fixed-priced contracts have expired and have been replaced by
spot-market-price-based contracts, which are currently more favorable to the
purchaser. Management also believes that the spot market for mtbe is now de-
veloped.
Sun's total mtbe purchases under this agreement were $214, $150 and $79 mil-
lion during 1996, 1995 and 1994, respectively. Recent spot market prices for
mtbe have been less than the prices paid by Sun under the off-take agreement.
The Company expects this adverse relationship to continue in the future. Ac-
cordingly, a $130 million accrual ($85 million after tax) was established at
December 31, 1996 for the estimated losses expected to be realized with re-
spect to this agreement.
The Company guarantees the $109 million of outstanding debt of Radnor Corpora-
tion, its real estate operation held for sale. Such debt, which is due no
later than February 2001, is expected to be substantially repaid by the end of
1998 with proceeds from the disposal of the Company's remaining real estate
portfolio (Note 2). Sun is also contingently liable under various other ar-
rangements which guarantee debt of affiliated companies and others aggregating
approximately $26 million at December 31, 1996 and maturing at various dates
through 2014.
Sun is subject to numerous federal, state and local laws regulating the dis-
charge of materials into, or otherwise relating to the protection of, the en-
vironment. These laws result in loss contingencies for remediation at Sun's
facilities, including refineries, service stations, terminals, pipelines and
truck transportation facilities as well as at third-party or formerly owned
sites at which contaminants generated by Sun may be located. The accrued lia-
bility for environmental remediation is classified in the consolidated balance
sheets as follows:
December 31
-----------
(Millions of Dollars) 1996 1995
- ---------------------------------------------------
Accrued liabilities $ 77 $ 55
Other deferred credits and liabilities 150 144
- ---------------------------------------------------
$ 227 $199
- ---------------------------------------------------
Pretax charges against income for environmental remediation totalled $56, $12
and $11 million in 1996, 1995 and 1994, respectively. The $44 million increase
in 1996 was largely attributable to accruals for remediation activities asso-
ciated with the reconfigurations of the Philadelphia and Puerto Rico refin-
eries as well as to increased accruals at service station sites (Note 2). The
1996 service station accruals have been determined utilizing recent regulatory
changes which incorporate a risk-based methodology and clarify previously un-
certain remediation requirements. Claims for recovery of environmental liabil-
ities that are probable of realization, which totalled $4 million at December
31, 1996, are included in deferred charges and other assets in the consoli-
dated balance sheets.
Total future costs for environmental remediation activities will depend upon,
among other things, the identification of 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 ex-
isting legal requirements, the nature and extent of future environmental laws,
inflation rates and the determination of Sun's liability at multi-party sites,
if any, in light of the number, participation levels and financial viability
of other parties.
Many other legal and administrative proceedings are pending against Sun. The
ultimate outcome of these proceedings and the matters discussed above cannot
be ascertained at this time; however, it is reasonably possible that some of
them could be resolved unfavorably to Sun. Management believes that any expen-
ditures attributable to these matters will be incurred over an extended period
of time and will be funded from Sun's net cash flow from operating activities.
Although the ultimate impact of these matters could have a significant impact
on results of operations for any one year, management of Sun believes that any
additional liabilities which may arise pertaining to such matters would not be
material in relation to the consolidated financial position of Sun at December
31, 1996.
13. SHAREHOLDERS' EQUITY
Each share of Company common stock is entitled to one full vote. The $10 mil-
lion of outstanding 6 3/4 percent debentures are convertible into shares of
common stock of the Company at any time prior to maturity at a conversion
price of $40.81 per share and are redeemable at the option of the Company. At
December 31, 1996, there were 246,166 shares of common stock reserved for this
potential conversion (Note 10).
44
In June 1995, the Company announced the details of an extensive operational
and financial restructuring. As part of this restructuring, on August 3, 1995,
the Company issued 25,000,000 "depositary shares" in exchange for an equal
number of shares of Company common stock in a tax free transaction. Each de-
positary share represents ownership of one-half share of the Company's Series
A cumulative preference stock. The Company also reduced the quarterly dividend
paid on common stock from $.45 per share ($1.80 per year) to $.25 per share
($1.00 per year). In addition, the Company repurchased 6,400,000 shares of its
common stock on August 9, 1995 for $192 million through a tender offer and
2,910,300 shares of common stock and 78,900 depositary shares during the 1995-
96 period subsequent to the exchange and tender offers on the open market for
approximately $79 million. The open market purchases were made under a program
authorized by the Company's Board of Directors ("Board") to purchase up to
$100 million of stock in the open market from time to time depending on pre-
vailing market conditions.
Each owner of a depositary share is entitled, proportionately, to all the
rights, preferences and privileges of the preference stock represented there-
by. Dividends on the preference stock are cumulative and accrue at a rate of
$3.60 per year. The preference stock ranks prior to common stock with respect
to dividend rights and rights upon liquidation, dissolution and winding up of
the Company. Each share of preference stock has a liquidation preference equal
to $60.00, which is twice the fair market value of a depositary share at its
date of issuance, plus accrued and unpaid dividends. The holders of preference
stock vote together with the holders of common stock as a single class, and
are entitled to one full vote for each share of preference stock owned.
The outstanding shares of preference stock are redeemable at any time by the
Company, in whole or in part, for common stock at a value initially equal to
approximately $84.80 per share of preference stock at June 12, 1995, decreas-
ing ratably to $80.00 per share of preference stock at June 11, 1998. After
June 11, 1998, the Company may elect to redeem each outstanding share of pref-
erence stock for two shares of common stock, subject to adjustment in certain
events. The redemption value also includes a cash amount equal to all propor-
tionate accrued but unpaid dividends. The Company currently intends to redeem
all of the outstanding preference stock (and thereby the depositary shares) no
later than June 12, 1998.
The Company's Articles of Incorporation authorize the issuance of up to
2,500,000 shares of additional classes of preference stock without par value,
subject to approval by the Board. The Board also has authority to fix the num-
ber, designation, rights, preferences and limitations of these shares, subject
to applicable laws and the provisions of the Articles of Incorporation.
On February 1, 1996, the Company adopted a shareholder rights plan and desig-
nated 1,743,019 shares of its remaining 2,500,000 authorized cumulative pref-
erence stock as Series B participating cumulative preference stock. Pursuant
to the plan, the Company declared a dividend of one stock purchase right
("Right") for each share of common stock and two Rights for each share of Se-
ries A cumulative preference stock outstanding on February 12, 1996. A Right
will be granted for each share of common stock issued after such date and
prior to the expiration date of the rights plan. Generally, the Rights become
exercisable a specified period after a party acquires 15 percent or more of
the aggregate outstanding common stock and Series A cumulative preference
stock (collectively, "Voting Stock") or announces a tender offer for 15 per-
cent or more of the Voting Stock. Each Right initially entitles a holder to
purchase one one-hundredth of a share of the Series B participating cumulative
preference stock for $100. After a party has acquired 15 percent or more of
the Voting Stock, each Right will entitle a holder to pay $100 for the number
of shares of Company common stock (or in certain situations, common stock of
the acquiring party) having a then current market value of $200. Alternative-
ly, the Company has the option to exchange one share of Company common stock
for each Right at any time after a party has acquired at least 15 percent but
less than 50 percent of the Voting Stock. The Company may redeem each Right
for $.01 per Right at any time until the end of a specified period after a
party has acquired 15 percent or more of the Voting Stock. In general, none of
the benefits of the Rights will be available to a holder of 15 percent or more
of the Voting Stock. The Rights will expire on February 12, 2006, unless ear-
lier exchanged or redeemed.
In December 1992, the Board approved the adoption of the Employee Option Plan
("eop") which provides for the award of stock options to all employees (other
than executives) of the Company and certain subsidiaries. The awards have a
ten-year term, are not exercisable until two years after the date of grant and
permit optionees to purchase Company common stock at the fair market value on
the date of grant. Two million shares of Company common stock are authorized
for issuance under the eop. In 1994 and 1993, stock option awards totalling
241,895 and 1,721,385, respectively, were made to eligible employees.
14. MANAGEMENT INCENTIVE PLANS
Sun's principal management incentive plans are the Executive Incentive Plan
("eip") and the Executive Long-Term Stock Investment Plan ("elsip"). The eip
provides for the payment of annual incentive awards in cash or Company common
stock and the elsip provides for the award of stock options and related rights
to officers and other key employees of Sun. The option awards under elsip and
its predecessor plan have a ten-year term and permit optionees to purchase
Company common stock at the fair market value on the date of grant. No awards
may be granted under elsip after December 31, 1996. Aggregate charges against
income for annual incentive awards for 1995 and 1994 were $4 and $2 million,
respectively. There were no charges against income for annual incentive awards
in 1996.
On November 7, 1996, the Board recommended the adoption of the Long-Term Per-
formance Enhancement Plan ("ltpep") as a successor to elsip. ltpep, which au-
thorizes the use of 4,000,000 shares of common stock for awards with terms and
conditions
45
similar to awards under elsip, is subject to shareholder approval at the
Company's Annual Meeting of Shareholders in May 1997. The following table sum-
marizes information with respect to common stock option awards under the eop
(Note 13) and Sun's management incentive plans:
Employee Option Plan Management Incentive Plans
------------------------ ---------------------------------
Weighted
Shares Option Shares Average
Under Price Under Option Price
Option Per Share Option Per Share
- -------------------------------------------------------------------------------------
OUTSTANDING, DECEMBER
31, 1993 1,663,675 $28.00 3,281,460 $30.65
Granted 241,895 $28.00 626,210 $30.19
Exercised -- (219,318)* $29.08
Canceled (30,590) $28.00 (303,465) $32.34
- -------------------------------------------------------------------------------------
OUTSTANDING, DECEMBER
31, 1994 1,874,980 $28.00 3,384,887 $30.52
Granted -- 687,990 $27.25
Exercised (135,920) $28.00 (53,770) $28.43
Canceled (88,230) $28.00 (394,740) $31.31
- -------------------------------------------------------------------------------------
OUTSTANDING, DECEMBER
31, 1995 1,650,830 $28.00 3,624,367 $29.84
Granted -- 646,140 $24.48
Exercised (88,485) $28.00 (72,435) $28.15
Canceled (74,870) $28.00 (208,272) $30.59
- -------------------------------------------------------------------------------------
OUTSTANDING, DECEMBER
31, 1996** 1,487,475 $28.00 3,989,800 $28.96
- -------------------------------------------------------------------------------------
EXERCISABLE, DECEMBER 31
- -------------------------------------------------------------------------------------
1994 -- 2,687,316 $30.66
1995 1,408,935 $28.00 2,941,577 $30.44
1996 1,487,475 $28.00 3,354,340 $29.83
- -------------------------------------------------------------------------------------
AVAILABLE FOR GRANT, DE-
CEMBER 31
- -------------------------------------------------------------------------------------
1994 125,020 3,493,920
1995 213,250 2,891,220
1996 288,120 --
- -------------------------------------------------------------------------------------
*Includes 23,023 options canceled due to the exercise of related alternate
appreciation rights which resulted in the issuance of 1,939 shares. Alternate
appreciation rights permit the optionee to receive in cash or common stock
the appreciation of Company common stock from the date of grant. In addition,
1,600 1,970 and 10,480 shares were issued for matured restricted stock units
during 1996, 1995 and 1994, respectively. Restricted stock units are awards
which entitle the holder to receive cash or Company common stock upon comple-
tion of a restriction period or upon attainment of predetermined performance
targets.
**Exercise prices for options outstanding as of December 31, 1996 ranged from
$23.25 to $41.13 per share. The weighted average remaining contractual life of
these options is approximately 7 years.
The Company follows the method of accounting for employee stock compensation
plans prescribed by apb no. 25, which is permitted by Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("sfas
no. 123"). In accordance with apb no. 25, the Company has not recognized com-
pensation expense for stock options because the exercise price of the options
equals the market price of the underlying stock on the date of grant, which is
the measurement date. If the alternative method of accounting for employee
stock compensation plans prescribed by sfas no. 123 had been followed, the im-
pact on Sun's net income (loss) and net income (loss) per share of common
stock for 1996 and 1995 would not have been material.
15. FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments has been determined based on
the Company's assessment of available market information and appropriate valu-
ation methodologies. However, these estimates may not necessarily be indica-
tive of the amounts that the Company could realize in a current market ex-
change.
Sun's current assets (other than inventories, deferred income taxes and in-
vestment in discontinued operations) and current liabilities are financial in-
struments. The estimated fair value of these financial instruments approxi-
mates their carrying amounts. At December 31, 1996 and 1995, the estimated
fair value of Sun's long-term debt amounted to $903 and $1,008 million, re-
spectively, compared to carrying amounts totalling $835 and $888 million, re-
spectively. Long-term debt which is publicly traded was valued based on quoted
market prices while the fair value of other debt issues
46
was estimated by management based upon current interest rates available to Sun
at the respective balance sheet dates for similar issues.
The Company guarantees the debt of affiliated companies and others (Note 12).
Due to the complexity of these guarantees and the absence of any market for
these financial instruments, the Company does not believe it is practicable to
estimate their fair value.
Sun uses a variety of off-balance sheet commodity-based derivative financial
and nonfinancial instruments to hedge the impact of fluctuations in crude oil,
natural gas and refined product prices. Derivative financial instruments re-
quire settlement in cash and include such instruments as over-the-counter
("otc") commodity swap agreements, otc commodity options and certain exchange-
traded futures. Certain other futures contracts and all of Sun's forward con-
tracts are not financial instruments as they require or permit settlement by
delivery of commodities. Sun is at risk for possible changes in the market
value for all of its derivative instruments. However, it is anticipated that
such risk would be mitigated by price changes in the underlying hedged transac-
tions. In addition, Sun is exposed to credit risk in the event of nonperform-
ance by counterparties. Management believes this risk is negligible as its
counterparties are regulated by exchanges or they are major international fi-
nancial institutions with high credit ratings. Market and credit risks associ-
ated with all of Sun's derivative contracts are reviewed regularly by manage-
ment.
Swaps, price collars and other option contracts are used to hedge the unfavor-
able impact on feedstock costs of significant increases in crude oil prices. At
December 31, 1996, approximately 13 million barrels of Sun's expected 1997
crude oil purchases had been hedged utilizing these financial instruments.
Swaps are also used to lock in what Sun considers to be acceptable wholesale
margins for various refined products. At December 31, 1996, Sun locked in mar-
gins for approximately 20 million barrels of its expected 1997 wholesale fuel
sales. The swap and option contracts vary in duration but do not extend beyond
1997. Although these contracts are intended to limit the Company's exposure to
declining margins and/or rising crude oil prices, they could limit the
Company's participation in rising margins and/or falling crude oil prices. In
addition, Sun uses futures and forward contracts to achieve ratable pricing of
its crude oil purchases and refined product sales. The fair value of the deriv-
ative contracts outstanding at December 31, 1996 under the ratable pricing pro-
gram was not significant.
The following table sets forth summary information concerning Sun's derivative
financial instruments at December 31, 1996:
Deferred Fair
(Millions of Dollars) Gain Value*
- -------------------------------------------
Swaps $ 6 $ 6
Options 8 8
Futures -- --
- -------------------------------------------
$14 $14
- -------------------------------------------
*Based on various indices or dealer quotes.
16. SUPPLEMENTAL CASH FLOW INFORMATION
During 1996, Sun acquired the Kendall/Amalie lubricants business and related
working capital and in 1994, Sun acquired the Girard Point refinery, related
inventory and certain pipeline interests (Note 2). The following is a summary
of the effects of these transactions on Sun's consolidated financial position:
Kendall/
Amalie Girard Point
(Millions of Dollars) Acquisition Acquisition
- ---------------------------------------------------------------------
Increase in:
Accounts and notes receivable $(30) $ --
Inventories (16) (108)
Properties, plants and equipment (16) (149)
Deferred charges and other assets (12) --
Accounts payable and accrued liabilities -- 10
Retirement benefit liabilities -- 22
Other deferred credits and liabilities -- 61
- ---------------------------------------------------------------------
Net decrease in cash and cash equivalents $(74) $(164)
- ---------------------------------------------------------------------
In 1995, Sun transferred an interest in its cokemaking operations in exchange
for $95 million in cash. The transferee is entitled to a preferential return
from the cash flows of the cokemaking operation until certain cumulative return
targets have been met. Sun did not recognize a gain or loss on this transac-
tion. The transaction has not had a significant impact on Sun's results of op-
erations.
Cash payments for income taxes were $7, $41 and $40 million in 1996, 1995 and
1994, respectively. Cash payments for interest, net of amounts capitalized,
were $74, $95 and $64 million in 1996, 1995 and 1994, respectively.
17. BUSINESS SEGMENT INFORMATION
Sun is principally a petroleum refiner and marketer with interests in coal min-
ing and cokemaking. Sun also has an investment in real estate operations held
for sale.
Sun's petroleum refining and marketing operations include the refining of crude
oil and its derivatives; the marketing of crude oil and a full range of petro-
leum products, including fuels, lubricants and petrochemicals; and the trans-
portation of crude oil and refined products. Such operations are currently con-
ducted
47
principally in the eastern half of the United States. Sun's coal mining and
cokemaking operations are conducted in Virginia and Kentucky. Corporate in-
cludes Sun's domestic real estate operations held for sale, and prior to 1995,
coal operations and equipment leasing and secured lending activities. In 1995
and 1996, Sun's coal mining and cokemaking business is reflected as a separate
business segment as it is now considered one of Sun's ongoing business units
and is no longer being held for sale (Note 2). At December 31, 1994, Sun had
substantially liquidated its remaining portfolio of leases and secured loans.
On September 30, 1996, Sun completed the sale of its International Production
business and on June 8, 1995, divested its remaining interest in Suncor, a Ca-
nadian integrated oil company. As a result, Sun's international oil and gas
production and Canadian upstream petroleum operations, which previously were
included in segments entitled Exploration and Production and Oil Sands Mining
and also disclosed in geographic areas outside the United States, are presented
as discontinued operations for all periods, as these divestments resulted in
the Company's complete withdrawal from upstream petroleum activities.
SEGMENT INFORMATION
(Millions of Dollars)
Refining and Coal Mining and
Marketing Cokemaking Corporate Consolidated
- -------------------------------------------------------------------------------------
1996
Sales to unaffiliated
customers and other
operating
revenue (including
consumer excise taxes) $11,068 $165 $ -- $11,233
- -------------------------------------------------------------------------------------
Operating profit (loss) $ (364) $ 39 $ -- $ (325)
Equity income 24 -- -- 24
Related income tax (ex-
pense) benefit 98 (8) -- 90
- -------------------------------------------------------------------------------------
Profit contribution
(loss) before net fi-
nancing
expenses and after tax $ (242)* $ 31 $ -- (211)
- -----------------------------------------------------------------------
Corporate expenses (af-
ter taxes) (23)
Net financing expenses
(after taxes) (47)
Income from discontinued
operations 166**
-------
Net loss $ (115)
-------
Depreciation, depletion
and amortization $ 250 $ 17 $ -- $ 267
- -------------------------------------------------------------------------------------
Capital expenditures $ 374 $ 34 $ -- $ 408
- -------------------------------------------------------------------------------------
Identifiable assets $ 4,526 $140 $359*** $ 5,025
- -------------------------------------------------------------------------------------
* Includes after-tax provision for write-down of assets and other matters of
$254 million (Notes 2 and 12).
** Consists of income from international production operations, including a
$125 million after-tax gain resulting from the divestment of this business
(Note 2).
*** Includes investment in real estate operations held for sale of $79 million
(Note 2).
48
SEGMENT INFORMATION
(Millions of Dollars)
Coal
Refining and Mining and
Marketing Cokemaking*Corporate Consolidated
- -----------------------------------------------------------------------------------
1995
Sales to unaffiliated
customers and other op-
erating
revenue (including con-
sumer excise taxes) $9,747 $ 87 $ -- $9,834
- -----------------------------------------------------------------------------------
Operating profit (loss) $ 45 $ 22 $ (8) $ 59
Equity income 17 -- -- 17
Related income tax (ex-
pense) benefit (11) 3 3 (5)
- -----------------------------------------------------------------------------------
Profit contribution
(loss) before net fi-
nancing
expenses and after
tax** $ 51 $ 25 $ (5) 71
- ----------------------------------------------------------------------
Corporate expenses (af-
ter taxes) (24)
Net financing expenses
(after taxes) (55)
Income from discontinued
operations 235***
Cumulative effect of
change in accounting
principle (87)+
------
Net income $ 140
------
Depreciation, depletion
and amortization $ 253 $ 10 $ -- $ 263
- -----------------------------------------------------------------------------------
Capital expenditures $ 410 $ 7 $ -- $ 417
- -----------------------------------------------------------------------------------
Identifiable assets $4,397 $143 $545++ $5,085
- -----------------------------------------------------------------------------------
* Reflects coal and cokemaking operations as an operation held for sale for the
first half of 1995 and on a fully consolidated basis thereafter. Accordingly,
the amounts presented for sales and other operating revenue, depreciation,
depletion and amortization and capital expenditures are for the second half
of 1995 (Note 2).
** Includes after-tax provision for write-down of assets and other matters of
$57 million in refining and marketing and $4 million in corporate. In addi-
tion, corporate includes a $1 million loss from real estate operations held
for sale (Note 2).
*** Consists of $57 million of income from international production operations
and $178 million of income from Canadian upstream petroleum operations. In-
cluded in the Canadian income is a $157 million after-tax gain resulting
from the completion of the divestment of Suncor (Note 2).
+ Reflects the cumulative effect for years prior to 1995 of a change in the
method of accounting for the impairment of long-lived assets (Note 3).
++ Includes investments in real estate operations held for sale of $87 million
and discontinued international production operations of $143 million (Note
2).
Refining and
Marketing Corporate Consolidated
- -------------------------------------------------------------------------------
1994
Sales to unaffiliated customers and
other operating
revenue (including consumer excise
taxes) $9,502 $ 11 $9,513
- -------------------------------------------------------------------------------
Operating profit (loss) $ 41 $(34) $ 7
Equity income 13 -- 13
Related income tax (expense) benefit (15) 34 19
- -------------------------------------------------------------------------------
Profit contribution before net fi-
nancing
expenses and after tax* $ 39 $ --** 39
- ------------------------------------------------------------------
Corporate expenses (after taxes) (23)
Net financing expenses (after taxes) (35)**
Income from discontinued operations 116***
Cumulative effect of change in ac-
counting principle (7)+
------
Net income $ 90
------
Depreciation, depletion and amorti-
zation $ 246 $ -- $ 246
- -------------------------------------------------------------------------------
Capital expenditures $ 550 $ -- $ 550
- -------------------------------------------------------------------------------
Identifiable assets $4,807 $839++ $5,646
- --------------------------------------------------------------------------------
* Includes after-tax provision for write-down of assets and other matters of
$12 million in refining and marketing and $20 million in corporate (Note 2).
** Net financing expenses of leasing operations are included in corporate. In
addition, corporate includes income from coal and real estate operations
held for sale of $15 and $2 million, respectively (Note 2).
*** Consists of $88 million of income from international production operations
and $28 million from Canadian upstream petroleum operations (Note 2).
+ Reflects the cumulative effect for years prior to 1994 of a change in the
method of accounting for postemployment benefits (Note 3).
++ Includes investments in coal and real estate operations held for sale of $51
and $123 million, respectively. Also includes investments in discontinued
international production and Canadian upstream petroleum operations of $171
and $225 million, respectively (Note 2).
49
Prior to completion of the divestment of Suncor on June 8, 1995, Canadian re-
fining and marketing activities were reflected in continuing operations as part
of the refining and marketing segment and also disclosed as part of the Cana-
dian geographic information. The following is a summary of the amounts related
to Canadian downstream operations included in the refining and marketing indus-
try segment:
(Millions of Dollars) 1995 1994
- --------------------------------------------------------------------------
Sales to unaffiliated customers and other operating revenue $558 $1,333
- --------------------------------------------------------------------------
Operating profit $ 5 $ 24
Equity income -- 1
Related income tax expense (3) (16)
- --------------------------------------------------------------------------
Profit contribution $ 2 $ 9
- --------------------------------------------------------------------------
Depreciation, depletion and amortization $ 11 $ 28
- --------------------------------------------------------------------------
Capital expenditures $ 8 $ 22
- --------------------------------------------------------------------------
Identifiable assets $ -- $ 626
- --------------------------------------------------------------------------
Income tax amounts give effect to tax credits in each of the designated indus-
try segments. Overhead expenses that can be identified with Sun's operations in
the designated industry segments have been included as deductions in determin-
ing operating profits and profit contributions. Net financing expenses consist
of interest cost and debt expense less interest income and interest capital-
ized. Identifiable assets are those assets that are utilized within a specific
segment.
50
REPORT OF MANAGEMENT
To the Shareholders of Sun Company, Inc.
The accompanying consolidated financial statements of Sun Company, Inc. and
its subsidiaries ("Sun") and the related information are the responsibility of
management. The financial statements, which include amounts based on informed
estimates and judgments, were prepared using generally accepted accounting
principles deemed appropriate in the circumstances. Management believes these
financial statements present fairly, in all material respects, Sun's financial
position, results of operations and cash flows. Other financial information
presented in this Annual Report is consistent with that in the financial
statements.
To fulfill its responsibility for the financial statements, Sun maintains a
system of internal accounting controls which in management's opinion provides
reasonable assurance of achieving the objectives of internal accounting con-
trol. These objectives include safeguarding of assets from loss through unau-
thorized use or disposition and maintaining reliable records permitting the
preparation of financial statements and accountability for assets. The system
of internal accounting controls is subject to ongoing evaluation of its con-
tinuing effectiveness.
Sun's independent auditors, Ernst & Young LLP, have expressed an opinion on
the fairness of management's 1996 financial statements by conducting their au-
dit in accordance with generally accepted auditing standards and issuing the
report presented on this page.
The Audit Committee of the Board of Directors is comprised of directors who
are not employees of Sun and meets a minimum of four times annually. It as-
sists the Board of Directors in discharging its duties relating to accounting
and reporting practices and internal controls, and it assesses the performance
and recommends the appointment of independent auditors. Both the independent
auditors and Sun's internal auditors have unrestricted access to the Committee
to discuss audit findings and other financial matters.
/s/ Robert H. Campbell
ROBERT H. CAMPBELL
Chairman & Chief Executive Officer
/s/ Robert M. Aiken, Jr.
ROBERT M. AIKEN, JR.
Executive Vice President & Chief Financial Officer
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors, Sun Company, Inc.
We have audited the accompanying consolidated balance sheet of Sun Company,
Inc. and subsidiaries as of December 31, 1996, and the related consolidated
statements of operations, changes in shareholders' equity and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these fi-
nancial statements based on our audit. The consolidated balance sheet as of
December 31, 1995 and the consolidated statements of operations, changes in
shareholders' equity and cash flows for each of the two years in the period
ended December 31, 1995 were audited by other auditors whose report dated Feb-
ruary 13, 1996 (except for the restatement for discontinued operations as de-
scribed in Note 2 for which the date is February 13, 1997) expressed an un-
qualified opinion on those financial statements and included an explanatory
paragraph that disclosed the changes in the Company's method of accounting for
the impairment of long-lived assets in 1995 and its method of accounting for
postemployment benefits in 1994, discussed in Note 3 to these financial state-
ments.
We conducted our audit in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of mate-
rial misstatement. An audit includes examining, on a test basis, evidence sup-
porting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement pre-
sentation. We believe that our audit provides a reasonable basis for our opin-
ion.
In our opinion, the 1996 financial statements referred to above present fair-
ly, in all material respects, the consolidated financial position of Sun Com-
pany, Inc. and subsidiaries at December 31, 1996 and the consolidated results
of their operations and their cash flows for the year then ended, in confor-
mity with generally accepted accounting principles.
/s/ Ernst & Young LLP
February 13, 1997
51
SUPPLEMENTAL FINANCIAL AND OPERATING INFORMATION (Unaudited)
DOMESTIC REFINING AND MARKETING DATA
REFINERY UTILIZATION* 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------
Refinery crude unit capacity at Decem-
ber 31 777.0** 777.0 777.0 600.0 600.0
- -------------------------------------------------------------------------------
Total input to crude units:
Crude oil 691.4 673.9 551.4 465.8 530.8
Other feedstocks 29.6 26.5 39.2 36.3 6.0
- -------------------------------------------------------------------------------
721.0 700.4 590.6*** 502.1 536.8
- -------------------------------------------------------------------------------
Refinery crude unit capacity utilized 93% 90% 88% 84% 89%
- -------------------------------------------------------------------------------
* Thousands of barrels daily except percentages. Reflects the acquisition on
August 4, 1994 of the 177.0 thousand barrel-per-day Girard Point refining fa-
cilities.
** Sun's crude unit capacity will decrease 85 thousand barrels per day in con-
nection with a project to be completed in the first quarter of 1997 to
reconfigure the Puerto Rico refinery to process intermediate feedstocks in-
stead of crude oil. This will result in a significant reduction in fuels
production while maintaining the current volume and quality of lubricants
production at this facility.
*** Includes 78.9 thousand barrels daily attributable to the Girard Point re-
fining facilities and reflects total input at Girard Point from August 4,
1994 through December 31, 1994 divided by 365 days. During this 150-day pe-
riod, input to crude units at these facilities actually totalled 191.9
thousand barrels daily.
REFINED PRODUCT SALES* 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------
Gasoline:
Wholesale 167.0 154.0 95.1 56.7 80.0
Retail 205.7 204.6 214.9 223.6 233.9
Middle distillates 219.9 210.9 186.6 161.8 169.0
Residual fuel 82.4 73.9 51.5 40.8 50.5
Petrochemicals 31.5 31.1 27.5 28.8 28.9
Lubricants 23.9 20.0 22.3 19.5 19.6
Asphalt** 18.3 26.7 29.3 29.9 29.3
Other 46.1 56.6 50.3 34.5 34.6
- -------------------------------------------------------------------------------
794.8 777.8 677.5 595.6 645.8
- -------------------------------------------------------------------------------
* Thousands of barrels daily to third parties.
** Sun withdrew from the asphalt business in December 1996.
REFINED PRODUCT MARGIN INFORMATION* 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------
Average sales price $28.65 $25.26 $24.31 $25.39 $26.47
Average cost of products sold** 23.59 19.95 18.70 19.08 20.96
- -------------------------------------------------------------------------------
$ 5.06 $ 5.31 $ 5.61 $ 6.31 $ 5.51
- -------------------------------------------------------------------------------
* Dollars per barrel.
** Consists of crude oil and other purchased feedstocks and refined products.
RETAIL GASOLINE OUTLETS 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------
Direct outlets:
Company owned or leased 1,389 1,446 1,519 1,577 1,645
Dealer owned 562 611 658 741 880
- -------------------------------------------------------------------------------
Total direct outlets 1,951 2,057 2,177 2,318 2,525
Distributor outlets 1,855 1,804 1,938 2,124 2,864
- -------------------------------------------------------------------------------
3,806 3,861 4,115 4,442 5,389
- -------------------------------------------------------------------------------
52
THROUGHPUT PER DIRECT OUTLET* 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------
Company owned or leased 101.6 96.1 97.2 93.5 89.4
Dealer owned 74.1 71.3 70.3 63.6 58.6
- -------------------------------------------------------------------------------
Average-total direct outlets 93.6 88.6 88.8 83.5 78.3
- -------------------------------------------------------------------------------
*Thousands of gallons of gasoline monthly.
PIPELINE MILEAGE* 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------
Crude lines 5,119 5,264 5,577 5,579 5,493
Product lines 4,548 4,805 4,552 4,303 4,605
- -------------------------------------------------------------------------------
*Includes all pipelines in which Sun has an ownership interest.
COAL AND COKEMAKING DATA
1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------
Proven and probable coal reserves (mil-
lions of tons) at December 31:*
Bituminous:
Metallurgical 115 116 116 117 120
Steam 17 23** 71 134 197
Subbituminous -- -- -- -- 384
- -------------------------------------------------------------------------------
132 139 187 251 701
- -------------------------------------------------------------------------------
Proven coal reserves (million of tons) at
December 31 63 70 104 147 564
- -------------------------------------------------------------------------------
*Sun sold its western U.S. coal operations during 1993 and certain of its
eastern U.S. coal operations during 1994 which resulted in a reduction in
proven and probable reserves of 508 million tons in the 1993-94 period. (See
Note 2 to the consolidated financial statements.)
** Reflects a 45 million ton revision of previous estimates.
1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------
Production (thousands of tons):
Bituminous:
Metallurgical 1,490 1,627 1,633 1,959 2,047
Steam 2,926 3,494 4,962 6,209 7,265
Subbituminous -- -- -- 4,690 13,338
- -------------------------------------------------------------------------------
4,416 5,121 6,595 12,858 22,650
- -------------------------------------------------------------------------------
Coke 648 638 678 642 640
- -------------------------------------------------------------------------------
Sales (thousands of tons):
Bituminous:
Metallurgical 592 674 772 1,033 1,197
Steam 2,921 3,556 5,537 6,214 7,385
Subbituminous -- -- -- 4,690 13,338
- -------------------------------------------------------------------------------
3,513 4,230 6,309 11,937 21,920
- -------------------------------------------------------------------------------
Coke 621 660 782 622 634
- -------------------------------------------------------------------------------
Average sales price of coal and coke (per
ton)* $40.03 $37.65 $34.00 $21.49 $15.86
Net acreage (in thousands) at December
31:
Developed:
Bituminous 22 35 34 45 49
Subbituminous -- -- -- -- 8
Undeveloped bituminous 103 112 113 154 163
- -------------------------------------------------------------------------------
*Reflects the absence of lower-value subbituminous coal sales subsequent to
the divestment of Sun's western U.S. coal operations during 1993.
53
QUARTERLY FINANCIAL AND STOCK MARKET INFORMATION
(Millions of Dollars Except Per Share Amounts and Common Stock Prices)
1996 1995
-------------------------------------- ---------------------------------------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------
Sales and other
operating revenue
(including consumer
excise taxes) $ 2,460* $ 2,886 $2,874 $3,013 $2,477* $2,580 $2,347 $2,430
Gross profit** $112 $210 $148 $124 $142 $207 $263 $146
Income (loss) from
continuing operations
before cumulative
effect of change in
accounting principle $(24)*** $(22)+ $(11) $(224)++ $(36)*** $(43)+++ $70 $1
Income (loss) before
cumulative effect of
change in accounting
principle $(5) $(3) $117# $(224) $(7) $138## $78 $18
Net income (loss) $(5) $(3) $117 $(224) $(94)### $138 $78 $18
Income (loss) per share
of common stock from
continuing operations
before cumulative
effect of change in
accounting principle@ $(.47)*** $(.45) $(.30) $(3.22) $(.34)*** $(.40) $.77 $(.13)
Income (loss) per share
of common stock before
cumulative effect of
change in accounting
principle@ $(.22) $(.19) $1.44 $(3.22) $(.07) $1.29 $.87 $.09
Net income (loss) per
share of common stock@ $(.22) $(.19) $1.44 $(3.22) $(.88)### $1.29 $.87 $.09
Cash dividends per share
of preference stock $.90 $.90 $.90 $.90 $ -- $ -- $.90 $.90
Cash dividends per share
of common stock $.25 $.25 $.25 $.25 $.45 $.45 $.25 $.25
Common stock price
range@@ --high $30 1/4 $32 5/8 $30 3/8 $25 5/8 $30 1/4 $32 7/8 $29 3/4 $29 3/4
- --low $25 3/8 $27 3/4 $21 7/8 $21 7/8 $27 1/8 $27 1/4 $25 3/4 $24 3/4
- ------------------------------------------------------------------------------------------------------------
* Reflects decreases of $71 and $101 million in the quarters ended March 31,
1996 and 1995, respectively, compared to amounts previously reported on
Securities and Exchange Commission Form 10-Q. The decreases are due to the
presentation of International Production and Canadian Upstream Petroleum
operations as discontinued operations effective in the second quarter of
1996.
** Gross profit equals sales and other operating revenue less cost of products
sold and operating expenses; depreciation, depletion and amortization; and
consumer excise, payroll and other applicable taxes.
*** For the first quarters of 1996 and 1995, reflects increases compared to
amounts previously reported on Securities and Exchange Commission Form 10-
Q in the loss from continuing operations before cumulative effect of
change in accounting principle of $(19) and $(29) million, respectively,
or $(.25) and $(.27), respectively, per share of common stock. The
increases are due to the presentation of International Production and
Canadian Upstream Petroleum operations as discontinued operations
effective in the second quarter of 1996.
+ Includes a $53 million after-tax provision for write-down of assets and
other matters.
++ Includes a $201 million after-tax provision for write-down of assets and
other matters and an $8 million after-tax profit due to the reduction in
certain inventory quantities which were valued at lower LIFO costs
prevailing in prior years.
+++ Includes a $61 million after-tax provision for write-down of assets and
other matters.
# Includes a $125 million after-tax gain on the sale of the International
Production business.
## Includes a $157 million after-tax gain on the sale of Suncor common stock.
### Includes net loss of $87 million or $.81 per share of common stock due to
the cumulative effect for years prior to 1995 of a change in the method of
accounting for the impairment of long-lived assets.
@ Represents both primary and fully diluted earnings per share, except in the
third quarters of 1996 and 1995 when income (loss) per share from continuing
operations, income per share before cumulative effect of change in
accounting principle and net income per share, on a fully diluted basis,
were $(.11), $1.19, and $1.19, respectively, in 1996 and $.68, $.76 and
$.76, respectively, in 1995.
@@ The Company's common stock is principally traded on the New York Stock
Exchange, Inc. under the symbol "SUN." The Company had approximately 38,500
holders of record of common stock as of January 31, 1997.
54