1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
----------------- ----------------
Commission file number 1-6841
SUNOCO, INC.
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(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-1743282
- --------------------------------------------- -------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
TEN PENN CENTER, 1801 MARKET STREET,
PHILADELPHIA, PA 19103-1699
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(Address of principal executive offices)
(Zip Code)
(215) 977-3000
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
------ ------
At March 31, 2000, there were 88,491,880 shares of Common Stock, $1 par value
outstanding.
2
SUNOCO, INC.
------------
INDEX
PART I. FINANCIAL INFORMATION
Page No.
Item 1. Financial Statements --------
Condensed Consolidated Statements of Income
for the Three Months Ended March 31, 2000
and 1999 3
Condensed Consolidated Balance Sheets at
March 31, 2000 and December 31, 1999 4
Condensed Consolidated Statements of Cash
Flows for the Three Months Ended March 31,
2000 and 1999 5
Notes to Condensed Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURE 20
3
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Sunoco, Inc. and Subsidiaries
(Millions of Dollars and Shares Except Per Share Amounts)
- --------------------------------------------------------------------------
For the Three Months Ended
March 31
--------------------
2000 1999
----- ------
(UNAUDITED)
REVENUES
Sales and other operating revenue (including
consumer excise taxes) $3,150 $1,882
Interest income 2 1
Other income (Note 2) 35 50
------ ------
3,187 1,933
------ ------
COSTS AND EXPENSES
Cost of products sold and operating expenses 2,462 1,306
Consumer excise taxes 371 356
Selling, general and administrative expenses 138 133
Depreciation, depletion and amortization 73 66
Payroll, property and other taxes 22 23
Interest cost and debt expense 20 21
Interest capitalized (1) --
------ ------
3,085 1,905
------ ------
Income from continuing operations before 102 28
income tax expense
Income tax expense 35 9
------ ------
Income from continuing operations 67 19
Income from discontinued operations (Note 3) 11 --
------ ------
NET INCOME $ 78 $ 19
====== ======
Earnings per share of common stock (Note 4):
Basic:
Income from continuing operations $ .75 $ .21
Net income $ .87 $ .21
Diluted:
Income from continuing operations $ .75 $ .21
Net income $ .87 $ .21
Weighted average number of shares outstanding:
Basic 89.2 90.4
Diluted 89.5 91.2
Cash dividends paid per share of common stock $ .25 $ .25
(See Accompanying Notes)
4
CONDENSED CONSOLIDATED BALANCE SHEETS
Sunoco, Inc. and Subsidiaries
At At
March 31 December 31
2000 1999
(Millions of Dollars) (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 43 $ 87
Accounts and notes receivable, net 886 833
Inventories:
Crude oil 235 158
Refined products 170 163
Materials, supplies and other 84 82
Deferred income taxes 126 133
------ ------
Total Current Assets 1,544 1,456
Investments and long-term receivables 117 118
Properties, plants and equipment 6,560 6,444
Less accumulated depreciation, depletion 3,103 3,029
and amortization ------ ------
Properties, plants and equipment, net 3,457 3,415
Deferred charges and other assets 207 207
------ ------
Total Assets $5,325 $5,196
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $1,081 $1,038
Accrued liabilities 395 437
Short-term borrowings 216 150
Current portion of long-term debt 1 1
Taxes payable 134 140
------ ------
Total Current Liabilities 1,827 1,766
Long-term debt 931 878
Retirement benefit liabilities 415 415
Deferred income taxes 245 237
Other deferred credits and liabilities (Note 5) 379 394
Commitments and contingent liabilities (Note 6)
Shareholders' equity (Note 7) 1,528 1,506
------ ------
Total Liabilities and Shareholders' Equity $5,325 $5,196
====== ======
(See Accompanying Notes)
5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Sunoco, Inc. and Subsidiaries
(Millions of Dollars)
- --------------------------------------------------------------------------
For the Three Months Ended
March 31
--------------------
2000 1999
----- ------
(UNAUDITED)
INCREASES (DECREASES) IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 78 $ 19
Adjustments to reconcile net income to net
cash provided by operating activities:
Income from discontinued operations (11) --
Gain on divestments (2) (13)
Depreciation, depletion and amortization 73 66
Deferred income tax expense 23 13
Changes in working capital pertaining to
operating activities:
Accounts and notes receivable (53) (11)
Inventories (86) 53
Accounts payable and accrued liabilities 1 (66)
Taxes payable (6) (9)
Other 2 (13)
---- ----
Net cash provided by operating activities 19 39
---- ----
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (80) (56)
Proceeds from divestments 13 20
Other (1) --
---- ----
Net cash used in investing activities (68) (36)
---- ----
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from short-term borrowings 66 3
Repayments of long-term debt -- (17)
Cash dividend payments (22) (23)
Purchases of common stock for treasury (37) --
Other (2) --
---- -----
Net cash provided by (used in) financing activities 5 (37)
---- -----
Net decrease in cash and cash equivalents (44) (34)
Cash and cash equivalents at beginning of period 87 38
---- -----
Cash and cash equivalents at end of period $ 43 $ 4
==== =====
(See Accompanying Notes)
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
1. General.
The accompanying condensed consolidated financial statements are presented
in accordance with the requirements of Form 10-Q and generally accepted
accounting principles in the United States for interim financial reporting.
They do not include all disclosures normally made in financial statements
contained in Form 10-K. In management's opinion all adjustments necessary
for a fair presentation of the results of operations, financial position
and cash flows for the periods shown have been made. All such adjustments
are of a normal recurring nature except for the income from discontinued
operations (Note 3). Results for the three months ended March 31, 2000 are
not necessarily indicative of results for the full year 2000.
2. Other Income.
In the first quarter of 1999, Sunoco recognized an $11 million pretax gain
($7 million after tax) in connection with the settlement of certain
insurance claims. The claims related to certain environmental matters of
Sunoco, including its predecessor companies and subsidiaries, arising from
ownership and operation of its businesses.
In February 1999, Sunoco divested its Shamrock steam coal mining operation
located in Kentucky for $13 million in cash. The divestment resulted in the
recognition of an $11 million pretax gain ($7 million after tax) in the
1999 first quarter. With this divestment, the Company ceased steam coal
mining activities.
3. Income from Discontinued Operations.
During the first quarter of 2000, Sunoco recorded an $11 million after-tax
favorable adjustment (including a $7 million tax benefit) to the gain
recognized in 1996 in connection with the divestment of the Company's
International Production business. The adjustment resulted from the
favorable resolution of certain United Kingdom income tax issues. At the
time of the sale, this business was treated as a discontinued operation in
Sunoco's consolidated financial statements; therefore, this adjustment has
been classified similarly in the 2000 first quarter condensed consolidated
statement of income.
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4. Earnings Per Share.
The following table sets forth the computation of basic and diluted earnings
per share ("EPS") for the three-month periods ended March 31, 2000 and 1999
(in millions, except per share amounts):
Three Months Ended
March 31
--------------
2000 1999
---- ----
Income from continuing operations $ 67 $ 19
Income from discontinued operations 11 --
--- ---
Net income $ 78 $ 19
=== ===
Weighted average number of common
shares outstanding (basic EPS
denominator) 89.2 90.4
Add effect of dilutive stock
incentive awards .3 .8
---- ----
Weighted average number of shares
(diluted EPS denominator) 89.5 91.2
==== ====
Basic EPS:
Income from continuing
operations $ .75 $ .21
Income from discontinued
operations .12 --
---- ----
Net Income $ .87 $ .21
==== ====
Diluted EPS:
Income from continuing
operations $ .75 $ .21
Income from discontinued
operations .12 --
---- ----
Net Income $ .87 $ .21
==== ====
5. Transferred Interests in Cokemaking Operations.
In 1998, Sunoco transferred an interest in its Indiana Harbor cokemaking
operation in East Chicago, IN, to a third party for $200 million in cash.
In 1995, Sunoco transferred an interest in its Jewell cokemaking operation
in Vansant, VA, to another third party for $95 million in cash. The
investors in each operation are entitled to 95 percent of the cash flows
and tax benefits from the respective
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cokemaking operations until certain cumulative return targets have been
met. After these preferential return periods, which are expected to end in
2002 and 2000, respectively, the third parties will be entitled to variable
minority interests in the cash flows and tax benefits from the respective
operations ranging from 5 to 25 percent. Sunoco did not recognize any gain
or loss on these transactions. The outstanding balance attributable to the
transferred interests in these operations totalled $160 and $175 million at
March 31, 2000 and December 31, 1999, respectively, and is reflected in
other deferred credits and liabilities in the condensed consolidated
balance sheets.
The Company is currently in negotiations to transfer an additional interest
in its Jewell cokemaking operation during the second half of 2000. Such a
transfer would extend the preferential return period beyond 2000 and would
likely result in different variable minority interests in the cash flows
and tax benefits from this operation.
6. Commitments and Contingent Liabilities.
A wholly owned subsidiary of the Company is a one-third partner in Belvieu
Environmental Fuels ("BEF"), a joint venture formed for the purpose of
constructing, owning and operating a methyl tertiary butyl ether ("MTBE")
production facility in Mont Belvieu, Texas. At March 31, 2000, the Company
had a $55 million investment in this operation.
In order to obtain a secure supply of oxygenates for the manufacture of
reformulated gasoline, Sunoco entered into an off-take agreement with BEF
whereby Sunoco agreed to purchase all of the MTBE production from the
plant. During the fourth quarter of 1996, spot market prices for MTBE
were less than the prices paid by Sunoco under the off-take agreement with
BEF. At that time, the Company expected this adverse relationship to
continue into the future. Accordingly, a $130 million accrual ($85 million
after tax) was established at December 31, 1996 for the estimated purchase
commitment loss expected to be realized with respect to this agreement. An
additional $40 million provision ($26 million after tax) was added to the
accrual in December 1998 for incremental losses expected to be realized
with respect to this agreement.
During the first quarter of 2000 and the full years 1999, 1998 and 1997,
actual MTBE purchase costs in excess of spot market prices totalling $11,
$39, $47 and $65 million, respectively, were charged against the accrual.
The accrual has a remaining balance of $8 million as of March 31, 2000.
After May 2000, Sunoco will pay BEF spot-market-related prices for the last
four years of the agreement.
In November 1998, the EPA convened an advisory Panel on Oxygenate Use in
Gasoline (the "Panel"). The purpose of the Panel was to review public
health and environmental issues that have been raised by the use of MTBE in
gasoline, and specifically by the discovery of MTBE in water supplies. The
Panel made its recommendations to the EPA on July 27, 1999. The
recommendations call for the improved protection of drinking water from
MTBE contamination, a substantial reduction in the use of MTBE, and action
by Congress to remove the oxygenate requirements for reformulated gasoline
under the Clean Air Act. State
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and federal environmental agencies could implement the majority of the
recommendations; however, some would require Congressional legislative
action. While the Panel recommended that certain public and private funding
options be explored for the clean up of contaminated sites, it made no
specific recommendations concerning such funding options. However, private
parties are seeking clean-up remedies primarily from gasoline marketers,
including Sunoco.
California has acted to ban MTBE use by December 31, 2002. In connection
with the MTBE ban, California has requested a waiver from the EPA of its
oxygenate requirements; however, the EPA has not yet acted on this request.
Other states are also reviewing the use of MTBE in gasoline. The EPA has
proposed a legislative framework for Congress that would significantly
reduce or eliminate the use of MTBE, remove the oxygenate requirement and
replace it with a renewable fuels (e.g. ethanol) average annual content for
all gasoline. The EPA has not yet developed the specifics of this averaging
process. The EPA has also initiated a rulemaking process to consider a
limit or ban on the use of MTBE under the Toxic Substances Control Act.
Several other Congressional approaches to MTBE and renewable fuels are
under consideration. MTBE is the primary oxygenate used by Sunoco and
throughout the industry to meet the reformulated gasoline requirements
under the Clean Air Act. While phase-outs or restrictions on the use of
MTBE or any required clean up of MTBE could have a significant impact on
Sunoco and its results of operations, the ultimate impact cannot be
determined at this time.
Sunoco is subject to numerous federal, state and local laws which regulate
the discharge of materials into the environment or that otherwise relate to
the protection of the environment. The Comprehensive Environmental Response
Compensation and Liability Act ("CERCLA") and the Solid Waste Disposal Act
as amended by the Resource Conservation and Recovery Act ("RCRA"), and
related federal and state laws subject Sunoco to the potential obligation
to remove or mitigate the environmental effects of the disposal or release
of certain pollutants at Sunoco's facilities and at third-party or
formerly-owned sites. Under CERCLA, Sunoco is subject to potential joint
and several liability for the costs of remediation at sites at which it has
been identified as a "potentially responsible party" ("PRP"). As of March
31, 2000, Sunoco had been named as a PRP at 53 sites identified or
potentially identifiable as "Superfund" sites under CERCLA. Sunoco has
reviewed the nature and extent of its involvement at each site and other
relevant circumstances and, based upon the other parties involved or
Sunoco's negligible participation therein, believes that its potential
liability associated with such sites will not be significant.
Under various environmental laws, including RCRA, Sunoco has initiated
corrective remedial action at its facilities, formerly-owned facilities and
third-party sites and could be required to undertake similar actions at
various other sites. The cost of such remedial actions could be significant
but is expected to be incurred over an extended period of time.
10
Sunoco establishes accruals related to environmental remediation activities
for work at identified sites where an assessment has indicated that cleanup
costs are probable and reasonably estimable. The accrued liability for
environmental remediation is classified in the condensed consolidated
balance sheets as follows (in millions of dollars):
At At
March 31 December 31
2000 1999
------------ -----------
Accrued liabilities $ 39 $ 46
Other deferred credits and
liabilities 118 114
---- ----
$ 157 $ 160
==== ====
Pretax charges against income for environmental remediation amounted to $3
million for both the three months ended March 31, 2000 and 1999. Claims for
recovery of environmental liabilities that are probable of realization
totalled $4 million at March 31, 2000 and are included in deferred charges
and other assets in the condensed consolidated balance sheets.
Total future costs for environmental remediation activities will depend
upon, among other things, the identification of any additional sites, the
determination of the extent of the contamination at each site, the timing
and nature of required remedial actions, the technology available and
needed to meet the various existing legal requirements, the nature and
extent of future environmental laws, inflation rates and the determination
of Sunoco's liability at multi-party sites, if any, in light of the number,
participation level and financial viability of other parties.
Many other legal and administrative proceedings are pending against Sunoco.
The ultimate outcome of these proceedings and the matters discussed above
cannot be ascertained at this time; however, it is reasonably possible that
some of them could be resolved unfavorably to Sunoco. Management believes
that any expenditures attributable to these matters will be incurred over
an extended period of time and will be funded from Sunoco's net cash flows
from operating activities. Although the ultimate impact of these matters
could have a significant impact on results of operations or cash flows for
any future quarter or year, management of Sunoco believes that any
additional liabilities which may arise pertaining to such matters would not
be material in relation to the consolidated financial position of Sunoco at
March 31, 2000. Furthermore, management believes that the overall costs for
environmental activities will not have a material impact, over an extended
period of time, on Sunoco's cash flows or liquidity.
11
7. Shareholders' Equity.
At At
March 31 December 31
2000 1999
------------ -----------
(Millions of Dollars)
Common stock, par value $1 per share $ 132 $ 132
Capital in excess of par value 1,400 1,397
Earnings employed in the business 1,671 1,615
------ ------
3,203 3,144
Less common stock held in treasury,
at cost 1,675 1,638
------ ------
Total $1,528 $1,506
====== ======
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8. Business Segment Information.
The following table sets forth information concerning Sunoco's business
segments for the three-month periods ended March 31, 2000 and 1999 (in
millions of dollars):
Sales and Other
Operating Revenue
----------------------------
Profit Contri-
Three Months Ended Unaffiliated Inter- bution (Loss)
March 31, 2000 Customers segment (after tax)
- -------------------- ------------ ------- -------------
Northeast Refining $1,088 $602 $ 50
Northeast Marketing 985 -- 9
Chemicals 171 -- 13
Lubricants 355 1 (12)
MidAmerica Marketing &
Refining 486 -- 5
Logistics 10 30 9
Coke 55 -- 13
------ ----
Consolidated $3,150 87
======
Corporate expenses (6)
Net financing expenses
and other (14)
Income from discontinued
operations 11
----
Net income $ 78
====
Three Months Ended
March 31, 1999
- --------------------
Northeast Refining $ 558 $277 $(16)
Northeast Marketing 636 -- 13
Chemicals 117 -- 10
Lubricants 214 7 5
MidAmerica Marketing &
Refining 292 -- (12)
Logistics 14 28 13
Coke 51 -- 20
------ ----
Consolidated $1,882 33
======
Gain on settlement of
insurance litigation 7
Corporate expenses (6)
Net financing expenses
and other (15)
----
Net income $ 19
====
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
Earnings Profile of Sunoco Businesses (after tax)
Three Months Ended
March 31
------------------
2000 1999 Variance
---- ---- --------
(Millions of Dollars)
Sun Northeast Refining $ 50 $ (16) $ 66
Sunoco Northeast Marketing 9 13 (4)
Sunoco Chemicals 13 10 3
Sun Lubricants (12) 5 (17)
Sunoco MidAmerica Marketing & Refining 5 (12) 17
Sunoco Logistics 9 13 (4)
Sun Coke 13 20 (7)
Corporate expenses (6) (6) --
Net financing expenses and other (14) (15) 1
---- ---- ----
67 12 55
Special items:
Income from discontinued operations* 11 -- 11
Gain on settlement of insurance -- 7 (7)
litigation ---- ---- ----
Consolidated net income $ 78 $ 19 $ 59
==== ==== ====
- ----------
*Represents a favorable adjustment to the gain on divestment of Sunoco's
International Production business which was sold in 1996.
Analysis of Earnings Profile of Sunoco Businesses
- -------------------------------------------------
In the three-month period ended March 31, 2000, Sunoco earned $78 million, or
$.87 per share of common stock on a diluted basis, compared to net income of $19
million, or $.21 per share, for the first quarter of 1999. Excluding the special
items shown separately in the Earnings Profile of Sunoco Businesses, Sunoco
earned $67 million in the first quarter of 2000 compared to $12 million in the
first quarter of 1999.
14
Sun Northeast Refining -- The Sun Northeast Refining business had record
quarterly earnings of $50 million in the first quarter of 2000 versus a loss of
$16 million in the first quarter of 1999. The increase in earnings was due to
significantly higher realized margins, which increased $2.38 per barrel versus
last year's first quarter. Higher fuel costs and a $4 million pretax charge
associated with a crude oil pipeline spill partially offset the margin
improvement.
Sunoco Northeast Marketing -- The Sunoco Northeast Marketing business earned $9
million in the current quarter versus $13 million in the first quarter of 1999.
The decline was due mostly to lower gasoline margins, which were down one-half
cent per gallon versus the first quarter of 1999, and a $5 million pretax
planned increase in expenses. Partially offsetting these negative factors were
higher retail gasoline sales volumes and 10 percent higher average convenience
store sales.
Sunoco Chemicals -- Sunoco Chemicals earned $13 million in the first quarter of
2000 versus $10 million in the first quarter of 1999. The increase in earnings
was largely due to higher margins for propylene, which continued to strengthen
during the quarter. Partially offsetting this improvement were lower average
margins for phenol.
Sun Lubricants -- The Sun Lubricants business recorded a loss of $12 million in
the first quarter of 2000 versus income of $5 million in the first quarter of
1999. The decrease in results was largely due to lower lubricant product
margins, particularly for specialty oils, caused by significantly higher crude
oil costs during the current quarter. Compared to last year's first quarter,
average crude costs increased almost $17 per barrel and resulted in lower base
oil margins (down $1.30 per barrel) and specialty oil margins (down $14.70 per
barrel). Partially offsetting these negative factors were improved margins on
gasoline and distillates.
Sunoco MidAmerica Marketing & Refining -- Sunoco MidAmerica Marketing & Refining
earned $5 million during the current quarter, versus a loss of $12 million in
the 1999 first quarter. The improvement in results was primarily due to
significantly higher realized wholesale fuels margins, which increased $2.57 per
barrel versus the first quarter of 1999. A 6 percent increase in retail gasoline
sales volumes also contributed to the improvement. Results during the first
quarter of 2000 were constrained by a major planned maintenance turnaround at
the Toledo refinery, which limited crude runs to 80 percent of capacity during
the quarter. The turnaround, which began on March 2, was successfully completed
on schedule in mid-April.
Sunoco Logistics -- Net income was $9 million in the first quarter of 2000
versus $13 million in the year-ago period. The decrease in earnings was
primarily due to lower crude oil and refined product pipeline revenues. Also
contributing to the decline was a decrease in income from Sunoco's Nederland,
TX, crude oil terminal due to the relatively high foreign crude oil prices and a
backwardated futures market which resulted in lower terminal throughput during
the quarter.
15
Sun Coke -- Sun Coke earned $13 million in the first quarter of 2000 versus $20
million in the first quarter of 1999. The decline in earnings was due to the
absence of a $7 million after-tax gain associated with the sale of the Company's
Shamrock steam coal mining operation, which was recognized in the first quarter
of 1999.
Income from Discontinued Operations -- During the first quarter of 2000, Sunoco
recorded an $11 million after-tax favorable adjustment to the gain on divestment
of Sunoco's International Production business which was sold in 1996 (see Note 3
to the condensed consolidated financial statements).
Gain on Settlement of Insurance Litigation -- In the first quarter of 1999,
Sunoco recognized a $7 million after-tax gain associated with the settlement of
insurance claims related to certain environmental matters (see Note 2 to the
condensed consolidated financial statements).
Analysis of Consolidated Statements of Income
- ---------------------------------------------
Revenues -- Total revenues were $3.19 billion in the first quarter of 2000
compared to $1.93 billion in the first quarter of 1999. The 65 percent increase
was due to significantly higher refined product sales prices.
Costs and Expenses -- Total pretax costs and expenses were $3.09 billion in the
first quarter of 2000 compared to $1.91 billion in the first quarter of 1999.
The 62 percent increase was primarily due to significantly higher crude oil and
refined product acquisition costs largely as a result of the increase in crude
oil prices.
FINANCIAL CONDITION
Cash and Working Capital
- ------------------------
At March 31, 2000, Sunoco had cash and cash equivalents of $43 million compared
to $87 million at December 31, 1999, and had a working capital deficit of $283
million compared to $310 million at December 31, 1999. Sunoco's working capital
position is considerably stronger than indicated because of the relatively low
historical costs assigned under the LIFO method of accounting for most of the
inventories reflected in the condensed consolidated balance sheets. The current
replacement cost of all such inventories exceeds their carrying value at March
31, 2000 by $904 million. Inventories valued at LIFO, which consist of crude oil
and refined products, are readily marketable at their current replacement
values. Management believes that the current levels of Sunoco's cash and working
capital are adequate to support Sunoco's ongoing operations.
Cash Flows and Financial Capacity
- ---------------------------------
In the first quarter of 2000, Sunoco's net cash provided by operating activities
("cash generation") was $19 million compared to $39 million in the first quarter
of 1999. This $20 million decrease in cash generation was primarily due to an
increase in working capital uses pertaining to operating activities, partially
offset by an increase in income before special items and higher deferred income
tax expense.
16
Management believes that future cash generation will be sufficient to satisfy
Sunoco's capital requirements and to pay the current level of cash dividends on
Sunoco's common stock. However, from time to time, the Company's short-term cash
requirements may exceed its cash generation due to various factors including
volatility in crude oil and refined product markets and increases in capital
spending and working capital levels. During those periods, the Company may
supplement its cash generation with proceeds from financing activities.
The Company has a $500 million revolving credit agreement ("Agreement") with
commercial banks that provides access to short-term financing through September
2002. The Company can borrow directly from the participating banks under this
Agreement or use it to support the issuance of commercial paper.
The following table sets forth amounts outstanding related to Sunoco's
borrowings (in millions of dollars):
At At
March 31 December 31
2000 1999
------------- -----------
Short-term borrowings -- commercial paper $ 216 $ 150
Current portion of long-term debt 1 1
Long-term debt 931 878
------ ------
Total borrowings $1,148 $1,029
====== ======
Sunoco's ratio of debt (net of available cash) to total capital was 42.0 percent
at March 31, 2000 compared to 38.5 percent at December 31, 1999. Management
believes there is sufficient borrowing capacity available to pursue strategic
investment opportunities as they arise. No commitments have been made with
respect to any investment opportunity which would require the use of a
significant portion of Sunoco's unused financial capacity. In addition, the
Company has the option of issuing additional common or preference stock as a
means of increasing its equity base; however, there are no current plans to do
so.
INCOME TAX AUDIT MATTERS
In connection with audits of the Company's federal income tax returns, Sunoco
and the Internal Revenue Service have reached tentative agreements which resolve
certain issues that were in dispute. These tentative agreements will be
submitted to the Congressional Joint Committee on Taxation for its review and
approval. If approved by the Joint Committee, they would have a significant
positive impact on the Company's net income and cash flow. However, the ultimate
outcome and timing of the final resolution cannot be determined at this time.
SHARE REPURCHASES
During the first quarter of 2000, the Company repurchased 1,449,000 shares of
common stock for $37 million. At March 31, 2000, the Company had a remaining
authorization from its Board of Directors to purchase up to $99 million of
Company stock in the open market or through privately negotiated transactions
from time to time depending on prevailing market conditions.
17
DERIVATIVE INSTRUMENTS
Sunoco uses futures and forward contracts to achieve ratable pricing of its
crude oil purchases and to convert certain refined product sales from fixed to
floating price. In addition, price collars, swaps and option contracts are used
to lock in a portion of the Company's electricity and natural gas costs. Sunoco
also uses swaps, price collars and other contracts from time to time to hedge
against significant increases in crude oil prices and to lock in what Sunoco
considers to be acceptable margins for various refined products. At March 31,
2000, Sunoco had locked in margins for 21 million barrels (approximately 12
percent) of its expected wholesale fuel sales for the remainder of 2000. Sunoco
had a net deferred gain of $10 million pretax on all of its derivative contracts
at March 31, 2000.
FORWARD-LOOKING STATEMENTS
Those statements in the foregoing report that are not historical facts are
forward-looking statements made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Such statements generally will
be accompanied by words such as "anticipate," "believe," "estimate," "expect,"
"forecast," "intend," "possible," "potential," "predict," "project," or other
similar words that convey the uncertainty of future events or outcomes. Although
Sunoco believes these forward-looking statements are reasonable, they are based
upon a number of assumptions concerning future conditions, any or all of which
may ultimately prove to be inaccurate. Forward-looking statements involve a
number of risks and uncertainties. Important factors that could cause actual
results to differ materially from the forward-looking statements include,
without limitation:
. Changes in industry-wide refining margins;
. Variation in commodity prices and crude oil supply;
. Volatility in the marketplace which may affect market supply and demand for
Sunoco's products;
. Increased competition;
. Changes in the reliability and efficiency of the Company's operating
facilities;
. Changes in the level of operating expenses and hazards common to operating
facilities (including equipment malfunction, explosions, fires, oil spills,
and the effects of severe weather conditions);
. Changes in the expected level of environmental remediation spending;
. Delays related to work on facilities and the issuance of applicable permits;
. Changes in product specifications;
. Availability and pricing of oxygenates such as MTBE;
18
. Phase-outs or restrictions on the use of MTBE;
. Political and economic conditions in international markets in which the
Company operates;
. Changes in the availability of debt and equity financing resulting in
increased costs or reduced liquidity;
. Risks related to labor relations;
. Nonperformance by major customers;
. General economic, financial and business conditions which could affect
Sunoco's financial condition and results of operations;
. Changes in applicable statutes and government regulations or their
interpretations;
. Claims of the Company's noncompliance with statutory and regulatory
requirements; and
. Changes in the status of litigation to which the Company is a party.
The factors identified above are believed to be important factors (but not
necessarily all of the important factors) that could cause actual results to
differ materially from those expressed in any forward-looking statement made by
Sunoco. Unpredictable or unknown factors not discussed herein could also have
material adverse effects on forward-looking statements. All forward-looking
statements included in this Form 10-Q are expressly qualified in their entirety
by the foregoing cautionary statements. The Company undertakes no obligation to
update publicly any forward-looking statement (or its associated cautionary
language) whether as a result of new information or future events.
19
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
Many legal and administrative proceedings are pending against Sunoco.
Although the ultimate outcome of these proceedings cannot be ascertained at
this time, it is reasonably possible that some of them could be resolved
unfavorably to Sunoco. Management of Sunoco believes that any liabilities
which may arise from such proceedings would not be material in relation to
the consolidated financial position of Sunoco at March 31, 2000.
Item 6. Exhibits and Reports on Form 8-K
Exhibits:
12 - Statement re Sunoco, Inc. and Subsidiaries Computation of Ratio of
Earnings to Fixed Charges for the Three-Month Period Ended March
31, 2000.
27 - Article 5 of Regulation S-X, Financial Data Schedule.
Reports on Form 8-K:
The Company has not filed any reports on Form 8-K during the quarter ended
March 31, 2000.
**********
We are pleased to furnish this Form 10-Q to shareholders who request it by
writing to:
Sunoco, Inc.
Investor Relations
Ten Penn Center
1801 Market Street
Philadelphia, PA 19103-1699
20
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUNOCO, INC.
BY s/ JOSEPH P. KROTT
-----------------------
Joseph P. Krott
Comptroller
(Principal Accounting Officer)
DATE May 10, 2000
1
EXHIBIT INDEX
Exhibit
Number Exhibit
- ------- -----------------------------------------
12 Statement re Sunoco, Inc. and Subsidiaries Computation of Ratio of
Earnings to Fixed Charges for the Three-Month Period Ended March 31,
2000.
27 Article 5 of Regulation S-X, Financial Data Schedule.