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 June 30, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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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
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At June 30, 2000, there were 87,104,324 shares of Common Stock, $1 par value
outstanding.
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SUNOCO, INC.
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INDEX
Page No.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Income for the Six Months Ended
June 30, 2000 and 1999 3
Condensed Consolidated Statements of Income for the Three Months Ended
June 30, 2000 and 1999 4
Condensed Consolidated Balance Sheets at June 30, 2000 and December 31,
1999 5
Condensed Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2000 and 1999 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURE 26
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 Six Months
Ended June 30
------------------------
2000 1999
----- ------
(UNAUDITED)
REVENUES
Sales and other operating revenue (including
consumer excise taxes) $6,668 $4,210
Interest income 6 2
Other income (Notes 2 and 3) 147 94
------ ------
6,821 4,306
------ ------
COSTS AND EXPENSES
Cost of products sold and operating expenses
(Note 7) 5,114 3,001
Consumer excise taxes 789 757
Selling, general and administrative expenses 287 267
Depreciation, depletion and amortization 147 134
Payroll, property and other taxes 42 40
Interest cost and debt expense 42 40
Interest capitalized (2) (1)
------ ------
6,419 4,238
------ ------
Income from continuing operations before
income tax expense 402 68
Income tax expense (Note 2) 120 23
------ ------
Income from continuing operations 282 45
Income from discontinued operations (Note 4) 11 --
------ ------
NET INCOME $ 293 $ 45
====== ======
Earnings per share of common stock (Note 5):
Basic:
Income from continuing operations $3.19 $.50
Net income $3.31 $.50
Diluted:
Income from continuing operations $3.18 $.49
Net income $3.30 $.49
Weighted average number of shares outstanding:
Basic 88.5 90.4
Diluted 88.9 91.2
Cash dividends paid per share of common stock $.50 $.50
(See Accompanying Notes)
3
4
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Sunoco, Inc. and Subsidiaries
(Millions of Dollars and Shares Except Per Share Amounts)
- --------------------------------------------------------------------------------
For the Three Months
Ended June 30
------------------------
2000 1999
----- ------
(UNAUDITED)
REVENUES
Sales and other operating revenue (including
consumer excise taxes) $3,518 $2,328
Interest income 4 1
Other income (Notes 2 and 3) 112 44
------ ------
3,634 2,373
------ ------
COSTS AND EXPENSES
Cost of products sold and operating expenses
(Note 7) 2,652 1,695
Consumer excise taxes 418 401
Selling, general and administrative expenses 149 134
Depreciation, depletion and amortization 74 68
Payroll, property and other taxes 20 17
Interest cost and debt expense 22 19
Interest capitalized (1) (1)
------ ------
3,334 2,333
------ ------
Income before income tax expense 300 40
Income tax expense (Note 2) 85 14
------ ------
NET INCOME $ 215 $ 26
====== ======
Net income per share of common stock (Note 5):
Basic $2.45 $.29
Diluted $2.44 $.28
Weighted average number of shares outstanding:
Basic 87.8 90.5
Diluted 88.3 91.3
Cash dividends paid per share of common stock $.25 $.25
(See Accompanying Notes)
4
5
CONDENSED CONSOLIDATED BALANCE SHEETS
Sunoco, Inc. and Subsidiaries
At At
June 30 December 31
2000 1999
(Millions of Dollars) (UNAUDITED)
- ---------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 63 $ 87
Accounts and notes receivable, net 907 833
Inventories:
Crude oil 281 158
Refined products 238 163
Materials, supplies and other 83 82
Deferred income taxes 93 133
------ ------
Total Current Assets 1,665 1,456
Investments and long-term receivables 180 118
Properties, plants and equipment 6,547 6,444
Less accumulated depreciation, depletion
and amortization 3,113 3,029
------ ------
Properties, plants and equipment, net 3,434 3,415
Deferred charges and other assets 198 207
------ ------
Total Assets $5,477 $5,196
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $1,212 $1,038
Accrued liabilities 317 437
Short-term borrowings 160 150
Current portion of long-term debt 1 1
Taxes payable 178 140
------ ------
Total Current Liabilities 1,868 1,766
Long-term debt 933 878
Retirement benefit liabilities 394 415
Deferred income taxes 261 237
Other deferred credits and liabilities (Note 6) 344 394
Commitments and contingent liabilities (Note 7)
Shareholders' equity (Note 9) 1,677 1,506
------ ------
Total Liabilities and Shareholders' Equity $5,477 $5,196
====== ======
(See Accompanying Notes)
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6
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Sunoco, Inc. and Subsidiaries
(Millions of Dollars)
- --------------------------------------------------------------------------------
For the Six Months
Ended June 30
-----------------------
2000 1999
----- -----
(UNAUDITED)
INCREASES (DECREASES) IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 293 $ 45
Adjustments to reconcile net income to net
cash provided by operating activities:
Income from discontinued operations (11) --
Gain on income tax settlement (90) --
Gain on divestments (1) (14)
Depreciation, depletion and amortization 147 134
Deferred income tax expense 74 21
Changes in working capital pertaining to
operating activities:
Accounts and notes receivable (74) (82)
Inventories (199) 36
Accounts payable and accrued liabilities 134 42
Taxes payable 38 3
Other (43) (25)
----- -----
Net cash provided by operating activities 268 160
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (184) (140)
Proceeds from divestments 24 41
Other (8) --
----- -----
Net cash used in investing activities (168) (99)
----- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from short-term borrowings 10 2
Repayments of long-term debt -- (34)
Cash dividend payments (44) (45)
Purchases of common stock for treasury (81) --
Other (9) 2
----- -----
Net cash used in financing activities (124) (75)
----- -----
Net decrease in cash and cash equivalents (24) (14)
Cash and cash equivalents at beginning of period 87 38
----- -----
Cash and cash equivalents at end of period $ 63 $ 24
===== =====
(See Accompanying Notes)
6
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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1. General.
The accompanying condensed consolidated financial statements are presented
in accordance with the requirements of Form 10-Q and accounting principles
generally accepted 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 gain on income tax
settlement (Note 2) and income from discontinued operations (Note 4).
Results for the three and six months ended June 30, 2000 are not
necessarily indicative of results for the full year 2000.
2. Income Tax Settlement.
In July 2000, the Company was notified that the Congressional Joint
Committee on Taxation approved the settlement of certain federal income tax
issues that had been in dispute. In connection with this settlement, Sunoco
recognized a $90 million pretax gain in other income ($79 million after
tax) in the second quarter of 2000 and is expected to receive a net cash
refund of at least this amount in the second half of 2000. Certain
additional elements of the settlement must be resolved and, therefore, are
uncertain. The benefits of these unresolved matters have not yet been
recognized in the financial statements, but could result in an additional
positive impact on the Company's net income and cash flow in the second
half of 2000.
3. Other Income.
In the second and first quarters of 1999, Sunoco recognized $25 and $11
million, respectively, of pretax gains ($16 and $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.
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4. 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;
therefore, this adjustment has been classified similarly in the condensed
consolidated statement of income for the six months ended June 30, 2000.
5. Earnings Per Share.
The following table sets forth the computation of basic and diluted
earnings per share ("EPS") for the six-month and three-month periods ended
June 30, 2000 and 1999 (in millions, except per share amounts):
Six Months Three Months
Ended Ended
June 30 June 30
------------- ------------
2000 1999 2000 1999
---- ---- ---- ----
Income from continuing operations $282 $45 $215 $26
Income from discontinued operations 11 -- -- --
---- --- ---- ---
Net income $293 $45 $215 $26
==== === ==== ===
Weighted average number of common
shares outstanding (basic EPS
denominator) 88.5 90.4 87.8 90.5
Add effect of dilutive stock
incentive awards .4 .8 .5 .8
---- ---- ---- ----
Weighted average number of shares
(diluted EPS denominator) 88.9 91.2 88.3 91.3
==== ==== ==== ====
Basic EPS:
Income from continuing
operations $3.19 $.50 $2.45 $.29
Income from discontinued
operations .12 -- -- --
----- ---- ----- ----
Net Income $3.31 $.50 $2.45 $.29
===== ==== ===== ====
Diluted EPS:
Income from continuing
operations $3.18 $.49 $2.44 $.28
Income from discontinued
operations .12 -- -- --
----- ---- ----- ----
Net Income $3.30 $.49 $2.44 $.28
===== ==== ===== ====
8
9
6. Transferred Interests in Cokemaking Operations.
Third party investors in Sunoco's Indiana Harbor and Jewell cokemaking
operations are entitled to 95 percent of the cash flows and tax benefits
from the respective cokemaking operations until certain cumulative return
targets have been met. After these preferential return periods, which are
expected to end in 2002 and 2000, respectively, the investors will be
entitled to variable minority interests in the cash flows and tax benefits
from the respective operations ranging from 5 to 25 percent. The balance
attributable to the investors' interests in these operations totalled $142
and $175 million at June 30, 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 to a third party 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.
7. 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 June 30, 2000, the Company
had a $61 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 six months of 2000 and the full years 1999, 1998 and 1997,
actual MTBE purchase costs in excess of spot market prices totalling $12,
$39, $47 and $65 million, respectively, were charged against the accrual.
Beginning in May 2000, Sunoco began paying BEF spot-market-related prices
for the last four years of the agreement. Accordingly, the remaining $7
million accrual ($4 million after tax) was reversed into income as a
reduction of cost of products sold and operating expenses in the second
quarter of 2000.
9
10
In November 1998, the EPA convened an advisory Panel on Oxygenate Use in
Gasoline (the "Panel"). The purpose of the Panel was to review public
health and environmental issues that have been raised by the use of MTBE in
gasoline, and specifically by the discovery of MTBE in water supplies. The
Panel made its recommendations to the EPA on July 27, 1999. The
recommendations call for the improved protection of drinking water from
MTBE contamination, a substantial reduction in the use of MTBE, and action
by Congress to remove the oxygenate requirements for reformulated gasoline
under the Clean Air Act. State and federal environmental agencies could
implement the majority of the recommendations; 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.
A number of other states are also reviewing the use of MTBE in gasoline.
New York and Connecticut are among those states that have enacted
legislation to ban MTBE usage, beginning in 2004 and 2003, respectively.
The validity of the New York legislation has been challenged in litigation
on the basis that there is federal preemption under the Clean Air Act. 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 June 30, 2000, Sunoco had been named as a PRP at 51 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.
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11
Under various environmental laws, including RCRA, Sunoco has initiated
corrective remedial action at its facilities, formerly-owned facilities and
third-party sites and could be required to undertake similar actions at
various other sites. The cost of such remedial actions could be
significant but is expected to be incurred over an extended period of time.
Sunoco establishes accruals related to environmental remediation activities
for work at identified sites where an assessment has indicated that cleanup
costs are probable and reasonably estimable. The accrued liability for
environmental remediation is classified in the condensed consolidated
balance sheets as follows (in millions of dollars):
At At
June 30 December 31
2000 1999
------ ----------
Accrued liabilities $ 39 $ 46
Other deferred credits and
liabilities 114 114
---- ----
$ 153 $ 160
==== ====
Pretax charges against income for environmental remediation amounted to $7
and $6 million for the six months ended June 30, 2000 and 1999,
respectively. Claims for recovery of environmental liabilities that are
probable of realization totalled $4 million at June 30, 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
June 30, 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.
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8. Chemicals Joint Venture.
Effective June 15, 2000, Sunoco entered into a joint venture which combined
Sunoco Chemicals' polymer-grade propylene operation at the Marcus Hook
refinery with its partner's adjacent polypropylene business. The following
is a summary of the effects of this transaction on Sunoco's consolidated
financial position as of the transaction date (in millions of dollars):
Increase (decrease) in:
Properties, plants and equipment, net $(49)
Investments and long-term receivables 64
---
Cash advances to joint venture $15
===
In connection with this joint venture, Sunoco is contingently liable under
an arrangement which guarantees $120 million of the joint venture's
outstanding bridge financing. The joint venture is currently negotiating
permanent financing, which would be nonrecourse to Sunoco, to replace the
bridge financing.
9. Shareholders' Equity.
At At
June 30 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 1,864 1,615
------ ------
3,396 3,144
Less common stock held in treasury,
at cost 1,719 1,638
------ ------
Total $1,677 $1,506
====== ======
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10. Business Segment Information.
The following tables set forth information concerning Sunoco's business
segments for the six-month and three-month periods ended June 30, 2000 and
1999 (in millions of dollars):
Sales and Other
Operating Revenue
-----------------------
Profit Contri-
Six Months Ended Unaffiliated Inter- bution (Loss)
June 30, 2000 Customers segment) (after tax)
- ------------------ ------------ ---------- -----------------
Northeast Refining $2,208 $1,327 $113
Northeast Marketing 2,118 -- 13
Chemicals 370 -- 33
Lubricants 742 3 (14)
MidAmerica Marketing &
Refining 1,094 -- 43
Logistics 24 63 23
Coke 112 -- 27
------ ----
Consolidated $6,668 238
======
Gain on income tax
settlement and other
matters 83
Corporate expenses (12)
Net financing expenses
and other (27)
Income from discontinued
operations 11
----
Net income $293
====
Six Months Ended
June 30, 1999
- ------------------
Northeast Refining $1,278 $ 664 $(27)
Northeast Marketing 1,428 -- 31
Chemicals 239 -- 17
Lubricants 462 16 (4)
MidAmerica Marketing &
Refining 673 -- (13)
Logistics 27 56 27
Coke 103 -- 34
------ ---
Consolidated $4,210 65
======
Gain on settlement of
insurance litigation 23
Corporate expenses (12)
Net financing expenses
and other (31)
---
Net income $45
===
13
14
Sales and Other
Operating Revenue
--------------------- Profit Contri-
Three Months Ended Unaffiliated Inter- bution (Loss)
June 30, 2000 Customers segment (after tax)
- ------------------ ----------- ------- ------------
Northeast Refining $1,120 $725 $ 63
Northeast Marketing 1,133 -- 4
Chemicals 199 -- 20
Lubricants 387 2 (2)
MidAmerica Marketing &
Refining 608 -- 38
Logistics 14 33 14
Coke 57 -- 14
------ ----
Consolidated $3,518 151
======
Gain on income tax
settlement and other
matters 83
Corporate expenses (6)
Net financing expenses
and other (13)
----
Net income $215
====
Three Months Ended
June 30, 1999
- ------------------
Northeast Refining $ 720 $387 $(11)
Northeast Marketing 792 -- 18
Chemicals 122 -- 7
Lubricants 248 9 (9)
MidAmerica Marketing &
Refining 381 -- (1)
Logistics 13 28 14
Coke 52 -- 14
------ ----
Consolidated $2,328 32
======
Gain on settlement of
insurance litigation 16
Corporate expenses (6)
Net financing expenses
and other (16)
----
Net income $ 26
====
14
15
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS - SIX MONTHS
Earnings Profile of Sunoco Businesses (after tax)
- -------------------------------------------------
Six Months Ended
June 30
------------------
2000 1999 Variance
---- ---- --------
(Millions of Dollars)
Sun Northeast Refining $113 $(27) $140
Sunoco Northeast Marketing 13 31 (18)
Sunoco Chemicals 33 17 16
Sun Lubricants (14) (4) (10)
Sunoco MidAmerica Marketing & Refining 43 (13) 56
Sunoco Logistics 23 27 (4)
Sun Coke 27 34 (7)
Corporate expenses (12) (12) --
Net financing expenses and other (27) (31) 4
---- ---- ----
199 22 177
Special items:
Income from discontinued operations 11 -- 11
Gain on income tax settlement and
other matters 83 -- 83
Gain on settlement of insurance
litigation -- 23 (23)
---- ---- ----
Consolidated net income $293 $ 45 $248
==== ==== ====
Analysis of Earnings Profile of Sunoco Businesses
- -------------------------------------------------
In the six-month period ended June 30, 2000, Sunoco earned $293 million, or
$3.30 per share of common stock on a diluted basis, compared to net income of
$45 million, or $.49 per share, for the first six months of 1999. Excluding the
special items shown separately in the Earnings Profile of Sunoco Businesses,
Sunoco earned $199 million in the first six months of 2000 compared to $22
million in the first six months of 1999.
15
16
Sun Northeast Refining -- The Sun Northeast Refining business earned $113
million in the first six months of 2000 versus a loss of $27 million in the
first six months of 1999. The increase in earnings was due to significantly
higher refining margins, which increased $2.67 per barrel versus last year's
first half. Higher expenses, particularly refinery fuel costs, partially offset
the margin improvement.
Sunoco Northeast Marketing -- The Sunoco Northeast Marketing business earned $13
million in the current six-month period versus income of $31 million in the
first six months of 1999. An increase in retail gasoline sales volumes, higher
distillate volumes and margins and higher average convenience store sales were
more than offset by lower retail gasoline margins, which decreased approximately
1.6 cents per gallon versus the first half of 1999, and higher planned marketing
and administrative expenses, including expenses related to Sunoco's service
station reimaging program.
Sunoco Chemicals -- Sunoco Chemicals earned $33 million in the first six months
of 2000 versus $17 million in last year's first six months. The increase in
earnings was largely due to higher margins for propylene.
Sun Lubricants -- The Sun Lubricants business recorded a loss of $14 million in
the first six months of 2000 versus a loss of $4 million in the 1999 first six
months. The decrease in results was primarily due to lower specialty oil margins
(down $9.58 per barrel) caused by significantly higher crude oil costs during
the first six months of 2000 and higher expenses, particularly refinery fuel
costs. Partially offsetting these negative factors were improved margins on
gasoline and distillates and higher base oil margins.
Sunoco MidAmerica Marketing & Refining -- Sunoco MidAmerica Marketing & Refining
earned $43 million during the current six-month period versus a loss of $13
million in the first six months of 1999. The improvement was primarily due to
significantly higher realized wholesale fuels margins, which increased $4.52 per
barrel versus the first half of 1999. A seven percent increase in retail
gasoline sales volumes also contributed to the improvement. Partially offsetting
these increases were higher operating expenses and lower petrochemical margins.
Sunoco Logistics -- Sunoco Logistics earned $23 million in the first half of
2000 versus $27 million in the first half of 1999. The decrease in earnings was
primarily due to lower crude oil and refined product pipeline revenues, a
decrease in income from Sunoco's Nederland, TX, crude oil terminal and higher
expenses.
16
17
Sun Coke -- Sun Coke earned $27 million in the first six months of 2000 versus
$34 million in the 1999 first half. The decrease 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.
Net Financing Expenses and Other -- Net financing expenses and other activities
totalled $27 million for the first half of 2000 versus $31 million for the 1999
first half. The decrease was due in part to higher capitalized interest and
higher interest income.
Income from Discontinued Operations - In 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 4
to the condensed consolidated financial statements).
Gain on Income Tax Settlement and Other Matters - In the second quarter of 2000,
Sunoco recorded a $79 million after-tax gain from the settlement of certain
federal income tax issues and a $4 million after-tax benefit attributable to the
reversal of a loss accrual related to an MTBE purchase commitment (see Notes 2
and 7 to the condensed consolidated financial statements).
Gain on Settlement of Insurance Litigation -- In the first six months of 1999,
Sunoco recognized a $23 million after-tax gain in connection with the settlement
of insurance claims related to certain environmental matters (see Note 3 to the
condensed consolidated financial statements).
Analysis of Consolidated Statements of Income
- ---------------------------------------------
Revenues -- Total revenues were $6.82 billion in the first six months of 2000
compared to $4.31 billion in the first half of 1999. The 58 percent increase was
due to significantly higher refined product sales prices.
Costs and Expenses -- Total pretax costs and expenses were $6.42 billion in the
first six months of 2000 compared to $4.24 billion in the 1999 first half. The
51 percent increase in the first half of 2000 was primarily due to significantly
higher crude oil and refined product acquisition costs largely as a result of
crude oil price increases.
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RESULTS OF OPERATIONS - THREE MONTHS
Earnings Profile of Sunoco Businesses (after tax)
- -------------------------------------------------
Three Months Ended
June 30
------------------
2000 1999 Variance
---- ---- -------
(Millions of Dollars)
Sun Northeast Refining $ 63 $(11) $ 74
Sunoco Northeast Marketing 4 18 (14)
Sunoco Chemicals 20 7 13
Sun Lubricants (2) (9) 7
Sunoco MidAmerica Marketing & Refining 38 (1) 39
Sunoco Logistics 14 14 --
Sun Coke 14 14 --
Corporate expenses (6) (6) --
Net financing expenses and other (13) (16) 3
---- ---- ----
132 10 122
Special items:
Gain on income tax settlement and
other matters 83 -- 83
Gain on settlement of insurance
litigation -- 16 (16)
---- ---- ----
Consolidated net income $215 $ 26 $189
==== ==== ====
Analysis of Earnings Profile of Sunoco Businesses
- -------------------------------------------------
In the three-month period ended June 30, 2000, Sunoco earned $215 million, or
$2.44 per share of common stock on a diluted basis, compared to net income of
$26 million, or $.28 per share, for the second quarter of 1999. Excluding the
special items shown separately in the Earnings Profile of Sunoco Businesses,
Sunoco earned $132 million in the second quarter of 2000 compared to $10 million
in the second quarter of 1999.
Sun Northeast Refining -- The Sun Northeast Refining business earned $63 million
in the second quarter of 2000 versus a loss of $11 million in the second quarter
of 1999. The improvement was due to significantly higher refining margins, which
were up almost $3.00 per barrel from 1999 second
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quarter levels. Despite much higher crude oil and transportation costs, realized
refining margins averaged over $5.00 per barrel for the quarter as margins for
gasoline, particularly reformulated gasoline, were up sharply from 1999 levels.
Higher expenses, particularly refinery fuel costs, partially offset the margin
improvement.
Sunoco Northeast Marketing -- The Sunoco Northeast Marketing business earned $4
million in the current quarter versus $18 million in the second quarter of 1999.
The decrease was primarily due to lower retail gasoline margins, which decreased
approximately 2.4 cents per gallon versus second quarter 1999 levels. Higher
planned expenses also contributed to the decrease. Partially offsetting this
decline was a five percent increase in retail gasoline sales volumes and higher
distillate volumes and margins.
Sunoco Chemicals -- Sunoco Chemicals earned $20 million in the second quarter of
2000 versus $7 million in the 1999 second quarter. The increase was primarily
due to higher margins for propylene and phenol and increased production of most
products, particularly phenol and cumene.
Sun Lubricants -- The Sun Lubricants business recorded a loss of $2 million in
the 2000 second quarter versus a loss of $9 million in the 1999 second quarter.
The improvement was primarily due to higher fuels margins, particularly for
gasoline and distillates produced at the Tulsa refinery. Improved base oil
margins were largely offset by lower margins for specialty oils, for which
product price increases continued to lag rising crude oil costs.
Sunoco MidAmerica Marketing & Refining -- Sunoco MidAmerica Marketing & Refining
earned $38 million during the current quarter, versus a loss of $1 million in
the 1999 second quarter. The improvement was primarily due to considerably
higher wholesale fuels margins, as various industry-wide product inventory,
operating and distribution issues and the introduction of new RFG II gasoline
specifications limited gasoline supply in the region. After completing major
turnaround work in mid-April 2000, crude runs at the Toledo refinery were
excellent and included record production in the month of June. Also contributing
to the increase in earnings was a seven percent increase in retail gasoline
sales. Partially offsetting these improvements were higher operating expenses
and lower petrochemical margins, as feedstock price increases squeezed margins
for aromatics and oligomers produced at the Toledo refinery.
Sunoco Logistics -- Net income was $14 million in both second-quarter periods.
Higher throughput revenue was offset by an increase in expenses and lower income
from joint venture pipeline operations.
Sun Coke -- Sun Coke earned $14 million in the second quarter of 2000, unchanged
from the 1999 second quarter.
Net Financing Expenses and Other -- Net financing expenses and other activities
totalled $13 million for the second quarter of 2000 versus $16 million for the
1999 second quarter. The decrease was due in part to higher interest income.
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Gain on Income Tax Settlement and Other Matters - In the second quarter of 2000,
Sunoco recorded a $79 million after-tax gain from the settlement of certain
federal income tax issues and a $4 million after-tax benefit attributable to the
reversal of a loss accrual related to an MTBE purchase commitment (see Notes 2
and 7 to the condensed consolidated financial statements).
Gain on Settlement of Insurance Litigation -- In the second quarter of 1999,
Sunoco recognized a $16 million after-tax gain associated with the settlement of
insurance claims related to certain environmental matters (see Note 3 to the
condensed consolidated financial statements).
Analysis of Consolidated Statements of Income
- ---------------------------------------------
Revenues -- Total revenues were $3.63 billion in the second quarter of 2000
compared to $2.37 billion in the second quarter of 1999. The 53 percent increase
in the second quarter of 2000 was primarily due to significantly higher refined
product sales prices.
Costs and Expenses -- Total pretax costs and expenses were $3.33 billion in the
second quarter of 2000 compared to $2.33 billion in the second quarter of 1999.
The 43 percent increase in the second quarter of 2000 was primarily due to
significantly higher crude oil and refined product acquisition costs largely as
a result of crude oil price increases.
FINANCIAL CONDITION
Cash and Working Capital
- ------------------------
At June 30, 2000, Sunoco had cash and cash equivalents of $63 million compared
to $87 million at December 31, 1999, and had a working capital deficit of $203
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 June
30, 2000 by $1,048 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 six months of 2000, Sunoco's net cash provided by operating
activities ("cash generation") was $268 million compared to $160 million in the
first six months of 1999. This $108 million increase in cash generation was
primarily due to an increase in income before special items and higher deferred
income tax expense, partially offset by an increase in working capital uses
pertaining to operating activities.
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Management believes that future cash generation will be sufficient to satisfy
Sunoco's capital requirements and to pay the current level of cash dividends on
Sunoco's common stock. However, from time to time, the Company's short-term
cash requirements may exceed its cash generation due to various factors
including volatility in crude oil and refined product markets and increases in
capital spending and working capital levels. During those periods, the Company
may supplement its cash generation with proceeds from financing activities.
The Company has a $500 million revolving credit agreement ("Agreement") with
commercial banks that provides access to short-term financing through September
2002. The Company can borrow directly from the participating banks under this
Agreement or use it to support the issuance of commercial paper.
The Company filed a shelf registration statement with the Securities and
Exchange Commission, which became effective in July 2000, to register $1,250
million of securities. This registration statement also relates to $250 million
of unsold securities previously registered. The new registration statement
provides the Company with financing flexibility to offer up to $1,500 million of
senior and subordinated debt, common and preferred stock, warrants and trust
preferred securities. The Company expects to use any net proceeds from the sale
of securities for general corporate purposes, which may include: repayment of
outstanding indebtedness; funding working capital, capital expenditures or
acquisitions; and the repurchase of shares of common stock. The amount and
timing of any sales will depend upon market conditions and the Company's funding
requirements.
The following table sets forth amounts outstanding related to Sunoco's
borrowings (in millions of dollars):
At At
June 30 December 31
2000 1999
------ -----------
Short-term borrowings - commercial paper $ 160 $ 150
Current portion of long-term debt 1 1
Long-term debt 933 878
------ ------
Total borrowings $1,094 $1,029
====== ======
Sunoco's ratio of debt (net of available cash) to total capital was 38.1 percent
at June 30, 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.
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SHARE REPURCHASES
During the first six months of 2000, the Company repurchased 2,843,476 shares of
its common stock for $81 million. At June 30, 2000, the Company had a remaining
authorization from its Board of Directors to purchase up to $55 million of
Company common stock stock in the open market or through privately negotiated
transactions from time to time depending on prevailing market conditions.
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;
. Phase-outs or restrictions on the use of MTBE;
. Political and economic conditions in international markets in which the
Company operates;
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. 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.
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PART II
OTHER INFORMATION
Item 1. Legal Proceedings
In April 2000, Sunoco, Inc. (R&M) received a civil penalty demand in excess
of $100,000 from the Pennsylvania Department of Environmental Protection
("PaDEP") for allegedly failing to install reasonably available control
technology ("RACT") on the No. 6 and No. 7 boilers at its Marcus Hook, PA
refinery.
Many other legal and administrative proceedings are pending against Sunoco.
Although the ultimate outcome of these proceedings cannot be ascertained at
this time, it is reasonably possible that some of them could be resolved
unfavorably to Sunoco. Management of Sunoco believes that any liabilities
which may arise from such proceedings would not be material in relation to
the consolidated financial position of Sunoco at June 30, 2000.
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of the Company's shareholders was held on May 4, 2000.
Proxies for the meeting were solicited pursuant to Section 14(a) of the
Securities Exchange Act of 1934 and there was no solicitation in opposition
to the Company's solicitations. At this meeting, the shareholders were
requested (1) to elect a Board of Directors and (2) to approve the
appointment of independent auditors. The following action was taken by the
Company's shareholders with respect to each of the above items:
1. Concerning the election of a Board of Directors of the Company, there
was a total of 75,753,097 votes cast. The tabulation below sets forth
the number of votes cast for or withheld (abstentions) from each
director. There were no broker non-votes.
Number
Number "WITHHELD"
NAME "FOR" (ABSTENTIONS)
---------------- --------- ------------
R. E. Cartledge 74,256,172 1,496,925
R. J. Darnall 74,278,651 1,474,446
J. G. Drosdick 74,276,643 1,476,454
M. J. Evans 74,240,943 1,512,154
T. P. Gerrity 74,205,323 1,547,774
R. B. Greco 74,277,486 1,475,611
J. G. Kaiser 74,287,657 1,465,440
R. D. Kennedy 74,254,072 1,499,025
N. S. Matthews 74,234,030 1,519,067
R. A. Pew 72,272,223 3,480,874
G. J. Ratcliffe 74,230,314 1,522,783
A. B. Trowbridge 74,236,996 1,516,101
2. Concerning the motion to appoint Ernst & Young LLP as the Company's
independent auditors, there was a total of 75,753,097 votes cast, with
an aggregate of 75,012,600 votes cast in favor of such appointment and
322,602 against. There were 417,895 withheld (abstentions). There
were no broker non-votes.
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Item 6. Exhibits and Reports on Form 8-K
Exhibits:
10 - Amended Schedule to the Form of Indemnification Agreement,
individually entered into between Sunoco, Inc. and certain officers
and directors of the Company.
12 - Statement re Sunoco, Inc. and Subsidiaries Computation of Ratio of
Earnings to Fixed Charges for the Six-Month Period Ended June 30,
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
June 30, 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
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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 August 8, 2000
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EXHIBIT INDEX
Exhibit
Number Exhibit
- -------- --------------------------------------
10 Amended Schedule to the Form of Indemnification Agreement,
individually entered into between Sunoco, Inc. and certain
officers and directors of the Company.
12 Statement re Sunoco, Inc. and Subsidiaries Computation of Ratio of
Earnings to Fixed Charges for the Six-Month Period Ended June 30,
2000.
27 Article 5 of Regulation S-X, Financial Data Schedule.
27