UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2001
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
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(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 September 30, 2001, there were 78,600,175 shares of Common Stock, $1 par
value outstanding.
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 Operations
for the Nine Months Ended September 30, 2001
and 2000 1
Condensed Consolidated Statements of Operations
for the Three Months Ended September 30, 2001
and 2000 2
Condensed Consolidated Balance Sheets at
September 30, 2001 and December 31, 2000 3
Condensed Consolidated Statements of Cash
Flows for the Nine Months Ended September 30,
2001 and 2000 4
Notes to Condensed Consolidated Financial
Statements 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 27
Item 6. Exhibits and Reports on Form 8-K 27
SIGNATURE 29
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Sunoco, Inc. and Subsidiaries
(Millions of Dollars and Shares Except Per Share Amounts)
--------------------------------------------------------------------------------
For the Nine Months
Ended September 30
--------------------
2001 2000
-------- ---------
(UNAUDITED)
REVENUES
Sales and other operating revenue (including
consumer excise taxes) $ 10,758 $ 10,370
Interest income 7 8
Other income (Notes 2 and 3) 53 184
-------- --------
10,818 10,562
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COSTS AND EXPENSES
Cost of products sold and operating expenses 8,016 7,998
Consumer excise taxes 1,297 1,222
Selling, general and administrative expenses 483 428
Depreciation, depletion and amortization 237 222
Payroll, property and other taxes 80 63
Provision for write-down of assets and other
matters (Note 4) 41 187
Interest cost and debt expense 77 63
Interest capitalized -- (2)
-------- --------
10,231 10,181
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Income from continuing operations before
income tax expense 587 381
Income tax expense (Note 2) 193 124
-------- --------
Income from continuing operations 394 257
Income from discontinued operations (Note 5) -- 11
-------- --------
NET INCOME $ 394 $ 268
======== ========
Earnings per share of common stock (Note 6):
Basic:
Income from continuing operations $ 4.79 $ 2.93
Net income $ 4.79 $ 3.06
Diluted:
Income from continuing operations $ 4.74 $ 2.92
Net income $ 4.74 $ 3.04
Weighted average number of shares outstanding:
Basic 82.2 87.7
Diluted 83.2 88.1
Cash dividends paid per share of common stock $ .75 $ .75
(See Accompanying Notes)
1
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Sunoco, Inc. and Subsidiaries
(Millions of Dollars and Shares Except Per Share Amounts)
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For the Three Months
Ended September 30
--------------------
2001 2000
-------- --------
(UNAUDITED)
REVENUES
Sales and other operating revenue (including
consumer excise taxes) $ 3,447 $ 3,702
Interest income 2 2
Other income (Notes 2 and 3) 15 37
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3,464 3,741
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COSTS AND EXPENSES
Cost of products sold and operating expenses 2,581 2,877
Consumer excise taxes 458 433
Selling, general and administrative expenses 159 141
Depreciation, depletion and amortization 80 75
Payroll, property and other taxes 29 21
Provision for write-down of assets and other
matters (Note 4) 21 194
Interest cost and debt expense 25 21
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3,353 3,762
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Income (loss) before income tax expense 111 (21)
Income tax expense (Note 2) 19 4
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NET INCOME (LOSS) $ 92 $ (25)
======= =======
Net income (loss) per share of common stock
(Note 6):
Basic $ 1.15 $ (.29)
Diluted $ 1.14 $ (.29)
Weighted average number of shares outstanding:
Basic 79.7 86.1
Diluted 81.0 86.1
Cash dividends paid per share of common stock $ .25 $ .25
(See Accompanying Notes)
2
CONDENSED CONSOLIDATED BALANCE SHEETS
Sunoco, Inc. and Subsidiaries
At At
September 30 December 31
2001 2000
(Millions of Dollars)
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(UNAUDITED)
ASSETS
Current Assets
Cash and cash equivalents $ 94 $ 239
Accounts and notes receivable, net 921 890
Inventories:
Crude oil 212 210
Petroleum and chemical products 286 171
Materials, supplies and other 117 79
Deferred income taxes 106 94
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Total Current Assets 1,736 1,683
Investments and long-term receivables 179 170
Properties, plants and equipment 7,534 6,747
Less accumulated depreciation, depletion
and amortization 3,448 3,357
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Properties, plants and equipment, net 4,086 3,390
Deferred charges and other assets 203 183
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Total Assets $6,204 $5,426
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $1,167 $1,052
Accrued liabilities 363 377
Current portion of long-term debt 153 2
Taxes payable 237 215
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Total Current Liabilities 1,920 1,646
Long-term debt (Note 8) 1,141 933
Retirement benefit liabilities 408 385
Deferred income taxes 492 250
Other deferred credits and liabilities (Note 9) 450 510
Commitments and contingent liabilities
(Note 10)
Shareholders' equity (Note 11) 1,793 1,702
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Total Liabilities and Shareholders' Equity $6,204 $5,426
====== ======
(See Accompanying Notes)
3
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Sunoco, Inc. and Subsidiaries
(Millions of Dollars)
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For the Nine Months
Ended September 30
-------------------
2001 2000*
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(UNAUDITED)
INCREASES (DECREASES) IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 394 $ 268
Adjustments to reconcile net income to net
cash provided by operating activities:
Income from discontinued operations -- (11)
Gain on income tax settlement -- (90)
Provision for write-down of assets and other
matters 41 187
Depreciation, depletion and amortization 237 222
Deferred income tax expense 125 21
Changes in working capital pertaining to operating
activities, net of effect of acquisitions:
Accounts and notes receivable 133 (167)
Inventories (21) (111)
Accounts payable and accrued liabilities (99) 99
Taxes payable (4) 43
Other (53) (80)
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Net cash provided by operating activities 753 381
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (218) (296)
Acquisitions, net of debt assumed of $163 (Note 12) (552) --
Proceeds from divestments 26 30
Other (6) (15)
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Net cash used in investing activities (750) (281)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments of short-term borrowings -- (150)
Proceeds from issuance of long-term debt 200 --
Repayments of long-term debt (1) --
Proceeds from transferred interest in cokemaking
operations -- 214
Cash distributions to investors in cokemaking
operations (48) (18)
Cash dividend payments (62) (66)
Purchases of common stock for treasury (273) (136)
Proceeds from issuance of common stock under
management incentive and employee option plans 37 --
Other (1) 3
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Net cash used in financing activities (148) (153)
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Net decrease in cash and cash equivalents (145) (53)
Cash and cash equivalents at beginning of period 239 87
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Cash and cash equivalents at end of period $ 94 $ 34
====== ======
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*Reclassified to conform to the 2001 presentation.
(See Accompanying Notes)
4
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 gains on income tax settlements (Note
2), provision for restructuring of lubricants operations and other
matters (Note 4) and income from discontinued operations (Note 5).
Results for the three and nine months ended September 30, 2001 are not
necessarily indicative of results for the full year 2001.
2. Income Tax Settlements.
In the third quarter of 2001, Sunoco recognized a $21 million benefit
as a reduction in income tax expense resulting from the settlement of
certain federal income tax issues. Sunoco will not receive any cash
proceeds in connection with this settlement.
In the second quarter of 2000, Sunoco recognized a $90 million pretax
gain in other income ($79 million after tax) in connection with the
settlement of certain other federal income tax issues. Certain
additional elements of this settlement were resolved at the end of 2000
resulting in the recognition of an additional $30 million pretax gain
($38 million after tax) in the fourth quarter of 2000. In connection
with the 2000 settlements, Sunoco received cash proceeds of $132
million in the fourth quarter of 2000, which consisted of $47 million
for interest and an $85 million tax refund.
3. Insurance Litigation Settlements.
During 2000, Sunoco entered into settlements which resolved certain
insurance claims. In connection with these settlements, Sunoco
recognized a $7 million pretax gain ($5 million after tax) in the third
quarter of 2000. The claims related to certain environmental matters of
Sunoco, including its predecessor companies and subsidiaries, arising
from ownership and operation of its businesses.
4. Restructuring of Lubricants Operations and Other Matters.
On March 30, 2001, Sunoco completed the sale of its lubricants
marketing assets (which include the Kendall(R) motor oil brand, and the
customer lists and other related assets for both the Sunoco(R) and
Kendall(R) brand labels). During June 2001, Sunoco shut down its Puerto
Rico refinery, and in July 2001, closed its lubricants blend plants in
Marcus Hook, PA, Tulsa, OK and Richmond, CA. Previously, Sunoco had
signed a letter of intent to sell the Tulsa and Richmond blend
facilities; however, the parties were unable to come to a final
resolution on this arrangement and discussions were terminated.
5
Sunoco established $11, $17 and $4 million accruals ($7, $11 and $2
million after tax) in the first, second and third quarters of 2001,
respectively, for approximately 300 employee terminations and other
required exit costs and in the 2001 second quarter also recorded a
benefit increasing the estimated net realizable value of previously
written down lubricants assets held for sale by $8 million ($5 million
after tax). During the first nine months of 2001, payments charged
against the accruals described above and other accruals previously
established for employee terminations throughout the Company totalled
$20 million. At September 30, 2001, the remaining balance in the
termination benefit and exit cost accruals totalled $30 million.
Payments against these accruals are expected to continue through 2002.
In September 2001, Sunoco signed a letter of intent to sell its Puerto
Rico refinery to Shell Chemical. The sale, which is expected to be
completed around year-end 2001, is subject to terms and conditions set
forth in the letter of intent, including completion of a due diligence
review. Sunoco does not anticipate recognizing a significant gain or
loss on this transaction. In the third quarter of 2000, Sunoco recorded
a $177 million non-cash charge ($123 million after tax) to write down
the lubricants assets held for sale to their estimated values.
The disposal of the lubricants assets generated approximately $100
million of cash in the first nine months of 2001, primarily due to
liquidation of related working capital, and should generate about $25
million of additional cash proceeds.
In the third quarter of 2001, Sunoco established a $17 million accrual
($11 million after tax) for environmental remediation activities (Note
10).
During the second and third quarters of 2000, the Company recorded
accruals totalling $11 million ($7 million after tax) for employee
terminations and related costs and a $6 million provision ($4 million
after tax) to write down to fair value certain assets. In the second
quarter of 2000, the Company reversed into income the remainder of a
previously established loss accrual related to an MTBE purchase
commitment in the amount of $7 million ($4 million after tax).
5. 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 oil and gas 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 was classified
similarly in the condensed consolidated statement of operations for the
nine months ended September 30, 2000.
6
6. Earnings Per Share.
The following table sets forth the computation of basic and diluted
earnings per share ("EPS") for the nine-month and three-month periods
ended September 30, 2001 and 2000 (in millions, except per share
amounts):
Nine Months Ended Three Months Ended
September 30 September 30
------------------- ------------------
2001 2000 2001 2000*
---- ---- ---- ----
Income (loss) from continuing
operations $394 $257 $ 92 $ (25)
Income from discontinued operations -- 11 -- --
---- ---- ----- -----
Net income (loss) $394 $268 $ 92 $ (25)
==== ==== ===== =====
Weighted average number of common
shares outstanding (basic EPS
denominator) 82.2 87.7 79.7 86.1
Add effect of dilutive stock
incentive awards 1.0 .4 1.3 --
---- ---- ----- -----
Weighted average number of shares
(diluted EPS denominator) 83.2 88.1 81.0 86.1
==== ==== ===== =====
Basic EPS:
Income (loss) from continuing
operations $4.79 $2.93 $1.15 $(.29)
Income from discontinued
operations -- .13 -- --
----- ----- ----- -----
Net income (loss) $4.79 $3.06 $1.15 $(.29)
===== ===== ===== =====
Diluted EPS:
Income (loss) from continuing
operations $4.74 $2.92 $1.14 $(.29)
Income from discontinued
operations -- .12 -- --
----- ----- ----- -----
Net income (loss) $4.74 $3.04 $1.14 $(.29)
===== ===== ===== =====
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*Since the assumed issuance of common stock related to stock incentive
awards would have resulted in a reduction in the loss per share, the
diluted per share amounts are equal to the basic per share amounts.
7
7. Derivatives and Hedging Activity.
Effective January 1, 2001, Sunoco adopted the new derivative accounting
prescribed by Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" as
amended by Statement of Financial Accounting Standards No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities". There was no impact on Sunoco's consolidated net income or
total shareholders' equity on the date of adoption. A reconciliation of
changes in the separate component of shareholders' equity attributable
to derivatives and hedging activity during the nine months ended
September 30, 2001, net of applicable income taxes, is as follows (in
millions of dollars):
Accumulated net derivative losses, beginning of
period $ --
Current period net hedging losses (5)
Reclassifications to earnings, net --
----
Accumulated net derivative losses, end of period $ (5)
====
The amount of hedge ineffectiveness on derivative contracts during the
first nine months of 2001 was not material. Open contracts as of
September 30, 2001 vary in duration but do not extend beyond the third
quarter of 2002.
8. Long-Term Debt.
On March 29, 2001, the Company issued $200 million of 6-3/4 percent
10-year bonds through its $1.5 billion shelf registration statement.
While the primary purpose of this borrowing was to repay the Company's
$150 million of 7.95 percent notes maturing in December 2001, the
proceeds were used initially to pay down outstanding commercial paper.
9. Transferred Interests in Cokemaking Operations.
In the third quarter of 2000, Sunoco transferred an additional interest
in its Jewell cokemaking operation to a third-party investor for $214
million in cash. Sunoco did not recognize any gain or loss on this
transaction. Third-party investors in Sunoco's Jewell and Indiana
Harbor cokemaking operations are now entitled to 98 and 95 percent,
respectively, 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 2007 for Jewell and 2002 for Indiana Harbor, the investor in the
Jewell operation will be entitled to a minority interest in the cash
flows and tax benefits from Jewell amounting to 18 percent, while the
investor in the Indiana Harbor operation will be entitled to a variable
minority interest in the cash flows and tax benefits from Indiana
Harbor ranging from 5 to 23 percent. The balance attributable to the
investors' interest in these operations totalled $241 and $316 million
at September 30, 2001 and December 31, 2000, respectively, and is
reflected in other deferred credits and liabilities in the condensed
consolidated balance sheets.
8
10. Commitments and Contingent Liabilities.
In the third quarter of 2001, Epsilon Products Company, LLC, a
polypropylene joint venture in which the Company is a participant,
refinanced its outstanding bridge financing with a $120 million
five-year term loan and a $40 million revolving credit agreement.
Sunoco is contingently liable under an arrangement which guarantees the
term loan and borrowings under the revolving credit agreement, which
amounted to $32 million at September 30, 2001.
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. These laws
result in liabilities and loss contingencies for remediation at
Sunoco's facilities and at third-party or formerly owned sites. The
accrued liability for environmental remediation is classified in the
condensed consolidated balance sheets as follows (in millions of
dollars):
At At
September 30 December 31
2001 2000
------------ -----------
Accrued liabilities $ 35 $ 37
Other deferred credits and
liabilities 124 104
---- ----
$159 $141
==== ====
Pretax charges against income for environmental remediation amounted to
$29 and $11 million for the nine months ended September 30, 2001 and
2000, respectively. The increase in the first nine months of 2001 was
primarily attributable to a $17 million accrual for remediation
activities largely associated with more stringent MTBE cleanup
requirements (see below). Claims for recovery of environmental
liabilities that are probable of realization totalled $7 million at
September 30, 2001 and are included in deferred charges and other
assets in the condensed consolidated balance sheets.
In December 1999, the U.S. Environmental Protection Agency ("EPA")
adopted a rule which phases in limitations on the sulfur content of
gasoline beginning in 2004 and, in January 2001, adopted another rule
which will require limitations on the allowable sulfur content of
diesel fuel beginning in 2006. The diesel rule is currently being
challenged in federal court, but it is unclear whether the litigation
will have any impact on the implementation of the rule. The United
States Supreme Court recently upheld the EPA's ozone and particulate
matter standards against similar attacks. The rules include banking and
trading credit systems, which could provide refiners flexibility until
2006 for the low-sulfur gasoline and until 2010 for the low-sulfur
diesel. These rules are expected to have a significant impact on Sunoco
and its operations primarily with respect to the capital and operating
expenditures at the Philadelphia, Marcus Hook and Toledo refineries.
Most of the capital spending is likely to occur in the 2002-2005
period, while the higher operating costs will be incurred when the
low-sulfur fuels are produced. The Company estimates that the total
capital outlays to comply with the new gasoline requirements
9
will be in the range of $200-$250 million. The Company cannot estimate the
capital requirements of the new diesel standards at this time. The ultimate
impact of the rules may be affected by such factors as technology
selection, the effectiveness of the banking and trading credit systems,
timing uncertainties created by permitting requirements and construction
schedules and any effect on prices created by changes in the level of
gasoline and diesel fuel production.
Since the late 1990s, the EPA has undertaken significant enforcement
initiatives under authority of the Clean Air Act's New Source Review and
Prevention of Significant Deterioration ("NSR/PSD") program. These
enforcement initiatives have been targeted at industries that have large
manufacturing facilities and that are significant sources of emissions,
such as refining, paper and pulp, and electric power generating industries.
The basic premise of the enforcement initiative is the EPA's assertion that
many of these industrial establishments have modified or expanded their
operations over time without complying with NSR/PSD regulations that
require permits and new emission controls in connection with any
significant facility modifications or expansions that can result in
emissions increases above certain thresholds. As part of this on-going
NSR/PSD enforcement initiative, the EPA has entered into consent agreements
with several refiners that require the refiners to make significant capital
expenditures to install emissions control equipment at selected facilities.
The cost of the required emissions control equipment could be significant,
depending on the size, age and configuration of the refinery. Sunoco
received information requests in 2000 in connection with the NSR/PSD
enforcement initiative pertaining to its five refineries and its phenol
facility in Philadelphia, PA. Sunoco has completed its response to the
requests and has provided additional clarification requested by the EPA,
which is focusing solely on the refineries at this time. While Sunoco has
not been named in any proceeding, it is currently evaluating its position
and is engaging in discussions with the EPA concerning these issues.
Although Sunoco does not believe that it has violated any NSR/PSD
requirements, as part of this initiative, Sunoco could be required to make
significant capital expenditures.
The EPA is also reportedly considering limiting the levels of benzene and
other toxic substances in gasoline as well as banning MTBE. MTBE is the
primary oxygenate used by Sunoco and the industry to meet reformulated
gasoline requirements under the Clean Air Act. Congress is considering
several pieces of legislation that would prohibit, phase-down or regulate
the use of MTBE. The EPA is also seeking legislative and/or regulatory
changes on the use of oxygenates. Several states, including some in
Sunoco's marketing territory, have laws banning the use of MTBE beginning
in 2003 and 2004; however, litigation was initiated challenging the
legislation in California and New York. An initial court decision on a case
brought by a trade association has upheld New York's law banning MTBE. In
addition, the EPA rejected California's request for a waiver of the federal
oxygenate mandate. Numerous other states continue to explore options
concerning MTBE. If MTBE is banned throughout the United States, the effect
on Sunoco will depend on the specific regulations, the cost and
availability of alternative oxygenates if the minimum oxygenate
requirements remain in effect, and the ability of Sunoco to recover its
costs in the marketplace. A wholly owned subsidiary of the Company is a
one-third partner in Belvieu Environmental Fuels ("BEF"), a joint
10
venture that owns and operates an MTBE production facility in Mont Belvieu,
TX. At September 30, 2001, the Company had a $57 million investment in this
operation. The joint venture is currently evaluating alternative uses for
this facility in the event MTBE is banned.
Cleanup of groundwater aquifers contaminated by MTBE will be driven by
thresholds based on drinking water protection. Though not all groundwater
is used for drinking, several states have initiated or proposed more
stringent MTBE cleanup requirements. In connection with these new
requirements, Sunoco increased its accruals for remediation at certain
sites during the third quarter of 2001. While actual cleanup costs for
specific sites are variable and depend on many factors, expansion of
similar MTBE remediation thresholds to additional states or adoption of
even more stringent requirements for MTBE remediation would result in
further cost increases.
Private litigants, purportedly on behalf of various classes of private well
owners in numerous states, filed class action lawsuits against major
petroleum refiners and marketers who sold gasoline containing MTBE,
alleging MTBE may have contaminated the groundwater. The Judicial Panel on
Multidistrict Litigation consolidated several federal court MTBE class
action cases from New York and other states (In re: Methyl Tertiary Butyl
Ether ("MTBE") Products Liability Litigation; MDL No. 1358; Master File No.
00 Civ. 1898 (SAS)). MDL 1358 consists of five consolidated cases, and
Sunoco was named as a defendant in three of these cases that were filed in
New York. In response to motions to dismiss that had been filed, the judge
issued an opinion and order that applies to all five cases. The judge
dismissed the claims of the class of plaintiffs who have not tested their
wells and thus do not know whether there is MTBE contamination (the
"non-test class") or who have tested their wells and found no MTBE
contamination (the "non-contaminated class"). Because all the class
plaintiffs in La Susa, et al. v. Amerada Hess, et al. (one of the three New
York cases) were in either the non-test class or the non-contaminated
class, the La Susa case was dismissed.
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 potentially subject to joint and several liability for
the costs of remediation at sites at which it has been identified as a
"potentially responsible party" ("PRP"). As of September 30, 2001, Sunoco
had been named as a PRP at 48 sites identified or potentially identifiable
as "Superfund" sites under federal or state law.
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.
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
11
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 these matters could have a significant impact on results of operations
or cash flows for any future quarter or year. However, management does not
believe that any additional liabilities which may arise pertaining to such
matters would be material in relation to the consolidated financial
position of Sunoco at September 30, 2001. Furthermore, management does not
believe that the overall costs for environmental activities will have a
material impact, over an extended period of time, on Sunoco's cash flows or
liquidity.
11. Shareholders' Equity.
At At
September 30 December 31
2001 2000
------------ ------------
(Millions of Dollars)
Common stock, par value $1 per share $ 134 $ 132
Capital in excess of par value 1,438 1,403
Earnings employed in the business 2,282 1,950
Accumulated other comprehensive
loss (Note 7) (5) --
Common stock held in treasury,
at cost (2,056) (1,783)
------- -------
Total $ 1,793 $ 1,702
======= =======
12. Acquisition of Aristech Chemical Corporation.
Effective January 1, 2001, Sunoco completed the acquisition of Aristech
Chemical Corporation ("Aristech"), a wholly owned subsidiary of Mitsubishi
Corporation ("Mitsubishi"), for $506 million in cash and the assumption of
$163 million of debt. The purchase price includes $107 million for working
capital. Contingent payments with a net present value of up to $167 million
(the "earn out") may also be made if realized margins for polypropylene and
phenol exceed certain agreed-upon thresholds over the next six years. In
connection with the transaction, Sunoco also entered into a margin hedge
agreement with Mitsubishi whereby Mitsubishi has provided polypropylene
margin protection in 2001 of up to $6.5 million per quarter. Any earn out
or margin hedge payments/receipts would be treated as adjustments to the
purchase price. In addition, Mitsubishi is responsible during a 25-year
indemnification period for up to $100 million of potential environmental
liabilities for the business arising out of or related to the period prior
to the acquisition date.
12
In connection with the margin hedge agreement, Sunoco received $13
million from Mitsubishi in the first nine months of 2001 related to
Aristech's operations for the first half and will receive an additional
$6.5 million in the fourth quarter of 2001 related to the third
quarter's operations. These payments are being reflected as reductions
in the purchase price when received.
Included in the purchase are Aristech's five chemical plants located at
Neal, WV; Haverhill, OH; Neville Island, PA; and Pasadena and LaPorte,
TX and a research center in Pittsburgh, PA. These facilities produce
polypropylene, phenol and related derivatives (including bisphenol-A)
and plasticizers.
The acquisition has been accounted for as a purchase. The results of
operations of Aristech have been included in the condensed consolidated
statement of operations from the date of acquisition. The purchase
price has been tentatively allocated to the assets acquired and
liabilities assumed based on their relative estimated fair market
values at the acquisition date. The following is a summary of the
effects of this transaction on Sunoco's consolidated financial position
as of the acquisition date (in millions of dollars):
Allocation of purchase price:
Accounts and notes receivable, net $ 157
Inventories 130
Investments and long-term receivables 8
Properties, plants and equipment, net 675
Deferred charges and other assets 14
Accounts payable (110)
Accrued liabilities (58)
Current portion of long-term debt (1)
Taxes payable (9)
Long-term debt (162)
Retirement benefit liabilities (23)
Deferred income taxes (110)
Other deferred credits and liabilities (18)
-----
Cash paid, net of cash received under margin
hedge agreement and cash acquired $ 493
=====
The unaudited pro forma sales and other operating revenue of Sunoco for
the nine months ended September 30, 2000, as if the acquisition of
these assets had occurred on January 1, 2000, was $11,024 million. The
unaudited pro forma income from continuing operations for the nine
months ended September 30, 2000 was $203 million ($2.30 per share on a
diluted basis). The pro forma information does not purport to be
indicative of the results that actually would have been obtained if the
combined operations had been conducted during the period presented and
is not intended to be a projection of future results. Accordingly, the
pro forma results do not reflect any restructuring costs, changes in
operating levels, or potential cost savings and other synergies that
Sunoco's management expects to realize as a result of the acquisition.
13
13. Business Segment Information.
The following table sets forth certain income statement information
concerning Sunoco's business segments for the nine-month and three-month
periods ended September 30, 2001 and 2000 (in millions of dollars):
Sales and Other
Operating Revenue
------------------------- Profit Contri-
Nine Months Ended Unaffiliated Inter- bution (Loss)
September 30, 2001 Customers segment (after tax)
------------------- ------------ ------- --------------
Northeast Refining $ 2,941 $ 2,223 $ 194
Northeast Marketing 3,677 -- 80
Chemicals 1,069 -- (21)
Lubricants* 1,045 33 46
MidAmerica Marketing & Refining 1,814 -- 104
Logistics 39 93 33
Coke 173 45
-------- --------
Consolidated $ 10,758 481
========
Income tax settlement 21
Employee terminations and other
matters (26)
Corporate expenses (19)
Net financing expenses and
other (63)
--------
Net income $ 394
========
Nine Months Ended
September 30, 2000
-------------------
Northeast Refining $ 3,365 $ 2,104 $ 175
Northeast Marketing 3,331 -- 31
Chemicals 560 -- 43
Lubricants* 1,154 10 (22)
MidAmerica Marketing & Refining 1,754 -- 57
Logistics 39 96 35
Coke 167 -- 44
-------- --------
Consolidated $ 10,370 363
========
Income tax settlement 79
Insurance litigation settlements 5
Write-down of assets and other
matters (130)
Corporate expenses (18)
Net financing expenses
and other (42)
Discontinued operations 11
--------
Net income $ 268
========
----------
* Includes the Company's Puerto Rico refinery and lubricants blend facilities
and lubricants marketing assets prior to their disposition (Note 4).
14
Sales and Other
Operating Revenue
------------------------ Profit Contri-
Three Months Ended Unaffiliated Inter- bution (Loss)
September 30, 2001 Customers segment (after tax)
------------------- ------------ ------- --------------
Northeast Refining $ 898 $ 698 $ 5
Northeast Marketing 1,244 -- 41
Chemicals 333 -- (6)
Lubricants* 309 5 13
MidAmerica Marketing & Refining 591 -- 35
Logistics 14 31 9
Coke 58 -- 14
------- -------
Consolidated $ 3,447 111
=======
Income tax settlement 21
Employee terminations and other
matters (13)
Corporate expenses (7)
Net financing expenses
and other (20)
-------
Net income $ 92
=======
Three Months Ended
September 30, 2000
-------------------
Northeast Refining $ 1,157 $ 777 $ 62
Northeast Marketing 1,213 -- 18
Chemicals 190 -- 10
Lubricants* 412 7 (8)
MidAmerica Marketing & Refining 660 -- 14
Logistics 15 33 12
Coke 55 -- 17
------- -------
Consolidated $ 3,702 125
=======
Insurance litigation settlements 5
Write-down of assets and other
matters (134)
Corporate expenses (6)
Net financing expenses
and other (15)
-------
Net loss $ (25)
=======
----------
* Includes the Company's Puerto Rico refinery and lubricants blend facilities
and lubricants marketing assets prior to their disposition (Note 4).
15
The following table sets forth Sunoco's total assets by business segment at
September 30, 2001 (in millions of dollars):
Northeast Refining $1,595
Northeast Marketing 1,002
Chemicals 1,562
Lubricants 351
MidAmerica Marketing & Refining 696
Logistics 573
Coke 298
------
Consolidated $6,204*
======
----------
*After elimination of intersegment receivables of $73 million. Identifiable
assets also include Sunoco's $106 million consolidated deferred income tax
asset and $94 million attributable to corporate activities.
14. New Accounting Standards.
In July 2001, Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" ("SFAS No. 142") was issued. Sunoco
will adopt SFAS No. 142 effective January 1, 2002 when adoption is
mandatory. SFAS No. 142 will require the testing of goodwill and
indefinite-lived intangible assets for impairment rather than amortizing
them. Sunoco is currently assessing the impact of adopting SFAS No. 142 on
its consolidated financial statements. Sunoco's current level of annual
amortization of goodwill and indefinite-lived intangible assets, which will
be eliminated upon the adoption of SFAS No. 142, is approximately $5
million after tax.
In August 2001, Statement of Financial Accounting Standards No. 143,
"Accounting for Asset Retirement Obligations" ("SFAS No. 143") was issued.
This statement significantly changes the method of accruing for costs
associated with the retirement of fixed assets which an entity is legally
obligated to incur. Sunoco will evaluate the impact and timing of
implementing SFAS No. 143, which is required no later than January 1, 2003.
In August 2001, Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No.
144") was issued. Among other things, SFAS No. 144 significantly changes
the criteria that would have to be met to classify an asset as
held-for-sale. This statement supersedes Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of", and the provisions of Accounting
Principles Board Opinion 30 "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions"
that relate to reporting the effects of a disposal of a segment of a
business. Sunoco is currently assessing the impact of adopting SFAS No. 144
on its consolidated financial statements. Implementation of this standard
is required no later than January 1, 2002.
16
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS - NINE MONTHS
Earnings Profile of Sunoco Businesses (after tax)
-------------------------------------------------
Nine Months Ended
September 30
-----------------
2001 2000 Variance
---- ---- --------
(Millions of Dollars)
Northeast Refining $ 194 $ 175 $ 19
Northeast Marketing 80 31 49
Chemicals (21) 43 (64)
Lubricants* 45 (22) 67
MidAmerica Marketing & Refining 104 57 47
Logistics 33 35 (2)
Coke 45 44 1
Corporate expenses (19) (18) (1)
Net financing expenses and other (63) (42) (21)
----- ----- -----
398 303 95
Special items:
Value Added and Eastern Lubricants* 1 -- 1
Income tax settlements 21 79 (58)
Insurance litigation settlements -- 5 (5)
Write-down of assets and other matters (26) (130) 104
Discontinued operations** -- 11 (11)
----- ----- -----
Consolidated net income $ 394 $ 268 $ 126
===== ===== =====
----------
*In connection with the Company's decision to dispose of its Puerto Rico
refinery, lubricants blend facilities and lubricants branded marketing
assets (colectively "Value Added and Eastern Lubricants"), commencing
with the fourth quarter of 2000, such operations are reported separately
as a special item prior to their disposition. Value Added and Eastern
Lubricants losses of $29 million in the first nine months of 2000 are
included in Lubricants (see Note 4 to the condensed consolidated financial
statements).
**Represents a favorable adjustment to the gain on divestment of Sunoco's
international oil and gas production business which was sold in 1996 (see
Note 5 to the condensed consolidated financial statements).
17
Analysis of Earnings Profile of Sunoco Businesses
-------------------------------------------------
In the nine-month period ended September 30, 2001, Sunoco earned $394 million,
or $4.74 per share of common stock on a diluted basis, compared to net income of
$268 million, or $3.04 per share, for the first nine months of 2000. Excluding
the special items shown separately in the Earnings Profile of Sunoco Businesses,
Sunoco earned $398 million in the first nine months of 2001 compared to $303
million in the first nine months of 2000.
Northeast Refining - Northeast Refining earned $194 million in the first nine
months of 2001 versus $175 million in the first nine months of 2000. The
improvement was due largely to higher realized margins for gasoline
(particularly reformulated and premium grades) and distillates and increased
production levels. In addition, high natural gas prices resulted in increased
margins for chemical feedstocks, residual fuels, butane, propane and other
related products which more than offset increased refinery fuel costs. Realized
refining margins averaged $5.85 per barrel for the nine-month period, up $.79
per barrel from 2000 levels. Cash expenses, excluding fuel, were $6 million
lower than the first nine months of 2000. Despite an extensive amount of planned
maintenance activity, refinery production totalled 140.7 million barrels for the
first nine months of 2001, an increase of 1.5 million barrels versus the first
nine months of 2000.
Northeast Marketing - Northeast Marketing earned $80 million in the current
nine-month period versus $31 million in the first nine months of 2000. The
increase in earnings was primarily due to higher retail gasoline margins, which
were up 3.4 cents per gallon versus the 2000 nine-month period, and higher
retail gasoline sales volumes, which increased 10 percent versus the first nine
months of 2000, largely due to acquisitions of retail sites from Coastal
Corporation. Higher non-gasoline income and increased earnings from retail
heating oil operations also contributed to the improvement in operating results.
Partially offsetting these positive factors was a planned increase in expenses.
During the 2001 third quarter, Sunoco completed the acquisition of 65 direct and
163 distributor sites in the southeastern U.S. from Coastal Corporation.
Including the February 2001 acquisition of 245 retail sites in the northeastern
U.S. from Coastal, Sunoco's Northeast Marketing unit has increased total retail
sites by 471 during the first nine months of 2001, including more than 100
convenience-store locations.
Chemicals - Chemicals had a loss of $21 million in the first nine months of 2001
versus income of $43 million in the first nine months of 2000. The 2001
nine-month results include an after-tax loss of $9 million from Aristech's
operations, which were acquired effective January 1, 2001. Sunoco's Delaware
Valley and Aristech chemical operations were adversely impacted by reduced
product demand which resulted in lower production volumes and margins for most
chemical products. Also contributing to the decline in earnings was lower equity
income from Sunoco's joint venture chemical operations. With the acquisition of
Aristech, net production increased to almost 4.1 billion pounds for the first
nine months of 2001 despite being somewhat limited by both scheduled and
unscheduled maintenance activity and lower demand.
18
Lubricants - Lubricants earned $45 million in the first nine months of 2001 from
the continuing operations of its Tulsa refinery and related process oils
business ("Western Lubricants"). Western Lubricants earned $7 million in the
2000 nine-month period. The improved results were largely due to significantly
higher margins for lubricant base oils and fuels produced at the Tulsa refinery,
partially offset by higher expenses due to an increase in refinery fuel costs.
Production was limited during the first nine months of 2001 due to a planned
maintenance shutdown in the first quarter. Lubricants results for the first nine
months of 2000 also included a loss of $29 million from Sunoco's Value Added and
Eastern Lubricants operations. Subsequent to the Company's third quarter 2000
decision to dispose of these assets, these operations are being reported
separately as a special item.
MidAmerica Marketing & Refining - MidAmerica Marketing & Refining earned $104
million during the current nine-month period versus $57 million in the 2000
first nine months. The increase was largely due to higher average wholesale
fuels margins, which were up $3.61 per barrel from 2000 levels. Refinery
production for the first nine months totalled 41.6 million barrels, an increase
of 2.4 million barrels from the first nine months of 2000 when major planned
maintenance work was in progress. Partially offsetting these improvements were
significantly higher refinery fuel costs and lower margins for petrochemical and
retail gasoline products.
Coke - Coke earned $45 million in the first nine months of 2001 versus $44
million in the first nine months of 2000. The increased earnings are due to
higher tax benefits recognized by Sun Coke and higher coke production at Indiana
Harbor, partially offset by lower coke margins at Jewell.
Corporate Expenses - Corporate administrative expenses were $19 million during
the current nine-month period versus $18 million in the 2000 first nine months.
The increase was due to the recognition of a $1 million contribution by Sunoco
to relief efforts associated with the terrorist attacks of September 11, 2001.
Net Financing Expenses and Other - Net financing expenses and other activities
totalled $63 million in the first nine months of 2001 versus $42 million in the
first nine months of 2000. The increase is largely due to Aristech acquisition
financing costs.
Income Tax Settlements - In the third quarter of 2001 and second quarter of
2000, Sunoco recorded after-tax gains from the settlement of certain federal
income tax issues totaling $21 and $79 million, respectively (see Note 2 to the
condensed consolidated financial statements).
Insurance Litigation Settlements - In the third quarter of 2000, Sunoco recorded
a $5 million after-tax gain in connection with settlements of insurance claims
related to certain environmental matters (see Note 3 to the condensed
consolidated financial statements).
Write-Down of Assets and Other Matters - During the first nine months of 2001,
Sunoco recorded a $20 million after-tax charge for employee terminations and
other required exit costs related to the disposal of its Value Added and Eastern
Lubricants operations, an $11 million after-tax accrual for environmental
remediation activities and a benefit increasing the net realizable value of
previously written down lubricants assets held for sale by $5 million after tax.
During the first nine months of 2000, Sunoco recorded a $123 million after-tax
provision to write down its lubricants assets held for sale to their estimated
values. During this
19
period, Sunoco also recorded a $7 million after-tax charge for employee
terminations, a $4 million after-tax benefit attributable to the reversal of a
loss accrual related to an MTBE purchase commitment and a $4 million after-tax
provision to write down to fair value certain assets. (See Notes 4 and 10 to the
condensed consolidated financial statements.)
Discontinued Operations -- During the first quarter of 2000, Sunoco recorded an
$11 million after-tax favorable adjustment to the gain on divestment of its
international oil and gas production business which was sold in 1996 (see Note 5
to the condensed consolidated financial statements).
Analysis of Condensed Consolidated Statements of Operations
-----------------------------------------------------------
Revenues -- Total revenues were $10.82 billion in the first nine months of 2001
compared to $10.56 billion in the first nine months of 2000. The 2 percent
increase was primarily as a result of increased chemical sales volumes due to
the Aristech acquisition. Also contributing to the increase were higher consumer
excise taxes. Partially offsetting these increases were lower refined product
prices and sales volumes and the absence of the income tax settlement gain
recognized in 2000.
Costs and Expenses -- Total pretax costs and expenses were $10.23 billion in the
first nine months of 2001 compared to $10.18 billion in the first nine months of
2000. The increase was primarily due to the Aristech acquisition, higher
refinery fuel costs and higher consumer excise taxes, partially offset by lower
crude oil and refined product acquisition costs and a decrease in the provision
for write-down of assets and other matters.
20
RESULTS OF OPERATIONS - THREE MONTHS
Earnings Profile of Sunoco Businesses (after tax)
-------------------------------------------------
Three Months Ended
September 30
------------------
2001 2000 Variance
---- ---- --------
(Millions of Dollars)
Northeast Refining $ 5 $ 62 $(57)
Northeast Marketing 41 18 23
Chemicals (6) 10 (16)
Lubricants* 16 (8) 24
MidAmerica Marketing & Refining 35 14 21
Logistics 9 12 (3)
Coke 14 17 (3)
Corporate expenses (7) (6) (1)
Net financing expenses and other (20) (15) (5)
---- ----- ----
87 104 (17)
Special items:
Value Added and Eastern Lubricants* (3) -- (3)
Income tax settlement 21 -- 21
Insurance litigation settlements -- 5 (5)
Write-down of assets and other matters (13) (134) 121
---- ----- ----
Consolidated net income (loss) $ 92 $ (25) $117
==== ===== ====
----------
* Inconnection with the Company's decision to dispose of its Value Added and
Eastern Lubricants operations, commencing with the fourth quarter of 2000,
such operations are reported separately as a special item prior to their
disposition. Value Added and Eastern Lubricants losses of $11 million in the
third quarter of 2000 are included in Lubricants (see Note 4 to the condensed
consolidated financial statements).
21
Analysis of Earnings Profile of Sunoco Businesses
-------------------------------------------------
In the three-month period ended September 30, 2001, Sunoco earned $92 million,
or $1.14 per share of common stock on a diluted basis, compared to a net loss of
$25 million, or $.29 per share, for the third quarter of 2000. Excluding the
special items shown separately in the Earnings Profile of Sunoco Businesses,
Sunoco earned $87 million in the third quarter of 2001 compared to $104 million
in the third quarter of 2000.
Northeast Refining - Northeast Refining earned $5 million in the third quarter
of 2001 versus $62 million in the third quarter of 2000. The decline in earnings
was due primarily to significantly lower wholesale fuels margins, particularly
early in the quarter when industry product inventories were consistently rising.
Realized margins for the quarter averaged $3.28 per barrel, down $2.41 per
barrel versus third quarter 2000 levels and well below seasonal norms. Northeast
Refining accelerated certain maintenance work planned for later this year and
early 2002 into the July/August timeframe, limiting input to crude units to 90
percent of rated capacity during the quarter. With this work now completed,
Northeast Refining is positioned to maximize production levels through the
upcoming fall and winter seasons. Partially offsetting the decline in margins
were lower fuel and utility costs, mainly as a result of lower natural gas
prices.
Northeast Marketing - Northeast Marketing earned a record $41 million in the
current quarter versus $18 million in the third quarter of 2000. The increase in
earnings was primarily due to higher retail gasoline margins, which were up 4.5
cents per gallon versus the third quarter of 2000. Also contributing to the
improvement were higher retail gasoline sales volumes, which increased over 10
percent versus the comparable period a year ago, largely due to acquisitions of
retail sites from Coastal Corporation. Partially offsetting the volume growth
were higher associated expenses.
Chemicals - Chemicals had a loss of $6 million in the third quarter of 2001
versus income of $10 million in the third quarter of 2000. Sunoco's Delaware
Valley chemical operations lost $3 million in the current quarter versus income
of $4 million in the third quarter of 2000. This decline was due largely to the
negative impact of reduced product demand which resulted in lower production
volumes and margins for most chemical products. The Aristech operations acquired
earlier this year lost $1 million in the third quarter. Rising feedstock costs,
specifically for cumene and propylene, put added pressure on margins in the
quarter. Chemicals joint venture operations had a loss of $2 million for the
quarter compared to income of $6 million in last year's third quarter. This
decline was due to reduced earnings from MTBE production related to Sunoco's
interest in Belvieu Environmental Fuels and lower results in the Epsilon
Products polypropylene joint venture.
Lubricants - Western Lubricants earned $16 million in the third quarter of 2001
versus $3 million in the 2000 third quarter. The improved results were largely
due to significantly higher margins for both fuels and lubricant base oils
produced at the Tulsa refinery. Lubricants results for the 2000 third quarter
also included a loss of $11 million from Sunoco's Value Added and Eastern
Lubricants operations. Subsequent to the Company's third quarter 2000 decision
to dispose of these assets, these operations have been reported separately as a
special item.
22
MidAmerica Marketing & Refining - MidAmerica Marketing & Refining earned $35
million during the current quarter versus $14 million in the 2000 third quarter.
The increase was largely due to higher average wholesale fuels margins, which
were up $4.74 per barrel from 2000 levels, reflecting strong seasonal demand and
the impact of refinery disruptions in the region. Partially offsetting this
improvement were much lower margins for petrochemical and retail gasoline
products.
Logistics - Logistics earned $9 million in the third quarter of 2001 versus $12
million for the year-ago period. The decrease in earnings was due primarily to
lower margins associated with crude oil acquisition and marketing activities and
the adverse impact of an ad valorem tax adjustment recorded in the third quarter
of 2001.
Coke - Coke earned $14 million in the third quarter of 2001 versus $17 million
in the third quarter of 2000. The decreased earnings are due to slightly lower
tax benefits and coke production levels versus last year's third quarter.
Corporate Expenses - Corporate administrative expenses were $7 million for the
third quarter of 2001 versus $6 million for the year-ago period. The increase
was due to the recognition of a $1 million contribution by Sunoco to relief
efforts associated with the terrorist attacks of September 11, 2001.
Net Financing Expenses and Other - Net financing expenses and other activities
totalled $20 million in the third quarter of 2001 versus $15 million in the
third quarter of 2000. The increase is largely due to Aristech acquisition
financing costs.
Income Tax Settlement - For a discussion of the gain on income tax settlement
recorded in the third quarter of 2001, see Note 2 to the condensed consolidated
financial statements.
Insurance Litigation Settlements - For a discussion of the gain on insurance
litigation settlements recognized in the third quarter of 2000, see Note 3 to
the condensed consolidated financial statements.
Write-Down of Assets and Other Matters - For a discussion of the provision for
write-down of assets and other matters recorded in the first nine months of 2001
and 2000, see Notes 4 and 10 to the condensed consolidated financial statements.
23
Analysis of Condensed Consolidated Statements of Operations
-----------------------------------------------------------
Revenues -- Total revenues were $3.46 billion in the third quarter of 2001
compared to $3.74 billion in the third quarter of 2000. The 7 percent decrease
was primarily as a result of lower refined product prices and sales volumes.
Partially offsetting these decreases were increased chemical sales volumes due
to the Aristech acquisition and higher consumer excise taxes.
Costs and Expenses -- Total pretax costs and expenses were $3.35 billion in the
third quarter of 2001 compared to $3.76 billion in the third quarter of 2000.
The 11 percent decrease was primarily due to lower crude oil and refined product
acquisition costs and a decrease in the provision for write-down of assets and
other matters. Partially offsetting these decreases were higher costs as a
result of the Aristech acquisition and higher consumer excise taxes.
FINANCIAL CONDITION
Cash and Working Capital
------------------------
At September 30, 2001, Sunoco had cash and cash equivalents of $94 million
compared to $239 million at December 31, 2000, and had a working capital deficit
of $184 million compared to working capital of $37 million at December 31, 2000.
Sunoco's working capital position is considerably stronger than indicated
because of the relatively low historical costs assigned under the LIFO method of
accounting for most of the inventories reflected in the condensed consolidated
balance sheets. The current replacement cost of all such inventories exceeds
their carrying value at September 30, 2001 by approximately $775 million.
Inventories valued at LIFO, which consist of crude oil, and petroleum and
chemical products, are readily marketable at their current replacement values.
Management believes that the current levels of cash and working capital are
adequate to support Sunoco's ongoing operations.
Cash Flows and Financial Capacity
---------------------------------
In the first nine months of 2001, Sunoco's net cash provided by operating
activities ("cash generation") was $753 million compared to $381 million in the
first nine months of 2000. This $372 million increase in cash generation was
primarily due to an increase in income before special items, a decrease in
working capital uses pertaining to operating activities and higher deferred
income tax expense. The decrease in working capital uses is largely attributable
to the liquidation of working capital in connection with the disposal of the
lubricants assets.
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, natural gas, refined product and chemical 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.
24
On October 15, 2001, Sunoco formed Sunoco Logistics Partners L.P. to ultimately
acquire a substantial portion of the wholly owned logistics operations of the
Company. On October 22, 2001, Sunoco Logistics Partners L.P. filed a
registration statement on Form S-1 relating to an initial public offering of
limited partnership units of Sunoco Logistics Partners L.P., which the Company
expects to complete by early 2002, subject to acceptable market conditions and
other considerations.
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.
During the second quarter of 2001, Sunoco established Sunoco Receivables
Corporation, Inc., a wholly owned special purpose subsidiary. On June 29, 2001,
this subsidiary entered into a five-year agreement to sell up to a $200 million
undivided interest in a designated pool of certain Sunoco accounts receivable.
As of September 30, 2001, no receivables had been sold under this agreement.
The Company has a shelf registration statement which provides the Company with
financing flexibility to offer senior and subordinated debt, common and
preferred stock, warrants and trust preferred securities. On March 29, 2001, the
Company issued $200 million of 6-3/4 percent 10-year bonds, leaving $1,300
million available under this shelf registration statement. While the primary
purpose of this borrowing was to repay the Company's $150 million of 7.95
percent notes maturing in December 2001, the proceeds were used initially to pay
down outstanding commercial paper. The amount and timing of any additional
financings will depend upon market conditions and the Company's funding
requirements.
The following table sets forth Sunoco's outstanding borrowings (in millions of
dollars):
At At
September 30 December 31
2001 2000
------------- -----------
Current portion of long-term debt $ 153 $ 2
Long-term debt 1,141 933
------ -----
Total outstanding borrowings $1,294 $ 935
====== =====
Sunoco's ratio of debt (net of cash and cash equivalents) to total capital was
40.1 percent at September 30, 2001 compared to 29.0 percent at December 31,
2000. This increase was due to the Aristech acquisition. In connection with the
acquisition, Sunoco issued $200 million of commercial paper and assumed $163
million of long-term debt from Aristech. 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.
25
SHARE REPURCHASES
During the first nine months of 2001, the Company repurchased 7,496,411 shares
of common stock for $273 million and in October 2001 repurchased an additional
1,925,500 shares for $72 million. At October 31, 2001, the Company had a
remaining authorization from its Board of Directors to purchase up to $348
million of Company common 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 refined product and chemical 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 or those of third parties;
. 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;
26
. 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 or suppliers;
. 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.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
Many legal and administrative proceedings are pending against Sunoco.
Although the ultimate outcome of these proceedings cannot be ascertained at
this time, it is reasonably possible that some of them could be resolved
unfavorably to Sunoco. Management of Sunoco believes that any liabilities
which may arise from such proceedings would not be material in relation to
the consolidated financial position of Sunoco at September 30, 2001.
Item 6. Exhibits and Reports on Form 8-K
Exhibits:
12 - Statement re Sunoco, Inc. and Subsidiaries Computation of Ratio of
Earnings to Fixed Charges for the Nine-Month Period Ended September
30, 2001.
27
Reports on Form 8-K:
The Company has not filed any reports on Form 8-K during the quarter ended
September 30, 2001.
**********
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
28
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUNOCO, INC.
BY /s/ JOSEPH P. KROTT
-----------------------
Joseph P. Krott
Comptroller
(Principal Accounting Officer)
DATE November 1, 2001
29
EXHIBIT INDEX
Exhibit
Number Exhibit
------- ---------------------------------------------------
12 Statement re Sunoco, Inc. and Subsidiaries Computation of Ratio of
Earnings to Fixed Charges for the Nine-Month Period Ended September
30, 2001.
1