UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to ________________
Commission file number 1-6841
SUNOCO, INC.
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(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-1743282
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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
--- ---
At March 31, 2001, there were 83,905,497 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 Income
for the Three Months Ended March 31, 2001
and 2000 3
Condensed Consolidated Balance Sheets at
March 31, 2001 and December 31, 2000 4
Condensed Consolidated Statements of Cash
Flows for the Three Months Ended March 31,
2001 and 2000 5
Notes to Condensed Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURE 23
2
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Sunoco, Inc. and Subsidiaries
(Millions of Dollars and Shares Except Per Share Amounts)
--------------------------------------------------------------------------------
For the Three Months Ended
March 31
--------------------------
2001 2000
---- ----
(UNAUDITED)
REVENUES
Sales and other operating revenue (including
consumer excise taxes) $3,516 $3,150
Interest income 2 2
Other income 14 35
------ ------
3,532 3,187
------ ------
COSTS AND EXPENSES
Cost of products sold and operating expenses 2,672 2,462
Consumer excise taxes 395 371
Selling, general and administrative expenses 159 138
Depreciation, depletion and amortization 77 73
Payroll, property and other taxes 27 22
Provision for employee terminations (Note 2) 11 --
Interest cost and debt expense 25 20
Interest capitalized -- (1)
------ ------
3,366 3,085
------ ------
Income from continuing operations before
income tax expense 166 102
Income tax expense 60 35
------ ------
Income from continuing operations 106 67
Income from discontinued operations (Note 3) -- 11
------ ------
NET INCOME $ 106 $ 78
====== ======
Earnings per share of common stock (Note 4):
Basic:
Income from continuing operations $ 1.26 $ .75
Net income $ 1.26 $ .87
Diluted:
Income from continuing operations $ 1.24 $ .75
Net income $ 1.24 $ .87
Weighted average number of shares outstanding:
Basic 84.4 89.2
Diluted 85.2 89.5
Cash dividends paid per share of common stock $ .25 $ .25
(See Accompanying Notes)
3
CONDENSED CONSOLIDATED BALANCE SHEETS
Sunoco, Inc. and Subsidiaries
At At
March 31 December 31
2001 2000
(Millions of Dollars) (UNAUDITED)
------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 8 $ 239
Accounts and notes receivable, net 1,013 890
Inventories:
Crude oil 253 210
Petroleum and chemical products 292 171
Materials, supplies and other 117 79
Deferred income taxes 89 94
------ ------
Total Current Assets 1,772 1,683
Investments and long-term receivables 180 170
Properties, plants and equipment 7,395 6,747
Less accumulated depreciation, depletion
and amortization 3,334 3,357
------ ------
Properties, plants and equipment, net 4,061 3,390
Deferred charges and other assets 216 183
------ ------
Total Assets $6,229 $5,426
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $1,166 $1,052
Accrued liabilities 384 377
Short-term borrowings 90 --
Current portion of long-term debt 152 2
Taxes payable 234 215
------ ------
Total Current Liabilities 2,026 1,646
Long-term debt (Note 6) 1,142 933
Retirement benefit liabilities 413 385
Deferred income taxes 392 250
Other deferred credits and liabilities 500 510
Commitments and contingent liabilities (Note 7)
Shareholders' equity (Note 8) 1,756 1,702
------ ------
Total Liabilities and Shareholders' Equity $6,229 $5,426
====== ======
(See Accompanying Notes)
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Sunoco, Inc. and Subsidiaries
(Millions of Dollars)
--------------------------------------------------------------------------
For the Three Months
Ended March 31
--------------------
2001 2000*
------ ------
(UNAUDITED)
INCREASES (DECREASES) IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 106 $ 78
Adjustments to reconcile net income to net
cash provided by operating activities:
Income from discontinued operations -- (11)
Provision for employee terminations 11 --
Depreciation, depletion and amortization 77 73
Deferred income tax expense 37 23
Changes in working capital pertaining to
operating activities:
Accounts and notes receivable 45 (53)
Inventories (53) (86)
Accounts payable and accrued liabilities (57) 1
Taxes payable 10 (6)
Other (16) --
----- ----
Net cash provided by operating activities 160 19
----- ----
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (72) (80)
Acquisitions, net of debt assumed of $163 (Note 9) (549) --
Proceeds from divestments 12 13
Other (7) (1)
----- ----
Net cash used in investing activities (616) (68)
----- ----
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from short-term borrowings 90 66
Proceeds from issuance of long-term debt 200 --
Repayments of long-term debt (1) --
Cash dividend payments (21) (22)
Purchases of common stock for treasury (42) (37)
Other (1) (2)
----- ----
Net cash provided by financing activities 225 5
----- ----
Net decrease in cash and cash equivalents (231) (44)
Cash and cash equivalents at beginning of period 239 87
----- ----
Cash and cash equivalents at end of period $ 8 $ 43
===== ====
__________
*Reclassified to conform to the 2001 presentation.
(See Accompanying Notes)
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
---------------------------------------------------------------
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 provision for employee
terminations (Note 2) and income from discontinued operations (Note 3).
Results for the three months ended March 31, 2001 are not necessarily
indicative of results for the full year 2001.
2. Restructuring of Lubricants Operations.
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 the first quarter of 2001, Sunoco also announced a plan to
shut down its Puerto Rico refinery and lubricants blend plants in Marcus
Hook, PA, Tulsa, OK and Richmond, CA. The refinery will be shut down in May
while the blend plants are expected to be shut down during July.
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 have been terminated.
Efforts continue to sell the Puerto Rico refinery.
In connection with the restructuring plan, Sunoco recorded an $11 million
charge ($7 million after tax) in the first quarter of 2001 for
approximately 170 employee terminations and related costs. The termination
payments are expected to be made through 2002. Sunoco also expects to
recognize an after-tax charge of approximately $50 million in the second
quarter of 2001 for additional employee terminations and other required
exit costs. Actual expenditures for these items will occur over several
years. However, liquidation of related working capital over the second and
third quarters is expected to generate cash flow of approximately $125-$150
million and could result in a significant gain, which would partially
offset the shutdown charge. In the third quarter of 2000, Sunoco recorded a
$123 million after-tax non-cash charge to write-down the lubricants assets
held for sale to their estimated values.
3. 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
6
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 2000 first quarter condensed consolidated statement of income.
4. Earnings Per Share.
The following table sets forth the computation of basic and diluted
earnings per share ("EPS") for the three-month periods ended March 31, 2001
and 2000 (in millions, except per share amounts):
Three Months
Ended
March 31
---------------------
2001 2000
---- ----
Income from continuing operations $ 106 $ 67
Income from discontinued operations -- 11
----- -----
$ 106 $ 78
Net income ===== =====
Weighted average number of common
shares outstanding (basic EPS denominator) 84.4 89.2
Add effect of dilutive stock incentive awards .8 .3
----- -----
Weighted average number of shares
(diluted EPS denominator) 85.2 89.5
===== =====
Basic EPS:
Income from continuing operations $1.26 $ .75
Income from discontinued operations -- .12
----- -----
Net Income $1.26 $ .87
===== =====
Diluted EPS:
Income from continuing operations $1.24 $ .75
Income from discontinued operations -- .12
----- -----
Net Income $1.24 $ .87
===== =====
7
5. Derivatives and Hedging Activity.
Sunoco uses futures and forward contracts from time to time to achieve
ratable pricing of its crude oil purchases and to convert certain refined
product sales to fixed or floating prices. In addition, price collars,
swaps and option contracts are used to lock in a portion of the Company's
electricity and natural gas costs. Sunoco also uses swaps, price collars
and other contracts from time to time to hedge against significant
increases in crude oil prices and to lock in what Sunoco considers to be
acceptable margins for various refined products.
In June 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" was issued,
and in June 2000, it was amended by Statement of Financial Accounting
Standards No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities" (collectively, "new derivative accounting").
Sunoco adopted the new derivative accounting effective January 1, 2001. It
requires the Company to recognize all derivative contracts in the
consolidated balance sheet at their fair value. If the derivative contracts
qualify for hedge accounting, depending on their nature, changes in their
fair values are either offset in net income against the changes in the fair
values of the items being hedged or reflected initially as a separate
component of shareholders' equity and subsequently recognized in net income
when the hedged items are recognized in net income. The ineffective
portions of changes in the fair values of derivative contracts that qualify
for hedge accounting as well as changes in fair value of all other
derivatives are immediately recognized in net income. Most of the Company's
derivative contracts qualify for hedge accounting; however, some do not
even though the Company believes they are effective hedges from an economic
perspective.
The new derivative accounting had no impact on Sunoco's consolidated net
income or total shareholders' equity on the date of adoption. A
reconciliation of current period changes, net of applicable income taxes,
in the separate component of shareholders' equity attributable to
derivatives and hedging activity is as follows (in millions of dollars):
Accumulated net derivative gains/losses, beginning of period $ --
Current period hedging gains, net 3
Reclassifications to earnings, net (3)
----
Accumulated net derivative gains/losses, end of period $ --
====
The amount of hedge ineffectiveness on derivative contracts during the
first quarter of 2001 was not material. Open contracts as of March 31, 2001
vary in duration but do not extend beyond the first quarter of 2002.
8
6. 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 is 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.
7. Commitments and Contingent Liabilities.
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
March 31 December 31
2001 2000
------------ -----------
Accrued liabilities $ 34 $ 37
Other deferred credits and liabilities 113 104
----- -----
$ 147 $ 141
===== =====
Pretax charges against income for environmental remediation amounted to $2
and $3 million for the three months ended March 31, 2001 and 2000,
respectively. Claims for recovery of environmental liabilities that are
probable of realization totalled $6 million at March 31, 2001 and are
included in deferred charges and other assets in the condensed consolidated
balance sheets.
9
The U.S. Environmental Protection Agency ("EPA") has issued a series of
information requests to several U.S. refiners pursuant to Section 114 of
the Clean Air Act as part of an enforcement initiative relating to New
Source Review ("NSR"), leak detection and repair ("LDAR"), Benzene Waste
NESHAP, and start-up/shut-down malfunctions. Sunoco received Section 114
information requests in 2000 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.
The EPA has proposed a legislative framework for Congress that would
significantly reduce or eliminate the use of MTBE, the primary oxygenate
used by Sunoco and the industry to meet the reformulated gasoline
requirements under the Clean Air Act. The EPA also proposed removing the
oxygenate requirement and replacing it with an alternative, although the
specifics for the alternative have not yet been developed. They have also
initiated a rulemaking process to consider restrictions or a ban on the use
of MTBE. In addition, bills have been introduced in Congress that would
prohibit, phase-down or regulate MTBE. A number of states have either
already banned the use of MTBE in gasoline or are currently studying the
issue. California, Connecticut, Michigan and New York are among those
states that have enacted legislation to ban its use beginning in 2003 or
2004; however, litigation has been initiated challenging the legislation in
California and New York. 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 venture
that owns and operates an MTBE production facility in Mont Belvieu, TX. At
March 31, 2001, the Company had a $55 million investment in this operation.
The joint venture is currently evaluating alternative uses for this
facility in the event MTBE is banned.
Any required cleanup of groundwater aquifers contaminated by MTBE would be
driven by cleanup thresholds based on drinking water protection. Though not
all groundwater is used for drinking, several states have initiated or
proposed more stringent MTBE cleanup thresholds. While actual cleanup
costs for specific sites are variable and depend on many factors, more
stringent thresholds for MTBE remediation would cause costs at some sites
to increase.
Private litigants, purportedly on behalf of 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 groundwater. One such class action was filed in New York
on behalf of New York well owners. (LaSusa, et al v. Amerada Hess
Corporation, et al, (formerly styled as Berisha, et al v. Amerada Hess
Corporation, et al,) Case No. 00-CIV-1898-SAS, United States District
Court, Southern District of New York.) Sunoco is one of sixteen petroleum
refiner and marketer defendants in this
10
lawsuit. Sunoco has filed a motion to dismiss the complaint. Discovery has
been allowed by the judge and is proceeding. The Judicial Panel on
Multidistrict Litigation consolidated this matter with several other
federal court MTBE class action cases from other states. Sunoco is not a
defendant in the class actions involving the other states. Also before the
same judge are two other New York cases in which Sunoco has been named a
defendant.
The Comprehensive Environmental Response Compensation and Liability Act
("CERCLA") and the Solid Waste Disposal Act as amended by the Resource
Conservation and Recovery Act ("RCRA"), and related federal and state laws
subject Sunoco to the potential obligation to remove or mitigate the
environmental effects of the disposal or release of certain pollutants at
Sunoco's facilities and at third-party or formerly owned sites. Under
CERCLA, Sunoco is subject to potential joint and several liability for the
costs of remediation at sites at which it has been identified as a
"potentially responsible party" ("PRP"). As of March 31, 2001, Sunoco had
been named as a PRP at 50 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 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 March 31, 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
8. Shareholders' Equity.
At At
March 31 December 31
2001 2000
------------ -----------
(Millions of Dollars)
Common stock, par value $1 per share $ 133 $ 132
Capital in excess of par value 1,413 1,403
Earnings employed in the business 2,035 1,950
------ ------
3,581 3,485
Less common stock held in treasury, at cost 1,825 1,783
------ ------
Total $1,756 $1,702
====== ======
9. 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 $509 million in cash and the assumption of
$163 million of debt. The purchase price includes approximately $110
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 closing.
In connection with the margin hedge agreement, Sunoco will receive $6.5
million from Mitsubishi in the second quarter of 2001 related to Aristech's
operations for the first quarter. This payment will be reflected as a
reduction 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.
12
The acquisition has been accounted for as a purchase. The results of
operations of Aristech have been included in the consolidated statement of
income from the date of acquisition. The purchase price has been
tentatively allocated to the assets acquired and liabilities assumed based
on their relative 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 $ 161
Inventories 144
Investments and long-term receivables 8
Properties, plants and equipment, net 654
Deferred charges and other assets 27
Accounts payable (111)
Accrued liabilities (51)
Current portion of long-term debt (1)
Taxes payable (9)
Long-term debt (162)
Retirement benefit liabilities (28)
Deferred income taxes (110)
Other deferred credits and liabilities (13)
-----
Cash paid, net of cash acquired $ 509
=====
The unaudited pro forma sales and other operating revenue of Sunoco for the
three months ended March 31, 2000, as if the acquisition of these assets
had occurred on January 1, 2000, was $3,360 million. The unaudited pro
forma income from continuing operations for the three months ended March
31, 2000 was $52 million ($.58 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, increases in operating levels, potential cost savings
or other synergies that Sunoco's management expects to realize as a result
of the acquisition.
13
10. Business Segment Information.
The following table sets forth certain income statement information
concerning Sunoco's business segments for the three-month periods ended
March 31, 2001 and 2000 (in millions of dollars):
Sales and Other
Operating Revenue
------------------------------ Profit Contri-
Three Months Ended Unaffiliated Inter- bution (Loss)
March 31, 2001 Customers segment (after tax)
-------------------- ------------ ------- -------------
Northeast Refining $1,027 $695 $102
Northeast Marketing 1,109 -- 11
Chemicals 383 -- (19)
Lubricants* 359 9 12
MidAmerica Marketing &
Refining 570 -- 9
Logistics 12 30 9
Coke 56 -- 16
------ ----
Consolidated $3,516 140
======
Provision for employee
terminations (7)
Corporate expenses (6)
Net financing expenses
and other (21)
----
Net income $106
====
Three Months Ended
March 31, 2000
--------------------
Northeast Refining $1,088 $602 $ 50
Northeast Marketing 985 -- 9
Chemicals 171 -- 13
Lubricants* 355 1 (12)
MidAmerica Marketing &
Refining 486 -- 5
Logistics 10 30 9
Coke 55 -- 13
------ ----
Consolidated $3,150 87
======
Corporate expenses (6)
Net financing expenses
and other (14)
Income from discontinued operations
11
----
Net income $ 78
====
____________
*Includes the Company's Puerto Rico refinery and lubricants blend facilities,
which will be shut down in mid-2001 and the Company's lubricants marketing
assets, which were sold in March 2001 (Note 2).
14
The following table sets forth Sunoco's total assets by business segment at
March 31, 2001 (in millions of dollars):
Northeast Refining $1,525
Northeast Marketing 983
Chemicals 1,649
Lubricants 465
MidAmerica Marketing & Refining 697
Logistics 552
Coke 320
------
Consolidated $6,229*
======
__________
*After elimination of intersegment receivables of $71 million. Identifiable
assets also include Sunoco's $89 million consolidated deferred income tax
asset and $20 million attributable to corporate activities.
15
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
Earnings Profile of Sunoco Businesses (after tax)
-------------------------------------------------
Three Months Ended
March 31
--------------------------
2001 2000 Variance
---- ---- --------
(Millions of Dollars)
Northeast Refining $ 102 $ 50 $ 52
Northeast Marketing 11 9 2
Chemicals (19) 13 (32)
Lubricants* 6 (12) 18
MidAmerica Marketing & Refining 9 5 4
Logistics 9 9 --
Coke 16 13 3
Corporate expenses (6) (6) --
Net financing expenses and other (21) (14) (7)
---- ---- ----
107 67 40
Special items:
Value Added and Eastern Lubricants* 6 -- 6
Employee terminations** (7) -- (7)
Discontinued operations*** -- 11 (11)
---- ---- ----
Consolidated net income $ 106 $ 78 $ 28
==== ==== ====
____________
*In connection with the Company's decision to dispose of its Puerto Rico
refinery, lubricants blend facilities and lubricants branded marketing
assets (collectively, "Value Added and Eastern Lubricants"), effective in
the fourth quarter of 2000, such operations are being reported separately as
a special item. Value Added and Eastern Lubricants losses of $8 million in
the first quarter of 2000 are included in Lubricants (see Note 2 to the
condensed consolidated financial statements).
**Represents employee terminations related to the Value Added and Eastern
Lubricants operations.
***Represents a favorable adjustment to the gain on divestment of Sunoco's
international oil and gas production business which was sold in 1996.
16
Analysis of Earnings Profile of Sunoco Businesses
-------------------------------------------------
In the three-month period ended March 31, 2001, Sunoco earned $106 million, or
$1.24 per share of common stock on a diluted basis, compared to net income of
$78 million, or $.87 per share, for the first quarter of 2000. Excluding the
special items shown separately in the Earnings Profile of Sunoco Businesses,
Sunoco earned $107 million in the first quarter of 2001 compared to $67 million
in the first quarter of 2000.
Northeast Refining -- Northeast Refining earned $102 million in the first
quarter of 2001 versus $50 million in the first quarter of 2000. The improvement
was due largely to higher realized margins and increased production levels.
Realized refining margins averaged $7.80 per barrel for the quarter, up $3.38
per barrel from 2000 levels. In addition to stronger gasoline and distillate
margins, 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. Cash expenses, excluding fuel,
were $2 million lower than the first quarter of 2000. Despite an extensive
amount of planned maintenance activity, refinery production totalled 47 million
barrels for the quarter, an increase of almost two million barrels versus the
first quarter of 2000. Excluding the planned maintenance activity, crude and
conversion units ran at near capacity levels throughout much of the quarter.
Northeast Marketing -- Northeast Marketing earned $11 million in the current
quarter versus $9 million in the first quarter of 2000. The increase in earnings
was primarily due to higher income from retail heating oil operations and
slightly higher retail gasoline margins. Planned expense increases were largely
offset by higher retail gasoline sales volumes, which were up nine percent
versus the first quarter of 2000. Excluding sales from the sites acquired from
Coastal Corporation on February 9, 2001, volumes were up four percent versus the
year-ago period.
Chemicals -- Chemicals had a loss of $19 million in the first quarter of 2001
versus income of $13 million in the first quarter of 2000. The 2001 first
quarter 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 high
operating costs and weak margins, largely as a result of higher natural gas
prices. Also contributing to the decline in earnings was lower equity income
from Sunoco's joint venture operations. With the acquisition of Aristech, net
production increased to almost 1.4 billion pounds for the quarter but was
limited by some scheduled and unscheduled maintenance activity during the
quarter.
Lubricants - Lubricants earned $6 million in the first quarter of 2001 from the
continuing operations of its Tulsa refinery and related process oils business
("Western Lubricants"). Western Lubricants lost $4 million in the 2000 first
quarter. The improved results were largely due to significantly higher margins
for lubricant base oils and fuels produced at the Tulsa refinery. Production was
limited to approximately 80 percent of capacity due to a planned maintenance
shutdown during the quarter. Lubricants results for the 2000 first quarter also
included a loss of $8 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.
17
MidAmerica Marketing & Refining -- MidAmerica Marketing & Refining earned $9
million during the current quarter, versus $5 million in the 2000 first quarter.
The increase was largely due to higher average wholesale fuels margins, which
were up $2.67 per barrel from 2000 levels. Refinery production for the quarter
totalled 13.6 million barrels, an increase of 2.5 million barrels from the first
quarter of 2000 when major planned maintenance work was in progress. Partially
offsetting these improvements were significantly higher refinery fuel costs and
lower retail gasoline margins.
Coke -- Coke earned $16 million in the first quarter of 2001 versus $13 million
in the first quarter of 2000. The increased earnings are due to higher tax
benefits recognized by Sun Coke and higher coke production at Indiana Harbor.
Net Financing Expenses and Other - Net financing expenses and other activities
totalled $21 million in the first quarter of 2001 versus $14 million in the
first quarter of 2000. The increase is primarily due to Aristech acquisition
financing costs.
Employee Terminations - During the first quarter of 2001, Sunoco recorded a $7
million after-tax charge for employee terminations related to its Value Added
and Eastern Lubricants operations (see Note 2 to the condensed consolidated
financial statements).
Income from Discontinued Operations -- During the first quarter of 2000, Sunoco
recorded an $11 million after-tax favorable adjustment to the gain on divestment
of Sunoco's international oil and gas production business which was sold in 1996
(see Note 3 to the condensed consolidated financial statements).
Analysis of Consolidated Statements of Income
---------------------------------------------
Revenues -- Total revenues were $3.53 billion in the first quarter of 2001
compared to $3.19 billion in the first quarter of 2000. The 11 percent increase
was primarily as a result of increased chemical sales volumes due to the
Aristech acquisition. Also contributing to the increase were higher refined
product sales prices and volumes.
Costs and Expenses -- Total pretax costs and expenses were $3.37 billion in the
first quarter of 2001 compared to $3.09 billion in the first quarter of 2000.
The 9 percent increase was primarily due to the Aristech acquisition and higher
refinery fuel costs.
18
FINANCIAL CONDITION
Cash and Working Capital
------------------------
At March 31, 2001, Sunoco had cash and cash equivalents of $8 million compared
to $239 million at December 31, 2000, and had a working capital deficit of $254
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 March 31, 2001 by approximately $800 million.
Inventories valued at LIFO, which consist of crude oil, 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 quarter of 2001, Sunoco's net cash provided by operating activities
("cash generation") was $160 million compared to $19 million in the first
quarter of 2000. This $141 million increase in cash generation was primarily due
to a decrease in working capital uses pertaining to operating activities and an
increase in income before special items.
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.
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 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 is 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 Company expects to use any net proceeds from
the sale of any other securities through the shelf registration statement 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 other
sales will depend upon market conditions and the Company's funding requirements.
19
The following table sets forth Sunoco's outstanding borrowings (in millions of
dollars):
At At
March 31 December 31
2001 2000
------------- -----------
Short-term borrowings -- commercial paper $ 90 $ --
Current portion of long-term debt 152 2
Long-term debt 1,142 933*
------ -----
Total borrowings $1,384 $ 935
====== =====
___________
*Includes the Company's $150 million 7.95 percent notes due in 2001, which
Sunoco refinanced on a long-term basis during the first quarter of 2001.
Sunoco's ratio of debt (net of cash and cash equivalents) to total capital was
43.9 percent at March 31, 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 on January 2, 2001
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.
SHARE REPURCHASES
During the first quarter of 2001, the Company repurchased 1,300,000 shares of
common stock for $42 million. At March 31, 2001, the Company had a remaining
authorization from its Board of Directors to purchase up to $150 million of
Company 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 and chemical margins;
. Variation in commodity prices and crude oil supply;
20
. 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;
. 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.
21
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
In April 2001, Sunoco, Inc. (R&M) received a civil penalty demand in excess
of $100,000 from the Ohio Attorney General's office, representing the Ohio
Environmental Protection Agency, for alleged exceedances of permit emission
limitations relating to the sulfur recovery unit at Sunoco's Toledo, OH
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 March 31, 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 Three-Month Period Ended March
31, 2001.
Reports on Form 8-K:
The Company filed a report on Form 8-K on January 16, 2001 to provide under
Item 2 - "Acquisition or Disposition of Assets" a brief description of the
Aristech acquisition. On March 15, 2001, the Company filed a Form 8-K/A
which provided the financial statements and the pro forma financial
information relating to the Aristech acquisition for the periods required
under Item 7. This Form 8-K/A also described certain other events under
Item 5 - "Other Events". On March 21, 2001, the Company filed another Form
8-K to disclose under Item 5 - "Other Events" a press release issued by the
Company announcing the shutdown of its Yabucoa, Puerto Rico refinery and
lubricants blend plants in Marcus Hook, PA, Tulsa, OK and Richmond, CA. The
Company also separately announced in this press release its expected range
for operating income for the first quarter of 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
22
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUNOCO, INC.
BY s/ JOSEPH P. KROTT
-----------------------
Joseph P. Krott
Comptroller
(Principal Accounting Officer)
DATE May 3, 2001
23
EXHIBIT INDEX
Exhibit
Number Exhibit
------- -------------------------------------------------------
12 Statement re Sunoco, Inc. and Subsidiaries Computation of Ratio
of Earnings to Fixed Charges for the Three-Month Period Ended
March 31, 2001.
EXHIBIT 12
STATEMENT RE COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (a)
Sunoco, Inc. and Subsidiaries
(Millions of Dollars Except Ratio)
--------------------------------------------------------------------------------
For the Three
Months Ended
March 31, 2001
--------------
(UNAUDITED)
Fixed Charges:
Consolidated interest cost and debt expense $ 25
Proportionate share of interest cost and debt
expense of 50 percent owned but not controlled
affiliated companies 3
Interest allocable to rental expense(b) 10
-----
Total $ 38
=====
Earnings:
Consolidated income before income tax expense $ 166
Proportionate share of income tax expense of
50 percent owned but not controlled affiliated
companies --
Equity in income of less than 50 percent owned
affiliated companies --
Dividends received from less than 50 percent
owned affiliated companies 1
Fixed charges 38
Interest capitalized --
Amortization of previously capitalized interest --
-----
Total $ 205
=====
Ratio of Earnings to Fixed Charges 5.39
=====
----------------
(a) The consolidated financial statements of Sunoco, Inc. and subsidiaries
contain the accounts of all subsidiaries that are controlled (generally more
than 50 percent owned). Affiliated companies over which the Company has the
ability to exercise significant influence but that are not controlled
(generally 20 to 50 percent owned) are accounted for by the equity method.
(b) Represents one-third of total operating lease rental expense which is that
portion deemed to be interest.